News of Note
CRA indicates that a partnership of individuals can change with CRA’s permission to a different non-calendar year end
Email this ContentCRA 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).
Income Tax Severed Letters 29 March 2017
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that contributions to a legal defence fund of public interest could qualify as charitable contributions by routing them through a municipal-controlled fund
Donations made to two non-profit corporations to fund the costs of defending a legal action respecting the local County did not give rise to charitable credits. In order to permit future donations to generate such credits, the local municipality, which is a qualified donee, will set up a fund which will be beneficially owned by it and will issue charitable receipts for donations made to the fund. The fund will then be used to pay legal fees submitted by the two NPOs and approved by the municipality in its discretion.
CRA ruled that donations to the municipal fund could qualify as charitable gifts.
Neal Armstrong. Summary of 2016 Ruling 2016-0634031R3 under s. 118.1(1) – total charitable gifts.
CRA considers that an estate can make a gift qua GRE before it has filed its first return
The definition of a graduated rate estate requires that the estate designate itself as a GRE in its first return of income as well as state the deceased’s SIN. CRA considers that s. 118.1(5.1), which references a gift made by a GRE, can apply to a gift made by an estate before it has filed its first year’s return.
Neal Armstrong. Summary of 8 February 2017 External T.I. 2017-0684481E5 under s. 118.1(5.1).
Formadrain – Tax Court of Canada finds that improving the process for repairing drains qualified as SR&ED
It needn’t be rocket science to qualify as SR&ED. A taxpayer which repaired sewers and drains from the inside rather than through excavation, successfully claimed scientific research & experimental development credits for its work on a new approach involving developing a single-use light mandrel (i.e., tube) to facilitate the installation of a sheath from inside the drains, and a system for doing so from a single access point from inside a building (as opposed to using a heavier non-disposable mandrel that required two points of access in order to pull rather than push it.)
Respecting a Crown argument that the source of technological uncertainty respecting the project was “entirely in the chemical composition of the material [forming the mandrel], a task which was delegated to a rubber manufacturer,” D’Auray J noted that para. (d) of the SR&ED definition contemplated development work undertaken in Canada on behalf of the taxpayer and that there was more going on than just formulating the chemical composition of the mandrel. Also, the approach of the taxpayer’s engineers (who kept a detailed notebook of planned trials and results) was too systematic to be labelled the trial and error method.
Neal Armstrong. Summary of Formadrain Inc. v. The Queen, 2017 CCI 42 under s. 248(1) - scientific research & experimental development.
CRA states that it usually will provide administrative relief where a registrant fails to self-assess tax on the purchase of commercial real estate
A GST-registered person purchases commercial real estate and, when it files its return for that month, neglects to report the tax payable under s. 228(4) on the purchase (which is required to be reported on a separate line in the return) and to claim the offsetting input tax credit. If this is discovered by CRA on audit, it generally will assess the purchaser for its s. 228(4) tax, allow the off-setting ITC and not assess any interest. However, it states that it will not provide this “administrative relief” “where the purchaser was previously assessed under similar circumstances.”
Although ETA s. 296(2) requires CRA on audit to deduct any unclaimed ITCs from an assessment of net tax, CRA considers its usual approach described above to be “administrative relief” because, as a technical matter, “the tax payable [under s. 228(4)] is not part of the registrant’s net tax calculation” – so that in CRA’s view it is in its discretion as to whether, in addition to assessing the purchaser’s s. 228(4) tax, it also assesses the purchaser’s negative net tax resulting from recognizing the unclaimed ITC.
Neal Armstrong. Summaries of 25 February 2016 CBA Roundtable, Q.11 under ETA s. 228(4) and 296(2).