News of Note
Private Opcos should examine the passive income of their shareholders from a CEWS perspective
Email this ContentAn affiliated group of eligible entities may all elect under s. 125.7(4)(b) for their qualifying revenue for CEWS (wage subsidy) purposes to be determined on a consolidated basis. The definition of an “eligible entity” is broader than that of a ”qualifying entity,” so that an individual controlling an Opco could jointly elect with the Opco even though the individual did not have a payroll remittance number. This could be helpful to Opco if, for example, the individual sustained a significant decrease in interest income during the testing period.
However, since the joint election must be made with all group members, the qualifying revenue of each one should be examined – for example, the passive income of the individual’s spouse.
Neal Armstrong. Summary of Martin Lee and Thanusan Raveendran “Affiliation Election for CEWS: Private Corporation Applications,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 3 under s. 125.7(4)(b).
The likely CRA policy is that COVID-19 assistance should not reduce costs for transfer-pricing purposes
TPM-17 states that where a Canadian taxpayer receives government assistance and participates in a cross-border controlled transaction, it should not share any part of that assistance with non-arm's-length non-resident persons. For example, if the policy of a Canco performing research and development in Canada for its foreign parent is to charge the parent the total cost of this work plus a 10% markup, it would appear that COVID-19 government assistance received by it should (per TPM-17) not reduce its costs for the purposes of computing this 110% charge, so that the assistance generally would increase its Canadian taxable income.
It is suggested:
Where a Canadian taxpayer plans to directly or indirectly share all or part of the COVID-19 government assistance with a non-arm's-length non-resident person by way of reducing its allocable cost or markup, it should perform an in-depth economic analysis to develop support for this approach. In other words, it should have documentation that shows that the prices charged reflect arm's-length prices … .
Neal Armstrong. Summary of Nakul Kohli, “Sharing COVID-19 Assistance with Foreign Entities Through Transfer Pricing,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 5 under s. 247(2)(a).
CRA indicates that a scheme to circumvent TOSI application to the reinvested earnings of a professional practice “technically” worked
2019-0819431E5 dealt with what appeared to be a scheme to get around the fact that shares of a professional corporation could not be “excluded shares” for purposes of the split-income (TOSI) rules (and also that spouses often are prohibited from holding voting shares of a professional corporation, as effectively required by para. (b) of the “excluded share” definition) even with respect to the investment income derived by the professional corporation from reinvestment of its earnings from the practice. A professional corporation (PC1) whose non-voting equity was held equally by a physician (Dr. A) and Spouse A (who had no involvement in the practice) applied its earnings to build up a large investment portfolio, which CRA noted very well might be an investment business. However: on December 30 of Year 1, PC1 ceased carrying on its medical services business; on December 31, Spouse A acquired 50% of Dr. A’s voting shares; and on January 1 of Year 2, Dr. A commenced carrying on the medical services business in a newly- incorporated professional corporation (PC2) with the same ownership as PC1 had prior to December 30.
CRA had found that the TOSI rules applied to dividends paid to Spouse A at the end of Year 1, but that they did not technically apply to dividends paid to Spouse A in Year 2 given that: (i) PC1 was no longer a professional or services business, and in the previous year (Year 1) it had derived less than 90% of its revenue from the medical practice (para. (a) of the excluded shares definition); (ii) Spouse A satisfied the 10% of votes-and-value test in para. (b) of that definition; and (iii) the test under para. (c) was by its terms to be applied to the results of the previous year (Year 1) and “all or substantially all of the income of PC1 is derived directly or indirectly from one or more related businesses (i.e., the medical services business and the investment business) in Year 1, and PC1 is still carrying on these businesses in Year 1.”
In a follow-up technical interpretation, CRA has now re-addressed Year 3 where, respecting the application of para. (c), it had previously stated that because “…any dividend paid by PC1 to Spouse A would be considered to be derived directly or indirectly from a 'related business' carried on by PC2 (and not PC1) in Year 2 and subsequent years,” the shares of PC1 held by Spouse A would not qualify as “excluded shares.”
CRA now acknowledges:
In the event that the income of PC1 for Year 2 and any subsequent year is income earned solely from its investment business, such income would not be considered to be derived directly or indirectly from the medical services business now carried on by PC2. This would be the case even though the historical retained earnings of PC1 that are used in PC1’s investment business were originally derived from its former medical services business. Accordingly, in those circumstances, we would consider all the conditions of the “excluded share” definition to be technically met for those years.
CRA went on to indicate that the transactions “appeared to be undertaken primarily to ensure that the shares of PC1 held by Spouse A would meet the definition of ‘excluded shares’,” and that GAAR could be engaged.
Neal Armstrong. Summary of 8 April 2020 External T.I. 2020-0839581E5 - "Excluded Shares" under s. 120.4(1) – excluded shares - (c).
CRA is not extending the June 30, 2020 deadline for GST/HST remittances and waiving late-return penalties
CRA has made an addition dated June 29, 2020 to its Webpage on Deferral of GST/HST Tax Remittances, which states:
There will not be an extension of the relief that was announced by the CRA on March 27, 2020 which allowed all businesses to defer, until June 30, 2020, any GST/HST payments or remittances that became owing on or after March 27, 2020, and before July 2020.
Businesses must therefore make these payments and remittances and file these returns by June 30, 2020. Interest will begin to apply to outstanding remittances and payments, and penalties will begin to apply to outstanding returns, effective July 1, 2020.
