News of Note

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).

The taxpayer was the sole shareholder and director of a holding company which, in turn, was the majority shareholder of a logging company, which had been paying significant premiums on insurance policies (arranged by the taxpayer’s stepdaughter, a licensed insurance broker) on the life of the taxpayer and of his spouse and for which, at times, the beneficiaries were his spouse and stepchildren.

In confirming the reassessments of the taxpayer under s. 15(1) in the amounts of the premiums, St-Hilaire J stated:

… Chopp confirmed… that a benefit may be conferred without any intent or actual knowledge on the part of the shareholder if the circumstances are such that the shareholder ought to have known. I find that the circumstances in this appeal are such circumstances. The purchase of policies … for which significant premiums were paid and for which there were several changes to the beneficiaries over several years, is not and cannot be treated as a simple bookkeeping error.

Neal Armstrong. Summary of Harding v. The Queen, 2022 TCC 3 under s. 15(1).

The taxpayer, was designated by his employer (“BMO,” an insurance company) to attend a one-week conference for insurance brokers and financial advisors whom one of BMO’s managing general agents had identified as top “performers.” During his attendance, the taxpayer put on a 20-minute presentation, but spent most of the time on events, such as snorkeling and catamaran sailing, with the attendees and responding to messages from the BMO office.

In reversing the ARQ assessment to include 62.5% of the cost of the trip in the taxpayer’s income as a taxable benefit, Pilon JCQ stated:

The recreational activities were an opportunity to create or maintain relationships with advisors and brokers. …

… [T]he ARQ's … approach is somewhat penalizing and unfair to Mr. Lussier. His employer did not give him the choice to participate in a trip, on which he went alone, and where he was expected to work and develop business, which he did, both during business hours and beyond. …

[T]he ARQ's position stems either from a misunderstanding of what constitutes the steps required for business development where there is a legitimate growth objective, or from a desire to dictate to a business what its business model should be and how to achieve it. In either case, the ARQ's position is unjustified.

Neal Armstrong. Summary of Lussier v. Agence du revenu du Québec, 2022 QCCQ 9 under s. 6(1)(a).