News of Note
Income Tax Severed Letters 19 October 2016
Email this ContentThis morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Further translations of French severed letters are available
The table below links to full-text translations of French technical interpretation that were released last Wednesday and in the week of February 10 and January 27, 2016. They are paywalled in the usual (4-days per week) manner.
Proposed s. 152(9) might not alter the outcome in Last
Finance responded to the finding in Last, that the prohibition of an increased assessment on appeal is to be applied on a source-by-source basis, by proposing to amend s. 152(9) to provide that additional arguments can be advanced to support "all or any portion of the total amount determined on assessment." “However, it is worth considering whether [this] selected method to address Last would alter the outcome of the decision,” given that this language does not engage with the source-by-source finding in Last.
Neal Armstrong. Summary of Derrick Hosanna, "Alternative Arguments on Appeal: Does Finance Get the Last Word?", Tax For The Owner Manager, Vol. 16, No. 4, October 2016, p. 3 under s. 152(9).
Proposed s. 212.1(4) discriminates against foreign buyers
The proposed version of the s. 212.1(4) safe harbour from the application of s. 212.1(1) “discriminates against foreign buyers” – notwithstanding that “there is no difference to the Canadian tax base whether purchasers are Canadian or foreign or whether they deal at arm's length or not (as shareholders) with the Canadian corporation that acquires the non-resident corporation.”
Neal Armstrong. Summary of Nathan Boidman, "Judicial and Legislative Developments Threaten Indirect Canadian Acquisitions", Tax Notes International, Vol. 84, No. 2, 10 October 2016, p. 163 under s. 212.1(4).
CRA indicates that qualifying non-resident employers can file T4s for their affected employees without obtaining individual tax numbers
Effective January 1, 2016, Treaty-exempt non-resident employers have been able to apply under s. 153(7) for certification as "qualifying non-resident employers" (QNERs) so as to be exempt from source deduction requirements on remuneration paid to "qualifying non-resident employees" (broadly, Treaty-exempt non-resident employees who work in Canada for less than 45 days in the calendar year of payment or are present in Canada less than 90 days in any 12-month period that includes the payment time).
In early September 2016, CRA started issuing review letters to QNERs, requesting the following particulars:
- the number of employees who have come to Canada during a certain period
- an explanation of what documentation the employer has obtained to support each employee's country of residence
- an explanation on how the employees are expected to be exempt from tax in Canada under a tax treaty
- the number of days each qualifying non-resident employee was either working in Canada, or present in Canada, including arrival and departure dates, and
- the employment income attributable to each employee's workdays in Canada
Although the QNERs must issue T4 slips to qualifying non-resident employees earning more than C$10,000 of remuneration attributable to Canadian workdays during the year, CRA has indicated that a QNER's certification status will not be rescinded if T4 slips for the employees QNEEs are received without individual tax numbers.
Since the QNERs are required to obtain business numbers, their BN applications have been triggering GST/HST reviews to determine whether they are carrying on business in Canada.
Neal Armstrong. Summary of PWC, "Non-Resident Employer Certification Program: Compliance Reviews and other Updates", PWC Tax Insights – Global Mobility Services, Issue 2016-47, 12 October 2016 under s. 153(7).
CRA might not be authorized to carryforward an unreported SDA benefit to the first non-statute-barred year
S. 6(11) effectively provides that a deemed benefit “shall be included” in an individual’s employment income in the year in which a right under a salary deferral arrangement arises. CRA considers where there was a failure to report such an inclusion, the amount can be included in income by reassessment of the individual's first year that is not statute-barred.
“The Act provides no such statutory election to the minister” to change the year of required inclusion of the benefit.
Neal Armstrong. Summary of David Nathanson, "Included Versus Reported," Canadian Tax Highlights, Vol. 24, No. 9, September 2016, p. 5 under s. 6(11).
Revenue Quebec interprets the purpose test in the Canadian exploration expense definition narrowly
Revenue Quebec considers that expenses which are incidental to mineral exploration work qualify as Canadian exploration expense only if they are necessary for the performance of the work (which implicitly entails a review of the company’s business judgment). This interpretation does not appear to accord with the CEE definition which, in its relevant aspect, requires only that the expense have been incurred for the purpose of finding or assessing a mineral resource.
