News of Note
CRA no longer imputes interest on mismatched cross-border swap payments
Email this ContentAt 1984 CTF Roundtable, Q.60, the Department suggested that where swap payments are not made contemporaneously, for example, payments under the swap agreement are made by Canco to a non-arm’s length non-resident corporation (NRco) annually, whereas NRco makes its payments to Canco quarterly, withholding tax may apply to a portion of the outbound payments that represents an interest element.
CRA indicated that this position was contrary to Shell Canada, which found that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected – so that withholding tax would not apply in such a situation absent a finding of sham or the application of a specific provision, e.g., s. 245 or 247. CRA gave a similar response at 5 September 2020 IFA Roundtable, Q.2
CRA also stated that “CRA considers that all amounts payable or receivable under the terms of a swap agreement are on account of income and are to be included or deducted under section 9.” This is an over-simplification – for example, CRA would recognize that on a cross-currency swap hedging an FX borrowing, the hedge of the principal component generally would be on capital account.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable, Q. 16, 2020-0867071C6 F under s. 16(1) and s. 9 – capital gain vs. profit – swaps.
CRA indicates that s. 74.4(2) could apply to a s. 51 estate freeze-style reorganization by two spouses in favour of two discretionary trusts for them and their spouse
Mr. X and Mrs. X, each owning 50% of the common shares of corporation that is not a small business corporation, effect a s. 51 exchange of their respective shareholdings for the issuance of freeze preferred shares, with a discretionary trust created for each spouse (but with discretion to pay income or capital thereof to the other spouse) subscribing nominal and equal amounts for new common shares of the corporation.
CRA indicated that the s. 74.4(2) could apply following this transaction, given that “one of the spouses could potentially be entitled to more than 50% of the income of the Corporation because of his or her beneficial interest in both trusts,” so that there could be a resulting transfer of income from one spouse to the other.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 15, 2020-0852271C6 F under s. 74.4(2).
Income Tax Severed Letters 14 April 2021
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA comments on when utilities can be added to rent for CERS purposes and notes CERS/CEWS similarity for computing revenue reduction
The definition of “qualifying rent expense” for purposes of the CERS (rent subsidy) refers to “rent … including … regular instalments of operating expenses, such as insurance, utilities and common area maintenance expenses, customarily charged to the lessee under a net lease.” In clarifying (so to speak) what this means, CRA stated:
[I]f a net lease requires an amount to be paid to a third party as a regular instalment of operating expenses customarily charged to the tenant under a net lease, this payment may be a qualifying rent expense. Examples of third parties might include property managers or utility service providers.
CRA also confirmed that an eligible entity must compute its qualifying revenue using the same approaches and elections for both the CEWS (wage subsidy) and the CERS for a particular qualifying period.
For example, if Corporations A and B have jointly elected that the qualifying revenue of the affiliated group is to be determined on a consolidated basis under s. 125.7(4)(b) for qualifying period 9 for CEWS purposes (i.e., period 2 for CERS purposes) then, even if Corporation B did not apply for the CEWS for that period, it must determine qualifying revenue on a consolidated basis for that qualifying period in determining its revenue reduction for CERS purposes.
In addition, CRA provided a useful table showing all the upcoming application deadlines for periods 8 to 13 for the CEWS, along with the corresponding periods for the CERS (periods 2 to 6).
Neal Armstrong. Summaries of 23 March 2021 TEI Roundtable, 2021-0879631C6 under s. 125.7(1) – qualifying rent expense – (a)(i)(C)(II), rent subsidy percentage and s. 125.7(2.1).
CRA confirms that auditors must submit unclaimed GST/HST rebates for processing effective the return due date for the audited reporting period
In confirming that ETA s. 296(2.1) requires CRA auditors to allow GST/HST unclaimed rebates as a deduction from assessments of net tax, CRA stated:
Current audit procedures require the auditor to verify the validity of the unclaimed rebate and, if the rebate claim is valid, to send the rebate claim to be keyed into our system and processed with an effective date that is the same as the due date of the registrant's return for the reporting period under audit.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.9 under s. 296(2.1).
CRA finds that an Indian who is now working at a home office on the reserve for COVID reasons has become exempt from the resulting employment earnings
CRA’s Guideline 3 exempts from tax all income earned by a status Indian from employment if more than 50% of the duties of the employment are performed on a reserve and the employer or employee lives on a reserve.
Applying this Guideline, CRA found that the employment income of an employee, who previously worked at a location of the employer that was not on a reserve, but is now working from home on a reserve due to the COVID-19 pandemic, has now become tax exempt.
Neal Armstrong. Summary of 4 February 2021 External T.I. 2020-0875231E5 F under Indian Act, s. 87.
CRA indicates that Quebec supplementary maternity benefits subsidized childcare centres are taxable, but may not be subject to EI deductions
CRA indicated that supplementary maternity benefits paid under a plan for Quebec's subsidized childcare centres were taxable income subject to source deductions and T4 reporting, and also were subject to EI deductions unless:
- The total amount of the combined supplement and weekly EI benefits did not exceed the employee's gross regular weekly earnings; and.
- The supplement did not reduce the employee's accrued credits such as for a retiring allowance, unused sick leave or vacation leave.
Neal Armstrong. Summary of 27 August 2020 Internal T.I. 2016-0675801I7 F under s. 6(1)(a).
We have translated 11 more CRA Interpretations
We have published translations of 3 interpretations released by CRA last week, and a further 9 translations of CRA interpretation released in June and July, 2008. Their descriptors and links appear below.
These are additions to our set of 1,483 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
We have translated the questions released by CRA from the 2020 APFF Roundtable
We have published translations of the 14 questions from the October 7, 2020 (regular) APFF Roundtable that were released last week. Although most of them have been covered in various News of Note posts, for your convenience, they are also summarized and linked in the table below.
CRA finds that a USA stripped away voting control of a parent over its wholly-owned subs so that it was not closely related to them for ETA purposes
In 18 March 2019 Interpretation 186839, all the shareholders of a corporation (the “Corporation”) entered into a unanimous shareholders agreement (USA) that stripped away all the management powers of the board of the Corporation and its subsidiaries, with all those powers instead exercised by majority vote of the shareholders. CRA accepted that included in the powers taken away from the Corporation’s board under the USA was the right to exercise the voting rights attached to the shares of the wholly-owned subsidiaries of the Corporation.
In CRA’s view, this then engaged ETA s. 128(4), which provides that for qualifying voting control purposes, a person is not considered to own shares if another person (other than a closely-related person) has voting rights over those shares described in similar terms to ITA s. 251(5)((b)(i), e.g., a “right under a contract … to control the voting rights attached to the share.” Since the corporation (which was not closely related to any of its shareholders) thus was deemed not to have voting control of its subsidiaries, they were not closely related to it.
CRA was now asked to consider the effect a variation of the above structure under which the USA, as before, removed all powers of the directors of the Corporation with respect to the management of the business and affairs of the Corporation in favour of its shareholders, but did not remove the power of the directors of the Subsidiaries with respect to the management of their business and affairs. However, crucially, in the view of CRA, the decisions made by the shareholders under the USA included the exercise of the voting rights attached to the shares held by the Corporation in its subsidiaries for the purpose of, inter alia, appointing the directors of the subsidiaries. CRA found that, on this basis, ETA s. 128(4) continued to apply as in the first scenario, so that the corporation was not considered to be closely related to its wholly-owned subsidiaries.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 14, 2020-0852261C6 F under ETA s. 128(4).