News of Note
Income Tax Severed Letters 2 September 2020
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms its position on “standard” convertible debentures
In 2013-0509061C6, CRA indicated that:
[T]he deemed payment of interest on standard convertible debentures under subsection 214(7) of the ITA that arises because of a transfer or assignment of standard convertible debentures by a non-resident person to a person resident in Canada (including the issuer of the debenture), does not generally constitute "participating debt interest". …
CRA is not inclined at this time to take the position that standard convertible debentures would in general constitute "excluded debt obligations" pursuant to paragraph 214(8)(c) of the ITA.
CRA confirmed that 2013-0509061C6 continues to represent CRA’s position.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.16 under s. 212(3) – participating debt interest.
CRA indicates that accrual-basis taxpayers should not usually net bad or doubtful debt allowances against their qualifying revenues
Recently-enacted s. 125.7(4)(e)(ii) allows an eligible entity to elect “to determine its qualifying revenues based on … the accrual method, in accordance with generally accepted accounting principles." CRA indicated that:
- when using the accrual method in accordance with its normal accounting practices, an eligible employer should usually not be able to deduct its bad debts (or an allowance therefor), when determining its qualifying revenue.
- discounts are generally netted against revenue under common accounting practices in Canada (although whether a particular eligible entity deducts discounts from its qualifying revenue will depend on its normal accounting practices); and that the above election is not intended to allow an eligible entity to change how it records its discounts under its normal accounting practices.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.15 under s. 125.7(4)(e)(ii).
CRA indicates that COVID-related government assistance is not subject to special treatment under TPM-17
TPM-17 provides:
When a cost-based transfer pricing methodology is used to determine the transfer price of goods, services, or intangibles sold by a Canadian taxpayer to a non-arm's length non-resident person and the Canadian taxpayer receives government assistance, the cost base should not be reduced by the amount of the government assistance received, unless there is reliable evidence that arm's length parties would have done so given the specific facts and circumstances.
CRA indicated that COVID-related government assistance is treated the same as other government assistance insofar as TPM-17 is concerned.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.12 under s. 247(2)(a).
CRA indicates that there generally is no COVID relief from the obligation on non-resident corporations carrying on business Canada to file tax returns
CRA indicated that its general expectation was that non-resident corporations resident in a non-treaty jurisdiction, which are considered to be carrying on a business in Canada only because of COVID Travel Restrictions, nonetheless would file a tax return - but that the corporation could always seek to try to persuade CRA to show some flexibility in circumstances not covered in the COVID Guidelines.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.10 under s. 150(1)(a)(i)(B).
AgraCity - Tax Court of Canada rejects transfer-pricing attack on an arrangement for the sale of product into Canada by a Barbados CFA
Barbados international business corporation (“NewAgco Barbados”), that was a subsidiary of a Canadian company owned by two Canadian brothers, purchased a herbicide in the US and sold it to Canadian farmers, and paid management fees to another Canadian company (“AgraCity”) wholly-owned by one of the two brothers for assisting in making this happen.
In reassessing AgraCity, CRA relied upon the transfer pricing rules in ss. 247(2)(a) and (c) and re-allocated an amount equal to all of NewAgco Barbados’ profits from its sales to the income of AgraCity. However, in its arguments before Boyle J, the Crown’s primary position was now that the transactions were a sham or window dressing; in the alternative, that ss. 247(2)(b) and (d) applied to recharacterize the transactions; and in the further alternative, ss. 247(2)(a) and (c) resulted in a transfer pricing adjustment.
Boyle J found that the evidence presented did not establish sham or any deceptive window dressing, stating inter alia that “confused books and records … are not, on their own, evidence of a sham unless their inaccuracies, inconsistencies and/or omissions can be shown to favor a particular, but clearly inaccurate, recording of the party’s rights, obligations, revenues etc.”
Respecting s. 247(2)(d), a crucial fact was that the Health Canada rules prohibited sales of the herbicide by Canadian companies – but a non-resident company could purchase the herbicide in the U.S. and have it imported into Canada. Thus, there was no alternative transaction under which AgraCity could itself have sold the herbicide. Thus, the Crown case based on s. 247(2)(d) crumbled.
As for the conventional transfer pricing rule in s. 247(2)(c), Boyle J stated:
There was nothing … that could provide material support for the Respondent’s position that if NewAgco Barbados and AgraCity were arm’s length parties, they would have entered into a Services Agreement on terms and conditions that gave 100% of the [herbicide] sales profits to AgraCity and no share whatsoever of those profits to NewAgco Barbados … .
The only evidence the Court has on the point indicates that the amount paid to AgraCity generated a return on its costs that was in the range of what somewhat comparable arm’s length parties earn. …
Boyle J also noted that the Crown had dropped its FAPI case against the Canadian parent of NewAgco Barbados on the basis that this CFA’s sales of the herbicide were arm’s length.
Neal Armstrong. Summaries of Agracity Ltd. v. The Queen, 2020 TCC 91 under s. 247(2)(b), s. 247(2)(a), General Concepts – sham, onus, s. 95(2)(a.1).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in March, 2010. Their descriptors and links appear below.
These are additions to our set of 1,256 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the open week for September.