Subpara. (v.1) of (f) the CEE definition excludes an expense, incurred before a new mine comes into production in reasonable commercial quantities
that results in revenue or can reasonably be expected to result in revenue earned before the new mine comes into production in reasonable commercial quantities, except to the extent that the total of all such expenses exceeds the total of those revenues.
The apparent CRA position is that this provision can extend to revenue (e.g., from the sale of gold recovered in sampling operations, or from mill operations prior to a quarter in which it has not operated continuously at 60% of capacity) that arises in a year subsequent to that in which the expenses are incurred. This can give rise to very difficult allocation and matching issues.
Neal Armstrong. Summaries of Emmanuel Sala, "Flow-Through Share Financing: Recent Developments, Traps and Tips," 2015 CTF Annual Conference draft paper under s. 66.1(6) – Canadian exploration expense – (f), s. 66(12.6)(a), s. 66(15) – flow-through share.
Joint Committee Submission provides illustrations of the potential lack of integration under the new s. 55(2) rules and potential circularity issues arising on late capital dividend elections
The Part IV tax exception from the application of s. 55(2) has been narrowed so that it does not apply where there has been a refund of the Part IV tax as a consequence of a dividend payment by the corporation , even where this occurs on the payment of a taxable dividend to an individual shareholder.
A Joint Committee Submission attaches examples which the Committee had informally provided to Finance earlier in 2016. They illustrated concerns that this change to the Part IV exception distorted the integration system, producing results that could be either more or less favourable than intended. The more favourable results depend in part on having the ultimate individual shareholder accessing the capital dividend account generated from the application of s. 55(2) under the new rules.
The submission also illustrates the uncertainty regarding potential circularity arising in connection with late capital dividend elections: after the generation of a full dividend refund on a dividend paid to an individual so that the paying Holdco becomes subject to a s. 55(2) capital gain, a late s. 83(2) election is made to convert part of the dividend into a capital dividend based on s. 55(2) having generated a capital gain – but this reduces the amount of the s. 55(2) gain.
Neal Armstrong. Summary of Bruce Ball, Ken Griffin, Rick McLean, Eric Xiao, “Subsection 55(2) material and Part IV,” Submission of the Joint Committee, 13 October 2016 under s. 55(2).
CRA confirms that AgriInvest accounts do not taint mooted family farm or fishing corporations
Under the AgriInvest program (and the similar Québec program), if a farmer contributes up to 1% of his allowable net sales (or $15,000, if less) to an AgriInvest account, the federal and provincial government will together fund a matching contribution. The account can accumulate from year to year until it is used to recover from small income shortfalls, or make investments to reduce on-farm risks. CRA indicated that, as these accounts are "net income stabilization accounts,” their amounts are deemed by s. 110.6(1.1) to be nil for purposes of the "share of the capital stock of a family farm or fishing corporation" definition, i.e., a corporation would not be tainted by holding such an account.
Neal Armstrong. Summary of 30 June 2016 External T.I. 2015-0583561E5 Tr under s. 110(1.1).
Aubrey Dan Family Trust – Ontario Superior Court finds that an original assessment not dealing with tax in a particular province starts the normal reassessment period for that province
A purported Alberta trust which wanted to have more time to make submissions to CRA that it was not resident in Ontario provided a related waiver on the prescribed (T2029) federal form. When it was ultimately reassessed for Ontario income tax (with the previously assessed Alberta tax being reversed) it unsuccessfully argued that the waiver was invalid because the T2029 form did not refer to the fact that it was a prescribed form for provincial purposes.
More interestingly, Lederman J also rejected the counter-argument of the Crown that, as the 2008 assessment had not dealt with Ontario taxes, it was the 2012 “reassessment” which in fact was the original assessment of the taxpayer’s Ontario tax (so that the normal reassessment period did not start running until then). He stated (at para 17):
… If the original notice does not constitute notification of no tax payable in all provincial or territorial jurisdictions, then a taxpayer receiving such a notice, could be assessed for income taxes in any other province or territory indefinitely. …
Neal Armstrong Summary of Aubrey Dan Family Trust v. Minister of Finance, 2016 ONSC 3801 under Taxation Act, 2007, s. 158 and ITA s. 152(4).