News of Note
Proposed BEPS changes will place greater pressure on what it means for a dependent agent to “habitually” exercise its role
Email this ContentThe BEPS final action plan contemplates that the permanent establishment definition will be changed so as to no longer require the dependent agent to conclude contracts in the principal's name: it will be sufficient that the dependent agent habitually plays the principal role leading to the routine conclusion of contracts without material modification by the enterprise — that is, the principal. Given that dependent agents will likely play that role, the existence of a PE will often largely depend on whether the “habitually” requirement is met. Some observations on the “habitually” requirement:
- “a mere transient presence in a country is less likely to give rise to a PE than is a presence amounting to almost six months.”
- “An activity that is exercised recurrently is generally considered habitual, even if its duration does not exceed six months…[e.g.] a dependent agent who spends every Thursday in another country negotiating contracts that are binding on his employer”.
- The German Federal Tax Court found that regularly recurring trips to Germany (of roughly 12 per year) by the dependent agent (a Portuguese director) aggregating less than 60 days in total for each of four successive years fell below the “habitually” threshold.
- Whether the business is temporary in nature (e.g., a seasonal business) lowers the threshold - as does the situation where the dependent agent is the exclusive outlet for the non-resident’s product (e.g., where a wine producer sells all of its output at a particular festival through the local agent).
Neal Armstrong. Summary of Christian Ehlermann and Marla Castelon, "When Does a Dependent Agent Act Habitually?," Tax Notes International, 26 September 26 2016, p. 1141 under Treaties – Art. 5.
Tech Mahindra – Australian Full Federal Court finds that the exception in the Australia-India Treaty for “effectively connected” royalties was not intended to exempt royalties not attributable to the source country PE from source country withholding
The Indian-resident taxpayer performed technical services for its Australian customers from its offices in India, the fees for which were deemed to be royalties under the Australia-India Treaty - as well as earning fees through an Australian permanent establishment. Art. 12(4) of the Royalty Article of the Australia-India Treaty (similarly to a provision in the Canada-India Treaty) provided that the provisions of Arts. 12(1) and (2) (permitting India and Australia to tax royalties) “shall not apply” if the Indian resident entitled to the royalties carries on business through an Australian PE “and the… services in respect of which the royalties are paid… are effectively connected with such permanent establishment” – in which case “the provisions of Article 7 … shall apply.”
The Indian taxpayer argued that the royalties received by it in India (which were accepted by Australia as not being attributed under Art. 7 to the Australian PE) nonetheless were “effectively connected” to that PE in the sense that the work in India advanced the common goal with the Australian PE of servicing the Australian customers. The taxpayer then argued that the quoted statement - that Art. 12(2) “shall not apply” - meant that Australia was precluded from imposing withholding tax on these royalties.
In rejecting this argument, the Court stated:
[T]he evident purpose of Art 12(4) is to relieve the source State from the limitation on taxing rights imposed under Art 12 by taxing such royalties under Art 7, not to disentitle the source State from any taxing rights where otherwise Art 7 would not give such taxing rights.
In any event, “’effectively connected with’ should be understood to mean having a real or actual connection with the activities carried on through the permanent establishment,” which was not the case here.
Neal Armstrong. Summary of Tech Mahindra Limited v Commissioner of Taxation, [2016] FCAFC 130 under Treaties – Art. 12.
ARTV Inc. - Cour du Québec finds that a shareholder’s right to put its shares did not give the other shareholder a s. 251(5)(b)(i) “right” to acquire those shares
ARTV would have been associated with its largest shareholder (Radio Canada) under the Quebec equivalent of s. 251(5)(b)(i) if the obligation of Radio Canada to acquire the ARTV shares of another shareholder (ARTE France) in the event ARTE France exercised a put right constituted a contingent “right” to acquire those shares for s. 251(5)(b)(i) purposes. In rejecting this proposition (so that ARTV and Radio Canada were not associated), Cameron JCQ stated:
Before the exercise by ARTE France of its option, which depended on its will, Radio Canada had no right and, notwithstanding the irrevocability of its obligation to purchase, no expectation of purchasing, given the absence of control or influence over ARTE France.
Neal Armstrong. Summaries of ARTV Inc. v. Agence du revenu du Québec, 2016 QCCQ 8757 (Cour du Québec) under s. 251(5)(b) and Interpretation Act, s. 8.1.
Kvas – Tax Court of Canada finds that ss. 84(2) and 160 cannot apply to an involuntary dissolution
The general contracting corporation (“CIA”) of two brothers was dissolved for failure to file Ontario corporate tax returns. Although its property legally escheated to the provincial Crown, in fact, the CIA bank account was thereafter used to pay various CIA creditors. CRA treated the CIA property as being distributed to the brothers so as to give rise to s. 84(2) dividends to them, as well as being transferred by CIA to them so as to be the basis for s. 160 assessments of them.
