News of Note

CRA has announced its approach (which it indicates is generally informed by that in the OECD Commentary to allocating cross-border stock option benefits) on the allocation of RSU benefits between Canada and a foreign jurisdiction:

The following methodology generally applies [after 2020] in sourcing RSU Benefits between Canada and foreign jurisdictions (the “Hybrid Methodology”):

i. Separate the “in the money” portion of RSU Benefits at the date of grant (the “ITM Portion”) and the portion of RSU Benefits relating to the increase in fair market value of the underlying shares from date of grant to date of vesting (the “FMV Portion”).

ii. The ITM Portion at the date of grant generally pertains to past services, and is sourced to the jurisdiction in which the employment services were rendered in the year in which the RSUs were granted (if multiple jurisdictions, in proportion to the employment period exercised in each jurisdiction in that year).

iii. The FMV Portion generally pertains to services rendered during the vesting period, and is sourced according to the OECD Guidance (that is, in proportion to the employment period exercised in each jurisdiction from date of grant to date of vesting).

For example, an employee, who was resident and exercised his employment in a foreign country (“FC”) up until December 31, 2021 and thereafter was resident in and exercised his employment in Canada, was granted 300 RSUs (to be settled in employer shares) on December 31, 2020, when his employer’s shares were trading at $10. The RSUs vest 1/3 each on December 31 of 2021, 2022, and 2023.

Focusing, for instance, on December 31, 2023, when he receives 100 shares with an FMV of $34 each, the ITM Portion for those shares, of $1,000, is sourced to FC (where his services were performed before the grant date); and the FMV Portion, of $2,400, is sourced 1/3 to FC and 2/3 to Canada (in proportion to the respective periods of employment in each country during the vesting period).

The individual recognizes an employment benefit of $3,400 in 2023 under s. 7(1)(a) (assume no Treaty). However, he is entitled to claim a foreign tax credit under s. 126(1) for any income tax paid to FC on the portion of the employment benefit that is sourced to FC (i.e., $1,800 = $1,000 + $800).

Neal Armstrong. Summary of 20 January 2021 Internal T.I. 2019-0832211I7 under s. 126(1).

Since 2005, a security entitlement system (pursuant to Securities Transfer Acts) has been adopted by all the provinces. Under this system for the indirect holding of publicly traded shares and bonds, a person acquires a securities entitlement if a securities intermediary indicates through a book entry that a financial asset has been credited to the person’s securities account.

Official commentary to the U.S. U.C.C. antecedents to this system state:

A security entitlement is not a claim to a specific identifiable thing; it is a package of rights and interests that a person has against the person’s securities intermediary and the property held by the intermediary. The idea that discrete objects might be traced through the hands of different persons has no place in the Revised Article 8 rules for the indirect holding system.

It is suggested that the ITA does not accommodate the security entitlement system, by failing to address germane questions, e.g.:

(1) Do dividends maintain their characterization as they work their way through the system to the end entitlement holder?

(2) Are shares in an American corporation “specified foreign property”?

(3) Is there a taxable disposition if a person delivers a share certificate to his or her broker in exchange for a security entitlement for the same number of shares?

Neal Armstrong. Summary of David H. Sohmer, “The Securities Transfer Act and the Income Tax Act: Who Owns Publicly Traded Securities?” Tax Topics (Wolters Kluwer), No. 2556, 2 March 2021, p. 1 under General Concepts – Ownership.

CRA presented the taxpayer with a form of waiver that adequately referenced the issue as being how much partnership income was to be allocated to the taxpayer. Before signing the waiver, the taxpayer introduced some language that described the issue as being one of the application of s. 103 to the income of the taxpayer, not from the partnership X of which the taxpayer was a member, but from partnership Y of which partnership X was the predominant member and the taxpayer was not a direct member. The taxpayer subsequently brought an application for a Rule 58 determination that the reassessment by CRA, to apply s. 103 to it to increase its income from partnership X by $78 million, was not within the scope of the waiver.

In confirming the Tax Court’s finding that the scope of the waiver was not an appropriate issue for a Rule 58 determination and that such issue was best left to a regular trial, Woods JA indicated inter alia that it was not inappropriate of the Tax Court to consider that the Crown should have an opportunity at a trial to introduce evidence of the factual circumstances surrounding the waiver.

Neal Armstrong. Summary of 632738 Alberta Ltd. v. Canada, 2021 FCA 43 under Rule 58(2).

We have published a translation of a CRA interpretation released last week, and a further 9 translations of CRA interpretation released in December and November, 2008. Their descriptors and links appear below.

These are additions to our set of 1,419 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.