News of Note
CRA expands on why it views a UK LLP as a corporation
Email this ContentCRA has provided its written responses to the questions posed at the October 27, 2020 CTF Roundtable. In its written response as to why it views a UK LLP as a corporation for ITA purposes, it set out its lists of what it considers to be salient attributes that led it to this conclusion under its two-step approach:
- A UK LLP has a legal existence separate from its members.
- A UK LLP, and not its members, carry on the business.
- A UK LLP, and not its members, acquires and owns property in its own name for use in its business, and is responsible for any debts or obligations incurred as a result of carrying on its business.
- The capital of a UK LLP serves the same function as the share capital of a corporation.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.9 under s. 248(1) - corporation.
We have translated 7 more CRA Interpretations
We have published translations of the 2 CRA interpretations that were released last week, as well as of a further 5 CRA interpretation released in November, 2009. Their descriptors and links appear below.
These are additions to our set of 1,315 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Glencore – Full Federal Court of Australia finds that it accorded with arm’s length transfer pricing for an Australian sub to agree to pricing that gave up some price upside for less volatility
An Australian subsidiary (“CMPL”) of Glencore Switzerland (“GIAG”), which had a high-cost copper mine, agreed with GIAG (who was the sole purchaser of the mine output) to amend its supply contract in early 2007 after there had been a surge in world copper prices. The Commissioner argued that CMPL had acted “irresponsibly” by agreeing in these amendments to “price sharing” which meant that CMPL would participate less in a high copper price over the 2007 to 2009 period, but with the benefit of less volatility in price.
The majority reasons found that for the transfer–pricing purposes at issue, it was posing the wrong question to ask “whether an arm’s length party would have agreed to the amendments, given the pre-existing terms of trade”, and that the correct question was simply whether “the pricing formula established by those [amended] terms did not differ from those formulae which might be expected to have operated between independent enterprises dealing wholly independently with one another in the copper concentrate market at the time”. In this regard, the majority concluded, in light inter alia of the evidence of the taxpayer’s expert witness as to industry contracting practice:
[T]he taxpayer has established that independent parties dealing at arm’s length with each other for the sale of the copper concentrate in fact sold by C.M.P.L. to G.I.A.G. from 2007 to 2009 might reasonably be expected to have agreed to a price sharing clause at the rate of 23% as part of the calculation of [the mooted aspect of the pricing formula].
Regarding an alternative pricing approach advocated by the Commissioner’s expert witness, they stated:
[H]is opinion that the parties should have adopted benchmark T.C.R.C.s [i.e., closer to spot pricing] appears to us to represent another possible position that arm’s length parties might reasonably be expected to have adopted. But the existence of this possibility does not negate our finding that price sharing using a 23% rate was also an arm’s length outcome.
Before so concluding, the majority made numerous observations on transfer pricing principles, as they bore on the determination of an arm’s length price, including:
- “one should include all of the objective circumstances of the actual ... mine” and the “objective circumstances of the copper concentrate market as at February 2007”
- however, “it would be appropriate to exclude any considerations that are the product of C.M.P.L.’s non-arm’s length relationship with G.I.A.G. and the broader Glencore Group” which “would include whatever attitude or policy C.M.P.L. had formed about the issue of risk when selling to G.I.A.G”
- “C.M.P.L. … could legitimately adopt a more conservative approach to risk so long as it was commercially rational to do so, and it is what an independent party dealing at arm’s length might reasonably be expected to have done”
- “the possibility of a range of arm’s length outcomes, each of which would be sufficient to answer the statutory test, is supported by authority”
Neal Armstrong. Summary of Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187 under s. 247(2)(a).
Mokrycke - a CRA decision, refusing to recommend FAA relief for reassessments that the taxpayer had failed to appeal, is set aside by the Federal Court
The taxpayer sought a remission order to reverse assessments which he stated were unjustified - but which were not reversed at the notice of objection and were not appealed to the Tax Court allegedly due to his personal circumstances and deficient performance by his accountant. Before setting aside the CRA Remission Committee’s decision and remitting it for consideration by a different decision maker, Norris J stated that the Committee’s decision was “lacking in justification, transparency and intelligibility.”
