News of Note
We have translated over 2,000 CRA interpretations
Email this ContentWe have published a further 8 translations of CRA interpretation released in February, 2005. Their descriptors and links appear below.
These are additions to our set of 2,004 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 17 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Carter – High Court of Australia finds that trust beneficiaries were taxable on income to which they were entitled at year end notwithstanding their subsequent disclaimer
The Australian tax legislation, as judicially interpreted, required (somewhat similarly to ITA s. 104(24)) the inclusion in a beneficiary’s income of the beneficiary’s share of the trust’s income for a year if, at the end of the trust year, the beneficiary’s interest in the trust income was both vested in interest and in possession, and the beneficiary had a present legal right to demand and receive payment of the income. The High Court of Australia found that this test was met where, under the terms of the trust, the trust beneficiaries (the children of the settlor) were entitled at the end of the trust’s income year to receive pro rata portions of the trust’s income for that year – even though, subsequently to that year end, they disclaimed all right, title and interest to that income.
The beneficiaries’ submission that the above test should be applied on the basis that “for ‘a reasonable period’ after the end of the income year, later events could subsequently disentitle a beneficiary who was presently entitled immediately before the end of the income year” was rejected on the basis inter alia that this interpretation “would give rise to uncertainty in the identification of the beneficiaries presently entitled to a share of the income of a trust estate.”
Neal Armstrong. Summary of Commissioner of Taxation v Carter, [2022] HCA 10 under s. 104(24).
Shell – Tax Court grants a confidentiality order respecting JV documents whose public disclosure would breach a confidentiality agreement
Shell realized a capital loss on its disposition of its interest in a partnership to Canadian subsidiaries of PetroChina in connection with establishing a joint venture with the PetroChina group for the development and production of natural gas. Shell and PetroChina did not wish their competitors to know the details of their JV and, to that end, made various confidentiality agreements and covenants.
CRA denied the above capital loss pursuant to GAAR and, in order to challenge this assessment in the Tax Court, Shell needed to disclose various JV documents. It brought a motion for a confidentiality order pursuant to s.16.1 of the general-procedure Tax Court rules so that such documents could be disclosed to the Crown on discovery, but shielded from public view.
After referring to the “open courts” principle set out inter alia in Sherman Estate, and before allowing the motion, Sommerfeldt J stated:
I am satisfied that Shell has established that, if a confidentiality order is not granted, there will be a serious risk to one or more of the following important public interests:
(a) the general commercial interest of preserving confidential information;
(b) the general public interest of protecting the right to a fair trial, also described as the public interest of enabling “commercial litigants to vindicate their legal rights without exposing themselves to the real risk of harm”;
(c) the public interest of enabling a litigant, when “compelled by the rules of discovery to divulge sensitive and confidential information, ... to maintain the confidentiality of that information”;
(d) the public interest of promoting commercial certainty and protecting proprietary information; and
(e) the public interest of protecting fair competition.
He also referred sympathetically to the dilemma faced by Shell that “in order to put its best foot forward in this Appeal, Shell will need to breach the confidentiality agreements” absent the motion being granted.
Neal Armstrong. Summary of Shell Canada Limited v. The Queen, 2022 TCC 39 under Tax Court of Canada Rules (General Procedure), s.16.1(1).
CRA indicates that annual balance sheet translation adjustments to FX-denominated balances are not included in qualifying revenue for CEWS purposes
CRA indicated that the annual adjustments made on the balance sheet of an eligible entity in translating FX-denominated balances to the current FX spot rate are not included in “qualifying revenues” for CEWS purposes, whose definition “requires … an inflow of cash, receivables or other consideration.” However, this inflow requirement would be satisfied, for example, “if an entity realizes a foreign exchange gain on the collection of an account receivable that arose on the sale of goods.”
Neal Armstrong. Summary of 23 January 2022 TEI Roundtable, 2021-0913421C6 under s. 125.7(1) – qualifying revenue.
