News of Note
CRA comments on the expansive effect of ss. 104(1) and s. 251(5)(b)(i) on related person status re trusts may be incorrect
Email this ContentComments on how to characterize the relations of a trust or its beneficiaries to other taxpayers include:
- CRA considers that s. 104(1) applies, and therefore a trust is related to each person related to the trustee of the trust. This position, which appears to be incorrect, is not supported by Wright Estate, and its reasoning seems to break down when a trust has more than one trustee.
- Obiter comments in Propep suggest that the broad definition of “beneficially interested” in s. 248(25) may also apply wherever the term “beneficiary” is used. However, these comments are inconsistent with the presumption of consistent expression, under which the expanded meaning of “beneficially interested” should apply only when the Act expressly states that it does.
- The rights referred to in s. 251(5)(b)(i) include those “in equity.” CRA has considered that s. 251(5)(b)(i) could apply to a beneficiary of a trust unless, under the terms of the trust agreement, the beneficiary could never obtain ownership of the shares or control the voting rights attached to the shares. However, Lyrtech RD Inc. stated that a beneficiary's interest in a discretionary trust does not come within the scope of s. 251(5)(b) [but see, more recently, CO2 Solution Technologies].
- In order for various beneficiaries of a trust, for example, a mutual fund trust which might be subject to a loss restriction event, to be considered to be a majority-interest group of beneficiaries, they must inter alia constitute a group. It is suggested that:
[C]ase-law principles should be applied to determining whether beneficiaries of a trust constitute a group of persons in the following manner:
1) There must be sufficient common connection between the beneficiaries in addition to their being beneficiaries of the same trust. A common identifying feature (such as being non-residents, as in Silicon Graphics) is insufficient to establish such a connection.
2) The common connection might include but is not limited to a voting agreement, an agreement to act in concert, or a business or family relationship.
3) Beneficiaries may share a mutually beneficial objective, such as maximizing the value of their investments in the trust, without being considered a group.
4) Beneficiaries can participate in modern corporate or commercial steps, such as granting a proxy or participating in a reorganization of the trust (for example, a fund merger pursuant to section 132.2), without being considered a group.
5) Whether the beneficiaries know, can identify, or communicate with each other is relevant in determining whether they are a group.
Neal Armstrong. Summaries of Jeffrey T. Love and Kenneth R. Hauser, “How Various Aggregation Rules Apply to Trusts,” 2018 Conference Report (Canadian Tax Foundation), 28: 1-79 under s. 248(25)(a), s. 248(25)(b)(ii), s. 248(25), s. 251.1(1)(g), s. 251.1(3) – majority-interest beneficiary, s. 251.1(4)(d)(i), s. 251.1(3) – majority-interest group of beneficiaries, s. 251(2)(c)(i), s. 251(5)(b)(i), s. 251(1)(b), s. 256(1.2)(f).
Holding a non-resident corporation through a partnership may generate FAPI, but also might convert FAPI to active business income
The interposition of a partnership between a small stakeholder and a non-resident corporation (Forco) may generate FAPI given that a partnership (including, it is thought, a non-resident one) is a taxpayer for income-computation purposes and Forco has become a controlled foreign affiliate of the partnership.
However, the interposition of partnership may also operate favourably through engaging s. 95(2)(a)(ii)(B):
[F]our arm’s-length Canadian corporations (Cancos) each own 25 percent of the shares of a non-resident corporation (Forco 1). In turn, Forco 1 owns 30 percent of the shares of another non-resident corporation (Forco 2), and Forco 1 makes an interest-bearing loan to Forco 2 to fund Forco 2’s active business. … [B]ecause none of the Cancos have a qualifying interest in Forco 2, the recharacterization rule in clause 95(2)(a)(ii)(B), for example, would not be available since each Canco would hold less than 10 percent of Forco 2 on a lookthrough basis.
Alternatively, if the Cancos formed a partnership and the partnership held the shares of Forco 1, FAPI would be determined at the level of the partnership. In this case, the partnership would have a 25 percent indirect interest in Forco 2 and would therefore have a qualifying interest in Forco 2. In that case, the recharacterization rule in clause 95(2)(a)(ii)(B) may apply … .
