News of Note

The U.S. parent (JMC) of the Canadian taxpayer (Atlas) acquired another Canadian company (LSI), following which some of the pieces of LSI ended up in Atlas’ hands in a post-closing reorganization. CRA requested, pursuant to s. 231.1, a copy of a tax due diligence report - that EY had prepared on LSI in advance of the LSI acquisition - on the grounds that it might be relevant to its audit of Atlas.

The EY report included an analysis of the tax filing positions taken by LSI and their risk of successful challenge by CRA. Atlas argued that compelling disclosure of the report was contrary to BP, which found that tax accrual working papers setting out uncertain tax positions were protected. In rejecting this argument, Southcott J stated:

BP is to be read as precluding general and unrestricted access to TAWPs on a prospective basis, outside the context of an audit of particular issues. …

… Unlike in BP, the Minister’s request for access to the Report in the present case is made in the context of an active audit of particular issues. …[T]he information in the Report sought by the Minister meets the applicable threshold of relevance in that context. I therefore find that compelling Atlas to provide the Report would not offend the principle described in BP that a taxpayer is not required to self-audit.

He also found that, as the report’s “dominant purpose when commissioned and generated was to inform the decision whether to proceed with the transaction and at what price” rather than to assist Stikeman in structuring the acquisition, it was not protected by solicitor-client privilege.

Neal Armstrong. Summaries of Canada (National Revenue) v. Atlas Tube Canada ULC, 2018 FC 1086 under s. 231.1(1) and s. 232(1) – solicitor-client privilege.

In its audits of cross-border cash pooling arrangements, CRA has taken the position that:

• amounts received by a related non-resident head account holder in a cash pool from a Canadian entity member of the cash pool (as part of a cash pooling arrangement) are subject to the shareholder loan rules in subsection 15(2) of the Act
• the ordinary business and bona fide arrangement exception [in s. 15(2.3)} is generally not met because:
  • there is a lack of evidence that a Canadian entity loans money to either arm’s length parties or other members in the corporate group …
  • the terms of cash pooling deposit agreements do not generally include a fixed or specific date for the foreign company to repay the loan … [indicating no] bona fide arrangement for repayment
• the repayments exception [in s. 15(2.6)] is generally not met because the automatic daily cash sweeps are considered to form part of a series of loans or other transactions and repayments
• …each loan requires a separate [PLOI] election, so if the election is filed late, there can be multiple late filing penalties
• there will be no refund [under s. 227(6.1)] of the withholding tax paid on the amount of a loan deemed to be a dividend when the loan is repaid if the repayment is part of a series of loans and repayments

Neal Armstrong. Summary of PwC, Tax Insights: Cross-border cash pooling arrangements ─ Recent developments, Issue 2018-41, 2 November 2018 under s. 15(2.6).

Observations on restricted and deferred share units plans (RSUs and DSUs) and other executive compensation arrangements include:

• Given the CRA view that receipt under ss. 5 and 6(1)(a) includes constructive receipt, a cash bonus plan should only be converted into RSU entitlements prior to the payable date for the bonus. Similarly, the decision to take cash, or compensation in the form of DSUs, should be made prior to the date that the annual bonus or the director fees become payable.
• An RSU plan that provides for payment to be made on the third anniversary of the award date (as opposed to the service year) can fall outside the three year period permitted under para. (k) of the salary deferral arrangement definition where the service year pre-dates the award date.

The CRA is attuned to these distinctions. As a practical matter, some companies view the RSU as a bonus in respect of services rendered in the prior year, while others take the view that the RSU is granted in respect of services rendered in the year in which the grant occurs and the public company disclosure may support either position.

• The supposed 3-year limitation under para. (k) can be busted if the RSU is structured to come within the s. 7 rules, i.e., satisfying the RSUs only by issuing treasury shares.
• Some corporations will match the amounts contributed by their employees through payroll deductions. Where the employer matching contributions are used to acquire shares from treasury, deductibility to the corporate employer likely will be denied pursuant to s. 7(3)(b), whereas if the shares are acquired on the market, the employer should generally be entitled to claim a deduction in respect of its cash contributions to the plan.

Neal Armstrong. Summaries of Dov Begun “Equity Based Compensation and Stock Options,” 2017 Annual CTF Conference draft paper under s. 5(1), s. 248(1) – salary deferral arrangement, para. (k), s. 7(3)(b) and s. 110(1.8).

The table below provides descriptors and links for two interpretations that were recently released (while we were engaged in translating the 2018 APFF Roundtables) as well as six interpretation released in February and January 2013, all as fully translated by us.

These are additions to our set of 678 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 5 3/4 years of releases by them These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the "open" week for November.