News of Note
CRA is reviewing how to deal with an error on its T1135 form, and its impact on other foreign reporting forms
Email this ContentCRA has released the official versions of the 2021 CTF Roundtable. For convenience of reference, we set out a chart below with links to the items and our summaries and to descriptors that we prepared shortly after the conference.
There is one change to the official answers (as compared to an earlier version) that caught our eye.
Q.14 of the Roundtable dealt with the T1135 form and related disclosure stated that specified foreign property “does not include … a share of the capital stock or indebtedness of a foreign affiliate,” without disclosing that the definition “foreign affiliate” for these purposes is narrower than the definition in s. 95(1). For example, if a Canadian corporation holds debt of a foreign “grandchild” subsidiaries whose shares are held by its immediate Canadian subsidiary, then (by virtue of s. 233.4(2)(a) as it applies pursuant to para. (k) of the “specified foreign property” definition in s. 233.3(1)), it will not be considered to be holding debt of a “foreign affiliate,” so that such debt will be required to be disclosed on the T1135 form.
In its preliminary response, CRA indicated that applications for cancellation of interest or penalties for taxpayers that were misled by the T1135 wording would be entertained by CRA, and that it also encouraged taxpayers to voluntarily correct past filing errors through submitting adjustments or applying under the voluntary disclosure program.
In its final version, CRA added:
At this time, the CRA is in the process of consulting internal stakeholders to evaluate and potentially develop a position on this issue, while giving consideration to the impacts on other foreign reporting forms.
Neal Armstrong. Summary of 3 November 2021 CTF Roundtable Q. 14, 2021-0911951C6 under s. 233.3(1) – specified foreign property - (k).
Income Tax Severed Letters 2 March 2022
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that s. 125.7(4)(c) cannot be accessed by a corporation jointly owned by joint venture participants which do not deal with it at arm’s length
S. 125.7(4)(c) provides that where all of the interests in an eligible entity are owned by participants in a joint venture and all or substantially all (interpreted by CRA as generally referencing a 90% threshold) of the qualifying revenue of the eligible entity for a qualifying period is in respect of the joint venture, the eligible entity may use the qualifying revenues of the joint venture (determined as if the joint venture were an eligible entity) as its qualifying revenues for the qualifying period in determining its CEWS (wage subsidy) entitlement.
CRA considered the situation where two related corporations (Holdco 1 and Holdco 2) were equal participants in a joint venture and Opco (owned by them on a 50/50 basis) earned all its revenues from providing services to the joint venture. Although this situation might seem to come within s. 125.7(4)(c), CRA referred to para. (d) of the qualifying revenue definition, which excludes amounts derived from persons or partnerships not dealing at arm’s length with the eligible entity from its qualifying revenues. CRA indicated that, based on para. (d), Opco did not derive any qualifying revenue from the joint venture (i.e., from Holdco 1 and Holdco 2), so that s. 125.7(4)(c) was not available – whereas it would have been available if it instead had been dealing with them at arm’s length.
However, its non-arm’s length relationship with Holdco 1 and Holdco 2 would not preclude it from effectively accessing their qualifying revenue declines through a joint election under s. 125.7(4)(d).
Neal Armstrong. Summaries of 15 February 2022 Internal T.I. 2020-0870731I7 under s. 125.7(4)(c) and s. 125.7(4)(d).
Ghermezian – Federal Court finds that s. 231.1(1) authorizes CRA to compel the production of existing documents, but not to compel written answers
The Minister applied for s. 231.7 compliance orders respecting CRA requests for various documents made pursuant to s. 231.1(1) (and s. 231.2(1)). Southcott J found that “s 231.1(1) entitles an authorized person to demand provision of documentation without physically attending at a place or premises where the documentation is kept.” However, he accepted that “s 231.1 … does not authorize issuance of a demand compelling the recipient to provide, through written answers to questions, substantive information relevant to a taxpayer’s tax position” as contrasted to “authoriz[ing] compulsion of only pre-existing documentation.” He stated in this regard:
[T]he distinction underlying the reasoning in Cameco is between documented and undocumented information. Section 231.1(1)(a) empowers the Minister to compel provision of the former but not the latter.
After noting the taxpayers’ submission “that the Minister cannot compel the production of foreign-based information or documents, within the meaning of s 231.6, other than through s 231.6,” Southcott J accepted “that the [s. 231.2(1)] Requirements oblige the Respondents to provide the documents and information in their power, possession and control, if accessible from Canada [emphasis in original]”, but found that the taxpayers had not met their burden of establishing that the requested information was not accessible from Canada.
Neal Armstrong. Summaries of MNR v. Ghermezian, 2022 FC 236 under s. 231.1(1), s. 231.2(1), s. 231.6(2), s. 244(5) and General Concepts – Evidence.
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 May, 2005. Their descriptors and links appear below.
These are additions to our set of 1,942 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).
Skatteforvaltningen v. Solo Capital – Court of Appeal of England and Wales finds that the revenue rule does not apply to fictitious tax refund claims made by a non-taxpayer
The Danish Customs and Tax Divisions (“SKAT”) brought claims in an English civil court seeking to recover £1.44 billion which it had paid based on allegedly fraudulent claims for refunds of Danish dividend withholding tax – SKAT alleged that most of the defendants had fraudulently misrepresented that they, as shareholders of Danish companies, had been subject to withholding at a rate in excess of the Treaty-reduced rate on dividends when, in fact, they never had held any shares in any of the relevant Danish companies. Sir Julian Flaux, Chancellor rejected the defendant’s submission that SKAT’s claim was precluded by the revenue rule, which he expressed as follows:
English courts have no jurisdiction to entertain an action … for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State.
