News of Note
CRA will assess the COVID impact on APAs on a case-by-case basis
Email this ContentWhat is the COVID-19 impact on: previously negotiated advance pricing arrangements (“APAs”); mutual agreement procedures (“MAPs”) that are currently being negotiated; and benchmarking analyses that are used to establish transfer pricing policies and prepare transfer pricing compliance documentation?
After noting that advance pricing arrangements (“APAs”) are generally undertaken on the base assumption that the future will be a reflection of the past, CRA indicated that although COVID-19 changes in business conditions might pose a challenge, CRA does not consider that there is any need for a formal general policy, and those circumstances will merely inform the APAs on a case-by-case basis. Regarding APAs that are currently being negotiated, there might be a need to use some limits or critical assumptions to point to a certain return within the range.
As for MAPs currently being negotiated, CRA does not expect an impact as long as those MAPs deal with pre-pandemic years.
Transfer-pricing benchmarking studies will continue to be based on the information gathered by CRA.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.12 under s. 247(2).
CRA confirms that a 1% prescribed-rate loan can effectively replace a 2% loan if the latter loan is repaid with sales proceeds
An individual, who used a loan ("Loan 1") bearing interest at the prescribed rate (2%) to purchase securities for $100,000, now wishes to refinance the loan at 1%. Accordingly, half the securities (which have doubled in value) are sold for $100,000, which is used to repay Loan 1, and $100,000 is borrowed at the new prescribed rate of 1% ("Loan 2") to purchase new investments.
CRA confirmed that the attribution rules in ss. 74.1 and 74.2 will cease to apply after the repayment of Loan 1, and that the s. 74.5(2) exception from the attribution rules could apply to Loan 2 if the usual conditions were met.
S. 74.1(3) - which CRA described as ensuring that the attribution rules continue to apply where a new loan is used, e.g., to repay an existing loan that was used to acquire property - would not “technically” apply, because the proceeds from Loan 2 were not used to repay Loan 1.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.11 under s. 74.1(3).
CRA confirms that a refreeze does not reduce the quantum of any imputed interest under s. 74.4(2)
CRA confirmed that where an individual exchanges preferred shares received in the course of a previous estate freeze for newly-issued preferred shares with a redemption amount equal to the current (lower) equity value of the underlying corporation:
- If s. 74.4(2) applied to the original estate freeze (e.g., the distribution restriction in s. 74.4(4) was not complied with), the preferred shares received on the refreeze will be excluded consideration that do not reduce the “outstanding amount” (as determined under s. 74.4(3)) on which the deemed interest benefit is computed under s. 74.4(2).
- If the refrozen preferred shares are redeemed for cash consideration, that consideration will reduce the outstanding amount, but only to the extent of the fair market value of those shares. However, the corporate attribution rules would cease to apply, for example, when the children were no longer minors.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.10 under s. 74.4(3). See also Demner and McIsaac.
GST/HST Severed Letters August 2020
This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their August 2020 release) is now available for your viewing.
CRA indicates that a UK LLP is a corporation in light [inter alia?] of its separate legal personality
Under the UK’s Limited Liability Partnerships Act 2000, a limited liability partnership (“UK LLP”) is treated in the UK as a separate legal entity, but the profits of its business are taxed as if the business were carried on by partners in partnership, rather than by a body corporate
CRA orally indicated that it would consider the UK LLP to be a corporation under its two-step approach, in light of the LLP’s separate legal personality.
There presumably is more to the CRA’s position than this – otherwise it would contradict its position that an ordinary Delaware LP (as contrasted to an LLP or LLLP) is a partnership for ITA purposes notwithstanding that such “a limited partnership is a separate legal entity:” 14 August 2008 External T.I. 2004-0104691E5. Also note that Scottish partnerships have been found to be partnerships under a two-step approach despite their separate legal personality (see Anson, [2013] EWCA Civ 63, at para. 64, rev'd on other grounds).
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.9 under s. 248(1) – corporation.
