News of Note
CRA agreed to fictional transfer pricing adjustments and rules that they also did not affect the exempt surplus calculation (other than for the foreign taxes adjustment)
Email this ContentCRA assessed a Canadian subsidiary (Canco 1) in a Canadian multinational group under s. 247(2) on the basis that the fees earned by a sister company (Forco 1) resident in Country A from a customer were too high from a transfer-pricing perspective and the fees earned by Canco 1 under a services contract as part of the same business arrangements were correlatively too low. After negotiations between the competent authorities for Canada and Country A, it was agreed that Canco 1 would not appeal this assessment, and the income of Forco 1 (which was from an active business) would be reduced by assessment by the Country A taxing authority, thereby generating income tax refunds for those years. It was agreed that there would be no adjustment to the actual fees charged to the (apparently arm’s length) customer(s) and that there would be no secondary adjustments.
CRA ruled that these downward adjustments to the business income of Forco 1 reduced its (exempt) earnings as determined under s. (a)(i) of the definition of “earnings” in Reg. 5907(1), i.e., its earnings as computed in accordance with the Country A income tax law – but that such adjustments were to be added to its earnings pursuant to Reg. 5907(2)(f), stating in its summary in the latter regard that:
The money realized and retained by the foreign affiliate [i.e., Forco 1], but excluded from its income for foreign income tax purposes as a result of the corresponding adjustment by the foreign tax authority, would be "revenue, income, or profit" derived by the foreign affiliate for purposes of paragraph 5907(2)(f) ... .
CRA also ruled that upon receipt of the Country A reassessment reflecting such downward income adjustments for the relevant years, the “net earnings” of Forco 1 for those years as defined in Reg. 5907(1)(a) would be increased by the amount of income taxes that had been correspondingly overpaid.
Neal Armstrong. Summary of 2018 Ruling 2017-0729431R3 under Reg. 5907(2)(f).
Ark Angel Foundation – Federal Court of Appeal confirms CRA’s revocation of charitable registration for paying unsubstantiated consulting fees to a director
The Foundation, a charitable foundation, received most of its revenues from three other registered charities (including the Humane Society of Canada Foundation) that were dominated by the same individual, and disbursed most of those revenues to those three charities, except that it paid approximately 1/3 of its revenues to the individual. Woods JA found that the failure of the Foundation to provide any records that substantiated the basis for the consulting fees justified the CRA’s decision to revoke the Foundation’s registration under s. 168(1)(e) (failure to maintain adequate records) and also on more substantive grounds under s. 168(1)(b) (failure to establish that the consulting services fees represented the devotion of Foundation resources to charitable activities).
Neal Armstrong. Summaries of Ark Angel Foundation v. Canada (National Revenue), 2019 FCA 21 under s. 168(1)(e) and s. 168(1)(b).
Milne – Ontario Divisional Court confirms that the executors per se do not hold their property in trust
The Ontario Divisional Court has overturned a decision of Dunphy J below that a primary will that covered property which needed probate in order to be transferred (as opposed to all the other property of the testator, such as private company shares, which was covered by a secondary will) was void because it did not satisfy one of the requirements for a valid trust, namely, that there be certainty of subject matter.
First, Marrocco ACJ, speaking for the unanimous Court, stated that “A will may contain a trust, but this is not a requirement for a valid will” – so that it did not matter whether the primary will satisfied the test of the “three certainties” for the existence of a trust. In this regard, he quoted Williams on Wills that “the property comprised in residue is not held in trust for the beneficiary under the will so as to invest any equitable interest in him.”
Second, even if there were a requirement for certainty of subject matter, that requirement was satisfied here as the criterion for distinguishing the included and excluded property could be objectively applied.
This decision is of course of interest for supporting the use of a secondary will that is not probated and, thus, avoids probate duties. Although the confirmation that a will is not a trust is not directly applicable for ITA purposes given that s. 104(1) effectively deems an estate to be a trust, such finding may assist in analysing what is going on, and when, where a residue is held on, or transferred to, trusts.
Neal Armstrong. Summary of Milne Estate (Re), 2019 ONSC 579 under s. 104(1).
CRA expansively interprets “on” in the s. 93(4) stop-loss rule
But for s. 93(4), a Canadian corporation (ACo) would have realized a capital loss on the liquidation and dissolution of a wholly-owned non-resident subsidiary (FA1) which, in turn, held FA2 and FA3. CRA found that s. 93(4) applied to deny the loss and add it to the ACB to ACo of the shares of FA2 and FA3 on the basis that ACo had acquired those shares “on” its disposition of the shares of FA1 – even though such acquisition in fact occurred before the dissolution of FA1. Its reasoning suggested that it considered the “on” test to be satisfied by virtue of the fact that “ACo acquired the shares of FA2 and FA3 as part of the process of liquidating and dissolving FA1, which included ACo disposing of its shares of FA1.”
Neal Armstrong. Summaries of 5 September 2018 Internal T.I. 2017-0698241I7 under s. 93(4), s. 93(2.01) and s. 93(1).
