News of Note
CRA finds that assessment of a director under s. 227.1 does not restart the 10-year limitation on relief under s. 220(3.1)
Email this ContentA corporation was assessed in its 2007, 2008 and 2010 taxation years regarding unremitted source deductions for its 2006 to 2009 taxation years together with interest and penalties. CRA assessed the director pursuant to s. 227.1 in September 2018, and the director applied for relief under s. 220(3.1) in 2019.
After stating that “the director’s liability under subsection 227.1(1) arises from his joint and several liability with the corporation and does not create a second tax debt,” the Directorate found that the taxation years referenced in s. 220(3.1) were those in which the corporation’s liability for the unremitted source deductions arose rather than that in which the director was derivatively assessed. Accordingly, as the director’s application for interest and penalty relief was in respect of the 2006 to 2009 taxation years, the 10-year limitation in s. 220(3.1) applied.
Neal Armstrong. Summary of 26 March 2024 Internal T.I. 2023-0974091I7 under s. 220(3.1).
We have translated 8 more CRA severed letters
We have translated a ruling and interpretation released by CRA last week and a further 6 CRA interpretations released in October of 2001. Their descriptors and links appear below.
These are additions to our set of 2,866 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 2/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA rules on s. 55(3.01)(g) applying to the transfer (fresh after an estate freeze) by unrelated shareholders of Opco to a new Holdco, with an Opco realty spin-off to a new Realtyco sister
The three unrelated individuals (A, B and C) holding the shares of Opco were to engage in preliminary estate-freeze transactions as a result of which trusts for the families of A and B will hold non-voting Opco common shares and Opco preferred shares will be held through holding companies for A and B. (C will participate, but did not use a family trust.)
Thereafter, the Opco shareholders were to transfer their shares to a new Holdco, Holdco would transfer some of its (newly-acquired) Opco preferred shares to a newly-formed subsidiary (Realtyco) and Opco would transfer its real estate to its sister, Realtyco, for preferred shares (as, in the two preceding transactions, utilizing s. 85(1)), with the preference shares between Opco and Realtyco then being cross redeemed.
CRA ruled that these transactions will not be considered in themselves to result in a disposition or increase in interest described in any of ss. 55(3)(a)(i) to (v) and, in particular, that the share issuance by Holdco to the Opco shareholders will not be described in s. 55(3)(a)(ii) by virtue of s. 55(3.01)(g).
The ruling letter had a representation that the estate freeze transactions “will not be carried out with a view to completing the series of transactions that includes the Proposed Transactions and would be completed notwithstanding the implementation of the Proposed Transactions, and vice versa.” This is consistent with the proposition that transactions are not undertaken in contemplation of a subsequent series unless they are undertaken “in relation to” or “because of” that series” (see, e.g., Deans Knight at para. 55).
Neal Armstrong. Summaries of 2024 Ruling 2023-0989121R3 F under s. 55(3.01)(g) and s. 75(2).
CRA finds that the “six months” test in Art. 5(3)(b) of the Mexico Treaty should be day-counted (more than 183 days)
Art. 5(3)(b) of the Mexico-Canada Convention provides that a “permanent establishment” includes:
(b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve month period
Regarding how “six months” should be computed, the Directorate stated:
Considering that the testing period of six months is not required to be consecutive, the only reasonable interpretation of the term “periods aggregating more than” six months within any twelve month period” is to aggregate the number of days equivalent to the number of months.
This interpretation is quite similar to 23 November 2023 Internal T.I. 2020-0850381I7 (issued two days later), finding that the 3-month threshold for a drilling rig to be a PE under the Canada-US Treaty is counted based on days of consecutive or non-consecutive use.
Neal Armstrong. Summary of 21 November 2023 Internal T.I. 2021-0880101I7 under Treaties – Income Tax Conventions – Art. 5.
Canadian Western Trust – Federal Court of Appeal confirms that a TFSA trading in qualified investments was taxable on the profits
A self-directed TFSA was conceded by it to be carrying on a business of trading in qualified investments. However, it submitted that the exemption from tax for an RRSP on business income from the disposition of qualified investments in s. 146(4)(b)) should be read into s. 146.2(6) given that the RRSP and TFSA regimes were “mirror images” of each other.
In rejecting this submission, and before dismissing the appeal, Biringer JA stated:
We agree with the Tax Court that the appellant’s reading is unsupported by the text, context, and purpose of subsection 146.2(6), and would amount to a re-drafting of the provision … .
Neal Armstrong. Summaries of Canadian Western Trust Company, Trustee of Ahamed TFSA v. Canada, 2024 FCA 108 under s. 146.2(6) and General Concepts - Evidence.
CRA indicates that it could, but is not required, to amend a statute-barred year return to replace an inventory with a capital gain so as to eliminate a loss carryback and interest
The initial assessment of a particular year of the taxpayer resulted in an amount of tax payable, which remained unpaid, so that interest accrued thereon. A non-capital loss was then carried back from a subsequent taxation year, resulting in CRA issuing a notification that no tax was payable for the particular year.
The taxpayer then requested an amendment to its return for the particular year (which now was statute-barred) so as to recharacterize as a capital gain an amount previously reported as business income, thereby eliminating the loss carryback.
