News of Note
CRA indicates that it will administer the GMTA in accordance with OECD administrative guidance where Finance has intimated that the GMTA will be amended to catch up
Email this ContentCRA indicated that as new OECD administrative guidance is released, the DST and Global Tax Section of CRA will consult with the Department of Finance to determine, on a case-by-case basis, how such guidance should be handled – whether there is a pending amendment to the Global Minimum Tax Act (GMTA) or whether CRA will apply the new guidance to inform its interpretation of the existing GMTA provisions.
CRA was provided with a particular example in this regard respecting s. 17(6) of the GMTA: A particular constituent entity (a CE) is a reverse hybrid entity in relation to its direct owner, while at the same time being fiscally transparent in relation to an indirect owner that holds the particular CE through one or more intermediaries who are also fiscally transparent in relation to the indirect owner. In the current version of the GMTA, this is addressed by allowing the income of the CE to be allocated to the indirect owner. However, the June 2024 OECD Administrative Guidance instead addressed this scenario by allowing any tax paid by the indirect owner with respect to the income of the CE to be allocated to the CE. Although proposed amendments to s. 17(6) released in August 2024 no longer allow the income of the CE to be allocated to the indirect owner, the amendments fail to provide for allocating the tax paid by the indirect owner, regarding the income of the CE, to the CE. However, it is understood that further GMTA amendments will align with the June 2024 administrative guidance.
CRA indicated that it has consulted with Finance and, in light of likely further amendments, it will administer the provisions of the GMTA to achieve what the OECD administrative guidance clarifies should be the outcome – that is, the constituent entity covered taxes paid by the upper-tier entity being pushed down to the CE.
Neal Armstrong. Summaries of 3 December 2024 CTF Roundtable, Q.11 under GMTA s. 3(1) and s. 17(6).
Income Tax Severed Letters 11 December 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that the prohibition against multiple use of the intergenerational transfer rules doe not apply to simultaneous transfers
One of the “intergenerational transfer” rule requirements, in s. 84.1(2.31)(a) or (2.32)(a), is that a previous inter-generational exception to s. 84.1 has not previously been sought. CRA was asked to address the situation where a parent, who has not previously sought out the intergenerational exception, simultaneously disposes of subject shares to two separate purchaser corporations, each wholly-owned by an adult child. CRA indicated that the s. 84.1(2.31)(a) or (2.32)(a) exception could be met on the basis that the two (or multiple) dispositions occur at the same time as part of the same genuine intergenerational transfer.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.10 under s. 84.1(2.31)(a).
CRA elaborates that Reg. 105 applies to amounts paid to a non-resident for services rendered in Canada including through a Canadian subcontractor
Regarding the situation where a Canadian taxpayer (CanCo) engages a non-resident (NRCo) to provide services to be rendered in Canada, with NRCo subcontracting part of the services rendered to CanCo in Canada to another corporation (SupplierCo), CRA noted that its previous position had been that the reimbursement of an expense would not be subject to Reg. 105 withholding based on the finding in Weyerhaeuser that that Reg. 105 applied only to an amount that is remuneration for services rendered that had the character of income in the hands of the recipient.
However, CRA’s new position was that, in the above situation, the amounts paid for services rendered in Canada (other than the reimbursement of certain out-of-pocket costs, such as, apparently, the travel expenses in Weyerhaeuser) would indeed have the character of income in the hands of NRco. The fact that NRco enters into a further agreement with the Supplierco does not alter the character of the payment to NRco, so that Reg. 105 would apply to the full amount received by such non-resident contractor irrespective of whether the subcontractor was a Canadian resident who was fully subject to Canadian tax.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.9 under Reg. 105(1).
CRA interprets s. 55(2)(b) so as to avoid circularity
Canco repurchased its shares held by its parent (which have an ACB and PUC of $100) for $1,000, thereby producing a deemed dividend of $900 which, in turn, is deemed by s. 55(2) to be proceeds of disposition to the parent.
The questioner suggested that there is some circularity in the drafting of s. (j)(i) of the definition of "proceeds of disposition" in s. 54 and s. 55(2)(b), namely:
- s. (j)(i) of the definition of “proceeds of disposition” reduces the proceeds of disposition otherwise received ($1000) by the amount of any dividend deemed to be received under s. 84(3) “except to the extent the dividend is deemed by paragraph 55(2)(b) to be proceeds of disposition of the share”
- s. 55(2)(b) deems the dividend to be proceeds of disposition of the share that is redeemed “except to the extent that the dividend is otherwise included in those proceeds.”
