News of Note
CRA finds that “sustaining” a s. 39(2) loss on a USD obligation requires more than locking-in the equivalent Canadian-dollar amount
Email this ContentA USD loan owing by Canco 1 to its parent Canco, has an accrued FX loss to it and an accrued FX gain to Canco. Canco 1 would like to “sustain” a loss under s. 39(2) in circumstances where there is no disposition of the debt by Canco. In particular, its FX exposure on the loan would be crystallized if a wholly-owned sub of Canco 1 agreed to undertake to repay the loan on maturity in consideration for issuing an equivalent Canadian-dollar note to Canco 1.
In finding that this did not result in Canco 1 sustaining a loss under s. 39(2), CRA stated that FX gains or losses respecting a debt obligation are realized or sustained only on the settlement or extinguishment of the debt, i.e., on their repayment or legal novation or legal rescission and substitution.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.7 under s. 39(2).
CRA considers that a suspended loss on the sale of CFA to Subco was not de-suspended on s. 88(3) wind-up of CFA
Canco sold all the shares of FA to Canco’s wholly-owned subsidiary (Subco) and realized a capital loss that was suspended under s. 40(3.4). In a subsequent year, Subco wound -up FA under s. 88(3). This would have de-suspended the loss but for s. 40(3.5)(c)(i), which applies if the particular corporation which, in fact, had disappeared (FA) would be considered to have been “merged or combined” with another corporation (Subco) to “form” a corporation.
CRA was not flustered by the latter issues, and considered that the loss continued to be suspended:
- “Merged or combined” encompasses a winding-up or liquidation given inter alia the exclusion, in various provisions listed by it, of a winding up or liquidation from a “merger;” and
- “Formed” includes an entity in place after a reorganization (for example, a s. 86(1) reorganization), even though no new entity may be formed in the traditional sense - so that Subco was considered to have been “formed” on its s. 88(3) winding-up of FA under a “QLAD.”
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.5 under s. 40(3.5)(c)(i).
CRA indicates that a non-resident who incorrectly claimed a no-PE Treaty exemption is exposed to the usual penalties
CRA indicated that it will not provide any special safe harbour for a non-resident corporation that did not make any T2 filings (other than a Treaty-based claim for exemption in an attached Sched. 91) or prepared contemporaneous documentation under s. 247(4) where it had reasonably (but, in CRA’s view, incorrectly) considered that it did not have a Canadian permanent establishment for its business. Accordingly, its failure to meet statutory deadlines will carry the associated statutory penalties – but CRA will consider, on a case-by-case basis, requests under s. 223(3) and (3.1) for relief of the resulting interest and penalties. CRA did not mention the due diligence defence.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.4 under s. 220(3).
CRA treats corporate-owned LP transparently to avoid a surplus anomaly re s. 91(5) dividend
Canco (and its Canadian sub) hold LP which received a $3,000 dividend from a wholly-owned foreign affiliate (FA). Although the dividend came out of FA’s exempt surplus of $3,000, it was deemed insofar as LP was concerned to be deductible as to $2,000 under s. 91(5) respecting previously earned foreign accrual property income.
S. 93.1(2)(d)(i) limits the s. 113 deduction of Canco to the portion of the $3,000 dividend that is included in its income under s. 96(1). Taking into account $300 of interest expense on acquisition debt of LP, the income of Canco (ignoring any other sources and rounding its partnership interest up to 100%) is $700 ($3,000 dividend - $2,000 s. 91(5) deduction - $300 interest expense). However, as CRA does not take into account interest relating to acquisitions by a partnership of FA shares for 93.1(2)(d)(i) limit purposes, the s. 113(1) deduction of Canco is $1,000 rather than $700 – so that in computing its taxable income, Canco would have a loss of $300 (i.e., partnership income of $700, minus a s. 113(1)(a) deduction of $1,000).
CRA considered this to be the appropriate result: there would have been the same $300 loss had Canco directly owned FA ($3,000 dividend - $3,000 s. 113(1) deduction - $300 interest expense). However, CRA considered that it is appropriate to “reinstate” $2,000 of exempt surplus of FA in respect of Canco, and to reduce its taxable surplus in respect of Canco by the same amount.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.3 under s. 93.1(2)(d)(i).
