News of Note

An “eligible employee” of an eligible entity excludes an individual who is without remuneration by the eligible entity in respect of 14 or more consecutive days in a qualifying period ending before July 5, 2020. CRA considers that “remuneration” for purposes of this 14-day test includes taxable benefits, even though non-cash taxable benefits received by the employee are not eligible remuneration for purposes of computing the wage subsidy. The allocation of taxable benefits to particular days for purposes of the 14-day test is a “question of fact.”

Neal Armstrong. Summary of 15 January 2021 External T.I. 2020-0847781E5 under s. 125.7(1) – Eligible Employee.

When a Netherlands couple immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. in 2009 of the partnership interest, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on. The FCA found that there was no reversible error in the finding of Smith J that B.V.’s central management and control was in Canada. However, it referred his decision back for further consideration by him of two points.

First, if B.V. had become resident in Canada shortly before the 2009 disposition, there would have been a step-up in the tax basis of the partnership interest under the immigration provision (s. 128.1(1)(c),) thereby reducing or perhaps eliminating the 2009 gain. In this regard, Smith J indicated that he considered B.V. to have become resident in Canada shortly before its acquisition of the partnership interest in 1998, so that s. 128.1(1) had no application.

Second, he was asked to consider the application of the Treaty residency provisions. In this regard, Smith J noted that B.V. had failed to “adduce expert evidence on applicable Dutch law” to establish that under Dutch law, B.V. “was subject to comprehensive taxation in the Netherlands” and, thus, satisfied that requirement for being a Dutch Treaty resident. Furthermore, even if B.V. was a dual resident, Art. IV(3) of the Treaty provided:

Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both States, the competent authorities of the States shall endeavour to settle the question by mutual agreement ... . In the absence of such agreement, such person shall be deemed not to be a resident of either State for the purposes of Articles 6 to 21 inclusive and Articles 23 and 24.

Given that the competent authorities had not been engaged (B.V., when it filed its Notice of Objection, did not request that its Objection be held in abeyance pending a Competent Authority referral), this meant that the Treaty could have no application to B.V. to alter the application to it by CRA of the domestic ITA provisions.

Thus, B.V. did not accomplish anything through its appeal to the FCA other than getting Smith J to provide some more detailed findings against it on some relatively obvious secondary points.

Neal Armstrong. Summaries of Landbouwbedrijf Backx B.V. v. The Queen, 2021 TCC 2 under s. 128.1(1)(c), Treaties – Income Tax Conventions - Art. 4 and General Concepts - Estoppel.

Comments made by CRA at the afternoon panel on selected topics at the CTF transfer-pricing webinar held on February 2, 2021 included:

• CRA asserted that the new s. 247(2.1) ordering rule is a clarifying amendment. Admittedly, the CRA might have considered it to represent a change if it had been asked 15 years ago, but the new wording accords with CRA’s current positions.
• Where a taxpayer makes a loan to a non-arm’s length non-resident, to which s. 17 would apply, at less than the prescribed interest rate, and the arm’s length rate would be even higher, the s. 247 penalty will be calculated on the full difference between the arm’s-length rate and the rate actually charged (rather than only the excess over the prescribed rate).
• Paragraph 10.13 of BEPS chapter 10 references a cross-border loan made in an amount in excess of the maximum amount that an unrelated lender would have been willing to advance, and indicates that the excess loan amount would not be “delineated” as a loan. In Canada, CRA would be inclined to agree that this approach effectively is one of partial recharacterization.
• That said, CRA is not diffident about recharacterizing – it is no longer CRA’s position that ss. 247(2)(b) and (d) are a last resort.
• In its July 2019 Notice to Tax Professionals, CRA referred to an inbound hybrid debt structure - in which USco lent to a Canadian operating subsidiary (“Canco”) which it held through a U.S. LLC, but with there being back-to-back agreements between USco and LLC, and between LLC and Canco, under which LLC had committed under a forward subscription agreement with Canco to fund the interest payments under the loan, and USco had committed to make matching capital contributions to LLC – with CRA indicating that it had “resolved” this file “on the basis that paragraphs 247(2)(b) and (d) … and transfer pricing penalties applied.” In now explaining this position, CRA indicated that it had concluded that arm’s length parties would not have entered into this kind of arrangement, and that the closest arm’s-length analogue would be a (100%) equity transaction rather than a debt transaction.
• Regarding the finding in 2017-0691191C6 that the transfer pricing rules can apply in determining the FAPI of a Canadian taxpayer even if the transaction is solely between two non-resident persons, or the proposition that s. 247 could apply to a transaction between two Canadian residents if a foreign affiliate happens to be involved in the series of transactions, CRA indicated that a non-resident is a “taxpayer,” so that, for example, a taxi-driver in Switzerland is probably a “taxpayer,” although that may have no significance. That said, CRA generally would only seek to apply s. 247 in this context where there is some tax avoidance involved, e.g., shifting taxable to exempt surplus.

