News of Note

CRA seemingly indicates that contingent interest under Art. XI(6)(b) of the US Treaty does not taint any contemporaneous fixed interest

2016-0664041R3 found that a term loan with fixed periodic interest plus contingent interest that was payable only when a commodity price was above a specified (and not yet achieved) level would not be considered to be paying participating interest if no contingent interest had yet become payable. CRA was essentially asked whether this turned on the reference in the “participating debt interest” definition to “all or any portion” of the interest being contingent or dependent – so that such interest could still be exempted under the Canada-U.S. Treaty, whose definition of (non-exempted) contingent interest in Art. XI(6)(b) did not have the “all or any portion” language.

The CRA oral response (which appeared to use the word “amount” to reference each applicable interest component, rather than the aggregate interest amount, made on each payment date) was ambiguous, but seemed to imply that the different Treaty language did indeed matter, so that on each payment date, the fixed interest “amount” could be exempt even if there was also a contingent interest amount paid on that date that was not exempt.

Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.3 under Treaties – Income Tax Conventions – Art. 11.

CRA indicates that a Canadian shared-work space can readily constitute a PE

After indicating that there is no requirement that a place be owned or rented in order to constitute a permanent establishment and there need only be a certain amount of space that is at the disposal of the non-resident, CRA went on to address two examples of a Canadian shared work space constituting a PE of a U.S. resident,

Example 1 - a. U.S. resident consultant has a Canadian membership in the workspace and works from a shared workspace in Canada on a regular basis, providing services and doing sales calls to Canadian clients.

Example 2 - rather than open a branch office, a U.S. resident corporation pays for a shared workspace in Canada for use by its Canadian resident employees.

Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.2 under Treaties – Income Tax Conventions – Art. 5.

CRA confirms that contributed surplus will cease to be recognized for thin cap purposes if the contributor ceases to be a specified non-resident shareholder

We have published our summaries (provided in more abbreviated form than prior years) of the oral responses given by CRA at the May 15, 2019 IFA Roundtable together with the written questions posed. Next up, we will summarize the oral responses of Ted Cook and Stephanie Smith to some of the questions posed to them at the IFA Finance Roundtable.

Q.1 of the CRA Roundtable confirmed the 1995 CRA position that, in order for contributed surplus to be recognized for thin cap purposes, the contributor must still be a specified non-resident shareholder at the time the equity amount computation is made for the year, i.e., at the end of that year. CRA further indicated that, in order to be included in the determination of the monthly average under s. (a)(ii) of the “equity amount” definition, the contributed surplus must also have been contributed by a specified non-resident shareholder by the beginning of the month for which that contributed surplus amount is taken into account in that computation.

Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.1 under s. 18(5) – equity amount – s. (a)(ii).

6 more translated CRA interpretations are available

We have published translations of 6 CRA interpretations released in March and February, 2012. Their descriptors and links appear below.

These are additions to our set of 861 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 ¼ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2012-03-02 10 February 2012 External T.I. 2010-0385861E5 F - Actions de remplacement Income Tax Act - Section 44.1 - Subsection 44.1(1) - Replacement Share application to IPO of CCPC
Income Tax Act - Section 44.1 - Subsection 44.1(1) - Qualifying Disposition elements of qualifying disposition definition
2012-02-24 23 January 2012 External T.I. 2011-0409671E5 F - Propriété superficiaire Income Tax Act - Section 54 - Principal Residence - Paragraph (e) land leased to corporation for business use not part of principal residence
Income Tax Act - Section 15 - Subsection 15(1) benefit if building constructed at corporation’s expense for business purposes becomes shareholder’s property by accession
Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) individual shareholder not entitled to claim CCA on building constructed by the corporation for use in its business even if where taxpayer owns it
General Concepts - Ownership whether tenant had Quebec right of superficies to garage erected by it determined whether it was its property
Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property building erected by corporation on shareholder’s land not depreciable property unless shareholder renounces right of accession
6 February 2012 External T.I. 2012-0434071E5 F - Honoraires professionnels - PDV Income Tax Act - Section 60 - Paragraph 60(o) professional fees incurred under VDP are deductible under s. 60(o) once CRA commences its review
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees professional fees incurred in applying under the VDP are not deductible
14 February 2012 External T.I. 2011-0416621E5 F - REER, swap Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (b) computation of advantage from swap transaction
Income Tax Act - Section 207.01 - Subsection 207.01(1) - RRSP Strip swap of savings bond between RRSP and non-registered account would be an RRSP strip
9 February 2012 Internal T.I. 2011-0426871I7 F - Perte au titre d'un placement d'entreprise Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) - Subparagraph 39(1)(c)(iv) requirement satisfied where debtor reacquired its status as SBC before becoming bankrupt
2012-02-17 9 February 2012 External T.I. 2008-0280941E5 F - Foreign sourced income - transportation Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(b) s. 4(1)(b) generally applied on a jurisdictional basis
Income Tax Act - Section 2 - Subsection 2(3) - Paragraph 2(3)(b) incidental business activities in jurisdiction may not constitute carrying on business there
Income Tax Act - Section 126 - Subsection 126(9) s. 4(1)(b) applied for s. 126(9) purposes
Income Tax Act - Section 126 - Subsection 126(7) - Business-Income Tax NY franchise tax qualified as an income tax only if it was not based on non-income specified minimums