Income Tax Severed Letters 13 April 2022
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CPA Canada comments on the “reportable uncertain tax treatment” rules
Draft s. 237.5 requires corporations above the rather small size threshold to annually report “reportable uncertain tax treatment” - generally respecting situations where their GAAP financial statements reflect uncertain tax treatment. Comments of CPA Canada include:
- The “reportable uncertain tax treatment” definition should be adjusted to clarify that the reporting requirement applies only to Canadian income tax (rather than, say, foreign income tax) uncertainties.
- There are some uncertainties as to whether such reporting extends to tax credits that have not been fully booked (e.g., because there is not yet reasonable assurance that all the conditions will be met.)
- There should not be continued reporting requirement arising on the same issue, transaction or series of transactions (e.g., multiple penalties should not arise where CRA already was provided with the required information).
- S. 237.5(8) references a requirement to potentially report to CRA “any information” relating to any transaction etc. to which the reportable uncertain tax treatment relates. It should be clarified that this applies only to factual information - and not subjective information that was used to determine whether an uncertain tax treatment should be reflected in the financial statements.
- Where, for example, a corporation with a March 31, 2022 year end engaged in a transaction in March 2022 that was not determined to create an uncertain tax position until a judicial decision in December 2022, it nonetheless could be required to report this unknown uncertainty when filing its 2022 return by September 2022. Off-calendar taxation years should be addressed.
Neal Armstrong. Summaries of CPA Canada, “Uncertain Tax Treatments (“UTT Proposals”),” 5 April 2022 Joint Committee Submission under s. 237.5(1) – reportable uncertain tax treatment, reporting corporation, s. 237.5(2) and s. 237.5(8).
The Joint Committee notes that the draft tax debt avoidance rules should be more narrowly focused
A few comments of the Joint Committee on the draft s. 160(5) rules targeting schemes to avoid liability for tax debts and the associated penalty provisions in s. 160.01 are noted below:
The use of the "one of the purposes” test in s. 160(5)(a)(ii) establishes too low a threshold, and should be re-framed as “one of the main purposes."
The reference in s. 160(5)(a)(ii) to a test of it being reasonable to consider that one of the purposes of the transaction or series was “to avoid … liability … for an amount payable under this Act” also sets too low a threshold and should be re-framed to refer to a demonstrable current or future anticipated tax debt of the transferor that would otherwise be avoided, determined at the beginning of the applicable series of transactions. Otherwise, the rule could apply, for example, to:
- An individual who makes a contribution to her spouse’s RRSP to protect against future liabilities of that contributor and to reduce (i.e., “avoid”) the transferor’s tax liability for that year - and two years later, that individual becomes liable for a tax debt under s. 160 as a result of a dividend from a controlled corporation.
- A Holdco, which was set up to hold Opco for general creditor-proofing reasons, receives a dividend out of Opco’s safe income in 2022 and then, unexpectedly, Opco is unable to pay its 2023 tax liability in 2024.
The rule under s. 160(5)(c) (deeming there to be a net property transfer to the current or future tax debtor under s. 160(1)(e)(i)) is deficient in that it should:
- include the benefit of substituted property for the consideration received, and any property received by the transferor by virtue of the ownership of such property (otherwise than as proceeds of disposition),
- refer to valuation at end of the series rather than throughout the series,
- not be adversely engaged due to FMV fluctuations from external factors such as stock market trading or FX fluctuations, and
- not be engaged where there is a cancellation of the debt or other securities received that represents a payment for value.
For example, there should not be considered to be a deemed depletion of value if:
- Shares of a corporation (Holdco) purchased for FMV consideration by the future tax debtor from the non-arm’s length (NAL) seller become worthless as part of the series due to a dividend-in-kind by Holdco to such future tax debtor of all its assets (i.e., shares of Opco); or
- The tax debtor assigns a note, equaling the FMV of assets sold by it to the NAL purchaser, to that purchaser’s parent, for FMV consideration, followed by a cancellation of that debt on a s. 88(1) wind-up.
The exclusion in the s. 160.01(3) penalty rule for clerical or secretarial services is too narrow – “it is entirely possible that a person may be more significantly involved in, for example, documenting the transaction, but without understanding the avoidance aspects of the plan as a whole (such as a corporate lawyer or valuator with no tax expertise)."
