News of Note

CRA has substantially expanded its Transfer Pricing Memorandum on secondary adjustments, and relief therefrom where there is an acceptable repatriation agreement. Where a Canadian taxpayer (including for these purposes, a partnership) is subject to a “primary adjustment” under s. 247(2) regarding its participation in a transaction or series with a non-arm’s length non-resident, (other than a CFA) a secondary adjustment (usually, a deemed dividend) is generally required to account for the benefit conferred on the non-arm’s length non-resident, namely, the excess amount paid to, or insufficient amount received from, such non-resident. However, if there is a repatriation agreement that is acceptable to CRA (that promptly refunds the benefit that otherwise gave rise to the secondary adjustment), CRA generally will not assess the deemed dividend.

Since the time of the original memorandum, ss. 212(12) and (13) were enacted to provide statutory authority for secondary adjustments and repatriation adjustments in the case of taxpayers who are resident corporations. However, this makes less of a difference than one might think. Where the taxpayer (e.g., a resident individual or trust) is not deemed to pay a dividend under s. 247(12), CRA will get to the same result by applying s. 15 (for a non-resident shareholder) or s. 56(2) (where the non-resident is not a shareholder) in order to impose withholding tax on the secondary adjustment under s. 214(3) – except that it may instead consider invoking s. 246(1)(b).

Similarly, although the potential relief for repatriation adjustments under s. 247(13) only applies to Canadian corporate taxpayers, CRA as an administrative matter applies the same policy to Canadian trusts and individuals.

However, CRA states that it will not provide relief from Part XIII tax on secondary adjustments, where there is repatriation, in the following cases:

• the Transfer Pricing Review Committee has approved the application of paragraphs 247(2)(b) and (d) of the ITA;
• the General Anti-Avoidance Rule Committee has approved the application of the general anti-avoidance rule under subsection 245(2) as an assessing position;
• other anti-avoidance provisions of the ITA are applicable to the transaction(s) or series of transactions (for example, subsections 17(2), 247(9), etc.);
• the taxpayer or a non-arm’s length non-resident has failed to honour a requirement or compliance order issued under the ITA relating to the transaction(s) or series of transactions; or
• any other circumstance in which the Minister does not concur with the repatriation.

These conditions for relief are expressed with greater rigidity than one would have expected for an appropriate exercise of Ministerial discretion.

Neal Armstrong. Summaries of TPM-02R Secondary Transfer Pricing Adjustments, Repatriation and Part XIII Tax Assessments 1 June 2021 under s. 247(12), s. 247(13) and s. 247(14).

The taxpayer’s business included installing culverts in housing subdivisions. A particular project was seeking to instal and tie-in new box culverts with existing box culverts that, in turn, hooked into a catchment pond 4 meters below the water surface. After trying various approaches, what ultimately worked was using a combination of a concrete cap, small objects, and pumps to dewater a square culvert (so that its workers could work inside it and instal the necessary tie-ins).

In confirming the disallowance of the taxpayer’s related SR&ED claims, Wong J stated inter alia that the taxpayer’s approach “was more akin to problem-solving by trial and error than formulating hypotheses and systematically testing them to reduce or eliminate a technological uncertainty.”

Neal Armstrong. Summary of WRD Borger Construction Ltd. v. The Queen, 2021 TCC 40 under s. 248(1) - SR&ED.

ValueClick Inc., a US corporation, was one of the market leaders in the online advertising business. Its Irish subsidiary, ValueClick Ireland, had a staff of no more than seven employees, who were responsible for account management and sales of ValueClick services for the world outside North America. ValueClick Ireland established subsidiaries in local European jurisdiction, including in France (“ValueClick France”). The external contracts between ValueClick and French advertisers were formally entered into with ValueClick Ireland rather than ValueClick France. However, a staff of around 50 employees of ValueClick France was responsible for marketing to French advertisers as well as various administrative and support functions, and forwarded contracts to Value-Click Ireland for signing. The intercompany services agreement between ValueClick Ireland and ValueClick France provided that it did not create an agency relationship, and that it did not authorize one party to sign contracts in the name of the other party or to represent that party for the purpose of contractually binding it. ValueClick France was remunerated by Value-Click Ireland under the agreement on a cost-plus-8% basis.

The permanent establishment wording in the French-Irish Convention had the standard OECD wording respecting PEs constituted by agents of a non-independent status. In affirming the position of the French tax authorities that Value-Click Ireland had an agency PE in France, the Supreme Administrative Court stated that a French company could be considered to be habitually exercising the authority to conclude contracts in the name of an Irish company “if, on an habitual basis - even if it does not formally conclude contracts on behalf of the Irish company - it decides on transactions which the Irish company merely endorses and which, once endorsed, bind it.” The Court went on to state:

[W]hile the Irish company sets the model for the contracts concluded with advertisers in order to give them the benefit of the services it engages to be provided, as well as the general pricing conditions, the decision to conclude a contract with an advertiser and all the tasks necessary for its conclusion are the responsibility of the employees of the French company, with the Irish company merely validating the contract by a signature which is of an automatic character.

Neal Armstrong. Summary of [ValueClick case] FR: CE, 11 Dec. 2020, Case No. 420174 (Conseil d'État) under Treaties – Income Tax Conventions – Art. 5.

A corporation, which has been headleased land, subdivides the land into residential lots that are registered in the land registry, and subleases the lots to persons who install manufactured homes (qualifying as “mobile homes,” as defined in ETA s. 123(1)) on the lots. CRA indicated that the subleasing of the land would be regarded as the supply of “part of a residential complex” – except that if the land was a site in a residential trailer park, the s. 123(1) definition of residential complex as it applied (in para. (d) thereof) to a mobile home, excluded the land from the residential complex (consisting only of the mobile home), so that the sublease instead would be a supply of bare land. CRA did not discuss whether such supplies were exempted under Sched. V, Pt. I, s. 6(a) or 7(b).

Neal Armstrong. Summaries of 1 December 2020 GST/HST Interpretation 193361r under ETA Sched. V, Pt. I, s. 6(a) and s. 123(1) - residential trailer park.