CIBC World Markets – Federal Court of Appeal finds that a non-resident PE had deemed separate person status sufficient to enjoy zero-rating notwithstanding an ETA s. 150 election

Administrative services provided by the appellant (“WMI”) to its parent (“CIBC”) respecting activities carried on by CIBC through its non-resident branches were treated by CRA as not being zero-rated under ETA Sched. V, Pt. VII, s. 2 because of an ETA s. 150(1) election made between the two companies, which deemed “every supply” between them to be an exempt financial supply (so that WMI’s related inputs did not generate input tax credits). The Crown argued that ETA s. 132(3), which merely deemed CIBC to be a non-resident person in respect of “activities” carried on by it through its non-resident permanent establishments, was inadequate to the task of deeming those PEs to be separate persons for s. 150 purposes.

Noël C.J. approached this issue from the perspective that:

Applying subsection 150(1) to deemed exported supplies under subsection 132(3) would defeat the tax neutrality which this provision is designed to achieve by imposing a less favourable and more onerous tax treatment on financial institutions that operate abroad through foreign branches rather than foreign subsidiaries.

Essentially, he thought the “activities” language in s. 132(3) indeed was adequate because the GST (a “transactional tax”) is therefore essentially only about activities, including those engaged here in the debate as to whether s. 132(3) or s. 150(1) applied in relation to them. The fact that other ETA provisions raised by the Crown had more exacting separate-person language only demonstrated that they were addressing more difficult issues that required the full bench press.

By the way, on Monday evening we will provide abbreviated summaries of all the CRA responses at Wednesday’s IFA CRA Roundtable.

Neal Armstrong. Summaries of CIBC World Markets Inc. v. Canada, 2019 FCA 147 under ETA s. 132(3), s. 123(1) - “closely related group”, s. 132(4), s. 150(2) and Statutory Interpretation - Ordinary Meaning.

Joint Committee suggests issues for consideration in drafting the new employee stock option restriction rules

The Joint Committee has provided comments on the 2019 Budget proposals to align Canada’s employee stock option rules with those in the U.S. through applying a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment for employees of large, long-established, mature firms (i.e., the s. 110(1)(d) deduction). Heads of commentary included:

  • The need for an adequate consultation period and subsequent transition period
  • The desirability of clarity as to the distinction between “large, long-established, mature firms” and “rapidly growing Canadian businesses” while at the same time having the distinction be grounded in the policy objective (and notes as to the somewhat intractable nature of this distinction).
  • The need for a methodology for distinguishing between options that are within the $200,000 annual cap and those that are not where only a portion of the employee’s options are exercised.
  • Confirmation that, where the employee is subject to the proposed restriction (i.e., is fully taxable on the benefit), an employer deduction will be available at the same time irrespective of other ITA provisions such as ss. 7(3)(b) and 143.3.
  • Moreover, there also should be full contemporaneous employer deductibility for phantom stock units, performance share units and deferred share units regardless of whether such compensation is ultimately paid in cash or in kind.
  • Confirmation that the proposed rules do not apply to the s. 110(1)(d.1) deduction.
  • The desirability of rectifying the prescribed share definition (as described in the Committee’s November 15, 2016 submission) at the same time as the introduction of the new rules.

Neal Armstrong. Summaries of Joint Committee submission, “Employee Stock Option Changes Announced in 2019 Federal Budget,” 14 May 2019 under s. 110(1)(d) and s. 7(3)(b).

Income Tax Severed Letters 15 May 2019

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Exxonmobil Canada – Tax Court of Canada declines to impute notional income to an essential income-generating activity

A participant in the Hibernia joint venture treated its share of the costs of the initial well in one of the oil reservoirs as SR&ED on the grounds that the well provided experimental validation of the predictions made using an improved systematic and logical methodology (the “reservoir connectivity analysis,” or “RCA”) for evaluating how a reservoir is connected. In rejecting this claim, Owen J stated:

[C]ommon sense and commercial reality dictate that the primary purpose of any such well (even the first one) is not to validate the RCA methodology but rather to obtain data regarding oil in the southern extension.

