News of Note

CRA provided detailed comments on Foix (where the FCA found that s. 84(2) applied to a particular hybrid sale transaction) in 10 October 2024 APFF Roundtable, Q.3. Now, in brief oral comments when a question about this case was repeated, CRA indicated:

• the reasons in Foix should be carefully considered in connection with any proposed hybrid sale (with exception of transactions identical to those in Geransky);
• the decision reinforces the broad scope of s. 84(2); and
• it represents a departure in some respects from the more restrictive view of s. 84(2) evident in some earlier cases.

Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.14 under s. 84(2).

The taxpayers (Russell Martin and Joshua Donaldson), who performed 40% of their duties in Canada rather than the US, agreed with the Toronto Blue Jays that a portion of their total package would take the form of annual contributions to a retirement compensation arrangement (RCA). The Crown position was that the RCA contributions did not enter into computing the taxpayers’ income for the purposes of the allocation of 40% thereof to Canada because they were not received by the taxpayers and because of the specific exclusion under s. 6(1)(a)(ii) of RCA benefits from employment income. Hence, in the case, for example, of the 2017 taxation year of Russel Martin, his taxable income earned in Canada was computed by CRA as follows:

Gagnon J agreed with the taxpayer submissions that the exclusion of RCA contributions in s. 6(1)(a)(ii) only applies against the amount of Canadian-source income subject to taxation in Canada, so that those contributions were to be deducted solely from the 40% of their remuneration that was earned in Canada. Hence, the above example would be corrected to read as follows:

Before so concluding, Gagnon J indicated inter alia:

• The ITA’s computational rules, including the exclusion in s. 6(1)(a)(ii) for RCA contribution benefits, “cannot apply to a non‑resident’s foreign-source income as the Act only grants jurisdiction over a non‑resident’s Canadian-source income” – so that such exclusion should only be applied to the non-resident’s Canadian-source employment income.
• Before their exclusion under that computational rule, the RCA contributions “made up a portion of the Appellants’ compensation and remuneration for the year” given the broad scope of the concept of an employment benefit, so that those contributions were “part of the Appellants’ compensation during the taxation years in which the contributions were made” - and it was this total income that was to be allocated between Canada and the US under s. 2(3) and s. 115((1)(a)(i) and in accordance with s. 4(1)(b) (before applying the domestic computational rules, as per the first point).
• “RCA contributions cannot be used against income derived from a foreign-jurisdiction” whereas the Crown’s method effectively used 60% of the RCA contributions to exclude recognition of US-source income of the taxpayers.

2017-0702061E5 concerned a non-resident athlete playing for a Canadian team, who performed 40% of his duties in Canada and who received $1,200,000 in annual salary, with an additional $800,000 annually contributed by the team to his RCA. CRA had rejected the methodology used by Martin and Donaldson as it would have resulted in the athlete in that interpretation having nil Canadian-source income. However, Gagnon J agreed with the taxpayers that such an arrangement would not meet the requirements of an RCA and would instead likely constitute a salary deferral arrangement (SDA). – whereas here the taxpayers had substantiated the existence of an RCA by obtaining an actuarial report to support the amount of contributions necessary to provide them with a reasonable pension on retirement.

Neal Armstrong. Summaries of Martin v. The King, 2024 TCC 153 under s. 115(1)(a)(i), s. 248(1) – SDA, s. 5(1) and s. 207.5(1) – refundable tax.

In a departure from 2009-0320231C6 (which indicated that there generally will be no excess under s. 214(7) on the conversion by the original holder of a “traditional” convertible debenture), CRA stated that, where there is a conversion of a standard convertible debenture issued by a Canadian public entity (i.e., taxable Canadian corporation, resident trust or Canadian partnerships), in general there will be an excess under s. 214(7) equal to the amount by which the fair market value of the common equity received on the conversion exceeds the price for which the debenture was issued. This new position applies prospectively to convertible debentures issued after December 3, 2024.

However, CRA is still of the view that the deemed payment of interest on standard convertible debentures under s. 214(7) does not generally constitute “participating debt interest” as defined in s. 212(3).

A s. 214(7) excess received by a holder of a convertible debt who did not deal at arm’s length with the issuer would not qualify for exemption under s. 212(1)(b)(i)(A). CRA indicated that a convertible debenture issued to a non-arm’s length person prior to December 3, but with that conversion feature having not yet been exercised, would essentially be grandfathered.

Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.13 under s. 214(7).

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