CRA indicated that such a request could be granted since it would have no impact on the tax payable for the particular year, but “emphasize[d] … that there is nothing in the Act that compels the Minister to automatically accept such requests.” However, it noted that if the amendment request was accepted, the accrued interest would be eliminated, stating:
[H]ad the taxpayer filed its initial tax return on that [capital gains] basis, the tax payable would be nil and a notification of no tax payable would be issued. In such a case, there would be no excess of tax payable over the tax paid on account of tax payable by the taxpayer and thus, no interest can accrue pursuant to subsection 161(1).
Neal Armstrong. Summaries of 25 January 2024 Internal T.I. 2023-0973901I7 under s. 152(4) and s. 161(1).
Income Tax Severed Letters 12 June 2024
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a disposition by a bare trust, or the trust’s winding-up, generally is not a disposition under the ITA
Even before taking into account the introduction of s. 150(1.2), s. 150(1.1)(b)(ii) required a trust which disposed of capital property in a year to file a T3 return for that year. Would a bare trust, that complied with the low-asset test in s. 150(1.2)(b), be required by s. 150(1.1)(b)(ii) to file a T3 return by virtue of a Canadian-dollar bond held by it maturing in the year?
CRA noted that under s. 104(1), the bare trust was not a trust for purposes of the definition in s. 248(1) of “disposition,” other than ss. (b)(v) and (k) of that definition, which were not relevant in this context, so that there would be no disposition by the bare trust of the bond.
If in the year of the maturity of the bond, the bare trust is wound up and the cash proceeds from the bond are transferred to the beneficiary, would this result in a disposition by the bare trust pursuant to s. (b)(v) of the definition of “disposition” (which refers to a bare trust ceasing to act as agent for a beneficiary with respect to any dealing with any of the trust’s property)?
CRA indicated that, notwithstanding the wording of s. (b)(v) of the definition of “disposition”, the exclusion in s. (e) of that definition (re no change in beneficial ownership) would apply. In particular, the bare trust would not be considered to be a trust for the purposes of s. (e)(ii) of the definition of “disposition” (which excludes from (e) any transfer from a trust to a beneficiary) and the s. (e) exclusion would apply provided that the property is transferred directly to the beneficiary.
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.8 under s. 150(1.1)(b)(ii).
Burlington Loan Management – Upper Tribunal finds that Irishco’s purchasing a UK interest claim from Caymansco at a tax arbitrage price did not have Treaty-reduction as a main purpose
BLM was a substantial Irish-resident investment company, which had been acquiring proved claims in the administration of Lehman Brothers International (Europe) ("LBIE" – a UK resident) since 2011. In 2018, an unrelated Caymans company (“SICL”), which was in liquidation, instructed a third-party broker to market its claim for post-administration interest from LBIE (the “SAAD Claim”). As a result, BLM purchased the SAAD Claim for a cash amount which exceeded the expected cash payment from LBIE as reduced by the UK withholding tax of 20% but, after receiving a refund of such withholding tax pursuant to Art. 12(1) of the UK-Ireland Treaty, would generate an 8% profit. There would have been no refund of the UK withholding tax had the SAAD Claim continued to be held by SICL when paid.
HMRC denied BLM’s refund claim on the basis of Art. 12(5) of that Treaty, which excluded the application of Art. 12 “if it was the main purpose or one of the main purposes of any person concerned with the … assignment … to take advantage of … Article [12].”
In confirming the conclusion of the First-tier Tribunal that the assignment did not engage Art. 12(5), the Upper Tribunal indicated that it did not discern reviewable errors in the findings of the FTT, which most relevantly, and as summarized by the UTT, were that:
- It was evident from the OECD commentaries that Art. 12(5) should be regarded as aimed at transactions involving conduits or treaty shopping.
- Here, by contrast, SICL did not retain any direct or indirect entitlements in respect of the SAAD Claim, and it “was Ireland who had full taxing rights over the interest beneficially owned by BLM” and “from BLM's perspective, it regarded its beneficial ownership of the interest in respect of the SAAD Claim in the same way as it regarded its beneficial ownership of all the other interest in respect of all the other debt claims in the LBIE administration” which it had acquired and whose eligibility for the Treaty reduction had not been challenged.
- Furthermore, "for BLM the existence of the UK-Ireland treaty was simply the setting in which the Assignment took place”.
- “It was appropriate for the FTT to have had regard to the fact that there were potential purchasers of the SAAD Claim for whom UK WHT would not have been an issue and for whom the UK-Ireland treaty would not have been relevant [e.g., UK purchasers with tax losses, or pension plans] … who were prepared to pay a price higher than 80% of the interest on the SAAD Claim for reasons wholly unconnected to the UK-Ireland treaty”.
- “SICL's only purpose in entering into the transaction was to sell the SAAD Claim for the best available price”, and similarly the “’sole purpose of BLM in acquiring each such claim, including the SAAD Claim, was to realise a profit by reference to the difference between its purchase price and the cash flows that it received as result of its acquisition of the relevant claim’”.
Neal Armstrong. Summary of Revenue & Customs v Burlington Loan Management DAC [2024] UKUT 152 under Treaties – Income Tax Conventions – Art. 12.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in November and October of 2001. Their descriptors and links appear below.
These are additions to our set of 2,858 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 2/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).