His conclusion was reinforced by a specific exclusion in the SR&ED definition for drilling for petroleum.

Crude pumped from an undersea oil reservoir up to the “Hibernia Platform” above the ocean surface was, for safety and environmental reasons, not pumped directly from the platform to oil tankers but was instead pumped from the platform through underwater flow lines to an “offshore loading system” (“OLS”) two kilometers away, which was used to load the crude onto the tankers for sale and shipment to refineries.

Reg. 1204(3)(a) excluded “income … derived from transporting … petroleum” from production profits for resource allowance purposes. CRA reassessed to reduce the amount of a participant's production profits for such purposes by the expenses of the OLS (effectively treating those expenses as equalling income from transporting the crude, and then deducting the same amounts as an expense applicable to such transporting income).

In rejecting this adjustment, Owen J stated:

[T]he word “derived” means that the income or loss must exist not because the transporting/transmitting of the petroleum from a natural accumulation of petroleum was necessary in order to sell the petroleum but because the transporting/transmitting of the petroleum in and of itself generated income or a loss. …

[T]he income realized by the joint venture owners from the sale of the crude was derived solely from the market value of the crude. The OLS had no impact one way or the other on the amount of income realized by the joint venture owners from the sale of the Hibernia crude and did not in and of itself generate any income or loss for the joint venture owners.

Although the resource allowance is kaput, the word “derived” is still with us, and it is noteworthy that Owen J adopted a somewhat narrow view of the concept of “deriving” income (cf. Westar – “the authority has established that 'derived from' is a term of wide import"). The unsuccessful CRA approach of imputing income to a portion of a business is vaguely reminiscent of Cudd Pressure (rejecting imputed rent).

Neal Armstrong. Summaries of Exxonmobil Canada Ltd. v. The Queen, 2019 TCC 108 under s. 248(1) - SR&ED and Reg. 1204(3)(a).

Pierre – Court of Quebec finds that a couple had a fraught but “conjugal” relationship

In Quebec they are referred to as “de facto spouses” rather than “common-law partners” but otherwise the federal and Quebec definitions are quite similar. Both reference the concept of cohabiting “in a conjugal relationship,” and both provide that they cease to be common-law partners/spouses if (to use the Quebec language) they have ceased “cohabiting … for a period of at least 90 days … because of a breakdown of their conjugal relationship.” (The federal definition refers to “living separate and apart” rather than to ceasing to cohabit.)

Edwards, JCQ found that a couple continued to live conjugally at the commencement of the 90-day period before a taxation year end, notwithstanding considerable tensions, given that they continued to live under the same roof, presented a united front to their daughter who lived with them, shared the domestic chores (although she did more) and presented as a couple on major social occasions. As for sex:

[T]he jurisprudence has determined that, after a certain number of years of existence as a couple, the absence of such relations does not prevent the court from characterizing their relationship as marital or as conjugal.

Neal Armstrong. Summary of Pierre v. Agence du revenu du Québec, 2019 QCCQ 2137 under s. 248(1) – common-law partner.

CRA indicates that medical escort services can be exempted but not zero-rated

A company provided medical repatriation services, which involved arranging to transport an individual (the patient) from a foreign hospital to a health care facility in the individual’s home country. This would include transport between the medical facilities and airports via ground transportation (ambulance, taxi, or limo), and commercial airline transportation in the company of a medical escort (registered nurses, physicians and advanced cardiac life support trained paramedics). The company charged a daily rate for the medical escort and a fee for the medical equipment required by the patient.

CRA found that the company was making a single supply under the single supply doctrine, and that such supply did not qualify as a zero-rated “ambulance” service. However, it could qualify as an exempt nursing supply under Sched. V, Pt, II, s. 6 or an exempt physician supply under Sched. V, Pt, II, s. 5, depending on who accompanied the patient – whereas if the attendants were paramedics it would not be exempted.

It is unclear to what extent CRA was accepting that a single supply can be exempted if it has significant elements from two separately enumerated exempt items (nurses and physicians) - and that if these exempt elements were present, the exemption would not be tainted by the presence of paramedics.

Neal Armstrong. Summaries of 27 April 2018 Ruling 185888 under ETA Sched VI, Pt, VII, s. 15, Sched. V, Pt, II, s. 6, Sched. V, Pt, II, s. 5 and s. 123(1) - supply.