News of Note
CRA rules on loss-shifting transactions beneath a non-wholly owning Canadian LP
Email this ContentCRA ruled on loss consolidation transactions in which the Lossco (held by a Canadian LP) made an interest-bearing loan to the Profitco (held directly and indirectly by the LP) and Profitco used those loan proceeds to subscribe for cumulative redeemable retractable preference shares of Lossco. Although the LP did not wholly-own Lossco and also perhaps did not directly or indirectly wholly-own Profitco, those two corporations were affiliated and related. CRA did not provide a GAAR ruling, and instead provided an opinion on the Bill C-59 version (now law) of s. 245.
Neal Armstrong. Summary of 2024 Ruling 2023-0994301R3 F under s. 111(1)(a).
We have translated 7 more CRA severed letters
We have translated a ruling released last week and a further 6 CRA interpretations released in October of 2001. Their descriptors and links appear below.
These are additions to our set of 2,879 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Lemay Co – Federal Court finds that the taxpayer had a reasonable argument that s. 125.7(5)(a) did not preclude it from making an amended increased CEWS claim
On audit, CRA determined that Lemay had made Canada Emergency Wage Subsidy (CEWS) claims for periods 6, 7 and 13 to 15 that were excessive to the extent of $311,204 but had underclaimed for periods 8 to 12. CRA proposed to assess the $311,204 but refused Lemay’s request that it exercise its discretion pursuant to s. 125.7(16) to allow increased CEWS claims for periods 8 to 12 of $1,715,341. Later, CRA rejected a further Lemay submission that CRA could accept its additional refund claims by virtue of ss. 164(1)(b) and 152(3.4) – on the basis inter alia that s. 125.7(5)(a) limited the amount of the CEWS subsidy to the amount initially claimed by the taxpayer. Lemay brought an application for judicial review of this decision, and the A.G. brought this motion to strike the application on the basis inter alia that the interpretation advanced had no chance of success. In rejecting such claim, Régimbald J stated:
[I]t is not clear, in light of sections 125.7(5), 152(3.4) and 164(1)(b), considered together and which are the subject of the application for judicial review, that the ITA does not allow the Minister to accept an amended prescribed form as requested by the plaintiff. …
[T]he defendant has therefore not discharged its burden of demonstrating that it is clear and obvious that the interpretation proposed by Lemay has no reasonable chance of acceptance ….
Neal Armstrong. Summaries of Lemay Co Inc. v. Attorney General of Canada, 2024 CF 995 under s. 125.7(5)(a) and s. 125.7(16).
GST/HST Severed Letters January-February 2024
PepsiCo – Full Federal Court of Australia finds that concentrate purchases by an Australian soft drink bottler could not be recharacterized as trademark royalties for withholding tax purposes
A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (the “Bottler”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to the Bottler, for bottling and sale, and granted the Bottler the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (the “Seller“) to the Bottler. There was a similar arrangement for the licensed bottling and sale by the Bottler of Gatorade pursuant to an EBA with another U.S. company in the Pepsi group (“SVC”).
Perram and Jackman JJ found that, since as a matter of contractual interpretation, all of the amounts paid by the Bottler to the Seller were consideration for the sold concentrate, none of such payments could be treated as a trademark royalty that was subject to Australian withholding tax. Furthermore, none of the concentrate selling price was owed to either US company, so that such payments were not derived by a non-resident of Australia. Accordingly, the Commissioner’s assessment of Australian withholding tax on a portion of the consideration was reversed. These conclusions arose under the domestic withholding tax provision, so that no reference was required to the terms of the Australia-US tax treaty.
Neal Armstrong. Summaries of PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86 under Treaties – Income Tax Conventions – Art. 12.
GST/HST Severed Letters December 2023
This afternoon's release of 25 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their December 2023 release) is now available for your viewing.
Income Tax Severed Letters 26 June 2024
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms no change to its administrative practice of not charging interest or penalties for insufficient instalment payments by trusts
CRA indicated that its release of two new forms - the T3 INNS3, Trust Instalment Voucher and the T3AO, Trust Amount Owing Remittance Voucher – does not signify any change to its current administrative practice of not charging interest or penalties for insufficient instalment payments by trusts.
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.14 under s. 156(1).
CRA indicates that a Canadian payer must withhold on rent paid to a s. 94 deemed resident trust
Regarding the application of Part XIII to a non-resident trust that is deemed to be resident in Canada pursuant to s. 94 and which owns a Canadian rental property, CRA indicated that such trust is not subject to Part XIII tax on amounts paid or credited to it, but is not considered to be resident in Canada for the purposes of determining the liability of a person other than the trust to withhold and remit under s. 215 – so that there is still a requirement for the Canadian tenant(s) to withhold and remit Part XIII tax on the rent paid by them. Per s. 94(3)(g), to the extent that the amount on which the Part XIII tax is paid has been included in computing the trust’s income, the withholding amount is deemed to have been paid on account of the trust tax under Part I for the particular taxation year.
Neal Armstrong. Summaries of 4 June 2024 STEP Roundtable, Q.13 under s. 94(3)(a)(viii) and s. 94(3)(a)(ii).
CRA finds that s. 13(7)(e)(ii) applies to a cross-border non-arm’s length gift of a foreign building
A resident individual received a gift of (or alternatively, an inheritance of) a foreign rental property from a non-resident relative. The building component had a cost to the non-resident of $1.0 million and a current FMV of $1.4 million.
Regarding the gift, CRA noted that although s. 69(1)(c) deemed the building’s cost to the resident to be its FMV of $1.4 million, the ½ step-up rule in s. 13(7)(e)(ii) reduced its capital cost to $1.2 million, so that the starting UCC of the building would also be that amount.
S. 13(7)(e)(ii) does not apply where the transfer is as a consequence of the death of the transferor. Accordingly, the cost to the resident of the building on its inheritance would be the full $1.4 million.
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.12 under s. 13(7)(e)(ii).