News of Note
Talbot – Tax Court of Canada finds that a taxpayer did not “reside” in a northern region where he stayed there only during work days in a room provided by his employer
Email this ContentS. 110.7 allows individuals who satisfy conditions, including that they have resided for a period of at least six consecutive months in a "prescribed zone," to take a special deduction in computing their taxable income for the year for travel and accommodation expenses.
The taxpayer would work in a remote area of Quebec for a 22 work-day stint while staying in a room provided by his employer, and then vacate the room and return with his personal belongings to his home in Quebec City for 20 days off, before repeating the cycle. Fournier J found that this was insufficient to consider that the taxpayer ever “resided” in the prescribed northern zone, stating that “The most that can be said is that he intermittently stayed at the work site.”
Neal Armstrong. Summary of Talbot v. The Queen, 2018 TCC 94 under s. 110.7(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Technical Interpretation released in September 2013, as fully translated by us.
These (and the other full-text translations covering all “French” Interpretations released in the last 4 2/3 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. Next week is the open week for June.
CRA rules on using the s.132.2 merger and a renunciation of most of the units otherwise issuable on the merger in order to eliminate a REIT corporate subsidiary held through an LP
A Canadian REIT (the “Fund”) holds the units and notes of a subsidiary unit trust (“Sub-Trust”), whose principal asset is most of the partnership interests, other than exchangeable LP units, in a subsidiary LP (“Partnership”) which holds real estate and a corporate subsidiary (“Opco”).
The Fund eliminates Sub-Trust by setting up a unit trust (“MFT”), transferring its assets to MFT under s. 107.4, distributing just enough units of MFT to its unitholders for MFT to qualify as a mutual fund trust, and then instigating a s. 132.2 merger of MFT into the Fund.
The Fund also does not want Opco to pay corporate income tax. Had the Fund now held Opco directly, this would have been accomplished by incorporating a subsidiary (“MFC”), distributing relatively modest shareholdings in MFC to its unitholders sufficient to qualify MFC as a mutual fund corporation, amalgamating MFC and Opco so that Amalco MFC also qualifies as a mutual fund corporation, and then instigating the merger of Amalco MFC into the Fund under s. 132.2 – so that the former assets of Opco are now held directly by a REIT (the Fund).
A complicating factor is that Opco is held by the Partnership. Accordingly, the Partnership first transfers its Opco shares to MFC under s. 85(2) in consideration for most of the shares of MFC (so that Opco then can be vertically amalgamated with MFC). On the s.132.2 merger of Amalco MFC into the Fund, the Partnership renounces the receipt of the Fund units that otherwise would be receivable by it on the merger. CRA ruled that the Partnership will not realize any gain or loss on the disposition of its Fund units as a result of the renunciation because their proceeds of disposition should be equal to their ACB pursuant to s. 132.2(3)(g)(vi)(C)(I), and that none of the conferral-of-benefit provisions in the Act would apply.
Neal Armstrong. Summary of 2017 Ruling 2016-0660321R3 under s. 132.2(1) – qualifying exchange.
Finance has issued a comfort letter respecting a deemed repayment rule for upstream loans
The upstream loan regime in s. 90 provides for income inclusions under s. 90(6) for certain indebtedness owing to foreign affiliates, and offsetting deductions on repayment under s. 90(14), and contain back-to-back loan provisions in s. 90(7). When the s. 15 shareholder loan rules were expanded to add s. 15(2.17) dealing with back-to-back loans, together with deemed repayment rules in ss. 15(2.18) and (2.19), no similar deemed repayment rule was added to s. 90.
Finance has issued a comfort letter recommending the introduction of repayment rules similar to those in ss. 15(2.18) and (2.19) effective for repayments after April 10, 2018.
Neal Armstrong. Summary of 16 May 2018 IFA Finance Roundtable, Q.10 under s. 90(14).
Finance is considering further significant changes to the foreign demerger rules
Proposed amendments to the foreign demergers rule in s. 15(1.4)(e) disappeared when most of the balance of the 2016 technical amendments were put in Bill form and enacted. Some issues were identified with the s. 15(1.4)(e) amendments and Finance did not proceed with them - but intends to do so once it has made further changes. Whether they are left in s. 15 or reformulated to give them a somewhat different application and scope is still under discussion.
