News of Note
CRA clarifies that solely future-looking employee incentive plans can still result in annual SDA assessments
Email this ContentIn a companion I7 memo to 2020-0850281I7 discussed in the previous post, the Directorate made a number of comments to clarify that prior statements did not indicate “that solely forward-looking or future-orientated incentive plans with certain characteristics are not salary deferral arrangements (‘SDAs’)”:
- Prior statements “made strictly in the context of ATR-45 SAR Plans” should not be “misconstrued as implying that a right to receive an amount after the end of a particular year is not created until the units of any given incentive plan are exercisable… .”
- A determination at any year end as to whether the rights of a plan participant give rise to a SDA turns on whether (i) the employee has a right to a deferred amount (which may be the case even for an ATR-45 SAR plan); and (ii) the tax-deferral purpose test referenced in the SDA definition is met (which generally is not considered to be the case for an ATR-45 SAR plan, and is a question of fact for other plans).
- Respecting (i), “it is possible for a right to a deferred amount to arise under an incentive plan even before the units of that plan are exercisable” – and the “fact that the value of the units of an incentive plan is subject to change prior to the occurrence of a triggering event does not … in and of itself, give rise to an indeterminable amount before the occurrence of the triggering event” so as to preclude a preliminary deferred amount being determined at a year end before the triggering event.
- “The fact that units in other types of incentive plans have no intrinsic value when granted is not a sufficient basis to conclude that the plan is not a SDA at inception, nor to conclude that the plan need not be tested on an annual basis.”
Neal Armstrong. Summary of 10 July 2020 Internal T.I. 2020-0841961I7 under s. 248(1) – SDA.
CRA will no longer issue SDA rulings on formula-based incentive plans for employees
CRA got cold feet about ruling that formula-based incentive plans are not salary deferral arrangements after considering, and rejecting, a proposed plan under whose units’ value on their redemption date would be based on changes in EmployerCo’s retained earnings between the grant and redemption date plus dividends paid over the same period – so that the units’ value would have increased over the duration of the vesting period even if EmployerCo’s net earnings remained stable over the period (as had been the case in prior years).
The Directorate explained that it has now developed a concern “that the financial metrics that underlie formula-based appreciation plans may be susceptible to manipulation … [which] can be used to obfuscate the fact that a formula-based appreciation plan’s underlying purpose is to defer tax,” and in that regard has announced: that it:
will no longer consider any ruling requests pertaining to whether any given formula-based appreciation plan is a SDA, unless:
i) the plan is of a type described in ATR-45 …; or
ii) the ruling request pertains to whether one of the enumerated exceptions listed in the definition of SDA apply to the plan.
… [S]hare appreciation rights (“SAR”) plans … described in ATR-45 … [have] the following characteristics:
- The unit has no intrinsic value at the date of grant;
- The value of a unit is not guaranteed and may have a negative value after the date of grant; and
- The value of each unit at any particular time is determined by subtracting the FMV of a share of the employer at the date of grant from the FMV of a share of the employer at that particular time.
… [O]ur decision to no longer consider ruling requests for formula-based appreciation plans does not mean that the CRA now considers all such plans to be SDAs.
Neal Armstrong. Summary of 10 July 2020 Internal T.I. 2020-0850281I7 under s. 248(1) – SDA.
Income Tax Severed Letters 2 September 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms its position on “standard” convertible debentures
In 2013-0509061C6, CRA indicated that:
[T]he deemed payment of interest on standard convertible debentures under subsection 214(7) of the ITA that arises because of a transfer or assignment of standard convertible debentures by a non-resident person to a person resident in Canada (including the issuer of the debenture), does not generally constitute "participating debt interest". …
CRA is not inclined at this time to take the position that standard convertible debentures would in general constitute "excluded debt obligations" pursuant to paragraph 214(8)(c) of the ITA.
CRA confirmed that 2013-0509061C6 continues to represent CRA’s position.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.16 under s. 212(3) – participating debt interest.
CRA indicates that accrual-basis taxpayers should not usually net bad or doubtful debt allowances against their qualifying revenues
Recently-enacted s. 125.7(4)(e)(ii) allows an eligible entity to elect “to determine its qualifying revenues based on … the accrual method, in accordance with generally accepted accounting principles." CRA indicated that:
- when using the accrual method in accordance with its normal accounting practices, an eligible employer should usually not be able to deduct its bad debts (or an allowance therefor), when determining its qualifying revenue.
- discounts are generally netted against revenue under common accounting practices in Canada (although whether a particular eligible entity deducts discounts from its qualifying revenue will depend on its normal accounting practices); and that the above election is not intended to allow an eligible entity to change how it records its discounts under its normal accounting practices.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.15 under s. 125.7(4)(e)(ii).
CRA indicates that COVID-related government assistance is not subject to special treatment under TPM-17
TPM-17 provides:
When a cost-based transfer pricing methodology is used to determine the transfer price of goods, services, or intangibles sold by a Canadian taxpayer to a non-arm's length non-resident person and the Canadian taxpayer receives government assistance, the cost base should not be reduced by the amount of the government assistance received, unless there is reliable evidence that arm's length parties would have done so given the specific facts and circumstances.
CRA indicated that COVID-related government assistance is treated the same as other government assistance insofar as TPM-17 is concerned.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.12 under s. 247(2)(a).
