News of Note
CRA indicates that pay equity awards agreed to consensually did not qualify for tax reductions under s. 110.2
Email this ContentSs. 110.2 and 120.31 effectively permit employees receiving awards for lost pay or employment to benefit from the lower rates of tax that would have applied had the amounts been received in the course of the years to which the awards related rather than subsequently as a lump sum. However, to be “qualifying amounts,” they must be received pursuant to a court or arbitration award or an agreement settling a legal proceeding.
Regarding amounts paid in 2019 by an employer to some of its employees as part of a pay equity settlement, the Directorate indicated that only arbitration award amounts (that were included in the employees’ employment income), and not pay equity salary adjustments paid pursuant to a Memorandum of Understanding between the Employer and the Union, were "qualifying amounts" - notwithstanding that the latter amounts were set out in an Annex to an arbitration award.
Neal Armstrong. Summary of 1 June 2021 Internal T.I. 2020-0858471I7 F under s. 110.2(1) – qualifying amount - (a).
CRA indicates that additional dentists’ charges for COVID precautions qualify as s. 118.2(2)(a) medical expenses
CRA indicated that extra fees paid to a dentist for additional “asepsis” provided for COVID reasons, i.e., for additional procedures to guard against COVID infection such as personal protective equipment and sterilization, qualified as eligible dental services under s. 118.2(2)(a), reasoning that dental “services cannot be provided without asepsis.”
Neal Armstrong. Summary of 4 May 2021 External T.I. 2020-0853361E5 F under s. 118.2(2)(a).
Income Tax Severed Letters 16 March 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The s. 18.2 rules include anomalies
Observations on the interest-limitation rules in ss. 18.2 and 18.21 include:
- The effect of the apparent exclusion of interest received from any non-arm’s length nonresident from interest and financing revenues (IFR) is that they are instead included in adjusted taxable income (ATI) so as to result in a 30% rather than 100% capacity per dollar of income.
- This is especially anomalous where the IFR is for example interest paid by a Canadian branch business of the non-resident such that the deductibility of that interest to the non-resident in computing its income earned in Canada was restricted under s. 18.2.
- This rule could also apply to a Canadian parent, acting as the market-facing entity for a group of companies, that borrows in the market (thus incurring interest expense) and then on-lends to its foreign affiliates.
- Variable C of the adjusted taxable income definition effectively reverses inclusions in taxable income of various items including foreign income covered by tax credits claimed under ss. 126(1) and (2). “[T]here appears to be a circularity problem with respect to foreign income, in that the amount of tax credits to which the taxpayer may be entitled under subsections 126(1) or (2) could be affected by its deductible IFE, which cannot be determined without first taking into account the tax credits.”
- Unlike under s. 18.2, there is no requirement under the s. 18.21 rules to determine the “excess capacity” for any particular group member and then separately transfer excess capacity of one particular group member to another. Rather, the total amount of IFE that may be deducted for the group is determined and as part of the joint election is merely allocated out to each member in that election itself. No group member should have restricted IFE to the extent that the allocated group ratio amount allocated to that member is less than that member’s net IFE.
- Unlike the s. 18.2 rules, under which there is no ability for trusts within a group to transfer or receive excess capacity, the mechanics of the s. 18.21 rules effectively permit the transfer of excess capacity to or from trusts within the Canadian group (although the s. 18.21 rules are unavailable where a group member is a mutual fund trust).
Neal Armstrong. Summaries of EY, “Proposed EIFEL rules,” Tax Alert 2022 No. 13, 9 March 2022 under s. 18.2(12), s. 18.1(1) – excluded interest, adjusted taxable income – B(a), adjusted taxable income – C(b), s. 111(1)(a.1), s. 18.21(3) and s. 18.21(2).
Loral merges pursuant to a Delaware merger with Telesat Canada through creation of new Canadian partnership/corp holding structure
Telesat Canada, a Canadian corporation and global satellite operator that was mostly owned by Loral Space & Communications Inc. (a US public corporation) and Public Sector Pension Investment Board, effected a sort of merger transaction in which both Telesat and Loral became subsidiaries of an Ontario LP (Telesat Partnership) whose general partner (Telesat Corporation) became a TSX and NASDAQ-listed corporation. The transaction was largely accomplished through a merger of Loral with a Loral Delaware subsidiary (with Loral as the survivor) on which the public Loral shareholders were given the choice of receiving units of Telesat Partnership that are exchangeable into the (listed) shares of Telesat Corporation, or such shares of Telesat Corporation itself.
US tax counsel opined that Telesat Corporation should not be deemed to be a US corporation under Code s. 7874 and that Telesat Partnership should not be treated as a publicly traded partnership or a US corporation. The exchanges by the Loral shareholders for shares of Telesat Corporation or units of Telesat Partnership were considered to be non-recognition transactions under Code s. 351 or s. 721.
