News of Note
Straightforward debt transactions can raise difficult questions
Email this ContentThere often will be a punitively asymmetrical result where an intermediary in a back-to-back loan arrangement receives and pays a loan prepayment penalty. For example, if a non- financial institution had incurred a liability to fund the acquisition of a debt receivable, and the early repayment of the debt receivable to the intermediary and the use of those proceeds by the intermediary to repay, in turn, its liability triggered the receipt and payment by it of a penalty, it generally would include the full amount of the penalty in its current income, but might not be able to claim an offsetting deduction—and might instead be limited to claiming the penalty paid by it as a cost of disposition in computing its gain or loss arising from the disposition of the debt receivable.
It is unclear whether a specific tracing or blended aggregate approach (i.e., based on a buildup of the applicable relevant spot rates for historical transactions) should be used in determining the s. 39(2) gain or loss on partial repayments of foreign-currency denominated debt,
The computation of the exit tax under s. 219.1(1) includes a deduction for the “amount” of the debt of the emigrating corporation. Given the broad definition of “amount” in s. 248(1), this appears to refer to the debt’s fair market value rather than principal amount. This is reinforced by considering the example of an emigrating corporation with matching intercorporate debt receivable and payable, both of which have a FMV lower than their principal amounts – so that if the debt receivable but not the debt payable was taken into account at its FMV, a net deduction would arise to shelter other net asset values.
Neal Armstrong. Summaries of Jim Samuel and Byron Beswick “Selected Issues in Transactions Involving Debt,” 2019 Conference Report (Canadian Tax Foundation), 18:1 – 27 under s. 20(1)(f), s. 20(14)(a). s. 18(9.1), s. 39(2) and s. 219.1(1).
CRA finds that a provincial requirement for certain jobs to be held by members of an NPO satisfied the ETA “professional status recognized by statute” requirement
ETA Sched. V, Pt. V, s. 18 exempts “a supply of a membership made by an organization membership in which is required to maintain a professional status recognized by statute” (except where the organization has elected out of such treatment). CRA found that Regulations in three of the provinces limiting certain jobs within a particular industry to a person who was a professional registered with a particular non-profit organization was sufficient to render the supply of memberships by that organization to such professionals exempt under s. 18.
Neal Armstrong. Summary of 8 August 2019 GST/HST Ruling 188320 under ETA Sched. V, Pt. V, s. 18.
Joint Committee suggests more detailed scoping of the CRA’s COVID-19 relieving positions on international transactions
The Joint Committee has suggested that CRA’s Guidance on international income tax issues raised by the COVID-19 crisis, which provided relief from the crossing of status or characterization thresholds due to COVID Travel Restrictions, should be expanded:
- Although the Guidance focused on whether a foreign corporation will be resident in Canada due to participation in board meetings from Canada, similar relief could be applied elsewhere, e.g., regarding whether a foreign affiliate (FA) qualifies as resident in a “designated treaty country” (“DTC”) - so that, for example, where directors cannot attend a board meeting in person solely because of Travel Restrictions, this will not negatively impact the treatment of active income earned by FA as exempt surplus.
- Although the Guidance addresses having a Canadian permanent establishment as a result of the Travel Restrictions, it does not address the related inadvertent PE issue of income from an active business being deemed to be foreign accrual property income where it is carried on through a PE in a “non-qualifying country.”
- Furthermore, whether income from an active business carried on by an FA resident in a DTC will be included in its exempt earnings will often depend on whether that income is attributable to business activities carried on in a DTC, which could be affected by the stranding of employees in a non-DTC.
- Another FAPI issue: one of the exceptions to the “investment business” definition looks to whether the activities of the foreign affiliate are regulated under the laws of “each country in which the business is carried on through a permanent establishment in that country”.
- The Guidance, which speaks to relief for the impact of Travel Restrictions regarding whether a non-resident will have a PE under the 183-day test in the services PE provision, could also provide relief under the 12-month period referenced in the building site and installation or drilling rig provisions.
- The Guidance provided administrative relief for employees who exceeded the 183-day threshold in the Canada-U.S. Treaty, but should also address the 45-day and 90-day periods applicable in determining whether an individual resident in a treaty country is a "qualifying non-resident employee" under s. 153(6).
Neal Armstrong. Summaries of Joint Committee, “Guidance on International Income Tax Issues raised by the COVID-19,” 11 June 2020 Joint Committee Submission under Reg. 5907(1) – exempt earnings – (d). s. 95(1) – FAPI, Treaties – Income Tax Conventions – Art. 5, s. 153(6).
CRA rules that the GST/HST exemption for building permits does not extend to charges for extra inspections or reviews or overtime
The granting by a municipality of a building permit is exempted under ETA Sched. V, Pt. VI, s. 20(c), which references inter alia the supply of a permit and of processing an application therefor. CRA noted that ETA s. 146 renders governmental testing or inspection services taxable unless specifically exempted, and ruled that the exemption for a building permit did not extend to additional charges for additional inspections of the building work or additional reviews of plans or changed plans or additional charges for overtime building inspections.
Neal Armstrong. Summaries of 3 April 2019 GST/HST Ruling 188947 under ETA Sched. V, Pt. VI, s. 20(c) and s. 20(1)(c)(ii).
CRA applies a functional approach to determining the ownership of the “capital” of a non-share corporation
In response to an inquiry on the Crown corporation branch of the definition of a public institution in s. 125.7(1) of the CEWS rules, CRA first paraphrased the rules in ss. 149(1)(d) to (d.6) as well as referring to the deeming rule in s. 149(1.1), and then indicated that, in determining the ownership of the “capital” of a non-share corporation for these purposes, it would consider the following factors:
• the identity of members,
• the structure of the corporation,
• who exercises control over the financing, operation and direction of the corporation,
• who has the right to elect or change the board of directors or to reverse its decision,
• who can contribute capital and receive a distribution of capital,
• details regarding asset distribution on winding-up or dissolution and
• whether a person other than her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the corporation.
