News of Note
Income Tax Severed Letters 5 April 2017
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that there generally is no 3rd party requirement to report benefits under $500
Some points made by CRA in response to submissions on its recent Folio on employee benefits (S2-F3-C2):
- Where sales personnel are awarded trips as an incentive, the value of the benefit can “be reduced to the extent of the employment-related activities” required to be performed on the trip.
- Where employment benefits are provided by someone other than the actual employer, “if the amount of the payment [or benefit] is $500 or less, CRA generally waives the T4A reporting requirement unless income tax was withheld at source…[or in the case of] group term life insurance benefits.”
- CRA will amend the Folio to further clarify that it is following Spence to the effect that benefits should be valued based on their fair market value rather than cost.
Neal Armstrong. Summary of 15 November 2016 TEI Roundtable, Q.2, 2016-0670911C6 under s. 6(1)(a).
Six further full-text translations of severed letters are available
Full-text translations of the French severed letter released last week and five French severed letters released between May 20, 2015 and April 29, 2015 are now available, and are listed and briefly described in the table below.
These (and the other translations covering the last 23 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the "open" week for April.
Nestlé Canada – Tax Court of Canada finds that the mere posting and honouring by Costco of dollar-amount discounts for which it was reimbursed by Nestlé Canada did not come within the GST/HST coupon rules
Nestlé Canada promoted the sale of various of its products at Costco warehouses by having Costco agree to post signs on the shelves indicating per each product item a discount of a fixed dollar amount per item, and then reimbursing Costco for the full amount of all discounts applied to customer purchases at the Costco warehouses. Lamarre ACJ found that these discounts did not qualify as “coupons” as defined in ETA s. 181 because “the customer did not tender any coupon (physical or electronic) to the cashier” but instead simply received a discount. The arrangement instead was characterized by her as the provision of a promotional allowance.
The effect of this finding (as noted by her) was that CRA received a windfall, as the Costco customers had paid GST/HST on the full pre-discount price of the goods, and Nestlé Canada was not entitled to input tax credits for the applicable fraction of the discount amounts (unlike what would have been the case if they had qualified as “coupons.”)
Neal Armstrong. Summaries of Nestlé Canada Inc. v. The Queen, 2017 TCC 33 under ETA s. 181(1) – coupon and s. 231.2.
CRA ruled that annually recurring dividends are not a series of transactions for safe income determination purposes
The safe income determination time is no later than the time immediately before the earliest dividend paid as part of a “series,” which is broadly defined in s. 248(10) and Copthorne. It could be argued that if a corporation has a policy of annually distributing its earnings, the series respecting a dividend paid in, say, Year 10, commenced in Year 1, so that the earnings after Year 1 were not added to safe income. CRA noted that:
In a recent ruling, the CRA took the view that regular, recurring annual dividends would not, in the circumstances of the ruling request, be part of a series of transactions. Accordingly, a ruling confirmed that the safe income determination time in respect of the first and second annual dividends will be immediately before each such dividend.
CRA went on to confirm 2016-0633961E5 (respecting recapture of depreciation realized on sale before safe-income determination time being included in safe income.)
Turning to documentary issues, CRA noted that it would only very rarely accept accounting retained earnings as a “fair proxy” for safe income, and that it “will attempt, in regards to available resources” to accommodate requests to provide copies of older tax returns and assessments that it has on file to those trying to go back in time with a safe income computation.
Respecting a suggestion that Kruco did not permit the deduction of contingent amounts, CRA stated that “safe income should be reduced by actual or potential cash outflows such as non-deductible expenses, contingent liabilities and accounting reserves in the determination of the amount of safe income that can be viewed as contributing to the capital gain on a share.”
Neal Armstrong. Summary of 15 November 2016 TEI Roundtable, 2016-0672321C6 under s. 55(2.1)(c).
CRA indicates that a partnership of individuals can change with CRA’s permission to a different non-calendar year end
CRA indicated that where a partnership between individuals has timely elected under s. 249.1(4) to have a non-calendar year end, say April 30, and now wishes to change to a September 30 year end for tax and accounting purposes to conform with the September year end of a related group of corporations (i.e., changing to a new non-calendar year end), such change can be made with CRA’s permission - although such application “will generally only be accepted where a serious business reason exists.”
Neal Armstrong. Summary of 20 February 2017 External T.I. 2014-0534341E5 Tr under s. 249.1(4).