CRA generally accepts that formula-based appreciation plans are not SDAs where the formula closely tracks the FMV of the employer’s shares over the plan’s duration
CRA reiterated its statements in 2020-0850281I7 that it will no longer consider any ruling requests to whether a formula-based appreciation plan is a salary deferral arrangement, unless the plan is one described in ATR-45 (re share appreciation rights plans), or the request is about whether one of the exceptions, listed in the SDA definition, applies - but went on to note that it accepts that many formula-based appreciation plans are not SDAs where the underlying formula closely approximates the FMV of the relevant shares of the corporate employer over the duration of the plan.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.8 under s. 248(1) – SDA.
CRA intimates that use by the children of the cottage held in an alter ego or joint spousal trust is not permitted
The general CRA position is that where, pursuant to the terms of the trust indenture or will, a trust owns personal-use property (e.g., a cottage) for the benefit or personal use of a beneficiary, no taxable benefit will be assessed to that beneficiary for the rent-free use of such property.
When asked whether this position also applies to a trust that is an alter ego trust or a joint spousal trust or a common-law partner trust, CRA noted that in order to meet the conditions of s. 73(1.01)(c), the alter ego trust must be a trust under which no person except the settlor may receive or otherwise obtain the use of any of the income or capital of the trust before the settlor’s death – and similarly, for a joint spousal trust or a common-law spousal trust.
CRA’s anemic language may suggest that this is not a point it will pursue with gusto.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.7 under s. 73(1.01)(c) and s. 105(1).
CRA indicates that it will be guided by the OECD examples in applying the PPT
The OECD provided various examples on the application of the principal purpose test (PPT) in the MLI. CRA noted that no comments or reservations were made by Canada regarding those examples, and it will look at those examples for guidance in interpreting the PPT.
To date, no ruling requests on the PPT have been received.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.6 under Treaties – MLI – Art. 7(1).
CRA indicates that where Canco is held by fiscally transparent Franceco, which is held by LP with only some US partners, there is a choice as to which Treaty to apply
A partnership whose partners are resident in the U.S. and in other countries with which Canada does and does not have a treaty owns a French entity (that is fiscally transparent for U.S., but not Canadian or French purposes) that earns dividends and interest from a Canadian company. Can the Canadian payor of the dividends determine its withholding tax obligations in accordance with the relevant articles under either the Canada-France, or Canada-US, Treaty?
CRA noted that the first option is that, if IV(6) of the Canada-US Treaty applies, and some of the dividend paid by the Canadian company to the French company is deemed to be derived by the US partners, US Treaty benefits can be claimed to reduce the withholding rate on the portion of the dividend attributable to those partners, under Art. IV(6).
The second option is that, from a Canadian perspective, there is a single dividend payment from a Canadian entity to a French entity, so that the French Treaty is applicable to the entire amount of the dividend.
CRA indicated that the two options are mutually exclusive and exhaustive – either the French Treaty applies to the full amount of the dividend, or the US Treaty applies pro-rata to the US partners. (Presumably, the same analysis would apply to the payment of interest.)
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.5 under Treaties – Income Tax Conventions – Art. 4.
CRA indicates that the s. 116 certificate limit and the purchase price can coincide even where the vendor partnership has resident partners
CRA’s practice of accepting a consolidated s. 116 certificate request from a partnership disposing of taxable Canadian property (rather than requiring each partner to submit the request) created in its mind a technical issue where that partnership has both Canadian and non-resident partners, namely, that the certificate limit could only be based on the interests in the partnership property (that was TCP) disposed of by the non-resident partners, whereas the potential liability of the purchaser under s. 116(5) could be based on the excess of the global purchase price (reflecting also the interests in the partnership TCP property being sold by the resident partners) over the certificate limit.
However, CRA indicated that it considered that s. 116 can be interpreted such that, in determining the amount of the s. 116(5) liability, the purchase price is only the portion that is attributable to the interest sold by the non-residents, such that the certificate limit and the purchase price would line up, and there would be no resulting s. 116(5) liability.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.4 under s. 116(5).