Could there be one $900 capital gain on the disposition without s.(j)(i) of the definition of proceeds of disposition applying, and a second one under s. 55(2)(b)?
Perhaps the concern was that the exclusion in s. 55(2)(b) for a “dividend” otherwise included as proceeds did not apply because, at the end of the day, there was no $900 “dividend” which was included in the $1,000 proceeds.
CRA also was somewhat mystified by the question, and indicated that it did not read these provisions as creating circularity – but indicated that, in any event, if such a possibility did exist, it would take a purposive approach to avoid an absurd result. Accordingly, there would be only one capital gain ($900).
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.8 under s. 55(2)(b).
CRA indicates that an 11% estate beneficiary becomes a specified shareholder of the deceased’s corp. concurrently with its deemed acquisition under ss. 88(1)(d.2) and (d.3)
The estate of an individual who, on death, wholly-owned Aco, included a charity entitled to 11% of the Estate. The Estate will implement a standard post-mortem pipeline, entailing the Estate’s transfer of the Aco shares to Newco (formed by it), followed by the winding-up (or amalgamation) of Aco.
Under s. 88(1)(c)(vi), a bump will be denied if property distributed to the parent (Newco) on the winding-up, or “substituted property”, is acquired by a “specified shareholder” (other than a “specified person”) of the subsidiary (Aco) “at any time during the course of the series and before control of the subsidiary was last acquired by the parent.”
However, s. 88(1)(d.3) will deem control of Aco to have been acquired by the Estate immediately after the death from a person with whom the individual dealt at arm’s length; and pursuant to s. 88(1)(d.2), control of Aco by Newco will be deemed to have been acquired at the time of such deemed acquisition by the Estate.
CRA indicated that it would apply ss. 88(1)(d.2) and (d.3) on the basis that the deemed acquisition of control of Aco by the Estate occurs concurrently with the acquisition of shares of Aco by the Estate and, accordingly, it would not consider the charity to be a specified shareholder of the subsidiary (Aco) prior to the deemed acquisition of control of the subsidiary by the Estate.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.7 under s. 88(1)(d.2).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released by CRA last week and a further 6 CRA interpretations released in April of 2001. Their descriptors and links appear below.
These are additions to our set of 3,024 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 23 ¾ 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 |
|---|---|---|---|
| 2024-12-04 | 19 January 2024 External T.I. 2020-0865921E5 F - Foreign Currency dispositions by an individual | Income Tax Act - Section 39 - Subsection 39(1.1) | foreign currency dispositions under s. 39(1.1) include FX bank deposit conversions |
| 2001-04-13 | 28 March 2001 External T.I. 2001-0070415 F - Interaction entre les articles 51 et 116 | Income Tax Act - Section 116 - Subsection 116(5) | acquisition of the exchanged shares by the corporation on a s. 51 exchange at a cost equal to PUC of issued shares |
| Income Tax Act - Section 54 - Adjusted Cost Base | a corporation acquires shares in its capital on a s. 51 exchange at a cost equal to the PUC of the shares issued therefor | ||
| Income Tax Act - Section 116 - Subsection 116(6) - Paragraph 116(6)(a) | s. 116(6)(a) does not apply to shares acquired by Canco on a s. 51 exchange of Canco shares | ||
| Income Tax Act - Section 51 - Subsection 51(1) | on a s. 51 exchange, the corporation is considered to have acquired the exchanged shares at a cost equal to the PUC of the shares issued by it | ||
| 26 March 2001 External T.I. 2001-0070165 F - Conventions fiscales et lois provinciales | Treaties - Income Tax Conventions - Article 12 | Canada will not reduce its withholding rate to 0% to make room for Quebec taxes imposed on the same property income | |
| Treaties - Income Tax Conventions - Article 2 | Canada has no obligation to absorb Quebec taxes imposed on property income with treaty-reduced withholding | ||
| 26 March 2001 External T.I. 2001-0070585 F - Interaction entre Convention Canada-US et LIR | Treaties - Income Tax Conventions - Article 13 | Art. XIII(5) of Canada-US treaty applies to disposition of Amalco shares that were exchanged on the amalgamation for shares subjected to a deemed disposition under s. 128.1(4)(b) | |
| 29 March 2001 External T.I. 2001-0071825 F - Application de 132(6) et 132(6.1) | Income Tax Act - Section 132 - Subsection 132(6.1) | if trust did not have 150 beneficiaries by the 90th-day deadline, it can only qualify prospectively as a MFT after satisfying the conditions | |
| 5 April 2001 External T.I. 2000-0058445 F - Entreprise de gestion et REATB | Income Tax Act - Section 95 - Subsection 95(1) - Investment Business | a management services business was not an investment business | |
| Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(b) | s. 95(2)(b) application to provision of services to rental partnerships | ||
| 29 March 2001 External T.I. 2001-0064585 F - Application de 13(21.2)e)(iii)(C) | Income Tax Act - Section 13 - Subsection 13(21.2) - Paragraph 13(21.2)(e) - Subparagraph 13(21.2)(e)(iii) - Clause 13(21.2)(e)(iii)(C) | s. 13(21.2)(e)(iii)(C) is not engaged when the affiliated transferee becomes a non-resident |
CRA indicates that there are EIFEL continuity rules regarding amalgamations and windings-up respecting the use of capacity in pre-regime years
Where there have been amalgamations or winding-ups in the pre-regime years where an election has been to access capacity in those years for EIFEL purposes, do the deeming rules in s. 87(2.1)(a.1) or subsection 88(1.11) apply to take into account the pre-regime “excess capacity otherwise determined” and “excess interest” of the predecessor corporations for the purposes of determining the “net excess capacity” of the amalgamated corporation or parent corporation, and the “group net excess capacity” in respect of such amalgamated or parent corporation, as well as in determining the same amounts for other taxpayers in respect of which the particular taxpayer is an eligible pre-regime group entity?
Starting with amalgamations, CRA indicated that s. 87(2.1)(a.1) (when read together with s. 87(2.1)(d)) provides continuity treatment in respect of the various amounts that are relevant in computing the taxpayer’s cumulative unused excess capacity. Although s. 87(2.1)(a.1) does not contain a specific reference to terms used in the transitional rules, the balances described in the transitional rules are modified descriptions of the balances described in s. 87(2.1)(a.1).
Accordingly, s. 87(2.1)(a.1) should provide continuity treatment for the balances of the predecessor corporations in the transitional period for a corporation formed on an amalgamation. The same approach is used for a winding up during that period.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.6 under s. 87(2.1)(a.1).
CRA indicates that not permitting taxable income to be negative in the ATI formula is producing anomalous results
Is the computation of “adjusted taxable income” (ATI), defined in s. 18.2(1), iterative if a taxpayer wishes to claim sufficient non-capital losses under s. 111(1)(a) such that taxable income is nil after accounting for the deduction limitation under s. 18.2(2)? The core of this question is whether taxable income used in computing para. (b) of variable D in computing variable A of the definition of ATI can be negative or can it only be nil or positive having regard to the definition of “taxable income” in s. 248(1)? If it can be negative for the purposes of computing ATI, then this can lead to an iterative computation of the deduction claimed under s. 111(1)(a) and the limitation of interest and financing expenses (IFE) under s. 18.2(2).
CRA noted that ATI is determined by the formula
A + B – C,
and A is determined by the formula
D – E.
with variable D in general terms referring to the taxpayer’s taxable income for the year determined without regard to s. 18.2(2). As per s. 248(1), the taxpayer’s “taxable income” cannot be less than nil. This means that the taxable income of a taxpayer for purposes of computing (D - E) (e.g., taxable income minus non-capital losses used) can only be nil or positive, and ATI does not capture the non-capital losses that have been used to offset IFE.
CRA indicated that this result may not be consistent with policy in all circumstances, and it has been brought to the attention of the Department of Finance.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.5 under s. 18.2(1) – ATI – A – D(b).
CRA again notes that it does not apply 90% as a strict threshold for determining “substantially all”
Among the requirements in para. (c) of the definition of “excluded entity” in s. 18.2 is that “all or substantially all of the businesses … and undertakings and activities of the taxpayer are … carried on in Canada.”
CRA was asked to consider the situation of a Canadian sales subsidiary that focused on making sales in the US through Canadian employees who travelled there, but it did not have a PE there. CRA indicated that it was not relevant that Canada maintained full ability to tax the subsidiary, and that there was a two-part factual test: where does the entity carry on business; and if it carries on business both inside and outside Canada, are all or substantially all of its business activities and undertakings within Canada? CRA further noted that the meaning of “substantially all” has both qualitative and quantitative components and that neither CRA nor the courts have ever considered 90% to be a strict threshold for “substantially all.”
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.4 under s. 18.2(1) – excluded entity – (c)(i).