News of Note
Income Tax Severed Letters 16 September 2020
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that it no longer will impute interest on mismatched cross-border swap payments
In Q.60 at the 1984 CTF Roundtable, the Department suggested that where swap payments are not made contemporaneously, for example, payments under the swap agreement are made by Canco to a non-arm’s length non-resident corporation (NRco) annually, whereas NRco makes its payments to Canco quarterly, withholding tax may apply to a portion of the outbound payments that represents an interest element.
CRA indicated that this position was contrary to Shell Canada, which found that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected – so that withholding tax would not apply in such a situation absent a finding of sham or the application of a specific provision, e.g., s. 245 or 247.
Neal Armstrong. Summary of 5 September 2020 IFA Roundtable, Q.2 under s. 212(1)(b).
CRA directs dual-currency filing of s. 85 elections where the transferor and transferee have different tax reporting currencies
CRA indicated that where the parties to a s. 85 rollover transaction have different tax reporting currencies (as defined in s. 261(1)), it would require that two separate forms T2057 be filed. The amounts would be reported and denominated in the transferor’s tax reporting currency on the first form T2057, and in the transferee’s tax reporting currency on the second T2057.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.1 under s. 85(1).
CRA expands its CEWS Q&A
CRA has expanded its webpage Q&A on the CEWS (wage subsidy) rules. Numerous points made include:
- A non-resident corporation can be an “eligible entity” notwithstanding that it is not subject to Canadian income tax under the terms of the applicable Treaty by virtue of not having a permanent establishment in Canada.
- An “eligible entity” includes an organization prescribed under Reg. 8901.1, which includes a “person or partnership that operates a private school or private college.” CRA states that this includes “for-profit and not-for-profit institutions such as arts schools, language schools, driving schools, flight schools and culinary schools.”
- CRA provides detailed examples of the operation of the “greater of” rule re the current and preceding month in determining whether there has been a sufficient decline in qualifying revenues in claim periods 5 to 9, as well as numerical examples of the computation of the base and top-up wage subsidy.
- CRA repeats the warning in the amalgamation s. 88(1) wind-up continuity rule that it will not apply “if it is reasonable to consider that one of the main purposes for the amalgamation (or the wind-up) was to qualify for the wage subsidy or to increase the amount of the wage subsidy,” without further elaboration.
- A corporation filing its returns using a functional currency would use that currency in measuring its qualifying revenue – but Canadian dollars would be used where the normal accounting practice is to measure in Canadian dollars.
- CRA provides an example of the s. 125.7(4)(d) election being used by Canco, which has a stable income from providing payroll services exclusively to a non-arm’s length non-resident corporation, in order to access the CEWS based on a 25% decline in the non-resident’s qualifying revenues (which could be measured in the applicable foreign currency consistently with the non-resident’s normal accounting practice).
- The business continuity rule in s. 125.7(4.2) (available on an elective basis) is not available where there merely has been an acquisition of a business division which does not represent all or substantially all (in fair market value terms) of the assets of a business.
- In the absence of s. 125.7(4.2) applying, changes to the normalized scale of operations (e.g., a recent expansion or a strike) or in the type of operations are not relevant to determining whether there has been a requisite decline in qualifying revenue.
Neal Armstrong. Additional summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 12 August 2020 under s. 125.7(1) – eligible entity - (a), eligible entity - (f), qualifying entity – (d)(ii), qualifying entity – (c)(ii), s. 125.7(1) - qualifying revenue, s. 125.7(9)(b), s. 87(2)(g.5), s. 125.7(4)(d), s. 125.7(4.1), s. 125.7(1) – eligible remuneration, s. 125.7(1) – top-up percentage, base percentage.
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in February, 2010. Their descriptors and links appear below.
These are additions to our set of 1,267 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA rules on pipeline transaction where the subject company funds the payment of the terminal taxes
In a pipeline transaction involving a portfolio company whose shares had been stepped up to fair market value in the hands of the estate on the death of the deceased (A), it is proposed that the corporation lend the necessary funds to the estate to pay the terminal taxes of A. When the estate sells its shares of the portfolio company to a Newco for two promissory notes, the estate then assigns the first of these two notes to the portfolio company in repayment of the terminal-taxes loan. This first note then is extinguished by operation of law when the portfolio company is wound-up into Newco a year later – with payments of the second note by Newco to the estate commencing thereafter.