Neal Armstrong. Summaries of Ilia Korkh and Eivan Sulaiman, “Outbound Partnerships: FAPI in Unexpected Places,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 10 under s. 91(1) and s. 95(2)(a)(ii)(B).
The interaction of the ss. 17 and 247(2.1) rules might generate double taxation
Under proposed s. 247(2.1), amounts are subject first to adjustments as to their quantum (or nature) under s. 247(2), before other provisions can then be applied to such adjusted amounts. Accordingly, cross-border short-term loans that do not meet the conditions of s. 17(8) could now be subject to an imputation of interest based on an arm's-length rate.
S. 17(7) recognizes that where Pt. XIII tax has been imposed on the amount of a loan made to a non-resident by a resident lender, it is inappropriate to also impute interest on that loan under s. 17. However, as s. 247(2) will now apply first, this raises the possibility that an amount of interest will be included in the lender's income in addition to the recognition of a shareholder benefit to the borrower equal to the loan amount.
S. 17 contains recharacterization rules, e.g. for back-to-back loans (s. 17(11.2)) or loans through partnerships or trusts (ss. 17(4) to (6).) Such transactions usually will not be recharacterized under s. 247(2)(d). This raises the possibility of imputation of interest under s. 17 based on the recharacterized transactions rather than interest imputation occurring only under the s. 247(2) rules.
Neal Armstrong Summary of François Fournier-Gendron, “Amendments to the Act: The Impact of Proposed Subsection 247(2.1) on Section 17,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 5 under s. 247(2.1).
CRA provides new GST/HST Memorandum on Secondary and Elementary Schools
CRA has issued a new GST/HST Memorandum on supplies and purchases by elementary and secondary schools, mostly focusing on the various exemptions in Sched. V, Pt. III. Points include:
- A detailed description of the criteria applied by CRA to distinguish between a (usually taxable) supply of an admission to a seminar or event (viewed by it as a supply of intangible personal property) and a somewhat-frequently exempted supply of instruction (viewed by it as the supply of a service).
- CRA indicates that the supply of on-line instruction can potentially be exempted, but states that “It can, however, be difficult to determine whether a supply made online is the supply of a service (and thus possibly exempt under section 2, 7, 8, 11 or 16 of Part III of Schedule V or zero‑rated under section 18 of Part V of Schedule VI) or of intangible personal property as this determination is based on a number of factors, as well as the specific facts of the particular case.”
- CRA indicates that in various circumstances, kindergarten programming will not be exempted.
- CRA attempts to provide guidance on the slippery concept of what is a “program” for purposes of the exemption in Sched. V. Pt. III, s. 16 (as well as commenting on the less intractable nature of the exclusion from this exemption for “recreational pursuits”).
Neal Armstrong. Summaries of GST/HST Memorandum 20-1 December 2019 under ETA s. 123(1) – school authority, Sched. V, Pt. III, s. 1 – elementary or secondary school student, s. 2, s. 3, s. 4, s. 5, s. 7, s. 7.1, s. 11, s. 16, Sched. VI, Pt. V, s. 18.
Bell Canada – Supreme Court of Canada’s reasons suggest that CRA should demonstrate using a textual, contextual and purposive interpretation
Before going on to find that an order made by the CRTC had exceeded the authority accorded to it by s. 9(1)(h) of the Broadcasting Act, the majority of the Supreme Court stated:
The scope of the CRTC’s authority under s. 9(1)(h) is to be determined by interpreting that provision in accordance with the modern approach to statutory interpretation. As this Court has reiterated on numerous occasions, this approach requires that the words of the statute be read “in their entire context and in their grammatical and ordinary sense harmonious with the scheme of the Act, the object of the Act, and the intention of Parliament” … .
This contrasted with the approach of Abella and Karakatsanis JJ who, in their dissent, stated that a reviewing court should “defer to any reasonable interpretation adopted by an administrative decision maker, even if other reasonable interpretations may exist”.