CRA indicates that it will not provide quick and crisp PPT guidance
When asked what weight CRA will accord to the examples in paras. 182 and 187 of the Commentary on Art. 29 of the 2017 OECD Model respecting the application of the principal purpose test in the Multilateral Instrument, CRA noted that Commentary bearing on these examples emphasized the importance of the facts and circumstances of each case, and CRA will apply the same case-by-case approach. When asked whether it could issue PPT rulings on an expedited basis, it indicated that it very well may need to consult other areas, which would suggests that the initial rulings instead may take some time.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.2 under Treaties – MLI - Art. 7(1).
CRA confirms that a Canadian resident was not subject to Canadian tax on income accruing in a Swiss vested benefits policy
The Swiss pension system has three “pillars,” the second of which consists of pension funds (run by investment foundations) to which both employers and their employees are required to contribute. When a Swiss employee left for Canada, the Swiss legislation required that accumulated funds in the plan be transferred to a vested benefits policy (which would only pay benefits to the taxpayer once retirement age was reached), and upon the taxpayer’s return to Switzerland, the Swiss legislation required that the funds accumulated in the policy be returned to the second pillar pension plan of the taxpayer’s Swiss employer.
CRA considered that, based on its brief description, this policy likely qualified as a “superannuation or pension fund or plan.” Since such a plan is effectively only subject to tax on a cash basis under s. 56(1)(a)(i), the income accruing in the policy was not taxable during the taxpayer’s Canadian residency.
Neal Armstrong. Summary of 12 April 2018 External T.I. 2016-0640651E5 F under s. 248(1) - superannuation or pension fund or plan.
CRA indicates that the Treaty does not fetter the right of the US to impose GILTI tax with reference to Canadian subs’ income
The new rules on tax on “global low-taxed intangible income” or “GILTI” in s. 951A of the Code may result in a U.S. corporation being subject to tax on a current basis on active business income earned by a controlled Canadian subsidiary, even if that subsidiary does not have a permanent establishment in the U.S. CRA does not consider that this is contrary to Art. 29 of the Canada-U.S. Treaty, which confirms the rights of the US to impose tax on its own residents, subject to limited exceptions which are inapplicable here.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.1 under Treaties – Income Tax Conventions - Art. 29.
CRA finds that a headlease structure for a student residence avoided triggering the GST/HST self-supply rule
Shortly before the occupancy of a newly constructed apartment complex (expected to be predominantly occupied by students), LP#1 purchases the building from the developer. As this taxable sale occurs before any unit is occupied, and LP#1 acquired the building for the purpose of leasing it to another partnership (LP#2) rather than an individual, LP#1 will qualify as a builder for GST/HST purposes. That “headlease” will not be exempt because more that 10% of the units will be occupied for short-term stays (under one month) during the regular academic year, and with over 90% short-term occupancy in the summer months.
On the other hand, the “self supply” rule (usually triggering GST/HST on the first occupancy of a newly-constructed apartment complex on the complex’s fair market value) will not apply to LP#1 and, indeed, it likely will obtain full input tax credits for the GST/HST paid by it on its purchase of the building from LP#1. This GST/HST on the FMV is effectively deferred until LP#1 sells the building, perhaps decades down the road.
Neal Armstrong. Summaries of 17 May 2017 Interpretation 174462 under ETA s. 191(3) and s. 169(1) and Sched. V, Pt I, s. 5.
CRA confirms the application of the paymaster rules to salaries paid by a partnership
The central paymaster rules in Reg. 402.1 of the Regulations allocate the salaries and wages paid by an employer for services provided to a non-arm’s-length benefiting corporation. Given that Reg. 402.1(5) deems a partnership to be a corporation for the purposes of these rules, the paymaster rules will apply such that the salary or wages earned by an employee of a partnership for the performance of services in a particular province for a benefiting corporation are deemed to be salary or wages paid by non-arm’s length benefiting corporation to an employee of its permanent establishment(s) (if it has them) in the province.
Given that Reg. 402.1(3) provides that the salaries and wages paid by a partnership that are thus deemed to be paid by the benefiting corporation, are deducted from the partnership employer’s salaries and wages paid in the taxation year, such salaries and wages are not included in the salaries and wages that are allocated under Reg. 402(6) to the members of the partnership for their own allocation purposes .
Neal Armstrong. Summary of 2 February 2018 Internal T.I. 2017-0728331I7 under Reg. 402.1(5).
Income Tax Severed Letters 16 May 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.