News of Note
CRA indicates that the Art. XXIX-A(3) Canada-US LOB clause exclusion would be unavailable to income derived by a Canadian subsidiary from an offshore connected-business FA
Email this ContentCanco (which is purely a holding company for a foreign affiliate carrying on business in a third country) pays a dividend to USco, which is owned by individuals resident in a non-treaty country but which is engaged in the active conduct of a trade or business in the U.S. FA is in the same business as USco and its activities are all connected to USco’s business. Would Art. XXIX-A(3) of the Canada-US Treaty be available respecting such dividend, so that it would be subject to the Treaty-reduced rate of 5%?
No. CRA indicated that of the three tests set out in Art. XXIX A(3), the connected test would not be satisfied, i.e., the dividend income would not be considered to be derived in Canada in connection with, or incidental to, the USco trade or business (including any such income derived directly or indirectly by USco through one or more other Canadian residents).
CRA went on to indicate that to the extent that this denial is not considered appropriate in the circumstances, the taxpayer may request special relief through the CRA competent authority under Art. XXIX-A(6).
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.8 under Treaties – Income Tax Conventions - Art. 29A.
CRA indicates that a s. 15(1)-relevant s. 246(1)(a) benefit generally will not subject a non-resident to Part I tax
In the case of a non-resident indirectly receiving a benefit, the focus usually is more on the potential imposition of Part XIII tax under s. 246(1)(b) than of Part I tax under s. 246(1)(a).
When asked about the latter provision, CRA indicated that generally a non-resident’s Part I tax liability, including from any s. 246(1)(a) benefit, is based on the non-resident’s taxable income earned in Canada under s. 2(3) and Division D (ss. 115-116). To the extent that only s. 15(1) is relevant in the analysis of the s. 246(1)(a) benefit being conferred, such a benefit generally would not be considered taxable income earned in Canada, as it would generally not be included under s. 2(3) (which references only employment in Canada, carrying on business in Canada and dispositions of taxable Canadian property) or Division D.
CRA went on to indicate that even if the benefit amount were not taxable income earned in Canada, it could still be relevant for certain purposes in computing the non-resident’s income as provided in s. 250.1(1)(b).
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.7 under s. 246(1)(a).
CRA indicates that non-resident partners of a partnership that has disposed of TCP must file Part I returns even if a s. 116 certificate indicates that all Part I tax is paid
One of the exceptions to the s. 150 requirement for a non-resident to file a Canadian tax return is the exception for an “excluded disposition” in s. 150(5). Where a s. 116 certificate is issued respecting a disposition of taxable Canadian property (that is not treaty-protected property) by a partnership with numerous non-resident partners, and all Canadian taxes owing on the resulting taxable capital gain have been paid, is no Part I tax considered to be payable by the non-residents for the purposes of s. 150(5)(b), such that the disposition will be an “excluded disposition”?
CRA indicated that non-resident taxpayers are required under s. 150 to file a Canadian tax return if inter alia Part 1 “tax is payable” for the year, being the amount payable before deducting any amounts paid on account of tax, such as instalments or withholding. This interpretation applies to “tax is payable” in ss. 150(1), 150(1.1), and (respecting the definition of “excluded disposition”) 150(5)(b). Therefore, even if a s. 116 certificate has been issued indicating that all Part 1 tax has been paid, there would be no excluded disposition.
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.6 under s. 150(5)(b).
CRA indicates that a functional currency reporter realizes capital gains or losses from FX fluctuations when it receives a Cdn$ tax refund for an earlier functional currency year
Canco, which for all relevant years has filed its returns in U.S. dollars as its functional currency, becomes entitled to a Canadian dollar refund as a result of filing an amended return for an earlier such year (2012). The amount thereof, if it were converted to USD using the exchange rate as of the date of the refund, is greater than the USD amount that would be determined by converting the overpayment to USD using the exchange rate(s) that were initially used in determining Canco’s income tax payable for its 2012 taxation year.
CRA indicated that such FX fluctuation gives rise to a s. 39(1) gain that is included in computing Canco’s income, given that Canco, which in the first place, is required by s. 261(5)(a) to computing its Canadian tax results in the elected currency, must then, when determining the amount of the payment, convert to Canadian dollars, as per s. 261(11).
This made sense to it, stating that a functional currency reporter’s foreign-exchange risk arising from an overpayment of Canadian income tax is comparable to a Canadian resident’s foreign-exchange risk arising from the overpayment of tax to a foreign jurisdiction: s, 39 applies in either case.
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.5 under s. 261(11).
CRA indicates that unpaid simple interest that is deemed to be a loan by s. 78(1)(b)(ii) generally is not outstanding debts to specified non-residents
The thin cap rules apply to “outstanding debts to specified non-residents”, whose definition specifies that there is deductible interest paid or payable on them. Where the Canadian debtor and the non-resident creditor make an s. 78(1)(b)(ii) agreement to deem the amount of simple interest owing by the one to the other to be a loan, CRA generally considers that the amount of the deemed loan would not be an outstanding debt to a specified non-resident for the purposes of ss. 18(4) and (5) until the compound interest is paid and thereby becomes deductible under s. 20(1)(d).