It is clear, in light of the majority decisions in Bell Canada and Vavilov, that the administrative decision maker is expected to provide a reasoned application of the textual, contextual and purposive interpretation that is mandated for the courts themselves where there is an interpretive issue. In Vavilov, the majority stated:
[W]hatever form the interpretive exercise takes, the merits of an administrative decision maker’s interpretation of a statutory provision must be consistent with the text, context and purpose of the provision. In this sense, the usual principles of statutory interpretation apply equally when an administrative decision maker interprets a provision. Where, for example, the words used are “precise and unequivocal”, their ordinary meaning will usually play a more significant role in the interpretive exercise … . Where the meaning of a statutory provision is disputed in administrative proceedings, the decision maker must demonstrate in its reasons that it was alive to these essential elements.
Neal Armstrong. Summary of Bell Canada v. Canada (Attorney General), 2019 SCC 66 under Statutory Interpretation – Ordinary Meaning.
Vavilov – Supreme Court of Canada reformulates the tests that will be applied in judicial review of administrative decisions, e.g., of CRA
In Vavilov, and the companion case of Bell Canada, the Supreme Court has revised the standards to be applied in the judicial review of administrative decisions. Generally, administrative decisions are to be reversed if they are unreasonable. There no longer should be an inquiry as to the relative expertise of the decision maker in determining the standard of review to be applied to the decision.
The presumption that a reasonableness review should be applied can be rebutted where there is a statutory appeal mechanism in place (thereby entailing application of a standard of correctness to questions of law) – however, the Court made it clear that this did not include provisions, such as ss. 18 to 18.2, 18.4 and 28 of the Federal Courts Act – so that this aspect does not appear to apply to reviews of CRA decisions (other than assessments). Furthermore, the rule of law requires that the standard of correctness be applied to legal questions, namely constitutional questions, general questions of law of central importance to the legal system as a whole (e.g., questions of res judicata and abuse of process, or of solicitor-client privilege) and questions related to the jurisdictional boundaries between two or more administrative bodies.
The Court also made numerous comments on application of the reasonableness standard. To pick one at random:
[T]he reviewing court must be able to trace the decision maker’s reasoning without encountering any fatal flaws in its overarching logic, and it must be satisfied that “there is [a] line of analysis within the given reasons that could reasonably lead the tribunal from the evidence before it to the conclusion at which it arrived” … . Reasons that “simply repeat statutory language, summarize arguments made, and then state a peremptory conclusion” will rarely assist a reviewing court in understanding the rationale underlying a decision and “are no substitute for statements of fact, analysis, inference and judgment” … .
Although the concurring reasons of Abella and Karakatsanis JJ agreed in the result (which was to reverse an unreasonable decision of the Registrar of Citizenship), they disagreed with the revised standard of review adopted by the majority, stating:
Presented with an opportunity to steady the ship, the majority instead dramatically reverses course — away from this generation’s deferential approach and back towards a prior generation’s more intrusive one. Rather than confirming a meaningful presumption of deference for administrative decision-makers … the majority’s reasons strip away deference from hundreds of administrative actors subject to statutory rights of appeal; rather than following the consistent path of this Court’s jurisprudence in understanding legislative intent as being the intention to leave legal questions within their mandate to specialized decision-makers with expertise, the majority removes expertise from the equation entirely and reformulates legislative intent as an overriding intention to provide — or not provide — appeal routes; and rather than clarifying the role of reasons and how to review them, the majority revives the kind of search for errors that dominated the pre-C.U.P.E. era. In other words, instead of reforming this generation’s evolutionary approach to administrative law, the majority reverses it, taking it back to the formalistic judge-centred approach this Court has spent decades dismantling.
Neal Armstrong. Summary of Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 under Federal Courts Act, s. 18.1(1).
CRA indicates that charges made to Canco by its non-resident parent equaling the FMV of shares distributed out of a trusteed PSP by the parent to Canco employees likely were deductible
Employees of a Canadian subsidiary participated in a performance share plan (“PSP”) under which the non-resident public parent (Parentco) contributes funds to a non-resident trust, which purchases shares of Parentco on the open market, and distributes shares (within approximately three years) to the group employees as the shares vest in accordance with the performance conditions of the PSP. After finding that the arrangement was an employee benefit plan (EBP), Headquarters concluded that payments made by Canco to Parentco under a “recharge” agreement, equalling the fair market value of shares that were distributed to the Canco employees at the time they vested, were not deductible under s. 32.1, stating:
To be deductible under section 32.1, Canco’s reimbursement payment to Parentco would have to be considered to be a contribution to the EBP by Canco. Given the potentially significant differences in both the amount and timing of the reimbursement payment as compared to the actual contributions made by Parentco … the reimbursement payments are not equivalent to Parentco’s contributions to the EBP, and thus cannot be considered to be a proxy for those contributions.