Neal Armstrong. Summary of 2020 Ruling 2019-0819191R3 F under s. 84(2).
Ray-Mont – Federal Court of Appeal confirms applying 4-part Wiebe test to find employment notwithstanding intent of Quebec parties not to be employer-employee
Notwithstanding that a logistics company and workers performing loading work for it had intended their relationship to be one of independent contractors rather than of employment, the Tax Court went on to apply the four objective tests in Wiebe as to the presence of an employment relationship to find that there was one. Although the definition of employment in the Civil Code “places emphasis on the essential characteristic of direction or control,” Boivin JA found that even for Quebec workers “’a court does not err in taking into consideration as indicators of supervision the other criteria used under the common law [Wiebe tests of] the ownership of the tools, the chance of profit, the risk of loss, and integration into the business.’”
This is a different articulation of the tests than by Graham J in Insurance Institute - that under “Connor Homes … a different test must be applied [than in Wiebe] when the worker and the payor share a common intention.”
Neal Armstrong. Summaries of Ray-Mont Logistiques Montréal Inc. v. Canada (National Revenue), 2020 FCA 113 under s. 5(1) and General Concepts – Judicial Comity.
National R&D – Tax Court finds that programming costs were not SR&ED and not deductible
Lafleur J confirmed the denial of SR&ED treatment for a project of a consulting company to develop a computer program to automate aspects of filing SR&ED claims through a “web-based, cross-platform and cross-browser framework to track claimable SR&ED projects.” Among other things, there was a failure to “carry out systematic investigation to remove technological uncertainties” and there was no “contemporaneous documentation that details any of the tests and the results of those tests.” The result was to deny deductions for the expenditures in addition to denying investment tax credit claims.
The taxpayer did not argue that the expenditures were deductible under s. 9, notwithstanding that it is common for businesses to deduct their programming expenses without challenge.
Neal Armstrong. Summary of National R&D Inc. v. The Queen, 2020 TCC 47 under s. 248(1) - SR&ED.
CRA rules on pipeline involving creation of high PUC common shares
CRA ruled on post-mortem pipeline transactions with somewhat unusual mechanics, i.e., the Newco will not issue notes or preferred shares to the company whose shares were stepped up on death (Holdco), and Newco and Holdco might amalgamate only after some of the earnings of Holdco have been stripped.
In particular:
- S. 51 is used to convert the estate’s stepped-up shares of Holdco into high ACB (and low PUC?) preferred shares, with the estate then subscribing a (presumably nominal) amount for voting common shares of Holdco.
- A portion of the Holdco shares are redeemed in order to distribute the capital dividend account of Holdco and generate a capital loss for effective carryback under s. 164(6).
- The estate transfers its high ACB/lower PUC prefs of Holdco to Newco under s. 85(1) in consideration for high ACB/high PUC shares of Newco.
- After a stipulated period (perhaps a year), Newco effects a PUC distribution on its Class A shares by distributing 8 non-interest bearing promissory notes to the estate with staggered maturity dates, with the first one occurring the next day (and the last one 2 years later?)
- After a specified passage of time, Newco and Holdco will amalgamate.
- At an appropriate juncture (which apparently could occur before the amalgamation), the estate will distribute to its beneficiaries the above promissory notes which had not yet been repaid, as well as the common shares of Newco or Amalco.
Neal Armstrong. Summary of 2019 Ruling 2019-0835131R3 F under s. 84(2).
CRA recognizes that an individual and their registered plans can constitute multiple beneficiaries under the 150 MFT beneficiary test
Reg. 4801(b) requires a mutual fund trust to have at least 150 beneficiaries each holding one block of units with an aggregate fair market value of at least $500. CRA indicated that where an individual, her TFSA, her RRSP and her spouse’s RRSP (to which she had contributed) each held a block of units, they would be considered to be four beneficiaries for these purposes. It stated:
There is no requirement to look through the registered plan trust.
It also noted:
Notwithstanding our general view described above, we note that the CRA has previously applied … GAAR … in situations where mutual fund trust status was artificially achieved to facilitate abusive tax avoidance.
Neal Armstrong. Summary of 8 June 2020 External T.I. 2019-0822901E5 under Reg. 4801(b).