The reference in s. 160.01(2) to “every person who engages, participates in, assents to or acquiesces in section 160 avoidance planning” is too broad, and should be refocused to apply to those who devise and promote the plan or scheme.
Neal Armstrong. Summary of Joint Committee, “Avoidance of Tax Debts,” 5 April 2022 Joint Committee Submission under s. 160(5)(a)(ii), s. 160(5)(c), s. 160(1)(c), s. 160.01(3) and s. 160.01(2).
We have translated 11 more CRA severed letters
We have published translations of 3 CRA severed letters released last week and a further 8 translations of CRA interpretation released in March and February, 2005. Their descriptors and links appear below.
These are additions to our set of 1,996 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 17 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2022-04-06 | 2017 Ruling 2017-0696791R3 F - Reduction of PUC/capital | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | interest on money borrowed by Subco for distribution of share-capital account to its parent is deductible if the Subco property continues generating business incomeAmended and supplemented by 2017-0696792R3 F |
| Income Tax Act - Section 51 - Subsection 51(1) | s. 51(1) will apply where convertible note, that was issued as boot, will be converted to sharesAmended and supplemented by 2017-0696792R3 F | ||
| 2019 Ruling 2017-0696792R3 F - Internal reorganization | Amending and supplementing 2017-0696791R3 F | ||
| 7 January 2022 External T.I. 2020-0866751E5 F - CEWS and government financial assistance | Income Tax Act - Section 125.7 - Subsection 125.7(4) | government assistance based partly on payroll levels would not be qualifying revenue if normal accounting practice would be to contra payroll expense | |
| Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue | government assistance that under normal accounting practice was applied to reduce recorded expenses would not be qualifiying revenue | ||
| 2005-03-11 | 3 March 2005 External T.I. 2004-0096371E5 F - Revenu tiré d'un emploi et 110(1)f)(iii) | Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(f) - Subparagraph 110(1)(f)(iii) | no special tests under s. 110(1)(f)(iii) for determining whether the individual is self-employed |
| 2005-03-04 | 7 February 2005 External T.I. 2004-0101421E5 F - Subsection 111(5.1) | General Concepts - Fair Market Value - Other | depreciable assets’ value inferred from the share purchase price |
| Income Tax Act - Section 111 - Subsection 111(5.1) | FMV of assets should be established on a push-down basis from the share purchase price, but can be allocated based on an appraisal | ||
| 28 February 2005 Internal T.I. 2004-0103991I7 F - Remboursement de frais de scolarité | Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) | agreement of employer to pay tuition would have been taxable under s. 6(3) if a benefit | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | payment of tuition fees conditional on a return to extended employment was not a taxable benefit | ||
| 28 February 2005 External T.I. 2004-0104121E5 F - Détermination du statut de résidence | Income Tax Regulations - Regulation 2607 | individual working in Ontario but visiting Quebec family home twice monthly likely was resident in Quebec | |
| 7 February 2005 External T.I. 2005-0111431E5 F - Death of a Taxpayer - Deduction of CCDE | Income Tax Act - Section 66.2 - Subsection 66.2(2) | CCDE balance cannot be deducted in terminal return or by estate | |
| Income Tax Act - Section 70 - Subsection 70(5.2) | no s. 70(5.2) deduction where CCDE balance arose “through” a partnership | ||
| 23 February 2005 External T.I. 2004-0093921E5 F - Déménagement d'un employé-Paiement de frais | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | payment of house-hunting fee for new hire was non-taxable | |
| 2005-02-25 | 17 February 2005 External T.I. 2004-0091811E5 F - Exemption pour résidence principale | Income Tax Act - Section 54 - Principal Residence | separate municipal addresses not determinative that basement occupied by son and ground floor occupied by mother were two housing units |
| Income Tax Act - Section 54 - Principal Residence - Paragraph (a) | where residence held by son and mother in equal co-ownership is 2 units each occupied separately, each could technically access the exemption for only a ¼ interest | ||
| 17 February 2005 External T.I. 2004-0104331E5 F - Indemnisation et autres paiements | Income Tax Act - Section 5 - Subsection 5(1) | portions of settlement payment that compensated for lost vacation credits and reimbursed for psychotherapy and medication costs were taxable under s. 5(1) |
The Joint Committee notes difficulties with the proposed reportable and notifiable transaction rules
Observations or recommendations of the Joint Committee on the reportable transaction rules in s. 237.3 as they would be revised by the February 4, 2022 package of draft amendments, and on the new notifiable transaction rules in draft s. 237.4, include:
- The proposals should take into account that some of the advisors involved in reportable or notifiable transaction may not be aware of the aspects of the planning giving rise to a reporting obligation, or whether the transactions end up being implemented.
