News of Note

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

The taxpayer spent approximately six months per year doing work for one client (mostly construction and repair work), and the balance of the year sailing in the Bahamas. He reported annual income (of around $11,000) that was just below the level at which the Working Income Tax Benefit (“WITB”) (now the Canada Workers Benefit) began to be reduced. He kept no business records.

CRA denied his WITB claims on the surprising basis that he had no source of income and, therefore, no income – rather than on the basis that he was under-reporting his income. Masse DJ allowed his appeal, stating:

Although he was only carrying on a small business and only for 6 months of the year and had essentially only one client, this does not mean that he was not carrying on a business. The appellant's testimony is corroborated by his client, Mr. Huet, and I accept their testimony.

Neal Armstrong. Summary of Fyfe v. The Queen, 2022 CCI 20 under s. 122.7(1) – working income – para. (c).

We have published a further 8 translations of CRA interpretation released in June, 2005. Their descriptors and links appear below.

These are additions to our set of 1,932 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 2/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Observations on the draft s. 18.2 rules (supplemented by the elective rules in draft s. 18.21) for limiting a taxpayer’s interest and financing expenses net of its interest and financing revenues that are deductible in computing its income to a fixed ratio (ultimately 30%) of the taxpayer’s adjusted taxable income (“ATI”) (essentially, tax-basis EBITDA) include:

• It is unclear whether the rules apply to computing the income of a foreign affiliate, which is generally deemed by s. 95(2)(f) to be a Canadian resident for FAPI-computation purposes “except to the extent that the context otherwise requires.” If the rules did so apply, this could cause significant practical difficulties, such as conflicts with foreign interest limitation rules.
• Each year’s ATI is reduced by the non-capital loss and net capital loss generated for the current year – yet if these losses are applied in a future year, there is no consequential ATI adjustment for that subsequent year (except for the partial addback of the portion of a non-capital loss that reasonably relates to the taxpayer’s net interest and financing expense). “This results in these losses reducing ATI twice (once in the year incurred, and once in the year applied).”
• The definitions of interest and financing expenses and revenues, as supplemented by the Explanatory Notes, may be broad enough to include amounts arising under derivatives.
• Draft s. 18.2(3) deems amounts of previously capitalized interest that are otherwise deductible as CCA or resource pool deductions, but are denied as a deduction under s. 18.2(2), to have been allowed as deemed UCC or resource pool deductions - so as to prevent the taxpayer from receiving the “double benefit” of having a higher UCC or resource pool (potentially deductible in a future year) while at the same time having a restricted interest expense carryforward for future deduction. However, this deemed deduction also has the effect of increasing recapture to the taxpayer on a future disposition of such assets.
• The “excluded interest” rules depart from the 2021 budget (which stated that interest income and expense between Canadian members of a corporate group would be generally excluded) by requiring an election between two eligible group corporations. These rules (unlike the unused excess capacity rules) do not exclude financial institutions, but they are unavailable to trusts and partnerships.
• The group ratio rule in draft s. 18.21, which may enable taxpayers to access a higher fixed percentage than 30% where the group as a whole is bearing higher interest and financing expenses as a result of its external debt and as measured by the group GAAP financial statements, does not recognize any local European GAAP – so that the group ratio calculations could be unavailable for European-headed groups that do not consolidate using IFRS.
• This group ratio regime “requires information that may not easily be available to the Canadian group members, particularly in large conglomerate or private equity structures.”
• S. 18.2(4)(c), which effectively prevents a “relevant financial institution” from transferring any portion of its “cumulative unused excess capacity” for a year (as, for example, would typically be the case for a profitable bank with an excess of interest income over interest expense) to another member of its group having excessive interest and financing expenses, could cause significant difficulties for Canadian financial services groups, for example, where regulatory restrictions limit a regulated financial institution’s incurring of third party debt, leading other group members to incur such debt.

Neal Armstrong. Summaries of PwC, “Tax Insights: Excessive interest and financing expenses limitation (EIFEL) regime,” Issue 2022-06, 15 February 2022 under s. 18.2(1) – adjusted taxable income – A, excluded entity, excluded interest, interest and financing expenses – A – para. (d), s. 18.2(2), s. 18.2(3), s. 18.2(4)(c), s. 18.21(1) – acceptable accounting standards and s. 18.21(2).