News of Note
We have translated 6 more CRA Interpretations
Email this ContentWe have published a further 6 translations of CRA interpretations released in February, 2010. Their descriptors and links appear below.
These are additions to our set of 1,273 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA finds that circular transactions to effect a s. 212.3(9)(b)(ii) PUC reinstatement abused that provision
Canco (wholly-owned by NRco) acquired all the shares of FA1 for $100, thereby effecting a reduction of the paid-up capital (PUC) of the common shares of Canco by $100.
In order to reinstate that PUC under s. 212.3(9)(b)(ii), Canco has another newly-formed non-resident subsidiary (“New FA2”) use the $100 proceeds of a daylight loan to capitalize a new non-resident sub of it (“New FA3”) with common shares, and sell those New FA3 common shares to FA1 for a $100 promissory note. The reinstatement (which CRA indicated “arguably occurred") is effected by FA1 making a capital distribution of the New FA3 shares to Canco. The daylight loan can now be repaid by Canco contributing the New FA3 common shares to New FA2 under s. 85.1(3), and New FA3 being liquidated into New FA2.
Turning to GAAR, CRA noted the circular nature of the transactions, and concluded that the series of transactions resulted directly or indirectly in a misuse or abuse of the scheme of s. 212.3 in general and s. 212.3(9) in particular.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.6 under s. 212.3(9)(b)(ii).
Finance updates on MLI and Pillars One and Two
Comments of Brian Ernewein included:
- It is unclear whether a Budget will be tabled before 2021, and also whether a technical amendments package will be released before the first half of 2021.
- Although Canada effectively erred on the side of caution in adopting only certain of the optional provisions in the MLI, it would be wrong to assume that Canada rejects any of the other optional provisions, which could be adopted either in bilateral treaty negotiations, or through withdrawal of MLI reservations.
- A comprehensive limitation on benefits (“LOB”) clause is something that Canada would probably look to discuss in every treaty negotiation, and there are treaties where Canada would seek to include a comprehensive LOB.
- Canada is negotiating bilateral treaties with Switzerland, Germany and Brazil with a view to incorporating the BEPS minimum standards. Brazil did not sign the MLI, so that bilateral negotiation is required for it, whereas Switzerland and Germany signed, but indicated a preference for bilateral protocols to update their respective treaties.
- Comprehensive and substantive documents should be released in October on the two Pillars. Intensive work on landing each of these proposals in going to continue beyond the end of this year and well into the next.
- The idea of Pillar Two (the global minimum tax, which can be analogized to the CFC rules or the US GILTI) is conceptually more familiar than what is being discussed under Pillar One, and there is a sense that it is more likely that agreement can be reached on its technical design ahead of Pillar One. It is understood that the U.S. is supportive of Pillar Two.
- The design issues for Pillar One seem more challenging, but there could possibly be agreement on it as well, either on digital alone (for which there is a better policy argument) - but also, with some greater difficulty, on the consumer based businesses basis. The position expressed in December by the U.S. Treasury Secretary - that they would support the adoption of Pillar One only on an elective basis - does not appear to be a workable approach, and if the U.S. so insists, it is difficult to see how agreement could be reached on Pillar One.
Neal Armstrong. 15 September 2020 IFA Webinar – Finance Update.
CRA indicates that it anticipates that Canadian governmental COVID assistance will not reduce cost under cost-plus transfer-pricing methods
TPM-17 provides that the Canadian taxpayer’s cost base should not be reduced by government assistance unless there is reliable evidence that arm’s length parties would have done so. CRA confirmed that this position also applies to COVID assistance received by the Canadian taxpayer. Although the taxpayer can seek to demonstrate that there is marketplace evidence to the contrary (whatever on earth that might be), CRA generally would expect, given the temporary and exceptional objectives of the COVID-related government assistance, that it should be kept by the Canadian recipient. Thus, in a cost-based transfer pricing methodology, the cost base should not be reduced by the amount of a wage subsidy that a Canadian company receives, and there would be no reduction in that company’s profit margin (with numerical examples provided).
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.5 under s. 247(2)(a).
CRA notes that the pandemic has not changed Treaty time limitations
Respecting the pandemic effect on various CRA international programs, CRA indicated:
- CRA has been dealing with its counterparts on APA and MAP matters using teleconferencing and, where possible, video-conferencing; and some MAP cases were recently closed. Members of the Transfer-Pricing Review Committee have also been meeting through teleconferencing.
- Bill C-20 (re domestic time limits) does not apply to treaty time limits. If there is none, the usual domestic limits apply, e.g., under s. 152, subject to Bill C-20, which extended those limits for up to six months, but to no later than December 31, 2020.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.4 under Treaties - Article 26.
CRA treats ss. 247(2)(b) and 245(2) the same for MAP procedure purposes
Given that both are viewed as domestic anti-avoidance provisions, CRA will follow the same MAP approach to s. 247(2)(b) as with GAAR, i.e., if it is a primary position of the CRA that 247(2)(b) applies then, as with GAAR assessments, Canada will simply present that position to the other Competent Authority and, if there is double-taxation, seek relief from the other country - rather than giving up the assessment.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.3 under s. 247(2)(b).
Gladwin Realty – Federal Court of Appeal finds that generating and utilizing a CDA increase whose subsequent reversal would never matter was abusive
The taxpayer, a private real estate corporation, effectively generated the technical ability to pay a capital dividend of $24 million in relation to a taxable capital gain of $12 million on a property sale by, prior to the property’s sale, rolling the property into a subsidiary LP and then structuring a result under which it both realized a negative ACB capital gain of $24 million under s. 40(3.1) (as a result of an immediate distribution to it of the sale proceeds) and also was allocated the $24 million capital gain on the property sale. After it subsequently paid the capital dividend of $24 million, it took a $24 million capital loss under s. 40(3.12), in effective recognition of it having recognized the same gain twice.
Noël CJ found that there was no abuse in merely paying out the CDA balance after realizing a capital gain in one year, and before subsequently realizing a capital loss. However, here there was a s. 245(4) abuse because it was intended for the taxpayer to become immediately dormant, so that it “will never have to contend with the negative CDA balance resulting from the corresponding deemed loss” under s. 40(3.12). It did not change his GAAR analysis that, subsequently to the transactions at issue, an amendment eliminated a CDA increase for a negative s. 40(3.1) gain.
Before getting to the abuse analysis, Noël CJ indicated (citing Wild) that there had been no tax benefit so as to engage s. 245(2) because the capital dividends had not been paid outside the corporate group. However, the taxpayer made an undertaking (since fulfilled) that “a dividend be paid to non-corporate shareholders so as to allow the matter to be resolved at this juncture” with the court agreeing “to conduct the abuse analysis on the basis that a tax benefit arose by reason of such a dividend having been paid.”
Neal Armstrong. Summaries of Gladwin Realty Corporation v. Canada, 2020 FCA 142 under s. 245(4) and s. 245(1) – tax benefit.
Income Tax Severed Letters 16 September 2020
This 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).