However, Headquarters went on to find that the payments were deductible under s. 9, except to the extent that they related to periods during the vesting period that the employees had been employed by affiliates rather than by Canco.
Canco originally filed its returns without claiming a deduction for the reimbursement payments but, following the Transalta decision, filed requests (“TPRs”) for adjustments to its returns to allow such a deduction. Before noting that the PSP might not have been a s. 7 plan (in which case, the prohibition on deductions under s. 7(3)(b) would not have applied even before Transalta), Headquarters stated that whether the TPRs should be allowed:
depends, in part, on whether the TPRs are due to an error or are due to a change in position resulting from the Transalta decision. If it is determined that the TPRs were due to an error … the TPRs for all of the taxation years could be accepted. However, if due to a change in position, we understand that only those TPRs for income tax returns originally filed after the Transalta decision (April 4, 2012) could be accepted.
Neal Armstrong. Summaries of 1 August 2019 Internal T.I. 2018-0781951I7 under s. 7(3)(b), s. 32.1(1), s. 248(1) – employee benefit plan, s. 18(1)(a) – income-producing purpose and s. 152(4).
[corrected] 12 more translated CRA interpretations are available
We have published a further 12 translations of CRA interpretations released in March, 2011. Their descriptors and links appear below.
These are additions to our set of 1,053 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ 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 January.
The PPT raises familiar issues of the relationship between a GAAR and SAAR
The author, in discussing the principal purpose test (PPT) in the Multilateral Instrument, and its relationship to specific anti-avoidance rules (SAARs), suggests:
If a purported abusive arrangement can be dealt with by the PPT and a SAAR, the SAAR should prevail, provided that the SAAR does cover the same situation. In conclusion, it can be argued that the determining factor in applying the PPT is deciding whether any SAAR would be able to deal with the facts of the specific case in question. …
The concept of beneficial ownership had been looked to as a prime tool to address Treaty shopping. Post-PPT it is suggested that:
The prima facie conclusion is that the OECD has narrowed the application of the beneficial ownership tests in favour of the use of the PPT and the LOB due to the greatly varying interpretation of the concept of “beneficial ownership” worldwide. This is evidenced by the fact that a number of examples in the Commentary on Article 29 of the OECD Model (2017), such as Examples A and B … are based on fact patterns of past cases argued on the basis of beneficial ownership clauses.
Neal Armstrong. Summaries of Ian Zahra, “The Principal Purpose Test: A Critical Analysis of Its Substantive and Procedural Aspects – Part I,” Bulletin for International Taxation, November 2019, p. 609 under Treaties – Multilateral Instrument – s. 7(1).
Friedman – Federal Court does not follow its interpretation in Lin that a requirement letter insufficiently specified who was covered
The Friedmans, a married couple, who had not filed T1135 returns, each received Requests for Information under s. 231.1(1) (“RFIs”) that were addressed to them personally, and stated inter alia:
Your personal income tax returns and any other related or associated entities have been selected for audit … . [Y]ou may have offshore holdings that you have failed to disclose … .
In order to expedite and facilitate our audit, we will require a clear understanding of all entities with which you had a connection or affiliation during the taxation years noted above. …
Please send us back the attached questionnaire fully completed within 30 days … .
The taxpayers refused to provide the requested information, noted that the RFIs’ wording was essentially identical to those at issue in Lin, and argued that, like in Lin, they should not have been required to comply because it was unclear whether the RFIs were directed to them individually or to their related entities. Pamel J rejected these submissions and found in light of the wording of the letters and a reading of the accompanying questionnaire that “the CRA is specifically directing those questions to the Friedmans in respect of their personal tax situation.”
Pamel J also rejected their submissions that the RFIs contravened s. 13 or 7 of the Charter.
Neal Armstrong. Summaries of Canada (National Revenue) v. Friedman, 2019 FC 1583 under s. 231.7(1) and Charter s. 13, s. 7.