Bocock J found that s. 84(2) could not apply to an involuntary dissolution and, similarly, that s. 160 could not apply because CIA did not take any action to transfer its property to the brothers.
Neal Armstrong. Summaries of Kvas v. The Queen, 2016 TCC 199 under s. 84(2) and s. 160(1).
CRA confirms that receipt of a non-taxable s. 6(1)(b)(v) allowance for one type of expense does not preclude s. 8(1)(f) deductions for other types
Although this represents a generous interpretation of s. 8(1)(f)(iv), which could readily be interpreted as indicating that the receipt of any non-taxable allowance by a travelling employed salesperson under s. 6(1)(b)(v) precludes the deduction of all expenses of employment under s. 8(1)(f), CRA has affirmed its position in IT-522R so that, for example, the employee whose only allowance is of $0.xx per kilolmetre driven, would also be able to deduct specific expenses for non-car expenses, e.g., for meals, cell phone and promotional gifts (assuming the other s. 8(1)(f) requriements were satisfied).
Neal Armstrong. Summary of 11 April 2016 External T.I. 2015-0564161E5 Tr under s. 8(1)(f).
CRA thinks using a trust to funnel a deemed dividend from creating PUC to a Holdco beneficiary and funnelling that PUC to the individual beneficiary/Holdco shareholder, is surplus stripping
A discretionary trust of which X and his holding company (Holdco) are the beneficiaries receives a s. 84(1) deemed dividend of $100K from Opco (not in excess of applicable safe income) resulting from a PUC increase, and issues a $100K note to Holdco as the distribution of this deemed dividend. Opco uses its newly-created PUC to make a capital distribution to the trust, which makes a $100K capital distribution to X. These transactions are similar in economic effect to the trust using the $100K capital distribution that was made to it, to pay off its note to Holdco, with Holdco paying a corresponding dividend to X, but that of course would not be as “tax efficient.”
CRA stated that the transactions appeared “to strip Opco's surplus by converting a taxable dividend to a payment of a capital nature that is not taxable to Mr. X,” and that were such transactions submitted in a ruling request, the Directorate “would recommend to the General Anti-Avoidance Committee to confirm the application of subsection 245(2).”
Neal Armstrong. Summaries of 27 April 2016 External T.I. 2016-0625001E5 Tr under s. 84(2) and s. 104(24).
CRA rejects a submission to construe Descarries narrowly
In 2015-0610711C6, CRA indicated that as a result of Descarries, it would no longer issue rulings in which an individual can in effect use shares (e.g., preferred shares) whose ACB was stepped up using the capital gains deduction (by redeeming those shares to create a deemed dividend and a capital loss) to offset or reduce a capital gain on a disposition of his or her common shares. CRA has now rejected a submission that 2015-0610711C6 read the purpose of s. 84.1 too broadly and that its purpose is only “to prevent persons from monetizing their lifetime CGD outside the context of an actual sales transaction occurring on a market basis” - so that s. 84.1 was not abused if, as in the reversed ruling, all that was going on was that “a taxpayer who, with a view to retiring, embarked on a process of business succession with a family member similar to one that could be undertaken with an arm's length third party.”
CRA added that “we understand your concerns about the application of section 84.1 in the context of an intergenerational transfer of a family business between a parent and children,” but that was a policy question for Finance.
Neal Armstrong. Summary of 2 May 2016 External T.I. 2016-0633351E5 Tr under s. 84.1(1).
CRA confirms that it makes no difference if safe income is too low because of incentive tax deductions
In the course of a discussion of s. 55(2.1)(b) that is largely repetitive of previous published positions, CRA reduced to writing a comment it made orally at the June 2016 National Technical Seminar that even “if corporate income has not previously been taxed…because the corporation was entitled to certain [incentive] tax benefits under the Act…then a dividend paid by the corporation from such income should be subject to subsection 55(2) unless none of the purposes of the dividend is described in proposed paragraph 55(2.1)(b)” – and added (implying that someone had argued the contrary) that this is also the case even where the funds received by the shareholder instead are in the form of redemption proceeds funded with borrowed money.
Neal Armstrong. Summary of June 2016 External T.I. 2016-0627571E5 under s. 55(2.1)(b).
Income Tax Severed Letters 21 September 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that employee meal reimbursements other than in connection with travel are not taxable benefits if made principally to enhance employee efficiency
In response to an inquiry on the taxability of the reimbursement of meal expenses to employees, CRA indicated that although normally it only accepts that meal reimbursements are not taxable benefits where made in connection with travel outside the metropolitan area of the employer’s establishment, “where the principal objective of the reimbursement of meal expenses is to ensure that the employee's duties are undertaken in a more efficient manner during the course of a work shift, then the employer could be the one who principally benefits,” in which case there is no taxable benefit.
Neal Armstrong. Summary of 10 June 2016 External T.I. 2015-0587131E5 Tr under s. 6(1)(a).