Rogers Enterprises – Tax Court of Canada finds no GAAR tax benefit where an alleged excessive CDA addition was not yet distributed to individual shareholders (and also no abuse)
To simplify somewhat, a group of private corporations owned for the benefit of the Rogers family structured their affairs such that one corporation (“CGESR”) was the beneficiary of policies on the life of Ted Rogers whereas a company (“ESRL”) holding shares of CGESR through another CCPC (“ESRIL 98”) was the policyholder and had been paying the premiums, so that its adjusted cost basis (“ACB”) was $42M. On the death of Mr. Rogers in 2008, the full proceeds of the policies ($102M) were added to the capital dividend account (“CDA”) of CGESR, which used such proceeds to pay actual and deemed capital dividends in that amount. However, not all of these proceeds were fully distributed up the chain, so that, on the trial date, ESRIL 98 continued to have a CDA of approximately $42M.
CRA considered that it was abusive for the group to benefit from the full $102M addition to the CGESR CDA rather than an amount net of the $42M ACB to the policyholder (ESRL). However, Sommerfeldt J. found that there was no “tax benefit” for GAAR purposes because, so far, no tax had been avoided, i.e. any intercorporate dividends would have been free of tax (in light inter alia of the availability of the s. 184(3) election) irrespective of whether they were paid as “taxable” or capital dividends, and the “abusive” portion of the $102M increment to CGESR’s CDA had not, so far, been used by the estate or any other individual.
In any event, there was no abuse under s. 245(4). In 1977, there had been a legislative change to reflect a policy that the addition to a corporate beneficiary’s CDA would now only be reduced by the policy’s ACB to it rather than by the ACB of the policy to any person. Accordingly, taking advantage of the fact that CGESR itself had a nil ACB for the policies, so that the bump to its CDA was $102M rather than by $60M ($102M - $42M) accorded with the object and spirit of the provisions. Sommerfeldt J. stated that “this is one of those, perhaps rare, situations where the underlying rationale of the Reduction [for ACB] Provision in 2008 and 2009 was no broader than the text itself.”
Notwithstanding some “self-serving” language of Finance to the contrary, a 2016 amendment “clearly changed” the object and spirit of the provisions so that, from thence onwards, there was to be a reduction in the bump to the corporate CDA for the policyholder’s ACB.
Neal Armstrong. Summaries of Rogers Enterprises (2015) Inc. (successor by amalgamation to CGESR Limited) v. The Queen, 2020 TCC 92 under s. 245(1) – tax benefit, s. 245(4), and s. 89(1) – CDA – (d)(iii).
J.D. Irving – Court of Quebec finds that a property serviced by the user was not a leasing property
The taxpayer and another pulp and paper company in the Irving group (“IPPL”) engaged in several transactions to effectively transfer non-capital losses (“NCLs”) from an oil refining company (“IOL”) in the Irving group to the taxpayer. In a representative transaction, IOL acquired pollution control equipment (“PCE”), that IPPL had been using in its pulp facilities, from IPPL on a rollover basis at a nominal agreed amount. The taxpayer almost immediately acquired the PCE from IOL for $120 million (claiming 100% of this amount as CCA for that year), and agreed to operate the PCE in consideration for “throughput fees” and cost reimbursements payable to it by IPPL pursuant to “Operating and Services Agreements” (“OSAs”) governed by New Brunswick law. In January of the next year, the taxpayer transferred the PCE “back” to IPPL on a rollover basis with a nominal elected amount – so that similar transactions could be repeated for that year, and so on.
The ARQ attacked on the basis that the PCE constituted leasing property to the taxpayer, so that the Quebec leasing property restriction rules denied the deduction of CCA so as to generate NCLs. In particular, although the OSAs provided that the taxpayer was to operate the PCE, the taxpayer delegated to IPPL, in consideration for fees, the performance of all such operating services, so that nothing changed “on the ground.”
In allowing the taxpayer’s appeal and finding that the PCE generated business income rather than leasing revenue to it, so that the targeted NCLs were generated, Fournier JCQ accepted the submissions of the taxpayer that a “legal right of exclusive possession is essential to the existence of a lease at common law” and that here “no legal right of possession of the PCE is conferred upon IPPL under the Operating and Services Agreement, let alone an exclusive right of possession.” Furthermore, the delegation of the performance of the services to IPPL (who had been performing them all along) did not detract from the services nature of the OSAs: similarly to Stubart, the taxpayer “carried on business through an agent, in this case IPPL.”
Neal Armstrong. Summaries of J.D. Irving Limited v. Agence du revenu du Québec, 2020 QCCQ 2423 under Reg. 1100(17) and General Concepts – Agency.
CRA indicates that, in the COVID context, companies without Treaty protection should demonstrate that board meeting locations were not manipulative
The CRA's COVID Guidance on international transactions indicates that it will consider administrative relief for non-resident entities which are resident in non-Treaty countries “on a case-by-case basis”. When asked to elaborate, CRA indicated that it avoided bright-line tests in order to avoid accommodating tax avoidance techniques but that, broadly speaking, taxpayers should be prepared to illustrate how the location and timing of the board meetings were necessary from a business corporate governance perspective and not intended to exploit the relief in the Guidance for tax avoidance purposes.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.9 under s. 2(1).