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.4 under s. 18(5) - outstanding debts to specified non-residents - s. (a)(ii).
CRA seemingly indicates that contingent interest under Art. XI(6)(b) of the US Treaty does not taint any contemporaneous fixed interest
2016-0664041R3 found that a term loan with fixed periodic interest plus contingent interest that was payable only when a commodity price was above a specified (and not yet achieved) level would not be considered to be paying participating interest if no contingent interest had yet become payable. CRA was essentially asked whether this turned on the reference in the “participating debt interest” definition to “all or any portion” of the interest being contingent or dependent – so that such interest could still be exempted under the Canada-U.S. Treaty, whose definition of (non-exempted) contingent interest in Art. XI(6)(b) did not have the “all or any portion” language.
The CRA oral response (which appeared to use the word “amount” to reference each applicable interest component, rather than the aggregate interest amount, made on each payment date) was ambiguous, but seemed to imply that the different Treaty language did indeed matter, so that on each payment date, the fixed interest “amount” could be exempt even if there was also a contingent interest amount paid on that date that was not exempt.
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.3 under Treaties – Income Tax Conventions – Art. 11.
CRA indicates that a Canadian shared-work space can readily constitute a PE
After indicating that there is no requirement that a place be owned or rented in order to constitute a permanent establishment and there need only be a certain amount of space that is at the disposal of the non-resident, CRA went on to address two examples of a Canadian shared work space constituting a PE of a U.S. resident,
Example 1 - a. U.S. resident consultant has a Canadian membership in the workspace and works from a shared workspace in Canada on a regular basis, providing services and doing sales calls to Canadian clients.
Example 2 - rather than open a branch office, a U.S. resident corporation pays for a shared workspace in Canada for use by its Canadian resident employees.
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.2 under Treaties – Income Tax Conventions – Art. 5.
CRA confirms that contributed surplus will cease to be recognized for thin cap purposes if the contributor ceases to be a specified non-resident shareholder
We have published our summaries (provided in more abbreviated form than prior years) of the oral responses given by CRA at the May 15, 2019 IFA Roundtable together with the written questions posed. Next up, we will summarize the oral responses of Ted Cook and Stephanie Smith to some of the questions posed to them at the IFA Finance Roundtable.
Q.1 of the CRA Roundtable confirmed the 1995 CRA position that, in order for contributed surplus to be recognized for thin cap purposes, the contributor must still be a specified non-resident shareholder at the time the equity amount computation is made for the year, i.e., at the end of that year. CRA further indicated that, in order to be included in the determination of the monthly average under s. (a)(ii) of the “equity amount” definition, the contributed surplus must also have been contributed by a specified non-resident shareholder by the beginning of the month for which that contributed surplus amount is taken into account in that computation.
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.1 under s. 18(5) – equity amount – s. (a)(ii).
6 more translated CRA interpretations are available
We have published translations of 6 CRA interpretations released in March and February, 2012. Their descriptors and links appear below.
These are additions to our set of 861 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 ¼ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CIBC World Markets – Federal Court of Appeal finds that a non-resident PE had deemed separate person status sufficient to enjoy zero-rating notwithstanding an ETA s. 150 election
Administrative services provided by the appellant (“WMI”) to its parent (“CIBC”) respecting activities carried on by CIBC through its non-resident branches were treated by CRA as not being zero-rated under ETA Sched. V, Pt. VII, s. 2 because of an ETA s. 150(1) election made between the two companies, which deemed “every supply” between them to be an exempt financial supply (so that WMI’s related inputs did not generate input tax credits). The Crown argued that ETA s. 132(3), which merely deemed CIBC to be a non-resident person in respect of “activities” carried on by it through its non-resident permanent establishments, was inadequate to the task of deeming those PEs to be separate persons for s. 150 purposes.
Noël C.J. approached this issue from the perspective that:
Applying subsection 150(1) to deemed exported supplies under subsection 132(3) would defeat the tax neutrality which this provision is designed to achieve by imposing a less favourable and more onerous tax treatment on financial institutions that operate abroad through foreign branches rather than foreign subsidiaries.
Essentially, he thought the “activities” language in s. 132(3) indeed was adequate because the GST (a “transactional tax”) is therefore essentially only about activities, including those engaged here in the debate as to whether s. 132(3) or s. 150(1) applied in relation to them. The fact that other ETA provisions raised by the Crown had more exacting separate-person language only demonstrated that they were addressing more difficult issues that required the full bench press.
By the way, on Monday evening we will provide abbreviated summaries of all the CRA responses at Wednesday’s IFA CRA Roundtable.
Neal Armstrong. Summaries of CIBC World Markets Inc. v. Canada, 2019 FCA 147 under ETA s. 132(3), s. 123(1) - “closely related group”, s. 132(4), s. 150(2) and Statutory Interpretation - Ordinary Meaning.