News of Note
Income Tax Severed Letters 7 November 2018
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA has been applying s. 15(2) in its audits of cross-border cash pooling arrangements
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).
CRA indicates that a charity gets a better GST/HST result if it exchanges cash with volunteers who donate their expenses
Some of the volunteers at a registered charity are reimbursed for their expenses, or receive an allowance – but then donate those payments to the charity for a donation receipt. CRA stated:
The payment of the reimbursement or the allowance by the Charity and the later donation of all or part of this amount back to the Charity are two separate transactions for GST/HST purposes.
Accordingly, the expenses claimed by the charity for public service body (PSB) rebate purposes include the expenses recognized under ETA s. 175 or 174 as a result of its having paid the reimbursements or allowances – notwithstanding that those expenses in effect are donated back to it.
This contrasts with the situation where no cash is exchanged and the volunteer simply incurs the expenses as a gift-in-kind to the charity and is issued a receipt for the value of this in-kind donation. CRA stated that since “the Charity does not actually pay an amount to the volunteer,” ETA s. 175 and, therefore, the PSB rebate, is unavailable.
Neal Armstrong. Summary of 18 May 2018 Interpretation 183321 under ETA s. 175(1).
Structuring RSUs and DSUs requires careful attention to the SDA and constructive receipt rules
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).
Akanda – Federal Court of Appeal grants an extension to seek reversal of a default judgment notwithstanding the absence of a reasonable explanation for the delay
After the taxpayer (Akanda) had missed a lot of deadlines for providing a list of documents and completing discovery examinations, and shortly after its counsel had resigned, its appeals respecting the denial of over $6M and $1.5M in SR&ED and ITC claims, respectively, were dismissed without an appearance by the taxpayer. Akanda then appointed new counsel, who was unsuccessful in a motion for extending the time limit for applying to have this default judgment set aside (the application to set aside having been brought three months’ late).
Webb JA reversed this decision. He noted that Akanda had satisfied three of the usual criteria for such an extension (having a continuing intention to pursue the application to set aside the default judgment, having some merit to its application and there being no demonstrated prejudice to the Crown in the three month delay) but not the fourth criterion (having a reasonable explanation for the delay) – but stated:
Since the findings with respect to three of the four factors favour Akanda and since the amounts involved are significant, the interests of justice support a finding that the application for an extension of time should be granted.
Neal Armstrong. Summary of Akanda Innovation Inc. v. The Queen, 2018 FCA 200 under Tax Court of Canada Rules, s. 140(2).
8 further translations of CRA French-language interpretations are available
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.
Brookfield Infrastructure provided an exchangeable LP unit rollover option on its acquisition of Enercare
On October 16, 2018, Brookfield Infrastructure acquired all of the 107M common shares of Enercare Inc. (being all its shares) under a CBCA Plan of Arrangement. The consideration (aggregating C$4.3B) was C$29.00 per share, except that some of the Enercare shareholders elected to instead receive 0.5509 of an Exchangeable LP Unit of a subsidiary LP (“Exchange LP”) of Brookfield Infrastructure Partners L.P. (“BIP”) in exchange for each elected Enercare common share (with a total of 5.7M Exchangeable LP Units being issued). BIP is a Bermuda exempted limited partnership whose units are listed on the TSX and NYSE, and is not a SIFT partnership given that it is not a Canadian resident partnership.
Each Exchangeable LP Unit is exchangeable for one non-voting limited partnership unit of Brookfield Infrastructure Partners L.P. Exchange LP, although a SIFT partnership, is not expected to be subject to significant SIFT tax as it will mostly hold Canadian shares. Those who received Exchangeable LP Units have 75 days from the Arrangement Date to submit the relevant information for making an s. 97(2) election to Exchange LP through the applicable website. Exchange LP may elect to redeem its Exchangeable LP Units after seven years.
Neal Armstrong. Summary of Enercare Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – LP Acquisitions of Corporations – Exchangeable Units.
CRA finds that a government-assisted NPO providing door-to-door transportation services in a rural municipality was supplying GST/HST exempt municipal transit services
A non-profit organization which provided daily pre-booked door-to-door transportation services to members of the rural public within a municipality for fares was ruled to be providing a GST/HST exempt municipal transit services under Sched. V, Pt. VI, s. 1 given inter alia that it received funding from the province and the municipality to support the supply of public passenger transportation services, and all or substantially all of the its supplies were supplies of “public passenger transportation services” (not a defined term) provided within the municipality and its environs. However, its contract or charter service, where it provided a driver and vehicle for events, usually weddings, was taxable.
Neal Armstrong. Summary of 11 July 2018 Ruling 187784 under Sched. V, Pt. VI, s. 1 – municipal transit service.
Satyam – Australian Full Court finds that a Treaty can impose tax
The Indian taxpayer (Satyam) argued unsuccessfully before the Full Federal Court of Australia “that tax treaties are, and can only be, exclusively relieving: that is, they are only ever ‘shields not swords’ and not the grant of a standalone taxing power and independent imposition of taxation.”
The issue arose in the context of the interpretation of Art. 23(1) of the Australia-India Treaty, which provided:
Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State.
From a Canadian perspective, the bolded language had the unusual effect of indicating that a technical-services royalty, which Australia was permitted to tax under the Australian royalties article of the Treaty, was deemed to arise in Australia not only for the purposes of the Article of the Treaty dealing with the elimination of double taxation, but also for the purposes of the Australian domestic taxation provisions. Consequently, technical services fees (which were deemed royalties) earned by Satyam, which in the absence of the Treaty would have been considered to not arise in Australia so that they would not have been subject to Australian income tax under the approximate Australian equivalent of ITA s. 115, were now deemed for the purposes of that provision to arise in Australia and to therefore be subject to Australian income tax.
Neal Armstrong. Summary of Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172 under Treaties – Income Tax Conventions – Art. 24.
CRA finds that royalties paid by a Canadian company for TV video streams could be bifurcated for Part XIII purposes based on Canadian and non-resident viewership
Canco streams movies and TV shows (the “digital content”) to its Canadian and foreign subscribers (who pay monthly fees) through a TV video stream and a digital content library. Canco pays a royalty to an arm’s length U.K. content provider (“U.K. Content Provider”) that is based on the amount of viewing of the digital content by Canco’s subscribers. Canco either stores its digital content on a server that is located outside of Canada or it is streamed directly by the U.K. Content Provider to Canco’s subscribers.
CRA found that s. 212(5) was still applicable in this streaming context, stating that “a motion picture film that is streamed remains a ‘motion picture film’ and a streamed TV show is a “means of reproduction” of the TV work." It also found that the royalty payments could be bifurcated between a (Part XIII) taxable and non-taxable component, stating that “a portion of the payments to the U.K. Content Provider relates to the use or reproduction of the digital content outside of Canada since Canco’s server is situated outside of Canada and the foreign subscribers are viewing the streamed content outside of Canada.”
Art. 12 of the Canada-U.K Treaty exempted copyright royalties, but there was an exclusion from this exemption for payments in respect of motion pictures or of works on film, videotape or other means of reproduction for use in connection with television broadcasting. CRA rejected an argument that the definition of “broadcasting” in the Interpretation Act had the effect of making this exclusion inapplicable to TV shows. Instead “an ordinary meaning was intended to be given to the words ‘television’ and ‘broadcasting’ and … their meaning, under either domestic or international law, is broad enough to include the digital streaming of television content” – so that the applicable Treaty rate was 10%, not zero.
Neal Armstrong. Summaries of 27 March 2018 External T.I. 2017-0715561E5 under s. 212(5) and Treaties – Income Tax Conventions – Art. 12.