News of Note
CRA reverses its position that forgiveness of an old trade debt generally will be on capital account
Email this ContentWe have provided English-language summaries of the questions posed at the November 2, 2023 APFF Roundtable and commenced to translate the written answers (one at a time), which we should finish in about a week – after which we will turn to the APFF Financial Strategies and Instruments Roundtable held on Friday, November 3.
Q.1 concerned IT-293R, para. 25, which indicates that where the forgiveness of a trade debt (i.e., a debt incurred for a deductible expense) occurs in a taxation year subsequent to that in which it was incurred, any portion of the forgiven debt that did not relate to inventory of merchandise on hand at the beginning of that taxation year of forgiveness will not be included in computing income pursuant to s. 9 and instead will be subject to the usual statutory debt-forgiveness rules.
CRA announced that this position will cease to be applicable to debts settled or extinguished on or after November 2, 2023, stating that:
There is no established principle (or rule of law) in Canadian jurisprudence that provides that the nature of a debtor's trade debt or of a debtor's gain from the forgiveness of a trade debt changes automatically merely because of the passage of time in a taxation year or a number of taxation years.
It also referred to Alco Dispensing where Bonner J found that accrued bonuses did not change their character to being on capital account when forgiven and that “it was contrary to common sense … to assert that the passage of a year end effects some sort of a magical conversion of executive compensation operations from current account transactions to capital account transactions.”
This reference to Alco Dispensing suggests that CRA may now generally presume that the forgiveness of a trade debt, irrespective of timing, will result in a s. 9 inclusion, rather than this becoming yet another one of those “question of fact” issues.
Neal Armstrong. Summary of 2 November 2023 APFF Roundtable, Q.1 under s. 9 – forgiveness.
CRA expands its positions on the mandatory disclosure rules
CRA has revised and expanded its webpage on the mandatory disclosure rules.
It has added a statement that:
Standard commercial indemnities provisions in standard client agreements or documentation, which do not contemplate a specific identified tax benefit or tax treatment would not, in and of themselves, result in a reporting obligation.
It has expanded its examples of acceptable contractual clauses, including expanding its example of public company bump covenants to those given respecting private-company bumps, and also added the following examples:
- “Indemnities or covenants to a purchaser and/or target in respect of Part III tax liabilities and other adverse tax consequences arising from dividends paid as part of a pre-closing reorganization.”
- “Standard contractual representations and indemnities with respect to the failure to deduct or withhold an amount under section 215, in an arm's length situation … “
- A standard clause in a partnership agreement providing for reasonable assistance to a partner to help resolve an audit.
- On an s. 132.2 merger, the fund manager indemnifying the trustee of the terminating fund for any liabilities that might arise in respect of the terminating fund (commercial disputes, securities law claims, etc.).
CRA states:
The contractual protection hallmark will not apply in a normal commercial or investment context in which parties deal with each other at arm's length and act prudently, knowledgeably and willingly, and does not extend contractual protection for a tax treatment in respect of an avoidance transaction.
Examples provided include tax indemnities in standard provisions such as gross-up clauses in loan or ISDA agreements, or in employment or severance agreements.
CRA has added a detailed footnote on transitional issues, stating, for instance:
If a person enters into a series of transactions that straddle the effective date of designation, the reporting requirement will be triggered with the first transaction entered into after the effective date of designation that is part of a series of transactions that is the same as, or substantially similar to one that is designated at that time by the Minister.
Neal Armstrong. Summaries of Mandatory disclosure rules – Guidance, 2 November 2023 CRA Webpage under s. 237.3(1) – reportable transaction – (a), confidential protection, contractual protection, s. 237.3(2), s. 237.4(6), s. 237.4(7), s. 237.5(1) - relevant financial statements, reportable uncertain tax treatment.
CRA releases the 2023 STEP Roundtable
CRA has released the official version of its answers at the 20 June 2023 STEP Roundtable. For convenience of reference, the table below provides links to those answers and to summaries that we prepared in June or July.
CRA publishes its list of notifiable transactions
CRA has published its list of notifiable transactions pursuant to s. 237.4(3). The wording of the list is identical to the consultation draft published by Finance on February 4, 2023, except that the transactions regarding manipulation of CCPC status have been dropped. In summarized form, the list now consists of:
- A taxpayer buys an interest in a partnership which, immediately prior thereto, had realized the gain legs on straddle transactions in FX forward contracts (with such gain allocated to the selling partner) – and with the loss legs then being realized and allocated to the taxpayer.