He stated:
[T]he fraud here was not fraud by the taxpayer in evading tax. There was no tax due and those who committed the fraud were never taxpayers. …
[W]hat SKAT is saying entitles it to repayment is not that the … alleged fraud defendants owe it tax or have cheated it out of tax, but that it was induced by fraudulent misrepresentation to pay away monies to these persons to which they were not entitled on any basis.
Neal Armstrong. Summary of Skatteforvaltningen v Solo Capital Partners LLP, [2022] EWCA Civ 234 under Statutory Interpretation – Revenue Rule.
CRA rules on pipeline using a joint Newco of children and estate – and notes that the replacement of an executor resulted in an acquisition of control of subsidiaries
CRA provided favourable rulings on a post-mortem pipeline transaction, but with the transactions complicated somewhat by the deceased and his surviving spouse having owned shares both of a portfolio company (Investco) and of a real estate subsidiary (Holdco) of Investco – but with the deceased’s shares of Holdco not having an accrued gain on his death. After preliminary transactions to convert Holdco to a wholly-owned subsidiary of Investco on a taxable basis and to pay capital and taxable dividends from Investco to the estate, the deceased’s children (who also held shares of Investco) transferred those shares on a rollover basis to a Newco formed by the estate, the estate transferred its Investco shares to Newco in consideration for a note and shares - and, after the requisite time, Newco and Investco were to be amalgamated and the note gradually repaid.
The preliminary statement of facts indicated that the resignation and replacement of the executor of the estate resulted in a deemed taxation year end for Investco and Holdco.
Neal Armstrong Summaries of 2021 Ruling 2020-0874931R3 F under s. 84(2) and s. 251.2(2)(a).
CRA confirms that the Lavrinenko interpretation regarding a shared-custody parent has been legislatively overruled retroactively
While normally the Canada child benefit (CCTB) can at most be claimed by only one parent, individuals who are a child’s “shared‑custody parent” are each entitled to ½ of the benefit. Formerly, one of the requirements in order to be a “shared‑custody parent” was that the parent reside with the child “on an equal or near equal basis.”
In Lavrinenko, Webb JA has concluded that the “near equal” concept was to be handled by rounding relative residing-with-the-child percentages to the nearest multiple of 10% - so that if the percentage was below 45%, (e.g., 44%) it was to be rounded down to 40% (test failed), whereas if it was 45% or more, it was to be rounded up to 50% (test passed).
CRA was asked at the 2019 APFF Roundtable how it would respond to this decision. It waited until now to give its answer, which was to note that the “shared-custody parent" definition had since been retroactively amended (back to July 1, 2011) to provide that the individual must reside with the dependant "at least 40% of the time in the month in which the particular time occurs, or on an approximately equal basis." This had the effect of retroactively confirming a CRA policy that effectively accommodated in some circumstances a relative percentage somewhat lower than the Lavrinenko 45%.
Neal Armstrong. Summary of 5 November 2021 External T.I. 2019-0812631E5 F under s. 122.6(1) – shared-custody parent – para. (b).
J.D. Irving – Quebec Court of Appeal finds that servicing fees paid by a property user to the owner for services that it performed on behalf of the owner were not leasing revenues
A loss consolidation transaction involved a company (“IPPL”) in the Irving group of companies transferring, in December, its pollution control equipment on a rollover basis to an affiliated lossco, which then sold the equipment for $120M to the group profitco (“JDI”), which then claimed $120M of CCA and, in January of the next year, transferred the equipment back to IPPL on a rollover basis. The ARQ denied most of JDI’s $120M CCA claim on the basis that servicing fees of $1.2M that JDI earned from IPPL during its one month of ownership of the equipment were in substance leasing revenues. In particular, the ARQ appeared to be struck by the artificiality of the agreement between JDI and IPPL that JDI would accomplish its servicing of the equipment under its “services agreement” with IPPL by means of delegating to IPPL the performance of such services as its agent, in consideration for fees going in the opposite direction.
In rejecting the ARQ submission that IPPL did not validly operate the equipment on behalf of JDI, Mainville JCA stated (at paras. 43-44, 46):
[I]t is undisputed that a taxpayer may carry on a business through an agent. …
The fact that the agent and the principal are related companies does not change this principle. This was the case in Stubart … .
As the trial judge concluded, we are dealing with clear contracts and uncontradicted evidence that confirm that the designation of the transactions as services agreements does reflect their true legal effects. It is a principle of tax law that, in the absence of sham, recharacterization is only possible where the label attached to a transaction does not properly reflect its actual legal effects.
Neal Armstrong. Summary of Agence du revenu du Québec v. J.D. Irving Limited, 2022 QCCA 241 under Reg. 1100(17).
Canadian residents generally are better off investing in a portfolio that may include Canadian companies through a partnership rather than an LLC
Where an LLC with both Canadian- and US-resident members receives a dividend from a Canadian corporation, the US members may benefit from Art. IV(6) of the Treaty so as to reduce the dividend withholding tax rate to 15% or 5% - but there is no Treaty reduction to the Canadian withholding tax rate regarding the indirect interest in that dividend of the Canadian members.
Contrast this with the receipt of the same dividend by a partnership with US and Canadian partners - form NR302 generally provides for look-through treatment of the partnership so that, with proper documentary support, withholding tax may not apply to the portion of the dividend allocated to the Canadian-resident partners.
Neal Armstrong. Summary of Nakul Kohli and Jiani Qian, “Canadian Residents Earning Income Through Non-Resident US LLCs,” Canadian Tax Focus, Vol. 12, No. 1, February 2022, p. 10 under Treaties – Income Tax Conventions – Art. 4.