News of Note

CRA indicates that it does not have rigid guidelines as to what is “acceptable security”

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).

Income Tax Severed Letters 22 June 2022

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

Levett – Federal Court of Appeal finds that taxpayer stonewalling satisfied the Swiss exchange-of-information requirement that CRA had “pursued all reasonable [domestic] means available”

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.

We have translated 10 more CRA severed letters

We have published translations of a CRA ruling and interpretation released last week and a further 8 translations of CRA interpretation released in November and October of 2004. Their descriptors and links appear below.

These are additions to our set of 2,109 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 2/3 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
2022-06-15 2021 Ruling 2021-0880641R3 F - Changes to existing monetization arrangements General Concepts - Transitional Provisions and Policies agreement novation likely would lose grandfathering
Income Tax Act - Section 80.6 - Subsection 80.6(1) substituting the index used in a monetization arrangement did not de-grandfather it from the synthetic disposition rules
30 March 2022 External T.I. 2017-0737181E5 F - Right to receive income from a trust Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) - Subparagraph 73(1.01)(c)(ii) clause suspending the right to income on bankruptcy would not satisfy s. 73(1.01)(c)(ii)
2004-11-12 27 October 2004 External T.I. 2004-0080191E5 F - Paragraphes 6(1) et 6(2) de la Loi Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) annual recognition of s. 6(1)(e) standby charges does not reduce quantum of s. 6(1)(a) benefit where subsequent employee bargain-purchase of automobile
Income Tax Act - Section 15 - Subsection 15(5) benefit from bargain purchase of car from employer not reduced by previous s. 15(5) standby charges
2004-11-05 25 October 2004 External T.I. 2004-0077031E5 F - Application de la division 20(1)e.2)(i)(B) Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.2) - Subparagraph 20(1)(e.2)(i) - Clause 20(1)(e.2)(i)(B) condition in s. 20(1)(e.2)(i)(B) is satisfied for a year if only a portion of the interest is deductible in that year pursuant to s. 20(1)(c)(iv)
8 October 2004 APFF Roundtable Q. 8, 2004-0090801C6 F - Benefit to Shareholders Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) could apply where corporate funds used to acquire non-participating preferred shares
2004-10-29 25 October 2004 External T.I. 2004-0086261E5 F - Ristournes Income Tax Act - Section 135 - Subsection 135(1.1) patronage dividends paid after March 22, 2004 are non-deductible even if reported before then
15 October 2004 External T.I. 2004-0068421E5 F - Bien de remplacement Income Tax Act - Section 44 - Subsection 44(5) replacement property can be acquired from a related person
Income Tax Act - Section 44 - Subsection 44(5) - Paragraph 44(5)(a.1) rental use is a similar use even if shift from residential to commercial use
18 October 2004 External T.I. 2004-0077151E5 F - Déduction pour gain en capital Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(ii) no requirement for the combined period of holding to be 24 months
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share - Paragraph (e) para. (e) effectively requires a combined 24-month holding period for s. 110.6(14)(f)(i) or (iii) transactions
8 October 2004 APFF Roundtable Q. 1, 2004-0085551C6 F - Application de la division 20(1)e.2)(i)(B) This repeats 2004-0077031E5 F
8 October 2004 APFF Roundtable Q. 4, 2004-0088411C6 F - Prêt à une société de personnes par une société Income Tax Act - Section 15 - Subsection 15(2) Gillette not followed: s. 15(2) applicable where a corporation makes a loan to a partnership equally owned by its 2 equal shareholders

Marino – Federal Court of Appeal confirms the Oceanspan principle that a non-resident who does not compute income from any source for ITA purposes does not have a taxation year

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).

CRA indicates that it initially imposes instalment interest on VDP-accepted wash transactions “given … system limitations”

Where CRA accepts a voluntary disclosure for a wash transaction, and grants full relief for penalties and interest on the amounts the supplier otherwise should have collected and remitted, instalment interest nonetheless will be applied respecting the periods covered by the voluntary disclosure given CRA’s “system limitations” – although CRA indicated that such interest likely would then be cancelled, and stated:

Internal discussions are currently underway on the processing and policies on the waiving of instalment interest with the Voluntary Disclosures Program.

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.10 under ETA s. 281.1(1).