Neal Armstrong. Summaries of 3 February 2021 Transfer Pricing Webinar of the Canadian Tax Foundation: Panel IV: Selected Topics in Transfer Pricing under s. 247(2.1), s. 247(2)(d), s. 247(2)(a) and Treaties – Income Tax Conventions – Art. 26.

Comments made by CRA in a morning transfer-pricing panel at the CTF transfer-pricing webinar held on February 2, 2021 included:

• CRA cancelled IC 87-2R “International Transfer Pricing” as it was misleading regarding recharacterization being used only as a “last resort” (it is now being liberally applied to recharacterize hybrid debt transactions) and the order in which it applied s. 247 in relation to other provisions of the Act. Although CRA has not officially ruled out an eventual update to IC 87-2R, it is focusing instead on updating the transfer pricing memoranda. TPM-2, on secondary adjustments and repatriation, which is in its final stages of approval, and CRA is working on TPM-3, dealing with downward adjustments, in conjunction with updates to IC 71-17, Guidance on Competent Authority under Canada’s Tax Conventions.
• CASD does not share its APA paper with the taxpayer before submitting it to the other Treaty partner.
• The revised IC 71-17 (re competent authority assistance) will remove the requirement that taxpayers provide their views on any possible basis on which to resolve the issues in MAP cases. This removal relates to efforts to standardize MAP document requirements under BEPS Action 14 - CASD wanted to ensure that this would not become a barrier for MAP requests to be eligible, and taxpayer views are still welcomed.
• Since ss. 247(2)(b) and (d) are part of Canada’s domestic anti-avoidance legislation, CASD will not revisit CRA’s conclusions under s. 247, but will submit the case to the other competent authority who may decide to provide relief on their end. Canada (consistently with OECD guidance) does not consider anti-avoidance adjustments to result in taxation that is not in accordance with the Treaty. The CRA will, however, negotiate in cases where the anti-avoidance provision is found in a treaty rather than the Act.
• The general concept animating CRA’s approach to determining whether to exercise its discretion respecting requested downward adjustments is that, while it wishes to avoid double-taxation, it also wishes to avoid double non-taxation. CRA at this juncture is not prepared to comment on Dow Chemical.
• CRA’s COVID-related guidance on corporate residency, permanent establishments, and other similar considerations expired on September 30, 2020, and it has decided not to extend the corporate residency guidance beyond that date, mostly because residency determinations need to be addressed on a case-by-case basis, especially if businesses start adopting new ways of doing business after the pandemic is over.
• Notwithstanding somewhat different views of the OECD, CRA will continue to evaluate transfer prices in accordance with its guidance on government subsidies in TPM-17.

Neal Armstrong. Summaries of 3 February 2021 Transfer Pricing Webinar of the Canadian Tax Foundation: Panel I: Transfer Pricing Audits and Competent Authority under s. 247(2)(d), s. 247(2)(a), s. 247(3), s. 247(10), Treaties – Income Tax Conventions – Art. 26, s. 271(1) and s. 2(1).