News of Note
Numerous difficulties remain in applying the FA system to partnerships
Email this ContentObservations on the application (or non-application) of the foreign affiliate (FA) system to partnerships include:
- The s. 93 regime (for converting capital gains into dividends) does not apply to any gain realized by a corporation resident in Canada (CRIC), or an FA of a CRIC, respecting a disposition of a partnership interest in a partnership that holds FA shares. If an actual dividend must be paid in order for a CRIC to benefit from any underlying FA surplus, this might have foreign withholding tax consequences. However, the loss denial rules in s. 93 do apply where a partnership interest is sold. The reason for this apparently inequitable treatment is not clear.
- The “partnership postamble” to the s. 95(1) definition of “excluded property” (EP) attempts to provide for a CRIC’s investment in assets “through” a partnership producing an equivalent excluded property result as if there had been a direct investment. However, in circumstances where the postamble wording is too narrow to accomplish this, there are good arguments that para. (a) of the EP definition (which refers to property of the FA that is “used or held by the [FA] principally for the purpose of gaining or producing income from an active business carried on by it”) can apply to an FA’s partnership interest. Under partnership law in common-law provinces (and somewhat similarly in Quebec), all members of a partnership are considered to be carrying on any activity carried on by the partnership.
- Para. (c) of the EP definition refers to property of the FA “all or substantially all of the income from which is … income from an active business.” Respecting an earlier version of para. (c), concerns were expressed that where a partnership of which a foreign affiliate is a member disposes of capital property used principally for the purpose of gaining or producing income from an active business, the property does not qualify as excluded property, given the requirement that the EP must be property “of” the FA. However, it is now accepted that this likely is not a concern, given inter alia that pursuant to Canadian common-law partnership principles, each member is considered to have an undivided interest in the property of the partnership.
- Where FA2 borrows from a sister FA Finco to fund FA Opco “through” a subsidiary Holdco partnership of FA2, s. 95(2)(y) may be broad enough to render s. 95(2)(a)(ii)(D) applicable so as to deem the interest on the loan to be active business income to FA Finco.
The sticking point in the analysis may be whether paragraph 95(2)(y) is broad enough to deem FA 2 to own its proportionate share of the FA Opco shares for the purpose of satisfying the requirement, set out in subclause 95(2)(a)(ii)(D)(III), that the FA Opco shares be “excluded property of” FA 2. In the context of the recent amendments that are clearly aimed at ensuring that the FA regime in general, and paragraph 95(2)(a) in particular, applies appropriately to FA structures involving partnerships, there are excellent arguments that paragraph 95(2)(y) is broad enough to accommodate this structure, on the appropriate facts.
Neal Armstrong. Summaries of Tina Korovilas and Drew Morier, “Non-Corporate Vehicles in the Foreign Affiliate Context,” Canadian Tax Foundation, 2018 Conference Report, 20:1 – 114 under s. 96, s. 104(1), Reg. 5907(11.2)(b), s. 90(1), s. 93.1(2)(a), s. 93.1(2)(d)(i), Reg. 5901(2)(b)(ii), s. 93(1.3), s. 95(1) – excluded property – para. (e), para. (a), para. (c), s. 95(2)(y), s. 95(2)(z), s. 95(2)(a)(ii)(B)(II), s. 95(2)(a)(ii)(D) and s. 94(1) – exempt foreign trust – (h)(ii)(C)(I).
CRA assessments under a GST/HST voluntary disclosure by a supplier permit a s. 225(4)(c) extension of the period for its customer to claim an ITC
A Notice of Assessment is issued by CRA once a GST/HST voluntary disclosure is finalized. This permits a supplier who has disclosed a failure to charge GST/HST on a taxable supply made more than four years prior to such assessment to disclose such assessment to its customer, so that s. 225(4)(c) can operate to extend the normal four-year period for the customer to claim an input tax credit for GST/HST that is now charged to it and paid by it on the supply from the assessed supplier.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.21 under s. 225(4)(c).
CRA uses information collected on an NR73 as its principal tool in assessing individuals’ residency
Some pension plans provide that after two years of non-residence of the annuitant, the funds in a locked-in retirement account, locked-in RRSP or life income funds cease to be locked-in and can be withdrawn without limitation through a transfer to a non-locked-in retirement vehicle such as an RRSP or RRIF. When asked to confirm non-residence status in this context, CRA indicated it will not simplify its normal procedures for reviewing residency. It stated:
[T]he CRA must conduct a detailed review of all facts and circumstances specific to the individual's situation, which will generally have been brought to its attention by Form NR73. These include residency links with Canada and the duration, purpose, intent and continuity of Canadian and international travel.
Neal Armstrong. Summaries of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.11 under s. 2(1).
