News of Note

Reg. 1103(1) allows a taxpayer to elect to include, what otherwise would be Class 2 to 12 properties of the same business, in Class 1, thereby reducing its potential CCA claims but also potentially avoiding (or deferring) recapture of depreciation. An additional 2% CCA claim is potentially available under Reg. 1100(1)(a.2) respecting an eligible non-residential building (potentially including a building addition) for which a Reg. 1101(5b.1) election has been made for it to be included in a separate class.

Regarding a partnership (SENC) holding Class 1 buildings along with additions thereto included in a separate class pursuant to a Reg. 1101(5b.1) election, and also holding property in Classes 8 and 10, CRA stated:

[T]he making of an election under subsection 1103(1) by a taxpayer does not override the election under subsection 1101(5b.1) and will not nullify its effects. … Consequently … SENC could elect, under subsection 1103(1), to include in Class 1 of Schedule II, the properties in Classes 8 and 10, but could not include those covered by the election under subsection 1101(5b.1).

Neal Armstrong. Summary of 15 February 2023 External T.I. 2022-0934821E5 F under Reg. 1103(1).

Were Canadian-situs solar electric power generating projects (consisting of a leasehold interest, solar panels, steel racks and metal posts, and wires, inverters and transformers, collectively the “Solar Equipment”) and wind electric power generating projects (consisting of a leasehold interest, foundation. and wind turbine including tower) taxable Canadian property (TCP)?

In finding that the Solar Equipment consisted of fixtures and, thus, was TCP under para. (a) of the definition (referring to “real … property situated in Canada”), CRA stated:

[A]ny item which is attached even minimally (such as with screws or bolts) is a fixture and if a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture. Solar panels would not lose their essential character nor be useless without the racking system however, they could not effectively function in the context of utility-scale power generation without the racking, which itself serves no purpose unless used with the attached framed solar panels. As all components of the Solar Equipment are attached to the land on which they are situated, it is our view that the Solar Equipment is described in paragraph (a) … .

The wind turbines also (more obviously) constituted fixtures and, thus, TCP.

Neal Armstrong. Summaries of 26 May 2022 External T.I. 2019-0813761E5 under s. 248(1) – TCP – (a) and ETA – s. 123(1) – real property.

The consultation paper of Finance on the transfer pricing rules includes draft legislation that is under consideration.

There would be added to s. 247 a definition of "economically relevant characteristics," which will de-emphasize somewhat the contractual terms and refer inter alia to the actual conduct of the parties and their economic circumstances.

A transaction or series of transactions is to be analyzed under draft s. 247(1.1) with reference to its economically relevant characteristics, and (under inter alia draft ss. 247(1.2), (1.3) and (2.02)) if such transaction or series as so analyzed (a “delineated transaction or series”), and taking into account the options realistically available to the participants, differs from the transaction or series that would have been entered into by the particular participants had they been dealing at arm’s length in a commercially rational manner in comparable circumstances, the delineated transaction or series will be disregarded and replaced with an alternative transaction or series that comports with the facts of the delineated transaction or series while achieving an expected result that, had the participants been dealing at arm’s length in comparable circumstances, would have been commercially rational.

Example 3 illustrates how the suggested rules would operate in circumstances similar to Cameco. Canco, the group’s ultimate parent, sells product to Forco under a long-term contract renewable only at the option of Forco using a price that is between the median and the lower end of historical product pricing and is fixed other than for an inflation adjustment. The delineated transaction or series is the purchase of product by Forco from Canco in which Forco takes title to the product and resells it, and Canco performs all significant risk control activities and has the financial capacity to assume such risk. The paper states:

Positing Canco as a commercially rational party dealing at arm's length with Forco in comparable circumstances, it would have expected the opportunity to participate in the market for the product. It would not have agreed to use a fixed price based on a relatively low historical product price thereby exposing itself over a prolonged period to the downside risk that its operating costs would exceed the intra-group selling price, all the while assuming all of the MNE group's economically significant risks. Similarly, it would have retained some autonomy as to the disposition of its product over time. …

[T]he overall result of the application of proposed [s. 247(2.02)] would be the recognition by Canco of significant additional income in line with its functional profile … .

Subject to some exceptions, Finance also suggests bringing the content required in Canada's documentation requirements in line with that laid out in Chapter V (Documentation) of the OECD Transfer Pricing Guidelines, e.g., requiring Canadian members of MNE groups that are also subject to CbC reporting requirements to provide the group’s “Master File” to CRA at CRA’s request.

Neal Armstrong. Summary of Department of Finance, “Consultation on Reforming and Modernizing Canada's Transfer Pricing Rules” 6 June 2023 under s. 247(1.3).

We have translated an interpretations released by CRA last week and a further 6 translations of CRA interpretations released in May of 2003. Their descriptors and links appear below.

These are additions to our set of 2,487 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 20 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5^th of each month).