CRA indicates that there generally is no COVID relief from the obligation on non-resident corporations carrying on business Canada to file tax returns
CRA indicated that its general expectation was that non-resident corporations resident in a non-treaty jurisdiction, which are considered to be carrying on a business in Canada only because of COVID Travel Restrictions, nonetheless would file a tax return - but that the corporation could always seek to try to persuade CRA to show some flexibility in circumstances not covered in the COVID Guidelines.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.10 under s. 150(1)(a)(i)(B).
AgraCity - Tax Court of Canada rejects transfer-pricing attack on an arrangement for the sale of product into Canada by a Barbados CFA
Barbados international business corporation (“NewAgco Barbados”), that was a subsidiary of a Canadian company owned by two Canadian brothers, purchased a herbicide in the US and sold it to Canadian farmers, and paid management fees to another Canadian company (“AgraCity”) wholly-owned by one of the two brothers for assisting in making this happen.
In reassessing AgraCity, CRA relied upon the transfer pricing rules in ss. 247(2)(a) and (c) and re-allocated an amount equal to all of NewAgco Barbados’ profits from its sales to the income of AgraCity. However, in its arguments before Boyle J, the Crown’s primary position was now that the transactions were a sham or window dressing; in the alternative, that ss. 247(2)(b) and (d) applied to recharacterize the transactions; and in the further alternative, ss. 247(2)(a) and (c) resulted in a transfer pricing adjustment.
Boyle J found that the evidence presented did not establish sham or any deceptive window dressing, stating inter alia that “confused books and records … are not, on their own, evidence of a sham unless their inaccuracies, inconsistencies and/or omissions can be shown to favor a particular, but clearly inaccurate, recording of the party’s rights, obligations, revenues etc.”
Respecting s. 247(2)(d), a crucial fact was that the Health Canada rules prohibited sales of the herbicide by Canadian companies – but a non-resident company could purchase the herbicide in the U.S. and have it imported into Canada. Thus, there was no alternative transaction under which AgraCity could itself have sold the herbicide. Thus, the Crown case based on s. 247(2)(d) crumbled.
As for the conventional transfer pricing rule in s. 247(2)(c), Boyle J stated:
There was nothing … that could provide material support for the Respondent’s position that if NewAgco Barbados and AgraCity were arm’s length parties, they would have entered into a Services Agreement on terms and conditions that gave 100% of the [herbicide] sales profits to AgraCity and no share whatsoever of those profits to NewAgco Barbados … .
The only evidence the Court has on the point indicates that the amount paid to AgraCity generated a return on its costs that was in the range of what somewhat comparable arm’s length parties earn. …
Boyle J also noted that the Crown had dropped its FAPI case against the Canadian parent of NewAgco Barbados on the basis that this CFA’s sales of the herbicide were arm’s length.
Neal Armstrong. Summaries of Agracity Ltd. v. The Queen, 2020 TCC 91 under s. 247(2)(b), s. 247(2)(a), General Concepts – sham, onus, s. 95(2)(a.1).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in March, 2010. Their descriptors and links appear below.
These are additions to our set of 1,256 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the open week for September.
Rogers Enterprises – Tax Court of Canada finds no GAAR tax benefit where an alleged excessive CDA addition was not yet distributed to individual shareholders (and also no abuse)
To simplify somewhat, a group of private corporations owned for the benefit of the Rogers family structured their affairs such that one corporation (“CGESR”) was the beneficiary of policies on the life of Ted Rogers whereas a company (“ESRL”) holding shares of CGESR through another CCPC (“ESRIL 98”) was the policyholder and had been paying the premiums, so that its adjusted cost basis (“ACB”) was $42M. On the death of Mr. Rogers in 2008, the full proceeds of the policies ($102M) were added to the capital dividend account (“CDA”) of CGESR, which used such proceeds to pay actual and deemed capital dividends in that amount. However, not all of these proceeds were fully distributed up the chain, so that, on the trial date, ESRIL 98 continued to have a CDA of approximately $42M.
CRA considered that it was abusive for the group to benefit from the full $102M addition to the CGESR CDA rather than an amount net of the $42M ACB to the policyholder (ESRL). However, Sommerfeldt J. found that there was no “tax benefit” for GAAR purposes because, so far, no tax had been avoided, i.e. any intercorporate dividends would have been free of tax (in light inter alia of the availability of the s. 184(3) election) irrespective of whether they were paid as “taxable” or capital dividends, and the “abusive” portion of the $102M increment to CGESR’s CDA had not, so far, been used by the estate or any other individual.
In any event, there was no abuse under s. 245(4). In 1977, there had been a legislative change to reflect a policy that the addition to a corporate beneficiary’s CDA would now only be reduced by the policy’s ACB to it rather than by the ACB of the policy to any person. Accordingly, taking advantage of the fact that CGESR itself had a nil ACB for the policies, so that the bump to its CDA was $102M rather than by $60M ($102M - $42M) accorded with the object and spirit of the provisions. Sommerfeldt J. stated that “this is one of those, perhaps rare, situations where the underlying rationale of the Reduction [for ACB] Provision in 2008 and 2009 was no broader than the text itself.”
Notwithstanding some “self-serving” language of Finance to the contrary, a 2016 amendment “clearly changed” the object and spirit of the provisions so that, from thence onwards, there was to be a reduction in the bump to the corporate CDA for the policyholder’s ACB.
Neal Armstrong. Summaries of Rogers Enterprises (2015) Inc. (successor by amalgamation to CGESR Limited) v. The Queen, 2020 TCC 92 under s. 245(1) – tax benefit, s. 245(4), and s. 89(1) – CDA – (d)(iii).