CRA confirms that partnership draws generally are exempted as a financial service rather than under ETA s. 272.1(1)
CRA ruled that distributions made by a limited partnership, which held investments, to its general and limited partners were exempt from GST/HST pursuant to para. (f) of the financial services definition, which explicitly exempts dividends on shares but also exempts distributions on other financial instruments, evidently including partnership distributions. Like other aspects of the financial services definition, this legislative drafting is conceptually confused and backwards as it focuses on the distribution by the investee being exempt rather than on explicitly exempting this distribution viewed as consideration for the capital provided by the investor. (See BLP cf. ING.)
CRA made no mention of s. 272.1 (other than to state that its letter did not address the recent amendments to s. 272.1). This confirms that in CRA’s view s. 272.1 does not oust the application of the financial services definition, so that partnership draws generally are exempted under para. (f) of that definition rather than under s. 272.1(1) (apparently referencing services provided qua partner rather than business operator.)
Neal Armstrong. Summary of 17 September 2018 Ruling 182403 under ETA s. 123(1) – financial service – para. (f).
Income Tax Severed Letters 13 February 2019
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Montecristo Jewellers – Tax Court of Canada finds that export sales were not zero-rated
ETA Sched VI, Pt. V, s. 12(a) zero-rates a supply of tangible personal property where the supplier “ships the property to a destination outside Canada that is specified in the contract for carriage of the property.” A Vancouver retailer of expensive watches and jewellery would accommodate customers who purchased such items (the “Jewellery“) as gifts to take with them on flights back to China by essentially arranging (by going through various hoops) to have the Jewellery personally delivered to the customers just as they were about to board their flights and just after a CBSA officer stamped a customs form attesting to the immediate exportation of the Jewellery. Lyons J agreed with CRA that this was not good enough to satisfy the zero-rating requirement, stating:
As no third party carrier was engaged under a contract for carriage, I find that the appellant did not ship the Jewellery within the meaning of paragraph 12(a).
As the place of delivery of the Jewellery was in Canada (i.e., at the Vancouver airport), its sale was taxable.
Neal Armstrong. Summaries of Montecristo Jewellers Inc. v. The Queen, 2019 TCC 31 under ETA Sched VI, Pt. V, s. 12(a) and s. 142(1)(a).
Six further full-text translations of CRA interpretations are available
We have published a further 6 translations of interpretations released in August 2012. Their descriptors and links appear below.
These are additions to our set of 777 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ½ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Crean – B.C. Supreme Court rectifies a sale agreement to turn it into a 2-step sale that no longer generated a s. 84.1 dividend
The executed documents indicated that an individual (Thomas) sold his shares of a corporation to the Newco of his brother (Michael) in consideration for a promissory note of the Newco. When the tax advisor realized this gave rise to a deemed dividend under s. 84.1, the parties applied successfully in the B.C. Supreme Court for a rectification order redoing the written agreement to provide that Thomas sold his shares to Michael directly for a promissory note, and that there was an immediate on-sale by Michael of those shares to his Newco in consideration for it assuming the promissory note.
Burke J relied on the terms of an agreement in principle that had been signed before the transactions were implemented which provided for a direct sale from Thomas to Michael and provided that “the transaction will be structured, to the extent possible, so that Tom receives capital gains treatment.” She also accepted the tax advisor’s testimony that, consistent with the agreement in principle, he had been instructed to provide for a direct sale and that the failure of the documents to so provide was an error on his part.
She accordingly found that the two brothers had a “prior definite and ascertainable agreement” to which the rectified written agreement was giving effect.
Neal Armstrong. Summary of Crean v Canada (Attorney General), 2019 BCSC 146 under General Concepts – Rectification.
Forbes Painting – Federal Court finds that CRA is required to consider financial hardship in s. 221.2 credit transfer requests
The taxpayer (Forbes) did not file its corporate income tax returns for its 2006 and 2007 years, showing a refund position, until well beyond the three-year limitation under s. 164(1) for claiming those refunds. CRA’s delegate denied the Forbes’ request that the statute-barred credits (SBCs) be reappropriated under s. 221.2(2) to its outstanding payroll account balance on the basis that there were no extraordinary circumstances that had prevented Forbes from filing its returns within the three-year period and that Forbes had not demonstrated that it took any action to resolve non-compliance within a reasonable time.
Before returning the matter for redetermination by another delegate, Boswell J stated:
The ability of a corporate taxpayer to continue as a going concern … is a factor that should be weighed … .
…When assessing a request for the re-apportionment of an SBC, the Minister should also have regard to whether denial of the request might possibly result in the Minister’s inability to collect outstanding tax arrears from a taxpayer. …
[T]he decision [is] unreasonable because it is not apparent or transparent that Forbes’ financial hardship was a factor in the decision-making process.
Neal Armstrong. Summary of Forbes Painting and Decorating Ltd. v. Canada (Attorney General), 2019 FC 160 under s. 221.2(2).