The decision referenced the taxpayer’s failure to demonstrate the incorrectness of the assessments, whereas the taxpayer’s request for reconsideration in this regard was “the very point in issue.” As for the Committee’s stated position that a taxpayer is responsible for the failures of the professional to whom he entrusts his affairs, “it is insufficient to simply state the rule without also explaining why an exception should not be made in this case.”
Neal Armstrong. Summary of Mokrycke v. Canada (Attorney General), 2020 FC 1027 under Financial Administration Act, s. 23(2).
CRA applies the surrogatum principle (but only in the year of receipt) to tax RRSP proceeds received under an unclaimed-property procedure
The estate of the deceased annuitant of an RRSP was fully settled without the executor (his surviving wife and the sole beneficiary) being aware of the RRSP. Later, the RRSP became unclaimed property and the Quebec Commission for dealing with unclaimed property instructed the RRSP issuer to liquidate the RRSP and remit the proceeds in cash to it. In a subsequent taxation year, the surviving spouse claimed and received the amount from the Commission as the sole estate beneficiary.
CRA found that the amount paid to the surviving spouse was to be included in her income under the surrogatum principle as being in lieu of a payment received under s. 146(8). A number of key related points were addressed:
- Although the benefit derived by the surviving spouse would normally have been excluded from her income on the basis that it was “included in computing the income of an annuitant” (i.e., her deceased husband) under s. 146(8.8), this in fact was not done (she did not know about the RRSP in preparing his terminal return) so that this exclusion did not apply (i.e., “included” is narrower than “includible”).
- Although the Commission (which effectively was her agent) had received the RRSP proceeds in an earlier taxation year, it was not to be included in her income until the subsequent year when she was ascertained and received the amount from the Commission, -on the basis of the “longstanding position … that the CRA must … rely on the facts as they exist at the end of the taxation year” – and the essential basis for income inclusion was not identified until the subsequent year.
- The surrogatum principle applied given that s. 146(8) would have applied but for the interposition of the Commission, and the amount received by her effectively was in lieu of that amount.
- Although she received the amount as the heir of an estate that had ceased to exist rather than as a designated beneficiary, this was not considered to be a barrier to the suggested treatment.
- The benefit to be recognized by her under s. 146(8) was to be grossed-up by the amount of fees that were deducted by the Commission and treated by the governing unclaimed property legislation as an obligation of her – and such fees were not deductible by her as they were not “incurred for the purpose of earning income.”
Neal Armstrong. Summaries of 13 August 2020 External T.I. 2019-0802891E5 F under s. 146(1) – benefit – (a), s. 146(8), s. 146(4)(c) and General Concepts – Payment and receipt.
St. Benedict Catholic Secondary School Trust - Tax Court of Canada finds that CCA claims could not be subsequently reversed to refresh losses
The taxpayer, over the course of its 1997 to 2003 taxation years, claimed capital cost allowance and generated non-capital losses. When CRA denied the carryforward of these losses to the taxpayer’s 2014 to 2016 taxation years (they had expired), the taxpayer claimed that it incurred a terminal loss in 2017 that could be carried back to those years. This terminal loss was computed by reversing a portion of CCA claims it had made in its 1997 through 2003 taxation years, and adding these amounts to the undepreciated capital cost of the property it had disposed of in 2017.
Hogan J found that this approach of subsequently changing CCA claims did not sit comfortably with the literal wording of the UCC definition (which refers to “the total depreciation allowed to the taxpayer… before that time”) and was “not the result that Parliament intended,” as to which he further stated:
Under the Appellant’s theory, a taxpayer could claim the maximum amount of all discretionary deductions that are calculated on a pool basis each year to maximize the amount of losses available for carry-forward. If the carry-over period expires, a taxpayer could unilaterally pick and choose which discretionary deductions would be adjusted downward to avoid the impact of this rule. … This result would be extremely difficult for the Canada Revenue Agency to audit. As a matter of effective tax administration of our self-assessment system, I have difficulty imagining that Parliament intended such a result.
