News of Note
CRA indicates that a corporation cannot change its year end by objecting to the 1st year’s initial assessment
Email this Content2020-0874951I7 indicated that if a request for a retroactive change to a taxation year is made after the corporate tax returns are filed but before the first Notice of Assessment for that year is issued, it will generally be granted – but not if such request is made after such issuance.
What if, after such initial assessment of the first year, a timely objection is filed to request cancellation of the initial assessment pursuant to s. 165(3), so that the taxpayer is now free to file a fresh first-year return with a changed year end? In rejecting this approach, CRA stated:
For the purposes of subsection 165(3), an assessment may generally be vacated upon receipt of a Notice of Objection if a taxpayer submits additional facts or compelling arguments that were not before the Minister at the time the assessment was made and that demonstrate that the assessment is either invalid … or was unfounded … .
[Here] … the mere fact that the corporation wishes to change the timing of its fiscal period end after tax has been assessed for the year corresponding to the fiscal period, even if it is the corporation's first fiscal period, does not, in and of itself, invalidate or render unfounded the [initial] assessment … .
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.11 under s. 249.1(7).
CRA states that it lacks jurisdiction to determine whether a trust can elect under Art. XIII(7) of the Canada-U.S. Treaty to avoid double taxation of a s. 104(4)(b) gain
CRA indicated that it considered that it was within the IRS’s jurisdiction and not its jurisdiction to determine whether the trust is eligible to elect pursuant to Art. XIII(7) the Canada-U.S. Treaty to have a notional sale and repurchase of the U.S. real property occur for U.S. purposes in the same year as that of the s. 104(4)(b) deemed disposition.
In also indicating that there would be no relief under Art. XXIV(2)(a) of the Treaty from the double taxation arising if there was no U.S.-source income for s. 126(1) purposes in the year of disposition for U.S. purposes, it noted that Art. XXIV(2)(a) is expressly “subject to the provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada,” and stated that “this means that a Canadian resident is subject to the limitations on claiming a foreign tax credit found in the Canadian legislation, and more specifically in section 126, including a timing restriction on when a foreign tax credit may be claimed (see … 2015-0601781E5 … .)
Neal Armstrong. Summaries of 3 February 2022 Internal T.I. 2021-0922301I7 under Treaties – income Tax Conventions – Art. 13, Art. 24.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations released in February and January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,257 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 18 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA indicates that there is no change in the regular use under s. 45(1)(c) where a property regularly alternates between personal and rental use
An individual owns a chalet that is personally occupied for six months of the year (May to October) and is rented out to others for the remaining six months of the year. CRA essentially appeared to indicate that there would be no deemed dispositions every six months at FMV each time there was such a (temporary) change in use since, for purposes of s. 45(1)(c), there was no change in the use regularly made of the property.
Based on this apparent conclusion, it would be unnecessary for the individual to make a s. 45(2) election to deem the property not to have a change of use to an income-producing use each November when it commenced to be leased. However, CRA indicated that if there were such a change of use and the election was made, there would be no further deemed disposition at FMV when the chalet commenced again to be used for personal use in May, as the s. 45(2) election effectively deemed it to have been used for personal use prior to this change.
Neal Armstrong. Summaries of 7 October 2022 APFF Federal Roundtable, Q.10 under s. 45(1)(c) and s. 45(2).
CAE – Federal Court of Appeal confirms that an unconditionally repayable loan with below-market yield was government assistance
CAE, which was engaged in manufacturing flight simulator systems, incurred over $700 million in R&D expenditures on further developing such systems, as to which it received “contributions” over a five-year period of $250 million from Industry Canada. Under the agreement with Industry Canada, CAE was required to repay 135% of the amounts advanced (or $337.5 million) beginning after the last advance was made and in escalating specified amounts over a 15-year period.
Boivin JA found that Ouimet J had not made a reversible error in finding “that the amounts received by CAE were not made pursuant to an ordinary commercial agreement, having regard to the terms of the agreement and, in particular, the implicit rate of return, which he found to be substantially lower than the market rate for a comparable loan and therefore contrary to the commercial interests of a private lender,” and in then applying Consumers' Gas, CCLC Technologies and Immunovaccine Technologies to conclude that the amounts received in the reassessed years were “government assistance,” as defined in s. 127(9).
Neal Armstrong. Summary of CAE Inc. v. Canada, 2022 CAF 178 under s. 127(9) – government assistance.
