News of Note
CRA finds that CFA1’s lending activity that depends on services provided by CFA2 is not directly related to that servicing activity under s. 95(2)(a)(i)(A)
Email this ContentThe business of two US CFAs of Canco (FA4 and FA5 Subco) and of a US LP essentially wholly-owned by FA4 consisted mainly of acquiring, owning and collecting portfolios of debt receivables. FA4 had more than 100 employees who managed and operated the activities of FA4, FA5 Subco and LP, and other US group entities, and with the exception of one employee of FA4, these constituted the only employees in that group. LP used the equivalent of more than five full-time FA4 employees.
The Directorate indicated that FA4 appeared to have two separate businesses - a debt portfolio business, and a business of providing services to other foreign affiliates in the group – given inter alia that its services were mostly rendered to other foreign affiliates and thus not principally services rendered to FA4’s own debt portfolio business.
Focusing on the income of FA5 Subco from its debt portfolio for its 2014 taxation year, did s. 95(2)(a)(i) deem that income to be active business income rather than FAPI?
CRA surprisingly stated that the servicing activities of FA4 did not satisfy the directly-related test in s. 95(2)(a)(i)(A)(I) – notwithstanding that FA5 Subco relied on those services to carry on its business - since "[g]enerally, the activities of a customer [i.e., FA5 Subco as the customer of FA4’s servicing business] are detached from the activities of a service provider and one would not necessarily view them as directly related with the active business activities of the service provider … and [furthermore] the assets of FA5 Subco are not at risk or employed in support of the service business of FA4.”
However, the activities of FA5 Subco were directly related to FA4’s debt portfolio business since their respective debt portfolio activities were integrated activities that required the services of employees that had similar expertise, and they carried on the same type of debt portfolio business.
Furthermore, the prescribed active business earnings requirement in s. 95(2)(a)(i)(B) also appeared to be met, “since the income of FA5 Subco would be included in computing the amount prescribed to be the earnings or loss of FA4, from an active business carried on in a country other than Canada, if the income were earned by FA4.”
Similarly, the directly related test in s. 95(2)(a)(i)(A)(IV) appeared to be satisfied by FA5 Subco in relation to the debt portfolio business of LP for essentially the same reasons – and the prescribed active business earnings requirement in s. 95(2)(a)(i)(B) also appeared to be met, also for similar reasons.
If s. 95(2)(a)(i) applied as described above, so that the services fees paid by FA5 Subco to FA4 were deductible from deemed active business income of FA5 Subco rather than foreign accrual property income, s. 95(2)(b)(i)(B) would not apply to deem such services fees to be FAPI to FA4.
Neal Armstrong. Summaries of 18 April 2023 Internal T.I. 2020-0864031I7 under s. 95(2)(a)(i) and s. 4(1)(a).
Iris Technologies – Supreme Court of Canada notes that the Federal Court has jurisdiction over matters of reprehensible CRA conduct (none was alleged here)
Kasirer J confirmed the decision of the Federal Court of Appeal to strike a Federal Court application of Iris Technologies Inc., which sought a declaration that Iris was denied procedural fairness in the audit and assessment process, that the resulting assessments were made without an evidentiary foundation and that they were issued for the improper purpose of depriving the Federal Court of jurisdiction to hear its administrative law grievances. He found that the first two claims were “best characterized as attacks on the correctness of the assessment which is the proper subject matter of an appeal to the Tax Court under the express authority of the ETA.” Regarding the third claim, he noted that ”jurisdiction to provide relief from reprehensible conduct of the Minister would fall to the Federal Court exercising its exclusive jurisdiction in judicial review under s. 18.1 of the FCA.” However, Iris’ third claim, that the Minister acted with an improper purpose, was properly struck “because Iris did not allege facts in its application that, if taken to be true, would give any support to this claim.”
Kasirer J also agreed with the Federal Court of Appeal that the Court should not exercise its discretion by making a declaration that will not “have any real or practical effect,” and that “[i]ssuing a declaration that does not quash or vacate the assessments would serve little or no purpose”.
Neal Armstrong. Summaries of Iris Technologies Inc. v. Canada, 2024 SCC 24 under Federal Courts Act, s. 18.5 and ETA s. 296(1).
Dow Chemical – Supreme Court of Canada indicates that the Tax Court lacks jurisdiction to review CRA decisions regarding s. 247(10) downward adjustments
The Minister indicated that she would not exercise her discretion to allow the request of the Canadian taxpayer (“Dow”) a requested “downward” adjustment under s. 247(10) (to increase the interest expense of Dow on a loan from a Swiss affiliate); and subsequently assessed Dow so as to make upward transfer pricing adjustments, but not any downward adjustment. After appealing a reassessment to the Tax Court, a Rule 58 question was posed, which was essentially whether it was the Tax Court that had jurisdiction regarding Dow’s challenge to this denial, or whether the only recourse was to the Federal Court for judicial review of the Minister’s decision to disallow.
Côté J, for the three dissenting Justices, indicated (at para. 131) that since s. 247(10), unlike other discretionary provisions, gave the Minister discretion in determining the amount of a taxpayer’s income before that income was assessed, an s. 247(1) “decision is inextricably linked to the assessment” so that a denied downward adjustment is within the scope of the Tax Court’s jurisdiction over an assessment. Furthermore, although “the Tax Court does not have the power to substitute its opinion for that of the Minister” (para. 200), the words of s. 171(1)(b)(iii) “imply ... that the Tax Court may, in referring the assessment back for reconsideration and reassessment, remit the matter of the downward pricing adjustment to the Minister as part of a ‘reconsideration’” (para. 200).
