News of Note
CRA indicates that not permitting taxable income to be negative in the ATI formula is producing anomalous results
Email this ContentIs 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).
CRA confirms that the B2B notifiable transaction reporting applies whenever there is an interest withholding tax reduction going from an ultimate to an immediate funder
The list of notifiable transactions for purposes of s. 237.4(3) essentially includes a non-resident person (NR1) entering into an arrangement to indirectly provide debt financing to a taxpayer through another non-resident person (NR2) where the taxpayer treats the interest paid by it to NR2 as subject to a lower withholding tax rate than if it paid that interest directly to NR1.
CRA was presented with the situation where the mostly non-resident public shareholders of Foreign Parent subscribe for shares of Foreign Parent, which uses those proceeds to make an interest bearing loan and subscribe for shares of its wholly-owned subsidiary, Foreign Opco, which uses all of such proceeds to make an interest-bearing loan to Canco. Interest paid by Canco to Foreign Opco is subject to a 10% withholding tax rate, whereas the rate would be 15% had the interest been paid by Canco to Foreign Parent. The character substitution rules in s. 212(3.6) do not apply and there are no “specified shares” as defined in s. 212(3.8).
CRA indicated that Foreign Parent (regarded as NR1) would be required to report pursuant to s. 237.4(4)(a) because it would be considered to be a person to whom a tax benefit results; and Foreign Opco (regarded as NR2) and Canco would be required to report under s. 237.4(4)(b) because they entered into the transaction for the benefit of Foreign Parent.
CRA also indicated:
- Intent and purpose do not provide a basis for limiting or excusing the reporting obligation, nor is there a materiality threshold.
- If Foreign Parent only equity-financed Foreign Opco, which used all or a portion of the proceeds to make an interest-bearing loan to Canco, the arrangement would not come within the s. 212(3.1) rules (assuming the shares were not specified shares) so that there would be no reporting obligation.
Neal Armstrong. Summaries of 3 December 2024 CTF Roundtable, Q.3 under s. 237.4(4)(b) and s. 212(3.1).
CRA continues to be prepared to issue rulings dealing with the s. 55(2.1)(b) purpose tests
When asked to provide any update on the application of s. 55(2) to ordinary course intra-group dividends, CRA indicated:
- Consistent with its prior statements, CRA continues to be open to considering a ruling request involving the determination of the purpose where all manifestations of purpose in the circumstances supported the absence of the purposes described in s. 55(2.1)(b) and the taxpayer represents that there is no such purpose.
- Where a taxpayer request relates to safe income (so that reliance is not being placed on the s. 55(2.1)(b) purpose tests), taxpayers have needed to manage the safe income determination time notion (of a series with respect to the safe income exception in 55(2.1)(c).)
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.2 under s. 55(2.1)(b).
CRA confirms that foreign currency dispositions under s. 39(1.1) include FX bank deposit conversions
CRA confirmed that the phrase “dispositions of currency other than Canadian currency” in s. 39(1.1) was not restricted to dispositions of foreign-currency banknotes and coins, and extended to “dispositions of foreign currency held by an individual in a chequing or current deposit account at a financial institution, to the extent that the individual is entitled to withdraw the currency on deposit at any time, convert it into another currency at any time, or use it to make a purchase or a payment at any time.”
Neal Armstrong. Summary of 19 January 2024 External T.I. 2020-0865921E5 F under s. 39(1.1).
CRA maintains that safe income of pref shares issued on a s. 85 share-for-share exchange matches the exchanged shares’ safe income, with subsequent dividend increases
We have published a webpage providing the questions posed, and summaries of the preliminary oral responses given, at the 2024 CTF CRA Roundtable, held yesterday.
Q.1 was a follow-up to the CRA "Update on Subsection 55(2) ..." (Full paper released on 22 December 2023) which stated that, where a shareholder acquires preferred shares as consideration for the transfer of property on a tax deferred basis, the accrued gain on the property, when subsequently realized by the corporation, would be viewed as contributing to the gain on the preferred shares, and accordingly would be included in the preferred shares’ safe income. In Q.1, CRA indicated that this position would not be extended to where the preferred shares are acquired in exchange for common shares, so that the accrued gains on the underlying property held by the corporation and any of its subsidiaries at the time of the share exchange will not be allocated to the safe income of the preferred shares once realized.
Instead, the allocation of the safe income to the preferred shares would follow CRA’s longstanding position that a portion of the safe income to which the exchanged shares would have been entitled immediately before the exchange simply flows through to the preferred shares. Regarding the safe income realized after the exchange, the preferred shares would generally participate in the safe income of the corporation in accordance with the shares’ dividend entitlement only.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.1 under s. 55(2.1)(c).
Income Tax Severed Letters 4 December 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA provides an SDA ruling on a SERP
CRA ruled on a supplemental employee retirement plan ("SERP") to provide benefits to senior employees based on the portion of their base salary (up to a cap) in excess of their maximum pensionable earnings for purposes of the company defined benefit registered pension plan (RPP). Each month, 1/12 of this eligible portion of their base salary would be credited to a notional account and, at year end, the notional balance would be adjusted for a notional positive or negative return based on that achieved for the year under the RPP. Upon retirement, a participant could elect to receive their notional account balance as a single lump sum payment, or in annual instalments over a period not exceeding 10 years, with the funding in either case to come only out of the employer’s general revenues.
CRA ruled that the SERP will not be a salary deferral arrangement (SDA) or retirement compensation arrangement, and that the only income inclusions to the participants would be pursuant to s. 56(1)(a)(i) of the payments to them. Regarding the SDA ruling, the CRA summary stated:
The SERP will provide for reasonable pension benefits and therefore none of the main purposes will be to postpone the payment of tax.
Neal Armstrong. Summary of 2021 Ruling 2021-0887611R3 under s. 248(1) – SDA.
GST/HST Severed Letters June 2024
This afternoon's release of 7 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their June 2024 release) is now available for your viewing.
Laprairie – Tax Court of Canada finds that a settlement agreement did not trench on the taxpayer’s right to direct how his non-capital loss should be applied
A group settlement reached in respect of the appeals of a large group of taxpayers including the taxpayer allowed a deduction of losses in a specified amount for their 1995 and 1996 taxation year, allowed interest expense claims for various periods and allowed “any consequential claims by [the taxpayers] for the carryforward or carryback of any losses resulting from the reassessments set forth above.” Without further communication with the taxpayer, the Minister carried back the resulting non-capital loss of the taxpayer to his 1992 and 1993 taxation years. The taxpayer objected on the basis that this carryback was done without giving him a choice as to the application of the loss, and that he wanted the loss applied to years under appeal, i.e., 1997 and 1998.
In allowing the taxpayer’s appeal, Wong J noted that “the starting point is that it is the taxpayer’s choice as to the application of available non-capital losses” and found that there was nothing in the wording of the settlement that took away this right of direction of the taxpayer.
Neal Armstrong. Summary of Laprairie v. The King, 2024 TCC 149 under s. 169(2.2).