News of Note
CRA considers that “income” for FTC Treaty purposes includes taxable capital gains
Email this ContentUnlike many other Treaties, the double taxation article of the Canada-Brazil Treaty refers to Canada allowing a foreign tax credit for Brazilian income tax on "income," rather than "income or gains," which may be taxed in Brazil. However, CRA accepts that "income" includes taxable capital gains. Accordingly, a Canadian company which has sold its shares of a Brazilian company is allowed a foreign tax credit, against its Canadian income tax on that gain, for the Brazilian gains tax (notwithstanding that under Canadian domestic principles, that gain may be considered to be from a Canadian source).
Neal Armstrong. Summary of 13 January 2014 T.I. 2013-0512581E5 under Treaties – Art. 24.
Income Tax Severed Letters 29 January 2014
This morning's release of 17 letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that the Part I limitation period rules apply to foreign information reporting penalties
Although foreign asset reporting occurs under information returns required under a separate Part of the Act (Part XV), CRA considers that the statute-barring rules in s. 152(4) for Part I of the Act apply to penalties applicable to delinquent filings of these returns - presumably because these penalties are imposed under a Part I section (s. 162). An implication is that, provided the taxpayer has filed a Part I return and been assessed so that the applicable limitation period (as potentially extended under draft s. 152(4)(b.2)) starts running, the imposition of a penalty respecting, for example, a T1135 information return ultimately can become statute-barred even if the information return is not filed at all. This contrasts, for example, with a Part VI.1 tax reporting obligation, which will never become statute-barred if a Part VI.1 tax return is never filed (see s. 191.4(2)).
Neal Armstrong. Summaries of 12 December 2013 Memo 2013-0497231I7 under s. 152(4)(a), s. 162(7), s. 162(10) and s. 162(10.1).
CRA is prepared to consider that “substantially all” can be less than 90%
Some cases such as Watts and Keefe have found that in particular contexts something in the neighbourhood of 80% could satisfy a "substantially all" test. When asked about this, CRA stated that it will "consider each case in its particular context to determine if a threshold lower than 90% could satisfy the test."
Neal Armstrong. Summaries of 11 October 2013 APFF Roundtable Q. 3, 2013-0495631C6 F under s. 248(1) – small business corporation and s. 110.6(1) – qualified small business corporation share.
Avoiding s. 55(2) may turn on the family patriarch or matriarch staying alive
A technical interpretation illustrates the proposition that if Opco is owned by holding companies which are controlled by Father (Fatherco), a grandchild (Nephewco) and an uncle of that grandchild (Uncleco), a redemption of Fatherco shares by Opco (giving rise to a deemed dividend) will be exempted under s. 55(3)(a), as Nephewco and Uncleco are related to Fatherco. However, as Nephewco and Uncleco are not related, a redemption of Uncleco shares could be subject to capital gains treatment under s. 55(2) unless this redemption does not result in a "significant" increase in the percentage interest of Nephewco in Opco (as opposed to a "small percentage" change.) The application of this test was unclear where Nephewco started off with 5% of the Opco common shares, and somewhat under half of the Opco preferred shares were redeemed by Uncleco - even if it were assumed that the prior introduction of Nephew Co into the structure was not part of the same series.
Neal Armstrong. Summary of 3 January 2014 T.I. 2013-0514021E5 F under s. 55(3)(a).
CRA maintains general prohibition on deducting disability policy premiums
CRA considers (subject to a limited exception in IT-223, para. 2 for overhead expense insurance) that the premiums paid under a disability policy are non-deductible, and the benefits received thereuder are non-taxable, even in the case of a policy of a corporation on its shareholders which it was required to obtain as a condition to receiving a loan to acquire a business asset.
Neal Armstrong. Summary of 8 October 2013 T.I. 2011-0428931E5 F under s. 18(1)(a) – income producing purpose.
Elk prevails in using a commission-based transfer pricing approach
CRA reassessed a Canadian company ("Elk"), which was charging cost-based commissions to its Japanese affiliate for its procurement of supplies of logs, by applying the transactional net margin method rather than increasing the commissions. Joel A. Nitikman, who acted for Elk, infers that the subsequent consent judgment of the Minister "is, essentially, an admission that the TNMM, at least in the manner in which it is used in this case, cannot apply under the 'terms and conditions' rule in paragraphs 247(2)(a) and (c)... ." (CRA also was unsuccessful with TNMM in Alberta Printed Circuits.)
Jules Lewy and Joel A. Nitikman, "Important Developments in Canadian Transfer Pricing", CCH Tax Topics, Number 2185, January 23, 2014, p. 1 under s. 247(2).
Cash pool utilization fees “may” be fully deductible
Aco and Bco have business-related aggregate bank overdrafts of $200,000, their sister, Cco has a cash balance of $50,000 with the same bank, the bank agrees to charge interest at X% only on the net balance of $150,000 owing by the group, and Cco charges a "financial services fee" to Aco and Bco of X% of $50,000 to recapture their interest savings.
CRA stated that there "are arguments" for Aco and Bco deducting the fees in full under s. 20(1)(e.1) – otherwise they should be deductible over five years under s. 20(1)(e). X% was 10%, and CRA emphasized that such deductibility was subject to the reasonableness limitation in s. 67.
Neal Armstrong. Summaries of 9 December 2013 T.I. 2013-0507931E5 F under s. 20(1)(e.1), s. 20(1)(e) and s. 18(1)(b) – capital expenditure v. expense – financing expenditures.
CRA requires the dissolution of a non-existent limited partnership in order to trigger a disposition of the LP units
CRA accepted the questionable assertion of a correspondent that a limited partnership which had ceased all activity and no longer had any assets (and, therefore, no longer represents a business carried on in common with a view to profit) "has not legally ceased to exist." (If it’s still registered, it must still exist, right?) CRA then went on to conclude that as the s. 50(1) rule did not extend to LP units, it would be necessary to "dissolve" the partnership in order to trigger their disposition.
Neal Armstrong. Summary of 3 January 2014 T.I. 2013-0482081E5 under s. 50(1).
A non-standard loss shift includes a payment for the losses
A loss shift from Opco to its sister (Profitco) normally would entail Opco lending at interest to Profitco and Profitco subscribing for Opco prefs. However, Profitco is a regulated financial institution which does not want additional debt on its balance sheet, and Opco is to be paid for its losses. Accordingly, Opco will effect a loss shift to a newco subsidiary (Lossco) and sell Lossco to Profitco for prefs whose redemption amount will reflect some value for the losses and which Profitco will redeem; and Lossco will be wound up into Profitco under s. 88(1.1). The goosed value of the prefs does not give rise to a s. 56(2) benefit to the parent of Profitco and Opco.
Neal Armstrong. Summaries of 2013 Ruling 2013-0496351R3 under s. 111(1)(a) and s. 88(1.1).