Neal Armstrong. Summary of 1 May 2020 External T.I. 2020-0846931E5 under s. 125.7(1) – public institution - (a).
Income Tax Severed Letters 10 June 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on a SERP that maintains the 18% RRSP contribution amount above the RRSP dollar limit
A Canadian public corporation had a group RRSP arrangement under which it approximately matched contributions of employees (“Members”) to the group RRSP. It was now proposed that an unfunded supplemental employee retirement plan (SERP) be created under which the corporation annually will notionally credit to an account for each Member an additional amount equal to 18% of the employment earnings of the Member in excess of those earnings engaging the RRSP dollar limit (subject to an overall cap on the corporation’s contributions, including under the group RRSP, of 15% of the Member’s employment earnings (or 10% in the case of non-executive employees).) The amount credited to the Member’s is notionally increased each year based on 5-year Canada bond yields; and on termination of employment, the Member can determine whether to receive payments based on the amount in the account over 10 years, or as a lump sum.
CRA ruled that there will be no recognition of income by the Member until the times of the payouts (e.g., the SERP is not a salary deferral arrangement), and that there can be a corresponding deduction on payout to the corporation.
Neal Armstrong. Summary of 2019 Ruling 2019-0817751R3 under s. 248(1) – salary deferral arrangement.
CRA provides additional administrative guidance on the CEWS subsidy
CRA has expanded its Q&A on the “CEWS” wage subsidy. Some of the additional or expanded points include:
- CRA states in Q.6-1 that qualifying revenue can include interest or dividend income “arise[ing] in the course of an eligible employer’s ordinary activities in Canada in the particular period [and that] is not an extraordinary item or on account of capital.” (This may suggest that a reduction in interest revenue because of the deployment of excess cash could generate the wage subsidy.)
- In Q.6-2, CRA indicates that COVID-19 – related government assistance would normally be excluded from qualifying revenue on the basis that it is an extraordinary item.
- In Q.9-1, CRA indicates that even though the qualifying revenue of an eligible employer does not include the portion of consolidated revenue that does not arise “in the course of ordinary activities in Canada,” the eligible employer “can however include the portion of the consolidated revenue that arises in the course of ordinary activities in Canada whether or not the ultimate sale to third parties occurs in Canada.”
- In Q.10-2, CRA confirmed that where entities in an affiliated group elect under s. 125.7(4)(b) to determine their (Canadian) qualifying revenues on a consolidated basis “all eligible employers in the affiliated group must consolidate for the purpose of calculating qualifying revenue” so that it “is not possible to have only some of those eligible employers in the affiliated group elect to consolidate.”
- In Q.12-1, CRA indicates that an election under s. 127.5(4)(a) of members of a group of eligible entities to determine their qualifying revenue separately rather than on a consolidated basis is not binding on subsequent qualifying periods.
- The “CEWS” wage subsidy is reduced by the full amount of the 10% temporary wage subsidy claimed rather than the amount of the latter that is actually collected through available reductions in source deduction remittances. CRA has added Q.13-1 showing that the CEWS wage subsidy will be restored if the amount of the temporary wage claim is reduced to the amount that can be so collected, i.e., this issue is only a trap for the unwary.
Neal Armstrong. Additional or revised summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020 under s. 125.7(1) – qualifying revenue, s. 127.5(4)(a), s. 125.7(4)(b), s. 125.7(2) – B.
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week, and a further 5 translations of CRA interpretations released in July 2010. Their descriptors and links appear below.
These are additions to our set of 1,193 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
7958501 Canada Inc. – Court of Quebec finds that software whose development was deducted under s. 37 could be stepped up on a related-party transfer notwithstanding s. 13(7)(e)
A private company (“SherWeb”), which provided the use of software developed by it to paying subscribers, transferred its software and other IP to a newly-formed sister company (“501”) at a gain for creditor-proofing reasons (with the IP licensed back to it for continued use in its software services business). Although 501 treated the acquired IP as depreciable property, it considered that Taxation Act s. 99 (equivalent to ITA s. 13(7)(e)) did not apply to reduce the capital cost to it of the acquired IP because, in SherWeb’s hands, the IP had been eligible capital property rather than depreciable property.
Boutin JCQ found that the contrary position of the ARQ foundered on the Quebec equivalent of Reg. 1102(1)(d) (which excludes, from depreciable property, any property that was acquired by expenditures in respect of which the taxpayer was allowed a deduction under s. 37), stating that “SherWeb has consistently claimed the salaries of its employees, first and foremost those of its programmers, as its main expense, and has claimed SR&ED credits year after year.”
Although he considered this to be a largely sufficient ground, he went on to refer to the definition of eligible capital property (which, similarly to the federal definition, relevantly required in effect that the amount to which the taxpayer is entitled for the property’s disposition is “not included in computing the taxpayer's income or any gain or loss of the taxpayer from the disposition of a capital property” - and found that this condition had been met as SherWeb had not reported any disposition of a capital property, and had instead correctly treated the costs of developing its software (its employees’ salaries) as “a recurring and current expense in and of themselves.”
Neal Armstrong. Summary of 7958501 Canada Inc. v. Agence du revenu du Québec (500-80-034604-174, Court of Quebec, 4 June 2020) under s. 13(7)(e).