- The change of the “avoidance transaction” test to refer to “one of the main purposes” of the transaction or series (rather than using a “primarily” test for a transaction) means that, for example, having a small safe income dividend (representing an acceptable tax benefit) as part of a series would render all transactions in the series avoidance transactions – so that the presence of only one hallmark would engage a reporting requirement.
- The fee hallmark could potentially be engaged by “value” billing, contingency work (which is common in non-“aggressive” areas such as SR&ED filings) and fees based on the number of taxpayers (for example, an accounting firm may bill for the preparation of T2057s on a per-transferor basis), especially given the “to any extent” language in that hallmark description.
- The draft exclusion in s. (c)(i)(B) from the contractual protection hallmark should be revised in various listed respects to clarify that the typical provisions in a share or asset sale agreement - where the vendor provides indemnities related to pre-closing taxes or tax attributes, or covenants for assistance in the event of disputes with third parties (including disputes regarding tax outcomes expected to apply to the purchaser) - will come within the exclusion.
- Under the Quebec notifiable transaction rules, a newly designated transaction need only be reported after the later of 120 days of publishing the transaction in the Quebec Gazette and 60 days after the day the Minister of Revenue of Québec determines that the obligation to disclose begins. A similar “later of” concept should be employed federally and, given that many taxpayers operate in Québec, consideration should be given to coordinating deadlines.
- It is unclear whether transactions need to be reported as notifiable transactions on a recurring basis and whether the sample list of notifiable transactions describes transactions that may provide tax benefits over a period of time – for example, would a transaction whereby CCPC status was lost before 2022 need to be reported because refundable taxes on investment income were avoided for subsequent years?
- Given that a series of transactions can encompass many years (much longer than the 45-day notifiable-transaction reporting window) and some of the examples (e.g., avoidance of deemed dispositions of trust property) deal with series where some steps may occur well into the future or not at all, an advisor may not know that there is a notifiable transaction until all the transactions in the series are completed and well after the reporting deadline.
- In particular, the taxpayer, advisors and promoters might be required to report before a series is completed. i.e., for some series, before they can know that there is a notifiable transaction.
Neal Armstrong. Summaries of Joint Committee, “Reportable Transaction and Notifiable Transaction Proposals,” 5 April 2022 Joint Committee Submission under s. 237.3(5), s. 237.3(1) - advisor, - avoidance transaction, - – reportable transaction - (a), - (b), - (c)(i)(B), s. 237.3(4), s. 237.4(4), s. 237.4(3), s . 237.4(5) and s. 237.3(9).
CRA rulings on interest deductibility appear to relate to a share capital account distribution out of accumulated profits
CRA ruled that interest on money used by a subsidiary (shortly after an amalgamation) to make a share capital account distribution in cash to its parent would be deductible in computing its income provided that its property continued to be used by it for the purpose of gaining or producing income from its business. Although the ruling letter is heavily redacted, the lack of emphasis on the subsidiary’s PUC, the emphasis on the accounting treamtment of the transaction and a supplementary letter ruling on the dollar amount of the subsidiary’s accumulated profits at the time of the amalgamation suggest that the distribution was regarded as coming, at least to some extent, out of the subsidiary’s accumulated profits rather than PUC.
Neal Armstrong. Summary of 2017 Ruling 2017-0696791R3 F and 2017-0696792R3 F under s. 20(1)(c)(i) and of 2017 Ruling 2017-0696791R3 F under s. 51(1).