CRA is non-commital on whether a U.S. revocable living trust could be viewed as an agency relationship
In the course of a general discussion of U.S. revocable living trusts, CRA stated that it is a question of fact whether they would be recognized as trusts rather than agency arrangements for ITA purposes, that s. 75(2) could apply to the grantor, and that if s. 75(2) did not apply, the U.S. taxes imposed on the grantor would not be eligible for a Canadian foreign tax credit if the income of the trust was not distributed.
Neal Armstrong. Summaries of 12 July 2016 External T.I. 2014-0560361E5 under s. 104(1), s. 75(2) and s. 126(1).
BP Canada – Federal Court of Appeal finds that taxpayers should not be compelled to disclose to CRA the uncertain tax positions comprising their tax cushion
An order of the Federal Court pursuant to s. 231.7(1) that BP Canada was to disclose tax accrual working papers (or, at any rate, the uncertain tax positions which were reflected in its tax cushion), has been reversed in part because:
[The] obligation to “self-assess” does not require taxpayers to tax themselves on amounts which they believe not to be taxable. Faced with an issue that is reasonably open to debate…taxpayers are entitled to file their tax return on the basis most favourable to them. … [A]lthough auditors are entitled to be provided with “all reasonable assistance” in performing their audits (paragraph 231.1(1)(d)…), they cannot compel taxpayers to reveal their “soft spots”.
After referencing financial reporting obligations of public companies under provincial securities legislation including the accurate reporting of accrued taxes, and before noting concerns of CPA Canada that required disclosure to CRA of tax accrual working papers would reduce the candour of disclosures by companies to their external auditors, Noël CJ also stated:
By enacting subsection 231.1(1), Parliament could not have intended to vest the Minister with a power so sweeping that it would undermine those obligations.
Although the second reason might only be applicable to public companies, it appears likely that private companies also cannot be required to disclose to CRA their uncertain tax positions summarized for audit purposes.
Neal Armstrong. Summary of BP Canada Energy Co. v. Canada (National Revenue) under s. 231.1(1)(d).
CRA considers that limited partners of an LP can deal at arm’s length with a Canadian subsidiary of the LP
The 5% Treaty-reduced withholding rate on dividends under Art. 10, subpara. 2(a) of the Canada-UK Treaty applies if the beneficial owner of the dividend “is a company which controls, directly or indirectly, at least 10 per cent of the voting power in the company paying the dividends.” CRA considers that a UK corporation that has a greater than 10% limited partnership interest in a UK LP holding all the shares of Canco will not satisfy this test assuming that only the general partner can vote the Canco shares.
On the other hand, a limited partner which is a UK pension fund with a greater than 10% LP interest will not be considered to satisfy the requirement in Art. 10, para. 3 that it “not own directly or indirectly” more than 10% of the capital of Canco. Although CRA recognizes that, under the partnership law, the pension fund would not be considered to own a particular percentage of the Canco shares of the UK LP, in its view the “own…indirectly” Treaty wording overcomes this obstacle.
A third issue was whether the 99% share of the limited partners in interest paid by Canco to the UK LP would be exempt from interest withholding. Under the ITA, the LP would be deemed to be a non-resident person for Part XIII purposes and that fictional person would be related to Canco under s. 251(2), so that the interest would be considered to be ineligible for the domestic exemption for arm’s length interest. However, Art. 11, subpara. 3(c) also has an exemption for arm’s length interest, and for Treaty purposes the UK LP would be fiscally transparent. Accordingly, the interest paid would be exempt provided that the limited partners were dealing at arm’s length with Canco as a factual matter. In this regard, CRA accepted a submission that referred to the statement in Folio S1-F5-C1 that “when a partner is not in a position to control a partnership…that…partner is dealing at arm's length with the partnership,” and reasoned that a partner who is considered to be dealing at arm’s length with a partnership should also be considered to be dealing at arm’s length with the corporation controlled by the partnership.
Neal Armstrong. Summaries of 7 September 2016 External T.I. 2014-0563781E5 under Treaties, Art. 10, Art. 11 and s. 251(1)(c).
CRA considers that s. 95(2)(a)(ii)(D) can recharacterize a loan prepayment penalty as active business income
Where a loan from one controlled foreign affiliate (FA Finco) of Canco to a second CFA of Canco (FA Holdco) meets the conditions in s. 95(2)(a)(ii)(D), CRA considers that a prepayment penalty paid by FA Holdco to FA Finco also can be recharacterized as active business income by s. 95(2)(a)(ii)(D) if the penalty is first recharacterized as interest under s. 18(9.1)(e).
Neal Armstrong. Summary of 27 January 2017 External T.I. 2013-0482351E5 under s. 95(2)(a)(ii)(D), s. 18(9.1) and Reg. 5907(2.7).