News of Note

CRA has published its list of notifiable transactions pursuant to s. 237.4(3). The wording of the list is identical to the consultation draft published by Finance on February 4, 2023, except that the transactions regarding manipulation of CCPC status have been dropped. In summarized form, the list now consists of:

• A taxpayer buys an interest in a partnership which, immediately prior thereto, had realized the gain legs on straddle transactions in FX forward contracts (with such gain allocated to the selling partner) – and with the loss legs then being realized and allocated to the taxpayer.
• A trust (“Old Trust”) that is approaching its 21st anniversary transfers its property under s. 107(2) to a resident corporate beneficiary (“Holdco”) which is held by “New Trust” - or that is held by non-resident beneficiaries of Old Trust, where the distributed property is not described in any of ss. 128.1(4)(b)(i) to (iii).
• Alternatively, Old Trust and Holdco hold shares of Opco, with Holdco in turn held by New Trust, and Opco redeems its shares held by Old Trusts for a note, with Old Trust allocating the resulting s. 84(3) dividend to Holdco on an s. 112(1)-exempt basis.
• A debtor is assigned into bankruptcy, its debt is settled with no “forgiven amount” arising due to the exception in (i) of the definition, and the debtor then files a proposal resulting in the bankruptcy being annulled.
• One of the following transactions is engaged in, and the taxpayer takes the position that the “attribute trading” rules in s. 256.1 do not apply because the “one of the main reasons” or “one of the reasons” tests in ss. 256.1(2), (4) or (6), respectively, is not satisfied:

1. Aco acquires shares of Lossco so as to exceed the 75% of FMV threshold but without an acquisition of control;
2. Profitco and a person not dealing at arm’s length with it (Aco) acquire shares of Lossco such that Profitco (which does not control Lossco) would satisfy the 75% of FMV threshold if the acquisition of Lossco shares by Aco was ignored; and
3. Lossco acquires Profitco.

• A relevant non-resident in respect of a taxpayer (NR1) enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
• Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.

Neal Armstrong. Summary of 1 November 2023 CRA Webpage, "Notifiable transactions designated by the Minister of National Revenue" under s. 237.4(3).

Regarding the determination of the location of the establishment of the employer for purposes of applying source deductions pursuant to Reg. 102(1), effective January 1, 2024 CRA’s policy will be that an employee will be considered to report for work at an establishment of the employer if:

• Where a “full-time remote work agreement” is in place, the employee can be reasonably considered “attached to an establishment of the employer”; or
• The employee physically reports for work at the establishment, which can include a temporary establishment such as a construction site (but not generally an employee home office) and with there now being no minimum amount of time for this test to be engaged [see previously, 2015-0620821I7].

CRA generally will consider there to be a full-time remote work agreement where the employer directs or allows employees to perform their employment duties full-time (100%) remotely, i.e., not at any employer establishment.

The primary indicator to determine if an employee can reasonably be considered "attached to an establishment of the employer" is whether the employee would physically come to work to carry out duties at that establishment, were it not for the full-time remote work agreement. Furthermore, for employees who physically reported to an establishment of the employer immediately before entering into a full-time remote work agreement, that establishment is considered to be the one to which they would be reasonably considered to be attached, unless the employees' circumstances or the nature of their duties have changed.

CRA also provides a list of secondary indicators as to the "attached to an establishment of the employer" test.

Neal Armstrong. Summary of CRA Webpage, “Determine the province of employment (POE)” 6 October 2023 under Reg. 102(1).

Northbridge issued fleet insurance policies to trucking companies who operated their vehicles in both Canada and the U.S. The Tax Court had found that none of such supplies of insurance were zero-rated under Sched VI, Pt. IX, s. 2(d), which covers insurance under a policy “that relates to risks that are ordinarily situated outside Canada,” on the basis that this wording referenced the ordinary location of the insured vehicles, and there was no evidence on that point – and accordingly confirmed the denial of Northbridge’s related input tax credit claims.

Before allowing Northbridge’s appeal, Webb JA stated:

“[R]isks” means the risk of a claim arising from an accident or other insurable event. To the extent that any insurance policy issued by Northbridge covered such risks that were ordinarily situated in the United States, the supply of such a policy would be a zero-rated supply. The risks would be ordinarily situated in the United States based on the historical data for claims arising from accidents in the United States.

The Tax Court had not considered the evidence relating to this point, and the matter was referred back to it for such consideration.

Neal Armstrong. Summary of Northbridge Commercial Insurance Corporation v. Canada, 2023 FCA 211 under ETA Sched VI, Pt. IX, s. 2(d).

Regarding whether amounts related to ransomware attacks and business email compromise (“BEC”) scams, including ransom payments, payments to a BEC scammer, and recovery costs, were deductible, CRA stated:

[E]xpenses resulting from a ransomware attack or BEC scam appear to be an inherent risk of most businesses in an increasingly digital age. Accordingly, we would generally consider them to be deductible in computing income from a business where the expense is reasonable compared to the income earning activities of the business.

Neal Armstrong. Summary of 21 September 2023 External T.I. 2023-0984251E5 under s. 18(1)(a) – income-producing purpose.