News of Note
Income Tax Severed Letters 29 June 2022
Email this ContentThis morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA takes an expansive view of what constitutes “double non-taxation” in its revised TPM on s. 247(10)
CRA has replaced TPM-03 (regarding downward adjustments under s. 247(10)) by TPM-03R. It added the following statement of general principle, along with elaborations thereof:
Downward transfer pricing adjustments are not intended to serve as a vehicle for taxpayers to implement retroactive tax planning or base erosion and profit shifting strategies, nor are they intended to achieve double non-taxation.
It was inferable from the position taken by CRA in Dow Chemical that it considers there to be “double non-taxation” even if the downward adjustment requested of it corresponds to an income inclusion in the foreign jurisdiction which is now statute-barred. CRA provides a more elaborate example in TPM-03R indicating that it also considers there to be double non-taxation if the downward adjustment requested of it corresponds to an income inclusion in the foreign jurisdiction that is sheltered by a loss created through a corporate reorganization.
As compared to TPM-03, CRA has removed a number of examples regarding repatriations and secondary adjustments. This topic is now principally addressed in TPM-02R. CRA has also elaborated on who within CRA has the authority to decide on requested downward adjustments of various types.
Neal Armstrong. Summary of Memorandum TPM-03 "Downward Transfer Pricing Adjustments, 21 June 2022 under s. 247(10).
CRA indicates that an alter ego trust, with planning, can use s. 88(1)(d.3) for post-mortem bumps
2009-0350491R3 ruled on the usebyf an alter ego trust of the s. 88(1)(d) bump following the death of its settlor and life beneficiary (Mr. X). At the time of his death, the trust held a holding company (Xco) with a number of subsidiaries. In the absence of some advance planning, the trust would not have been able to take advantage of the step-up in the ACB of the shares of Xco on the death of Mr. X by transferring its Xco shares to a Newco formed by it, and causing Xco to be wound-up with a view to having the tax basis of the subsidiaries’ shares bumped under s. 88(1)(d). The reason: ss. 88(1)(d.2) and 88(1)(d)(ii)(A) would generally (assuming typical circumstances) deem the ACB of the Xco shares to instead equal their historical cost.
The planning solution: the trust deed for the alter ego trust directed that such sale to Newco followed by Xco’s winding-up would occur following Mr. X’s death. On this basis, the parent (Newco) acquired the subsidiary (Xco) as a consequence of Mr. X’s death, so that s. 88(1)(d.3) relieved from the above provisions and permitted the bump rules to use the stepped-up ACB of the Xco shares. The CRA ruling summary stated:
Shares of subsidiary are acquired as a consequence of death pursuant to the directions of the settlor in the terms governing the alter ego trust, trustees of the alter ego trust under equitable obligation to transfer shares of subsidiary to parent on the death of the settlor.
CRA now confirmed that it “has not modified its views on the application of s. 88(1)(d.3) in the circumstances described in that document.”
It also indicated that the deemed reacquisition, pursuant to s. 104(4), of the Xco shares on the death of the settlor of the alter ego trust (Mr. X) would not have resulted in an acquisition of control of the corporation by the alter ego trust as “a consequence of the death of [the] individual,” stating that such deemed re-acquisition would not detract from the shares continuing to be legally owned by the trust, so there would be no transfer of the legal ownership of those shares that would result in an acquisition of control.
Neal Armstrong. Summaries of 15 June 2022 STEP Roundtable, Q.7 under s. 88(1)(d.3) and s. 104(4)(a.4).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in October of 2004. Their descriptors and links appear below.
These are additions to our set of 2,117 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).
CRA indicates that a change of 1 out of 3 trustees generally triggers an acquisition of control unless the replacement trustee is related
A Canadian corporation is wholly owned by a trust, which is a discretionary trust, so that s. 256(7)(i) does not apply to changes in its trustees. CRA indicated that although the determination of which trustee or group of trustees controls a corporation held by the trust is a question of fact, it considers there to be a rebuttable presumption that all of the trustees constitute a group that controls the corporation - so that there would be an acquisition of control, for example, if the trust deed required trustee decisions to be made by a majority of the three trustees, and one of their number was replaced by an unrelated trustee.