Businesses that are continuing to experience difficulty in making a GST/HST remittance or payment or filing a GST/HST return can contact the CRA to make a request for the cancellation or waiver of penalties and interest … .
CRA also added a section on electronic signatures, including a statement that:
[T]he CRA will be accepting electronic signatures for GST/HST documents submitted online. In particular, effective July 6, 2020, businesses will be able to use a new electronic service to submit a GST/HST document with an electronic signature.
Neal Armstrong. Summary of FAQ - Deferral of GST/HST Tax Remittances: CRA and COVID-19 20 (CRA Webpage dated 29 June 2020) under ETA s. 281.1(1).
Income Tax Severed Letters 30 June 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Cameco – Federal Court of Appeal rejects an expansive interpretation of the recharacterization rule in ss. 247(2)(b) and (d)
Cameco arranged its affairs so that long-term contracts for the purchase of uranium - that turned out to have a quite advantageous (i.e., lower-than-market) purchase price - were entered into by a Lux subsidiary, and then assigned to a Swiss sub at a time that the uranium market price was still depressed. The Crown argued that Cameco would not have entered into the transactions that it did with its two subs, with an arm’s length person, so that Cameco effectively should be treated under s. 247(2)(d) as the bargain purchaser, with the profits generated in Switzerland thus reallocated to Cameco.
Webb JA found that this submission departed from the text of s. 247(2)(b)(i), which effectively referred to transactions that would not have been entered into by any arm’s length persons (what he referred to as a “hypothetical persons” test, as contrasted to the above “subjective test” of the Crown), and noted that the effect of the Crown’s submission was that whenever a “corporation in Canada wants to carry on business in a foreign country through a foreign subsidiary, the condition in subparagraph 247(2)(b)(i) … would be satisfied” i.e., it therefore “would not sell its rights to carry on such business to an arm's length party.” He also noted that the OECD Guidelines indicated that “except in exceptional circumstances, transfer pricing arrangements should be examined based on the transactions undertaken by the parties,” i.e., except in exceptional circumstances, the term-adjustment rule in s. 247(2)(c) rather than the recharacterization rule in s. 247(2)(d), is applicable.
The Crown’s appeal was dismissed.
Neal Armstrong. Summaries of Canada v. Cameco Corporation , 2020 FCA 112 under s. 247(2)(b) and Statutory Interpretation - Marginal Notes.
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in June 2010. Their descriptors and links appear below.
These are additions to our set of 1,209 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 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 July.
S. 125.7(4)(b) CEWS consolidation rule may produce odd results where there is a multinational group or where there are year-over-year changes in the affiliated group
S. 125.7(4)(b) provides that each member of an affiliated group of eligible entities may jointly elect so as to result in each entity using the consolidated revenues as a proxy for stand-alone qualifying revenue when calculating its eligibility for the CEWS (wage subsidy).
It is suggested that on a literal interpretation of this rule, all companies in a multinational group would be required to participate in the joint election, and that a “CEWS claimant would need to take account of the qualifying revenue of all of the corporations worldwide in order to determine whether the decrease-in-revenue threshold is met.”
A second interpretive oddity is what to do where, say, four entities meet the definition of an affiliated group in March 2020, but one of the entities was newly incorporated in 2020.
[W]ould the affiliated group be composed of the four entities, which would then calculate revenue on a consolidated basis and compare it to the consolidated revenue of the three entities that existed during the comparative [2019] period? Or would the newly incorporated entity be excluded from this calculation?
David Carolin and Manu Kakkar, “The Canada Emergency Wage Subsidy: Affiliated Group Issues,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 1 under s. 125.7(4)(b).
Restaurant Le Relais – Quebec Court of Appeal finds that the mere erroneous exercise of audit discretion did not ground damages against the ARQ/CRA
The Tax Court had been critical of the ARQ auditor for using an arbitrary alternative method for determining the sales of a Quebec restaurant company for GST/QST purposes, and allowed its appeal. The company then brought an action against the ARQ and CRA for damages.
Bélanger JCA found that the prescription period for this damages action did not start running until the Tax Court judgment, since it was only at that point that “the injury actually manifested itself” - so that the company’s action was not time-barred. However, she found that the ARQ/CRA should not be liable for damages for the improper exercise of the ARQ auditor’s discretion in choosing an inappropriate audit method, stating:
It is therefore not in all cases where discretion has not been properly exercised that the government authority can be held liable for damages. It is the abusive or unreasonable exercise of discretion, marked by bad faith or amounting to gross negligence, carelessness or serious recklessness, that may lead to holding the State liable, as contrasted to the erroneous exercise of the discretion.
Neal Armstrong. Summary of Restaurant Le Relais de Saint-Jean Inc. v. Agence du revenu du Québec, 2020 QCCA 823 under General Concepts – Negligence, fiduciary duty and fault.
Sanctuary – Court of Quebec finds that the acquisition of a secondary residence just outside Quebec was insufficient to change the taxpayer’s Quebec residence
The taxpayer, who testified that “he never developed a strong sense of belonging to Quebec” and that “his best friend … lived in Ontario,” purchased a house in Lancaster, Ontario (90 km from Montreal) in late 2012. After it was rendered habitable, he and his wife spent occasional weekends there, but continued to work full time in Montreal and to live there most of the time.
Davignon JCQ confirmed the ARQ view that the taxpayer continued to reside in Quebec for his 2012 taxation year.
Neal Armstrong. Summary of Sanctuary v. Agence du revenu du Québec, 2020 QCCQ 1903 under s. 2(1).