Neal Armstrong. Summary of Comment on s. 15(1.4)(e) in the 16 May 2018 IFA Finance Roundtable under s. 15(1.4)(e).
Finance notes the narrow scope of the s. 15(2.11) PLOI election
S. 15(2.11) PLOI elections can be made to elect out of s. 15(2) only by corporations resident in Canada (CRICs) where controlled by a non-resident corporation. However, similar s. 15(2) issues arise on loans made by CRICs to non-resident sistercos, where they are both controlled by non-resident individuals or a Canadian-controlled private equity fund.
Finance indicated that it has not had time to really consider the broader issues that would be engaged under these structures were this requirement for control by a non-resident corporation to be relaxed. It traced this requirement to its formulation of the foreign affiliate dumping rules.
Neal Armstrong. Summary of 16 May 2018 IFA Finance Roundtable, Q.9 under s. 15(2.11).
Finance acknowledges a drafting deficiency in the relevant cost base rules where FAPI under $5,000
Transfers under ss. 88(3) and 95(2)(c), (d.1) and (e) can be elected under para. (b) of the “relevant cost base” definition in s. 95(4) to occur at up to fair market value rather than on a tax deferred basis where the transferring foreign affiliate is an eligible controlled foreign affiliate (ECFA). To be an ECFA the taxpayer’s participating percentage must be not less than 90%. The participating percentage of a taxpayer in a controlled foreign affiliate is deemed to be nil if the FAPI for the year is less than $5,000, which means that in such cases the FA does not qualify as an ECFA.
Finance acknowledged that this anomaly arises from a drafting error, and that it is considering whether or not to correct this deficiency.
Neal Armstrong. Summary of 16 May 2018 Finance Roundtable, Q.8 under s. 95(4) - eligible controlled foreign affiliate.
Finance official suggests that the expanded U.S. earnings stripping rule should not adversely affect the operation of s. 95(2)(a)(ii)
Among the requirements for s. 95(2)(a)(ii) to deem interest paid by a foreign affiliate to be active business income is that the interest be deductible in computing the amounts prescribed to be the income of the payer from an active business. U.S. tax reform has placed further limitations on interest deductibility.
Dave Beaulne (who recently had moved over to Finance from CRA) indicated that he expected that the current CRA position respecting Code s. 163(j) would apply here as well, meaning that if interest is denied under s. 163(j) (as expanded under the new rules) but is allowed to be carried forward indefinitely, it should be possible to recharacterize it under s. 95(2)(a)(ii).
If interest is permanently denied, under say the hybrid rule, that should also not create difficulties under s. 95(2)(a)(ii) by virtue of Reg. 5907(2)(j). However, both were really questions for CRA to address in a ruling.
Neal Armstrong. Summary of 16 May 2018 Finance Roundtable, Q.6 under s. 95(2)(a)(ii)(B).
Finance confirms that it will be accepting more MLI optional items
Canada will be accepting more optional MLI items, but is not yet willing yet to commit to them. It will be obligated to declare which items those are at the time of ratification. Finance is working on the MLI-implementing legislation, and it is possible (but uncertain) that it will be tabled before the summer.
Neal Armstrong. 16 May 2018 IFA Finance Roundtable, Q.1.
CRA states that all self-directed RRSPs and TFSAs are resident in Canada
CRA considers that because the trust company trustee of a TFSA, RRSP, RRIF, RESP or RDSP is required under the Act “to maintain and exercise key decision-making powers and responsibilities over the trust” (e.g., ensuring compliance with ITA requirements including monitoring for non-qualified investments and ensuring that all transactions occurred at fair market value), it follows that such trusts will have their central management and control in Canada, so that they “will always be considered resident in Canada.” Thus, the non-resident holder of a self-directed TFSA was unsuccessful in her arguments that the trust was resident outside Canada based on her making the investment decisions.
CRA’s interpretation could be argued to be consistent with Discovery Trust, where the work performed by Royal Trust, as the Alberta trustee, was somewhat routine.
Neal Armstrong. Summary of 22 March 2018 Internal T.I. 2018-0738201I7 under s. 2(1).