Our translations of the answers at the 2022 APFF Financial Strategies and Instruments Roundtable are available
We have published summaries of the questions posed at the 7 October 2022 APFF Financial Strategies and Instruments Roundtable together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers. We will provide comments on these answers after we have finished commenting on the (regular) 7 October 2022 APFF Roundtable, which we published in similar form a week ago.
CRA indicates that forgiveness under a Bankruptcy proposal occurred when it was court-approved
Pursuant to a proposal under the Bankruptcy and Insolvency Act, Opco and its creditor agreed to write off $600,000 of its $1 million debt and to revise the terms of repayment of the new balance of $400,000, including providing for payments over four years.
The proposal was signed on September 30, 2022, the Superior Court of Quebec approved it on January 20, 2023, the first payments are made in February 2023 and the last payment is made in December 2026 (with a discharge). In finding that the forgiveness for s. 80 purposes occurred at the time of the Court approval, CRA stated:
[A] debt or obligation is settled or extinguished when the obligation to pay ceases to exist, and payment, cancellation, set-off, substitution of debtors and release are among the means of settlement. …
Furthermore … Richer indicat[ed] that "in the context of section 80, the word 'settle' connotes a final and legally binding resolution that terminates or reduces the debtor’s obligations” … .
CRA also indicated that the resulting tax applicable to the income under s. 80(13) did not arise until such time of forgiveness, rather than being treated as a provable claim in the proceeding.
Neal Armstrong. Summaries of 7 October 2022 APFF Federal Roundtable, Q.9 under s. 80(2)(a) and s. 80(13).
CRA indicates that incorporating a sub through which a share sale will occur so as to avoid s. 84.1 is not per se GAARable
In order for Brother to avoid the application of s. 84.1 to his sale of half the shares of Opco to his sister’s corporation (Sister-Holdco), he first transfers those shares on a s. 85(1) rollover basis to a Newco formed by him (Brother-Portfolioco), which then sells the shares to Sister-Holdco, and claims the capital gains reserve because most of the sales proceeds are deferred.
CRA indicated that it would not apply s. 245(2) because of the specific creation of Brother-Portfolioco to avoid s. 84.1.
After noting that, under s. 40(1)(a)(ii), the availability of the reserve turned on Brother-Portfolioco and Brother not having de facto control of Sister-Holdco and on Sister-Holdco not having de facto control of Brother-Portfolioco, CRA commented on the expansion of de facto control under s. 256(5.11) stating:
As provided for in subsection 256(5.11) and the applicable jurisprudence, any factor, whether contractual, commercial, economic, moral or familial, may be taken into consideration in order to determine whether a person or group of persons has influence, direct or indirect, the exercise of which would result in de facto control of a corporation … .
Neal Armstrong. Summaries of 7 October 2022 APFF Federal Roundtable, Q.8 under s. 84.1(1) and s. 256(1.11).
Income Tax Severed Letters 19 October 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that an employee, with general authority to contract, may not be an employer PE while teleworking at his cottage
Mr. X, who while living in Quebec, had been commuting to the sole permanent establishment of his employer in Quebec, from which he was paid, will now telework at his Ontario cottage three days a week, and commute to the Quebec office two days a week. He has the authority to enter into contracts for his employer.
Regarding whether Reg. 400(2) would deem Mr. X's employer to have an Ontario permanent establishment at Mr. X’s cottage, CRA indicated that the “fact that an employee works from home is generally not sufficient to create a fixed place of business of the employer in the province,” and further stated, regarding the “general authority to contract rule” in Reg. 400(2)(b):
[I]n order for the presumption in [Reg.] 400(2)(b) to apply, the employee must not only have general authority to contract for the employer, but the employer must also carry on business in the province through the employee's place of business.
The operation of the source deduction rules turns on whether an employee is considered to “report for work” at an actual establishment of the employer as per Reg. 102(1), or is deemed by Reg. 100(4) to report for work at the establishment of the employer from which the remuneration is paid. CRA went on to indicate that even if the employer were deemed to have a PE in Ontario by Reg. 400(2)(b), this would not be relevant to the question of whether the employee reported for work at an establishment of the employer located in Ontario. Thus, the employee likely would continue to be subject to source deductions on the Quebec scale.
Neal Armstrong. Summaries of 7 October 2022 APFF Federal Roundtable, Q.7 under Reg. 400(2)(b) and Reg. 102(1).