News of Note
The s. 247 transfer-pricing rules should not apply to transactions between non-residents none of whom is within the ITA charging provisions
Email this ContentA textual, contextual, and purposive analysis of s. 247 and other Canadian transfer-pricing provisions, e.g., ss. 69(1) and 17(1), suggests that, contrary to 2017-0691191C6, s. 247 applies to a transaction between two parties that are non-residents of Canada only to the extent that at least one of the parties carries on business in Canada or disposes of taxable Canadian property, and only where the transfer-pricing analysis is relevant to one of those activities or transactions.
Factors suggestive of this conclusion include:
- Jurisprudence supports the general proposition that a person is not a "taxpayer" unless the person comes within the charging provisions of the Act - that is, the person is resident in Canada, carries on business in Canada, or disposes of taxable Canadian property.
- Analysis of contemporaneous external sources suggests that there was no intent to expand the scope of the parties to which the transfer-pricing rules apply when, on the replacement of ss. 69(2) and (3) by s. 247 in 1998, the reference to a "taxpayer carrying on business in Canada" in subsections 69(2) and (3) was replaced by a reference to only a "taxpayer."
- It appears unlikely that the change in 2009 from the computation of income “as though the affiliate were resident in Canada” in the predecessor to s. 95(2)(f), to the deemed Canadian residence of an affiliate in the current version, was intended to require the current s. 95(2)(f) to be taken into account in applying s. 247. For example, in the context of a transaction between a foreign affiliate and a Canadian taxpayer that gives rise to FAPI, if s. 95(2)(f) is taken into account for the purposes of s. 247 to deem the foreign affiliate to be resident in Canada, paradoxically s. 247 cannot apply because there will then be no "non-resident person" for the purposes of s. 247.
- A more expansive interpretation generates difficulties. To give one example:
[W]here a foreign affiliate has earnings from an active business and the affiliate is required under the tax law of its country of residence, or the tax law of the country in which the business is carried on, to compute income, the affiliate's earnings are computed in accordance with that foreign law. Such earnings computed under foreign law are then adjusted in accordance with the items listed in regulation 5907(2), none of which relate to transfer-pricing adjustments under Canadian law. If subsection 247(2) could apply to interaffiliate transactions, it appears that earnings and surplus adjustments could be made only in respect of earnings of the foreign affiliate computed under Canadian tax rules, and not, for example, in respect of active business earnings computed under foreign law. It is not apparent why a transfer-pricing adjustment under subsection 247(2) should affect the computation of surplus in the former circumstance but not the latter.
Neal Armstrong. Summary of Byron Beswick, “Transfer Pricing and Transactions Between Foreign Entities,” Canadian Tax Journal, (2019) 67:1, 187-208 under s. 247(2).
Moore – Tax Court of Canada vacates the penalty assessed on a careful Canadian for late-filing a T1135
The taxpayer (Mr. Moore) realized approximately a year late that he should have filed a T1135 form to report some U.S. shares that now exceeded the $100,000 threshold, and promptly filed the T1135 with CRA.
In allowing Mr. Moore’s appeal of the $2,500 penalty imposed for the late-filing of the 2015 form, Boyle J indicated that even a careful and otherwise-compliant Canadian like Mr. Moore would find the disclosure in the CRA Guide as to T1135 reporting requirements to be opaque, noted the implicit presence of a due diligence defence, and stated:
I would ask the rhetorical question, “Is Mr. Moore’s disclosure to CRA on a voluntary basis of his failure to file a 2015 information return not the type of compliance effort CRA wants to encourage Canadians to follow?” …
I cannot imagine why in a case such as this the CRA would prefer to have Mr. Moore appeal to this Court, lose, and then go back to CRA’s Fairness Review program armed with my comments.
Neal Armstrong. Summary of Moore v. The Queen, 2019 TCC 141 under s. 162(7).
Income Tax Severed Letters 3 July 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that ss. 6(1)(a) and 148(7) applied simultaneously to the transfer of a life insurance policy by an employer to an arm’s length employee
As a result of an arm’s length employee no longer being considered to be a key employee, her employer transfers its “key person” permanent life insurance policy on her life to her for nominal consideration. At the transfer time, the death benefit, cash surrender value (CSV) and adjusted cost basis (ACB) are $1 million, $50,000 and $20,000, respectively. The policy FMV equals its CSV.
CRA found that the employee would have a taxable s. 6(1)(a) benefit based on the $50,000 FMV of the policy, that the employer would realize a policy gain under s. 148(7)(a) of $30,000, being the CSV of $50,000, less the ACB of $20,000 and that the employee would be deemed under s. 148(7)(b) [rather than s. 52(1)] to have acquired the policy at a cost of $50,000.
Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 2, 2019-0799051C6 under s. 6(1)(a) and s. 148(7)(b).