Kasirer J, in speaking for the majority, found that the Minister’s decision under s. 247(10) cannot be appealed as part of an appeal of an assessment to the Tax Court. Among other considerations, he indicated:
- The Dow position that the Minister’s decision under s. 247(10) is part of an assessment, was “inconsistent with the understanding of a tax assessment as a ‘product’ and not a ‘process’” (para. 6).
- Dow’s theory would lower the “bar by interpreting s. 18.5 to exclude the Federal Court’s jurisdiction not just where a decision is subject to an express statutory appeal, but also where it is merely captured by an appeal provision by implication” – which was “likely to provoke litigation about which discretionary decisions are caught, implicitly, by statutory appeal provisions in other settings” (para. 8).
- Given that, if the Minister did not issue an assessment after she made a discretionary decision under s. 247(10), the only recourse would be seeking judicial review in the Federal Court, this implied “an untenable solution in which the Federal Court would retain its judicial review jurisdiction over discretionary decisions by the Minister as a general rule, but it would lose its jurisdiction to conduct judicial review of those same discretionary decisions if they are followed by assessments” (para. 95).
- The remedies granted to the Tax Court did not extend to the power to vary or quash an s. 247(10) opinion of the Minister, so that “[i]f the Tax Court issues an order for reconsideration and reassessment, the Minister will simply be required to issue a reassessment that correctly reflects the very decision that the taxpayer sought to challenge since that decision would not have been quashed”(para. 105).
Neal Armstrong. Summary of Dow Chemical Canada ULC v. Canada, 2024 SCC 23 under s. 247(10).
CRA rules on loss-shifting transactions beneath a non-wholly owning Canadian LP
CRA ruled on loss consolidation transactions in which the Lossco (held by a Canadian LP) made an interest-bearing loan to the Profitco (held directly and indirectly by the LP) and Profitco used those loan proceeds to subscribe for cumulative redeemable retractable preference shares of Lossco. Although the LP did not wholly-own Lossco and also perhaps did not directly or indirectly wholly-own Profitco, those two corporations were affiliated and related. CRA did not provide a GAAR ruling, and instead provided an opinion on the Bill C-59 version (now law) of s. 245.
Neal Armstrong. Summary of 2024 Ruling 2023-0994301R3 F under s. 111(1)(a).
We have translated 7 more CRA severed letters
We have translated a ruling released last week and a further 6 CRA interpretations released in October of 2001. Their descriptors and links appear below.
These are additions to our set of 2,879 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 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Lemay Co – Federal Court finds that the taxpayer had a reasonable argument that s. 125.7(5)(a) did not preclude it from making an amended increased CEWS claim
On audit, CRA determined that Lemay had made Canada Emergency Wage Subsidy (CEWS) claims for periods 6, 7 and 13 to 15 that were excessive to the extent of $311,204 but had underclaimed for periods 8 to 12. CRA proposed to assess the $311,204 but refused Lemay’s request that it exercise its discretion pursuant to s. 125.7(16) to allow increased CEWS claims for periods 8 to 12 of $1,715,341. Later, CRA rejected a further Lemay submission that CRA could accept its additional refund claims by virtue of ss. 164(1)(b) and 152(3.4) – on the basis inter alia that s. 125.7(5)(a) limited the amount of the CEWS subsidy to the amount initially claimed by the taxpayer. Lemay brought an application for judicial review of this decision, and the A.G. brought this motion to strike the application on the basis inter alia that the interpretation advanced had no chance of success. In rejecting such claim, Régimbald J stated:
[I]t is not clear, in light of sections 125.7(5), 152(3.4) and 164(1)(b), considered together and which are the subject of the application for judicial review, that the ITA does not allow the Minister to accept an amended prescribed form as requested by the plaintiff. …
[T]he defendant has therefore not discharged its burden of demonstrating that it is clear and obvious that the interpretation proposed by Lemay has no reasonable chance of acceptance ….
Neal Armstrong. Summaries of Lemay Co Inc. v. Attorney General of Canada, 2024 CF 995 under s. 125.7(5)(a) and s. 125.7(16).
GST/HST Severed Letters January-February 2024
PepsiCo – Full Federal Court of Australia finds that concentrate purchases by an Australian soft drink bottler could not be recharacterized as trademark royalties for withholding tax purposes
A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (the “Bottler”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to the Bottler, for bottling and sale, and granted the Bottler the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (the “Seller“) to the Bottler. There was a similar arrangement for the licensed bottling and sale by the Bottler of Gatorade pursuant to an EBA with another U.S. company in the Pepsi group (“SVC”).
Perram and Jackman JJ found that, since as a matter of contractual interpretation, all of the amounts paid by the Bottler to the Seller were consideration for the sold concentrate, none of such payments could be treated as a trademark royalty that was subject to Australian withholding tax. Furthermore, none of the concentrate selling price was owed to either US company, so that such payments were not derived by a non-resident of Australia. Accordingly, the Commissioner’s assessment of Australian withholding tax on a portion of the consideration was reversed. These conclusions arose under the domestic withholding tax provision, so that no reference was required to the terms of the Australia-US tax treaty.
Neal Armstrong. Summaries of PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86 under Treaties – Income Tax Conventions – Art. 12.
GST/HST Severed Letters December 2023
This afternoon's release of 25 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their December 2023 release) is now available for your viewing.
Income Tax Severed Letters 26 June 2024
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.