News of Note
CRA confirms that s. 60.03 permits transferring pension income to the higher-income spouse
Email this ContentCRA indicated that the lower-income spouse, whose fees payable to a retirement home were based on his or her net income for ITA purposes, could in accordance with s. 60.03 transfer 1/2 of the eligible pension income of such individual to the higher-income spouse.
Neal Armstrong. Summary of 29 April 2020 External T.I. 2020-0845211E5 under s. 60.03(2).
Income Tax Severed Letters 23 September 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hansen – Tax Court of Canada finds that CRA could not open up years where an individual annually purchased, occupied, improved and sold a home
An individual in the concrete pouring or foundation repair business sold five homes in succession over a six-year period after having occupied and improved them. D’Auray J found that the first three sales were statute-barred given that the taxpayer had relied on advice from his accountant that he was eligible for the principal residence exemption. For the two latter sales that were within the normal reassessment period, the gains were on income account given that he dealt with those houses “in a business-like way: he selected newly built homes that would be easier to sell, leveraged his construction industry experience to make improvements that would attract future buyers and picked homes in desirable markets.”
No gross negligence penalty was applicable, again, given his reliance on his accountant’s advice. D’Auray J also in passing noted the presumption in Mensah that the benefit of the doubt in s. 163(2) penalty matters should be given to the taxpayer.
Neal Armstrong. Summaries of Hansen v. The Queen, 2020 TCC 102 under s. 152(4)(a)(i), s. 9 – capital gain v. profit – real estate, and s. 163(2).
CRA finds that Reg. 5901(2)(b)(ii)(A) does not taint a siloed dividend paid by FA to Canco1 even though another Canco holds other FA shares through an LP
Canco1 owns 100% of the Class A shares, and a limited partnership (LP) with partners (including Canco 2) at arm’s length with Canco1 owns 100% of the Class B shares, of a foreign affiliate (FA) respecting Canco1 and 2. FA pays a dividend to Canco1 on the Class A shares. Could Canco1 elect under Reg. 5901(2)(b) to have the dividend received by it treated as paid out of pre-acquisition surplus of FA (i.e., treated as an ACB reduction)?
Although there was textual ambiguity on the point, CRA found (with some assistance from the Explanatory Notes) that the Reg. 5901(2)(b)(ii)(A) requirement, that no member of LP (i.e., Canco 2) be a corporation that is otherwise eligible to elect under Reg. 5901(2)(b)(i), was only applicable where such LP in fact was receiving a dividend that otherwise could be elected upon to reduce the ACB of shares.
However, the Reg. 5901(2)(b)(ii)(A) tainting of a dividend by FA to Canco1(and Canco 2) would apply if FA had only one class of shares and a dividend was paid on a pro rata basis to both Canco1 and LP.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.7 under Reg. 5901(2)(b)(ii).
CRA indicates that that “US EIP” payments received under the CARES Act are not income from a source
A permanent resident of Canada receiving “US EIP” payments under the CARES Act, being a refundable tax credit for U.S. citizens and U.S. resident aliens that is recaptured if adjusted gross income reaches certain thresholds was not taxable thereon given that:
The amount is considered an advanced payment of a 2020 refundable tax credit, and therefore is likely not income from a source under the Income Tax Act.
Neal Armstrong. Summary of 31 August 2020 Internal T.I. 2020-0851811I7 under s. 3.
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in February, 2010. Their descriptors and links appear below.
These are additions to our set of 1,273 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA finds that circular transactions to effect a s. 212.3(9)(b)(ii) PUC reinstatement abused that provision
Canco (wholly-owned by NRco) acquired all the shares of FA1 for $100, thereby effecting a reduction of the paid-up capital (PUC) of the common shares of Canco by $100.