Bakorp – Federal Court of Appeal finds that the only remedy for the failure of CRA to make a s. 152(4.3) adjustment was judicial review of that decision
Following the resolution of a tax dispute for taxation year 1, the taxpayer (Bakorp) requested that the Minister reduce the amount of a non-capital loss that it had carried forward to taxation year 2, and claimed the amount of that loss instead in its return that it filed for taxation year 3. The Minister denied the request and reassessed taxation year 3 to deny the claimed loss.
Webb JA found that in order for Bakorp to have tested its view - that the Minister should have made the requested adjustment to taxation year 2 - it should have sought judicial review of this decision. The Tax Court of Canada lacked jurisdiction to consider this decision of the Minister not to make the s. 152(4.3) adjustment.
Since Bakorp did not seek judicial review by the Federal Court of this decision, the non-capital losses claimed in taxation year 2 had not been adjusted, and per s. 111(3)(a), they could not be claimed again in taxation year 3.
Neal Armstrong. Summary of Bakorp Management Ltd. v. Canada, 2019 FCA 195 under s. 152(4.3).
Reference re Greenhouse Gas Pollution Pricing Act – Ontario Court of Appeal finds that the federal greenhouse gas (GHG) charges are valid under the POGG power
Strathy, CJO found that the fuel charge and excess emissions charges imposed under the Greenhouse Gas Pollution Pricing Act, Part 5 of the Budget Implementation Act, 2018, No. 1 are constitutionally valid on the basis of coming within the national concern branch of the federal peace, order and good government (POGG) power. After noting that “there is today a greater appreciation that environmental pollution can transcend national and international boundaries and it is no longer thought of as a purely local concern,” he stated:
Confining Canada’s jurisdiction to the establishment of minimum national standards to reduce GHG emissions does not result in a massive transfer of broad swaths of provincial jurisdiction to Canada, as Ontario claims.
Although it was unnecessary to address any other bases for finding the charges to be intra vires, he briefly noted (at para. 148);
I agree with Ontario that, given its pith and substance, the Act does not fall under the federal taxation power enumerated in s. 91(3). As noted, the Act falls under the national concern branch of the POGG power.
Neal Armstrong. Summary of Reference re Greenhouse Gas Pollution Pricing Act, 2019 ONCA 544 under Constitution Act, 1867, s. 91.
CRA does not provide any accommodations for the technical impossibility of demonstrating that a life insurance policy issued abroad is exempt
Annual income accrual is required on life insurance policies that are not exempt policies. It is unlikely that testing for compliance with Reg. 306(1) will be routinely performed by the insurer for policies issued outside of Canada where the policyholder is resident in, or immigrates to, Canada. Where the policy is not issued in Canadian currency, there could be failure under the exempt test simply as a result of FX fluctuations. What is such a Canadian taxpayer to do?
CRA responded:
Given that the information to determine the exempt status of a particular life insurance policy is only available in the accounts of the insurer, the onus is on the policyholder to establish that the policy qualifies as an exempt policy.
Summary of 14 May 2019 CLHIA Roundtable Q. 6, 2019-0799101C6 under Reg. 306(1).
CRA indicates that required top-up payments to satisfy the minimum-amount IPP rules do not qualify for income-splitting
The 2011 budget introduced measures for individual pension plans (“IPPs”) that generally parallel the “minimum amount”-based income withdrawal rules for RRIFs, so that minimal withdrawals are required from an IPP if the plan member has attained 71.
CRA considers that any additional payment that an IPP is required to make in a year to comply with the IPP minimum amount rules is not eligible to be split with a spouse/common-law partner under the s. 60.03 income-splitting rules. The definition of “pension income” for such purposes references a “life annuity,” and such top-up payments would not qualify as being part of an annuity, i.e., a series of periodic payments.
Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 14, 2019-0799191C6 under s. 118(7) – pension income – (a)(i).
CRA considers that a TFSA cannot hold a non-commutable life annuity
Life annuities providing benefits that are purely contingent on the life’s continuing survival generally are not commutable. CRA considers that in the absence of commutability, the life annuity contract will not satisfy s. 146.2(2)(e) and, therefore, cannot be registered as a TFSA. In addition, it is not a qualified investment for a trusteed TFSA.
Subsection 146.2(2) provides that a “qualifying [TFSA] arrangement” must:
(e) … provide that, at the direction of the holder, the issuer shall transfer all or any part of the property held in connection with the arrangement (or an amount equal to its value) to another TFSA of the holder;
CRA apparently is reading into this wording a requirement that the arrangement represent transferable property.
Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 7, 2019-0799121C6 under s. 146.2(2)(e).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in December 2011. Their descriptors and links appear below.
These are additions to our set of 897 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/2 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for July.