News of Note

40% of a non-resident athlete’s $2 million compensation package from a Canadian team was in the form of annual team contributions to his retirement compensation arrangement. Upon retirement or loss of employment, the athlete would receive a lump sum cash-out payment from the RCA that would be subject to 25% Part XIII tax.

CRA indicated that the $800,000 annual team RCA contribution was excluded from employment income under s. 6(1)(a)(ii) and that the (net) employment income of $1,200,000 should be allocated as to 40% (or $480,000) to Canada based on the higher number of games played in the U.S. Thus a submission that the athlete’s Canadian employment income under s. 115(1)(a)(i) was nil through allocating the s. 6(1)(a)(ii) exclusion wholly to the Canadian income ($2 million x 40% - $800,000) was unsuccessful.

A variant of these facts entailed the athlete and team each annually contributing $400,000 to the RCA. In finding that the employee contributions would not qualify for deduction under s. 8(1)(m.2), which refers inter alia to deduction of “an amount contributed by the taxpayer in the year to a pension plan in respect of services rendered by the taxpayer … where the plan is a [RCA],” CRA stated:

[A] plan will not be a pension plan where the only payment provided for under the terms of the plan is a single lump sum payable on retirement or loss of employment. … [A] plan that is excluded from being a salary deferral arrangement (“SDA”) by virtue of the special exception for professional athletes in paragraph (j) of the SDA definition in subsection 248(1) [also] will not be a pension plan, regardless of the form of benefits provided.

The first reason for denial focuses on the implausible situation of a plan providing only for the payment of a lump sum on retirement or termination, rather than providing for a retirement pension but with provision for commutation on specified events. The second reason appears to be an exercise in policy making rather than statutory interpretation.

Neal Armstrong. Summaries of 21 February 2018 External T.I. 2017-0702061E5 under s. 115(1)(a)(i) and s. 8(1)(m.2).

Immediately after its formation, Amalco dropped the business of a predecessor down to a partnership under s. 97(2) – except that it used the s. 22 election for the transferred trade receivables. The Directorate found that as a technical matter the s. 22 election was not available – effectively because s. 87(2)(g), which deemed Amalco to be a continuation of the predecessor for purposes of the ss. 20(1)(l) and (p) reserve provisions, did not go further to deem the Amalco receivables to have been includible in its income. Furthermore, it was at least somewhat doubtful that Amalco carried on the predecessor’s business given that the drop-down occurred within minutes of the amalgamation.

The Directorate nonetheless concluded that the s. 22 election was valid as denying the election “runs against the legislative scheme of section 87.”

Neal Armstrong. Summary of 24 October 2017 Internal T.I. 2017-0719531I7 under s. 22(1).

Where a taxpayer otherwise has realized a nil taxable capital gain under s. 38(a.1)(i) on the donation of shares, s. 40(12) provides that if those shares were included in a “flow-through share class,” then the taxpayer is deemed to have a capital gain generally equal to “exemption threshold” in respect of that flow-through share class (generally, the pool of actual (commercial) costs of flow-through shares issued to the taxpayer).

CRA indicated that non-flow through shares issued to a taxpayer are tainted as being part of a flow-through share class if any share in that class held by another person is a flow-through share. Although this sounds ominous, CRA went on to indicate that the taxpayer’s exemption threshold in this situation would be nil “it is necessary for the taxpayer to have acquired a flow-through share (or certain partnership interests …) in order for a taxpayer to have an exemption threshold in respect of a flow-through share class of property to which subsection 40(12) of the Act would apply.” Thus the capital gain on the donation of such shares to a registered charity would not be increased under s. 40(12).

Neal Armstrong. Summary of 19 January 2018 External T.I. 2017-0683501E5 under s. 40(12).

In consideration for a lump sum, a non-resident in a Treaty country (NRco) granted an arm’s length Canadian company (Canco) the exclusive right to distribute its product in Canada, with Canco agreeing not to acquire or sell competitive products. The Directorate found that the lump sum was not a royalty on general principles and, in light of Farmparts (which stated that an exclusive right to buy and sell could, “under no circumstances, be said to constitute the use or the right to use” the product) likely also was not caught by s. 212(1)(d)(i), nor did the Directorate recommend challenging the characterization under the agreement of the licence of a trademark as being gratuitous (as the “Distribution Agreement does not contemplate an extensive use of the trade-mark, but only limited use in connection with the distribution, promotion and advertising of the product.”) However, the exclusivity of the distributorship right granted by NRco was a “restrictive covenant,” so that the lump sum would be subject to Part XIII tax under ss. 56.4(2) and 212(1)(i).

But there was the Treaty, whose Royalty Article was similar to the OECD Model, the Commentary on which stated that that payments made in consideration for obtaining the exclusive distribution rights of a product in a given territory do not constitute royalties within the meaning of the Model Tax Convention as they are not made in consideration for the use of, or the right to use, an element of property included in the Royalty definition. Hence, the lump sum was withholding-tax exempt.

Neal Armstrong. Summaries of 16 August 2017 Internal T.I. 2017-0701291I7 under s. 212(1)(d)(i), s. 212(1)(d), s. 56.4(1) – restrictive covenant and Treaties – Art. 12.