Neal Armstrong. Summary of St. Benedict Catholic Secondary School Trust v. The Queen, 2020 TCC 109 under s. 13(21) - UCC – E.
Yorkwest Plumbing – Tax Court of Canada finds that difficulties in allocating costs between Years 1 and 2 could not be solved by deducting them in Year 3
In the course of its 2012 taxation year (a “year”), the taxpayer discovered that, as an indirect result of switching over to a new system for accounting for inventory at the beginning of its 2010 year, it had failed to deduct in that and the 2011 year, the $1.3M cost of inventory that it had acquired shortly before its 2010 year. Rather than attempting to allocate this cost to the sales of such goods made in its 2010 and 2011 years (which it considered to have been impracticable to do on an accurate basis), it simply deducted the full cost in its 2012 year.
In confirming the Minister’s denial of the full amount of this deduction, Spiro J stated:
[A]n unintentional understatement of the cost of goods sold in its 2010 and 2011 taxation years cannot be remedied by an intentional overstatement of the costs of goods sold in its 2012 taxation year. The cost of inventory is recognized in the taxation year in which it is sold… . In tax law, timing matters.
Neal Armstrong. Summary of Yorkwest Plumbing Supply Inc. v. The Queen, 2020 TCC 122 under s. 10(1).
CRA indicates that the central management and control of a TFSA trust is generally exercised in the office of the investment firm to which most of the trustee’s functions have been delegated
When asked where a self-directed TFSA was resident, CRA indicated that the trust would always be resident where its central management and control was factually exercised by the trustee – irrespective of the level of involvement of the TFSA holder in the decisions. However, CRA went on to indicate that where the administrative and investment functions of the plan had been largely delegated by its trustee, who was a trust company, to an investment firm, it would consider the central management and control of the trust to be exercised at the office where that firm carried out its delegated functions. Furthermore, if the TFSA carried on a taxable securities trading business, for purposes of determining the income of the trust that was allocable to a provincial permanent establishment of the trust, the:
TFSA trust will have a permanent establishment in a province if the TFSA trust carries on business in that province through an agent of the trustee who has a fixed place of business.
It went on to indicate that this would be the case in the situation described of substantial delegation of the trustee’s management and administrative functions to an investment firm.
This position (which CRA stated also generally applied to RRSP, RRIF, RESP and RDSP trusts) is of interest to investment trusts whose trustee has delegated most of its functions to an investment or fund manager, although it may be significant only for trusts whose trustee is a trust company that does not in fact exercise a major oversight role (cf. Discovery Trust, where a trust company trustee “worked”).
Neal Armstrong. Summaries of 28 September 2020 External T.I. 2019-0800551E5 under s. 2(1) and Reg. 2600(2).
CRA confirms that “land” generally includes buildings and other improvements
Reg. 1102(2) effectively excludes subjacent land from buildings and other depreciable property, and s. 18(3) defines land for s. 18(2) purposes to exclude buildings and other improvements. S. 70(5.2) provides for the deemed disposition on death for fair market value proceeds of inter alia "land" inventory.
CRA confirmed that for the purposes of the Act, and in the absence of a specific provision to the contrary such as s. 18(3), “a building or other structure affixed to land would generally be considered as part of the land,” so that “for the purposes of subsection 70(5.2) … ‘land’ includes not only vacant land, but also land on which other real property such as houses or condos are erected.”
Neal Armstrong. Summary of 22 June 2020 External T.I. 2017-0728051E5 F under s. 70(5.2). See also 2016-0651791C6 F.
Income Tax Severed Letters 4 November 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.