However, where the replacement trustee is a related person, s. 256(7)(a)(i)(A) may apply to deem there to be no acquisition of control. An example would be where there is a trust with two trustees, who are required by the trust deed to make their decisions unanimously, and one of them resigns and is concurrently replaced by an individual related to him or her.
Neal Armstrong. Summaries of 15 June 2022 STEP Roundtable, Q.6 under s. 251.2(2)(a) and s. 256(7)(a)(i)(A).
CRA finds that a CCPC not entitled to the SBD and with more than 5 employees receives the regular corporate rate on its rental income
Opco, which is a CCPC that has exceeded the $15 million “taxable capital employed in Canada” threshold such that the small business deduction is unavailable, employs more than 5 full-time employees in its sole business (the “Business”), which is the rental in Canada of real property. Rather than ducking the question of whether Opco’s income would be treated as aggregate investment income (AII) rather than active business income, by treating it as a question of fact, CRA stated:
As the Business has more than 5 full-time employees throughout its tax year, it is not a specified investment business and Opco’s income is from an active business.
Accordingly, all of its income would be treated as “full rate taxable income” as defined in s. 123.4(1) that would be subject to federal tax at the 15% rate.
Neal Armstrong. Summary of 2 June 2022 External T.I. 2019-0828381E5 under s. 123.4(1) - full rate taxable income- (b).
CRA treats somewhat-discretionary note interest as being interest for Part XIII exemption purposes
CRA ruled that “interest” paid by a resident corporation (Aco) on subordinated notes would not be subject to Part XIII tax based on the exemption from Part XIII tax for non-participating interest paid to arm’s-length recipients, but with the ruling letter stating under “Additional Information” that the interest would not be deductible under s. 20(1)(c) (or s. 9) in computing Aco’s income. Equity-like features of the notes included that:
- they were subject to the right of Aco in its discretion, with prior notice to the holders, to cancel any interest that would otherwise be payable on any due date; however, in such event, Aco would be precluded from declaring dividends or repurchasing shares until interest payments resumed;
- failure to make a payment on the Notes when due (including any interest, whether as a result of cancellation or otherwise) would not trigger an event of default thereunder;
- they had no scheduled maturity or redemption date, so that ACo was not required to make any repayment of the principal except upon an event of default (principally, bankruptcy or insolvency).
Although the CRA summary is cryptic, the analysis might have been that there was no “legal obligation to pay interest” as required under s. 20(1)(c) in light of the first two points above, but that the interest on the Notes was still “interest” for Part XIII purposes. 2016-0649061R3 and 2017-0732001R3 are similar.
Neal Armstrong. Summary of 2020 Ruling 2020-0854741R3 under s. 212(1)(b).
CRA indicates that it may not apply s. 80 where a trust distributes a debt, owing by a beneficiary, to the beneficiary [correction]
A Canadian resident trust makes a loan to a beneficiary, who uses the loan proceeds for investment purposes. Later, the trust distributes the loan as an in specie capital or income distribution to the beneficiary.
After noting that the extinguishment of the debt by operation of law (i.e., merger of the debtor and creditor) represented its settlement, CRA went on to indicate that since the extinguishment of the loan does not constitute a payment in satisfaction of the principal amount of the obligation, it would not reduce the forgiven amount under para. B(a) of the “forgiven amount” definition (respecting payments) nor would there be a reduction under any of the other paragraphs of the formula. Therefore, as a technical matter, this transaction would result in the debt forgiveness rules applying to the full loan amount.
However, CRA indicated that, in some specific situations, when a commercial obligation is extinguished by merger rather than by payment, it considers that there is not a forgiven amount for purposes of s. 80 and that it was of the view that this position would apply to the loan extinguishment in this example.
This suggests that the common practice of, for example, settling a debt owing by a parent to a subsidiary by distributing that debt to the parent (see, e.g., 2013-0498551R3), rather than making a distribution payable and then employing set-off, may be on somewhat shaky grounds. But what matters in the end is that CRA seems to be exercising its discretion not to apply s. 80.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.5 under s. 80(1) – forgiven amount – B(a).
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.