CRA considered, and declined, extending its wash-trading policy to supplies made to municipalities
In assessing a “wash transaction,” CRA will automatically waive a significant portion of the interest that was assessable (or all of it, in the context of a voluntary disclosure). However, Memorandum 16-3-1 states that municipalities, which are eligible for 100% GST rebates, are not considered to have received a wash transaction. When asked for the rationale, CRA indicated that it had reviewed this policy 10 years ago and had decided:
to maintain the original tax policy intent of the wash transaction policy whereby it would continue to only possibly apply for recipients involved in commercial activities and entitled to claim full ITCs. The wash transaction policy was not intended to apply to all circumstances where there is no net loss of revenues for the government.
CRA also noted:
… Municipalities in participating provinces may be entitled to a PSB rebate of 100% of the federal part of the HST but only entitled to a lesser percentage of the provincial part of the HST.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.19 under s. 281.1(1).
CRA assimilates a loan to a royalty agreement and finds that the principal advanced in fact was subject to GST/HST
CRA considered a situation in which a financing of a company with product sales was bifurcated into a non-interest-bearing loan and a royalty agreement. The loan was repaid on a quarterly basis to the extent of x% of product sales in each quarter, with the balance of the loan to be repaid on a specified date, if the revenues prior to then were insufficient to repay the loan. The second component was styled as a royalty agreement and contemplated that in consideration for a stipulated amount advanced to the company (which was labeled as an “interest free loan”), the company was to start paying a percentage of its product sales to the investor after a stipulated level of payments had been made under the loan agreement.
CRA found that the company had made a single supply under the two (loan and royalty) agreements. What it supplied to the investors was a “contingent right to be paid money” rather than the exempt supply of a debt security. Accordingly, there was a taxable supply by the company to the investors, and the “principal amount” advanced by them under their “loan” to the company was the up-front consideration charged to them for this taxable supply. Accordingly, the company was required to charge GST/HST on that principal amount.
CRA also ruled that a more straight-up royalty arrangement (somewhat similar to that described in 162056) was subject to GST/HST on the amount advanced by the investor.
Neal Armstrong. Summary of 10 May 2019 GST/HST Ruling 167225 under ETA s. 123(1) – debt security.
Joint Committee discusses uncertainties created by new transfer pricing override rule
Comments of the Joint Committee on draft s. 247(2.1) (which is a revised version of former draft s. 247(1.1) and whose general premise is that s. 247(2) applies in priority to all other provisions of the Act) included:
- If s. 247(2) was intended to apply to a contribution of capital made by a Canadian parent to a non-resident subsidiary, or to a gift by a Canadian-resident individual to a non-resident relation, this would result in the need to comply with transfer pricing documentation requirements (which would, for example, be impossible for gifts) and the potential application of transfer pricing penalties. On the other hand, if the transfer pricing rules should be “read down” to avoid such a result, there would be a resulting unexpected and undefined narrowing of the transfer pricing rules’ scope.
- If s. 247(2) was intended to apply before the rollover rules (e.g., s. 85(1)(e.2)) would this mean, for example, that the non-resident transferor would be deemed to have received more shares, thereby ousting s. 85(1)(e.2) to any other adverse consequences – or if s. 247(2) deemed there to be additional boot, would this mean that the safe harbor from s. 85(1)(e.2) no longer was available?
- S. 17(1) would be rendered redundant as between non-arm’s length parties even though such non-arm’s length circumstances were “front and centre” in the design of the s. 17(1) rules – and any “safe harbour” contained in s. 17 or other specific rules may be rendered moot by the prior application of s. 247(2).
Neal Armstrong. Summary of 5 November 2019 Joint Committee letter entitled “Transfer Pricing Amendments” under s. 247(2.1).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in June, 2011. Their descriptors and links appear below.
These are additions to our set of 993 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for November.
GST/HST Severed Letters May 2019
This morning's release of 11 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their May 2019 release) is now available for your viewing.
Income Tax Severed Letters 6 November 2019
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Stark International – Tax Court of Canada finds that a use test could be applied by looking beyond the property’s immediate intended use
In order to be Class 43 depreciable property, oil processing equipment of the taxpayer had to qualify as property acquired by the taxpayer to be used directly or indirectly by it in Canada primarily in processing goods for sale - and a similar test applied in determining whether the equipment was “qualified property” for investment tax credit purposes. In the case of some of the equipment, its initially contemplated use (which in fact occurred) was to purify oil for 10 months at the Bruce nuclear power station. This did not qualify as processing “for sale” because the oil in question at all times was oil of the customer rather than being sold to it. Nonetheless, the use test of processing for “sale” was satisfied because the taxpayer’s intention on completion of this contract was to use the equipment for purifying (i.e., processing) dirty oil that it acquired for the purpose of sale in its purified form.
The ITC “qualified property” test (which was easier to work with, because it had an explicit purpose test) was also satisfied.
In finding that safety equipment did not qualify, Sommerfeldt J stated:
While safety is a commendable and essential objective of any oil processing business, safety equipment is used for the purpose of promoting and ensuring safety, rather than for the purpose of processing oil for sale.
Neal Armstrong. Summary of Stark International Inc. v. The Queen, 2019 TCC 248 under Sched. II, Class 29.