In order to reinstate that PUC under s. 212.3(9)(b)(ii), Canco has another newly-formed non-resident subsidiary (“New FA2”) use the $100 proceeds of a daylight loan to capitalize a new non-resident sub of it (“New FA3”) with common shares, and sell those New FA3 common shares to FA1 for a $100 promissory note. The reinstatement (which CRA indicated “arguably occurred") is effected by FA1 making a capital distribution of the New FA3 shares to Canco. The daylight loan can now be repaid by Canco contributing the New FA3 common shares to New FA2 under s. 85.1(3), and New FA3 being liquidated into New FA2.
Turning to GAAR, CRA noted the circular nature of the transactions, and concluded that the series of transactions resulted directly or indirectly in a misuse or abuse of the scheme of s. 212.3 in general and s. 212.3(9) in particular.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.6 under s. 212.3(9)(b)(ii).
Finance updates on MLI and Pillars One and Two
Comments of Brian Ernewein included:
- It is unclear whether a Budget will be tabled before 2021, and also whether a technical amendments package will be released before the first half of 2021.
- Although Canada effectively erred on the side of caution in adopting only certain of the optional provisions in the MLI, it would be wrong to assume that Canada rejects any of the other optional provisions, which could be adopted either in bilateral treaty negotiations, or through withdrawal of MLI reservations.
- A comprehensive limitation on benefits (“LOB”) clause is something that Canada would probably look to discuss in every treaty negotiation, and there are treaties where Canada would seek to include a comprehensive LOB.
- Canada is negotiating bilateral treaties with Switzerland, Germany and Brazil with a view to incorporating the BEPS minimum standards. Brazil did not sign the MLI, so that bilateral negotiation is required for it, whereas Switzerland and Germany signed, but indicated a preference for bilateral protocols to update their respective treaties.
- Comprehensive and substantive documents should be released in October on the two Pillars. Intensive work on landing each of these proposals in going to continue beyond the end of this year and well into the next.
- The idea of Pillar Two (the global minimum tax, which can be analogized to the CFC rules or the US GILTI) is conceptually more familiar than what is being discussed under Pillar One, and there is a sense that it is more likely that agreement can be reached on its technical design ahead of Pillar One. It is understood that the U.S. is supportive of Pillar Two.
- The design issues for Pillar One seem more challenging, but there could possibly be agreement on it as well, either on digital alone (for which there is a better policy argument) - but also, with some greater difficulty, on the consumer based businesses basis. The position expressed in December by the U.S. Treasury Secretary - that they would support the adoption of Pillar One only on an elective basis - does not appear to be a workable approach, and if the U.S. so insists, it is difficult to see how agreement could be reached on Pillar One.
Neal Armstrong. 15 September 2020 IFA Webinar – Finance Update.
CRA indicates that it anticipates that Canadian governmental COVID assistance will not reduce cost under cost-plus transfer-pricing methods
TPM-17 provides that the Canadian taxpayer’s cost base should not be reduced by government assistance unless there is reliable evidence that arm’s length parties would have done so. CRA confirmed that this position also applies to COVID assistance received by the Canadian taxpayer. Although the taxpayer can seek to demonstrate that there is marketplace evidence to the contrary (whatever on earth that might be), CRA generally would expect, given the temporary and exceptional objectives of the COVID-related government assistance, that it should be kept by the Canadian recipient. Thus, in a cost-based transfer pricing methodology, the cost base should not be reduced by the amount of a wage subsidy that a Canadian company receives, and there would be no reduction in that company’s profit margin (with numerical examples provided).
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.5 under s. 247(2)(a).
CRA notes that the pandemic has not changed Treaty time limitations
Respecting the pandemic effect on various CRA international programs, CRA indicated:
- CRA has been dealing with its counterparts on APA and MAP matters using teleconferencing and, where possible, video-conferencing; and some MAP cases were recently closed. Members of the Transfer-Pricing Review Committee have also been meeting through teleconferencing.
- Bill C-20 (re domestic time limits) does not apply to treaty time limits. If there is none, the usual domestic limits apply, e.g., under s. 152, subject to Bill C-20, which extended those limits for up to six months, but to no later than December 31, 2020.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.4 under Treaties - Article 26.