CRA rules that substituting the index used in a monetization arrangement did not de-grandfather it from the synthetic disposition rules

A monetization arrangement that was grandfathered from application of the synthetic disposition rules for deferring gain on the shareholding of a holding company (“Holdco A”) in a public company entailed a secured loan from a financial institution (“FI”) to Holdco A and a cash-settlement forward agreement between Holdco A and FI. A reference index was used in determining both the interest rate under the loan and the reference price under the Forward Agreement.

As a result of the discontinuance of the reference index, it will be replaced for such purposes by a similar index.

The synthetic disposition rules apply to agreements and arrangements entered into after March 20, 2013, and to earlier agreements or arrangements whose terms are extended after that date. CRA ruled that the index substitution would not result in the application of s. 80.6 (i.e., no loss of the deferral) - and also provided a tentative opinion “that there is a reasonable argument that Holdco A could lose the benefit of the transitional relief to the extent that the assignment of the Monetization Agreement would have the effect of novating it.”

Neal Armstrong. Summary of 2021 Ruling 2021-0880641R3 F under s. 80.6.

CRA confirms strict requirements for s. 94(1) “electing contributor” and “electing trust” elections

The s. 94(1) definition of “electing contributor” permits a resident contributor to elect to have income of the s. 94 trust attributed to the contributor. This definition stipulates that the election must be made in writing “on or before the contributor’s filing due date for the first taxation year of the contributor for which the election was to take effect” (the “initial year”).

CRA confirmed that this language requires that the election be filed on or before the filing due date of the contributor for the initial year - even if the personal return of the contributor was filed after such due date. CRA considers that it does not have the discretion to allow a late-filing. If the contributor misses the deadline for a particular year, this does not preclude the contributor from filing this election for a subsequent taxation year, which would then become the initial year.

The s. 94(1) definition of “electing trust” permits a trust to elect to be a separate trust in respect of its :non-resident portion.”

CRA indicated that as long as the election is filed with the trust’s income tax return for its first taxation year throughout which it is deemed to be resident in Canada and in which it holds property that is part of its non-resident portion, the election would not be considered to be filed late even if the trust return for that year is filed late. Conversely, where the election is not included with the income tax return as filed, the election is considered late, with no Ministerial discretion to allow a late-filing of the election.

Neal Armstrong. Summaries of 15 June 2022 STEP Roundtable, Q.3 under s. 94(1) - “electing contributor” and “electing trust”.

CRA confirms that it is required to allow unclaimed rebates when assessing under s. 296 without first requiring the receipt of rebate applications

CRA confirmed the proposition that in assessing a person’s net tax under s. 296, it was required to allow any valid but unclaimed rebate claims of the person irrespective of whether the normal rebate application period has expired or not yet expired – and is revising its Audit Manual to further clarify this point.

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.9 under ETA s. 296(2.1).

Triskelion – Tax Court of Canada leaves open the argument that days cannot be counted twice under the 183-day test for a services PE under the Canada-US Treaty

A U.S.-resident corporation provided 198 days of consulting services in Canada in 2015 and 54 days in 2016 respecting a 12-month Canadian construction project commencing in March 2015. Spiro J found that the taxpayer had a “services” permanent establishment in Canada in 2016 under Art. V(9) of the Canada-U.S. Tax Treaty, which referenced a test that “the services are provided in [Canada] for an aggregate of 183 days or more in any twelve-month period with respect to the [Canadian project]” – so that there was a services PE based on the taxpayer’s Canadian services provided during the 12-month period ending in March 2016.

Spiro J rejected the taxpayer’s argument, that the Minister had “counted 183 of the 198 days during which the Appellant provided consulting services in Canada in 2015” so “that the Minister was entitled to carry over only 15 days from her 2015 computation in determining whether the Appellant had a ‘deemed services PE’ in Canada for its 2016 taxation year,” on the basis of that there was no indication in the record that the taxpayer’s 2015 taxation year had been assessed - and went on to state that “the Court … makes no comment on whether such an argument might prevail on a different evidentiary record.”

Neal Armstrong. Summary of Triskelion Projects International Inc. v. The Queen, 2022 TCC 63 under Treaties – Income Tax Conventions – Art. 5.

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