News of Note

CRA ruled that “interest” paid by a resident corporation (Aco) on subordinated notes would not be subject to Part XIII tax based on the exemption from Part XIII tax for non-participating interest paid to arm’s-length recipients, but with the ruling letter stating under “Additional Information” that the interest would not be deductible under s. 20(1)(c) (or s. 9) in computing Aco’s income. Equity-like features of the notes included that:

• they were subject to the right of Aco in its discretion, with prior notice to the holders, to cancel any interest that would otherwise be payable on any due date; however, in such event, Aco would be precluded from declaring dividends or repurchasing shares until interest payments resumed;
• failure to make a payment on the Notes when due (including any interest, whether as a result of cancellation or otherwise) would not trigger an event of default thereunder;
• they had no scheduled maturity or redemption date, so that ACo was not required to make any repayment of the principal except upon an event of default (principally, bankruptcy or insolvency).

Although the CRA summary is cryptic, the analysis might have been that there was no “legal obligation to pay interest” as required under s. 20(1)(c) in light of the first two points above, but that the interest on the Notes was still “interest” for Part XIII purposes. 2016-0649061R3 and 2017-0732001R3 are similar.

Neal Armstrong. Summary of 2020 Ruling 2020-0854741R3 under s. 212(1)(b).

CRA recently amended its Information Circular on its collection policies (IC98-1R8, dated 24 May 2022, replacing IC98-1R7) by inter alia adding the following passage on what is “acceptable security”:

Some types of security we may accept include bank letters of guarantee, standby letters of credit, or mortgages. Bank letters of guarantee or standby letters of credit should be provided by a Schedule I or Schedule II Canadian financial institution as defined in the Bank Act. Other forms of security can be accepted in certain circumstances. Acceptability of other forms of security is determined on a case by case basis, subject to the Minister’s discretion to accept security under subsection 220(4) of the Income Tax Act.

Acceptable security must be liquid (easily convertible to cash), equivalent or near equivalent to cash, and realizable on demand without defense or claim from third parties. …

When asked about what security CRA would accept under s. 159(5) (which provides that the tax payable by a deceased individual respecting certain income and gains under s. 70(2), 70(5) or 70(5.2)) may be paid in 10 annual instalments if the executor so elects and furnishes the Minister with security “acceptable to the Minister”), CRA referred to the above passage, and then added that such guidelines are not meant to be exhaustive and that executors will have the opportunity to discuss arrangements or security as part of the process for the election.

Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.4 under s. 159(5).

Resident individuals and a corporation owned by one of them, whose disclosure that they had no foreign assets was doubted by CRA, brought an application to have CRA requests to the Swiss federal tax administration for information pursuant to Art. 25 of the Canada-Swiss Treaty declared invalid - principally on the ground that CRA had violated the requirement under Art. 25, para 1 of the Canada-Switzerland Treaty that “an exchange of information will only be requested once the requesting Contracting State has pursued all reasonable means available under its internal taxation procedure to obtain the information.”

Before confirming the decision below to dismiss the application, LeBlanc JA set the stage by stating that “[t]he true intentions of the parties, as they emerge from extrinsic materials when it comes to Article 25 (namely to promote the exchange of information to the maximum extent possible with a view, notably, of preventing tax evasion and avoidance), are reflected … in the actual language of that provision, coupled with that of the Interpretative Protocol.”

He then found that “it was reasonably open to the CRA … to proceed with the … RFIs at the time it did in view of the fact that [the taxpayers] had, to that point, denied, on more than one occasion, having any such [foreign] assets, revenues or activities in the taxation years at issue.”

Regarding the taxpayers’ submission that the specific listing in the Protocol, of types of information that could be requested, established a “ceiling” for such requests, LeBlanc JA stated that “paragraph 2(b) of the Interpretative Protocol establishes a threshold, not an upper limit” and that “on a reasonableness analysis … there is no issue with the fact that the CRA provided the Swiss Authorities with more information—essentially background information—than what was minimally required by paragraph 2(b) of the Interpretative Protocol.”

Neal Armstrong. Summary of Levett v. Canada (Attorney General), 2022 FCA 117 under Treaties –Income Tax Conventions - Art. 27.

An individual with no connection to Canada paid significant tuition fees while in attendance at U.S. universities prior to 2012 then, on immigrating to Canada, claimed his “unused” tuition tax credits as a deduction from Canadian tax. Those provisions referred to an individual’s “taxation year.” The Tax Court applied the Oceanspan principle that “a non-resident with no source of income in Canada, was not a ‘taxpayer’ and therefore did not have a taxation year” (para. 29). The Tax Court rejected the taxpayer’s position that s. 250.1(a) had the effect of deeming any non-resident to have a taxation year - and instead indicated that this provision only “applies where a non-resident must have a taxation year if a provision of the Act is to operate as it is intended to operate, including in respect of another taxpayer,” for example, respecting a non-resident trust with a resident beneficiary recognizing income under s. 104(13) based on when that trust has a taxation year end.

In the Court of Appeal, Stratas JA stated (at para. 3) that “Oceanspan is … directly on point … [and] binds us, just as it bound the Tax Court,” and further rejected the taxpayer’s argument - that s. 250.1 supersedes Oceanspan and has the effect of deeming every non-resident person to have a taxation year in Canada – and expressed agreement here as well with the Tax Court’s reasons.

Neal Armstrong. Summary of Marino v. Canada, 2022 FCA 115 under s. 248(1) – taxation year, and s. 250.1(a).