The merger did not qualify as a foreign merger, so that no Canadian rollover treatment applied. The resulting sandwich structure entailed a non-Canadian partnership (Telesat Partnership – held by a B.C. corporation, Telesat Corporation) holding shares of a controlled foreign affiliate (Loral) which, in turn, received FAPI income in the form of Canadian-source dividends. The disclosure states that, assuming a full current distribution of dividends at the various levels:
Telesat Corporation may deduct in computing its taxable income a prescribed portion of such dividends received by it through Telesat Partnership. In determining the amount of such dividends from Loral that may be deducted in computing its taxable income, Telesat Corporation intends not to take into account any deduction claimed by Telesat Partnership pursuant to subsection 91(5) of the Tax Act. Telesat Corporation believes that such interpretation is consistent with the rationale expressed by the CRA for its published administrative position in this regard, so that there would be no net income inclusion to the partnership, and it was considered appropriate that there also should be no net inclusion to Telesat Corporation.
These deductions would also address Telesat Partnership being a SIFT partnership.
Neal Armstrong. Summary of 16 November Non-Offering Prospectus of Telesat Corporation and Telesat Partnership and 30 June 2021 Proxy Circular (Schedule 14A) of Loral Space &Communications Inc. under Mergers & Acquisitions – Cross-Border Acquisitions – Outbound – Delaware etc. Mergers.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in May and April, 2005. Their descriptors and links appear below.
These are additions to our set of 1,958 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 16 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Mingle – Tax Court of Canada indicates that a de facto executor is a legal representative
Wong J rejected the taxpayer’s submissions that he had renounced his executorship shortly after being appointed and that his subsequent acts in jointly (with his brother) transferring estate property to his daughter were performed qua a trustee de son tort and not as an executor – so that he should not have been assessed under s. 159(3) for unpaid estate taxes given their failure to obtain a clearance certificate. Regarding the taxpayer’s second argument, Wong J stated:
[I]f Mr. Mingle was a trustee de son tort (i.e. a person who is not appointed as trustee but whose course of conduct suggests that he be treated as one), I believe that for income tax purposes, he would have still fallen within the definition of “legal representative” which encompasses “any other like person ... dealing in a representative or fiduciary capacity with the property.”
She also indicated that assessments of the taxpayer under s. 159(3) within the s. 222(4) 10-year limitation period restarted the limitation period running pursuant to s. 222(5)(c).
Neal Armstrong. Summaries of Mingle v. The Queen, 2022 TCC 34 under s. 159(3) and s. 222(5)(c).
The SCC has granted leave in Deans Knight
Leave for appeal to the Supreme Court has been granted in Deans Knight, which decided that the object, spirit and purpose of s. 111(5) is to restrict the tax losses of a corporation if a person acquires “actual control over the corporation’s actions, whether by way of de jure control or otherwise [emphasis added].”
Neal Armstrong. Summary of Canada v. Deans Knight Income Corporation, 2021 FCA 160 under s. 245(4).
CRA seems to suggest that where X makes a payment at the direction of Y, X need not issue a T4A to the payment recipient
A Canadian university agreed with a (perhaps, foreign) Ministry to apply funding received by it to pay the tuition of and a monthly stipend to trainees who were accepted into a University program. CRA stated:
The obligation to prepare and file T4A slips and T4A summaries rests with the payer of the amount. The payer is the person who has discretion and control over the funds, and would not include a person who merely disburses the funds on behalf of the payer without having any discretion or control. Therefore, if the University is not the payer of the amount, it is not obligated to prepare and file T4A slips and T4A summaries.
Although it is difficult to generalize, this suggests that where X disburses funds at the direction of Y for services of Z described in Reg. 200(2) (or the amount received by Z is otherwise described in Reg. 200(2)), it is Y rather than X who is obligated to issue the T4A to Z. Where Y is foreign, this may mean that no slip is issued.
Neal Armstrong. Summary of 15 March 2019 External T.I. 2018-0766021E5 under Reg. 200(2)(a).
CRA states that wage-reimbursement payments received by employers were s. 9 income
A BC government program required employers to pay wages in specified circumstances of employees who stayed home for COVID-related reasons – but then reimbursed the employer for all or a portion of this wage cost.
CRA indicated that these reimbursement payments were included in the employers' income under s. 9 (no need to resort to s. 12(1)(x)) and that the payments to the employees were includible in their income under s. 5(1).
Neal Armstrong. Summaries of 2 December 2021 External T.I. 2021-0898441E5 under s. 9 – expense reimbursement and s. 5(1).