- A trust (“Old Trust”) that is approaching its 21st anniversary transfers its property under s. 107(2) to a resident corporate beneficiary (“Holdco”) which is held by “New Trust” - or that is held by non-resident beneficiaries of Old Trust, where the distributed property is not described in any of ss. 128.1(4)(b)(i) to (iii).
- Alternatively, Old Trust and Holdco hold shares of Opco, with Holdco in turn held by New Trust, and Opco redeems its shares held by Old Trusts for a note, with Old Trust allocating the resulting s. 84(3) dividend to Holdco on an s. 112(1)-exempt basis.
- A debtor is assigned into bankruptcy, its debt is settled with no “forgiven amount” arising due to the exception in (i) of the definition, and the debtor then files a proposal resulting in the bankruptcy being annulled.
- One of the following transactions is engaged in, and the taxpayer takes the position that the “attribute trading” rules in s. 256.1 do not apply because the “one of the main reasons” or “one of the reasons” tests in ss. 256.1(2), (4) or (6), respectively, is not satisfied:
- Aco acquires shares of Lossco so as to exceed the 75% of FMV threshold but without an acquisition of control;
- Profitco and a person not dealing at arm’s length with it (Aco) acquire shares of Lossco such that Profitco (which does not control Lossco) would satisfy the 75% of FMV threshold if the acquisition of Lossco shares by Aco was ignored; and
- Lossco acquires Profitco.
- A relevant non-resident in respect of a taxpayer (NR1) enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
- Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.
Neal Armstrong. Summary of 1 November 2023 CRA Webpage, "Notifiable transactions designated by the Minister of National Revenue" under s. 237.4(3).
Income Tax Severed Letters 1 November 2023
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA revises its tests for determining the location of the employer establishment to which the employee reports in the context of remote work
Regarding the determination of the location of the establishment of the employer for purposes of applying source deductions pursuant to Reg. 102(1), effective January 1, 2024 CRA’s policy will be that an employee will be considered to report for work at an establishment of the employer if:
- Where a “full-time remote work agreement” is in place, the employee can be reasonably considered “attached to an establishment of the employer”; or
- The employee physically reports for work at the establishment, which can include a temporary establishment such as a construction site (but not generally an employee home office) and with there now being no minimum amount of time for this test to be engaged [see previously, 2015-0620821I7].
CRA generally will consider there to be a full-time remote work agreement where the employer directs or allows employees to perform their employment duties full-time (100%) remotely, i.e., not at any employer establishment.
The primary indicator to determine if an employee can reasonably be considered "attached to an establishment of the employer" is whether the employee would physically come to work to carry out duties at that establishment, were it not for the full-time remote work agreement. Furthermore, for employees who physically reported to an establishment of the employer immediately before entering into a full-time remote work agreement, that establishment is considered to be the one to which they would be reasonably considered to be attached, unless the employees' circumstances or the nature of their duties have changed.
CRA also provides a list of secondary indicators as to the "attached to an establishment of the employer" test.
Neal Armstrong. Summary of CRA Webpage, “Determine the province of employment (POE)” 6 October 2023 under Reg. 102(1).
CRA further extends the filing deadline for initial UHT returns to 30 April 2024
On March 27, 2023, CRA announced that no interest and penalties would be imposed on owners who otherwise would have been required to file an underused housing tax return for their 2022 year on April 30, 2023, provided the return was filed or the UHT paid by October 31, 2023. Today (on October 31, 2023), CRA issued a Press Release stating:
The Minister of National Revenue announces that owners affected by the Underused Housing Tax (UHT) will have until April 30, 2024, to file their returns for the 2022 calendar year without being charged penalties or interest.
… Consequently, the Canada Revenue Agency will waive the application of penalties and interest for any late-filed UHT returns and for any late-paid UHT payable for the 2022 calendar year, provided the return is filed and the UHT is paid by April 30, 2024.
Neal Armstrong. Summary of 31 October 2023 Press Release, “Government of Canada extends deadline for homeowners to file their Underused Housing Tax return” under UHTA, s. 48(1).
Northbridge Commercial Insurance – Federal Court of Appeal finds that zero-rating for fleet insurance could be based on the relative expected claims experience for US accidents
Northbridge issued fleet insurance policies to trucking companies who operated their vehicles in both Canada and the U.S. The Tax Court had found that none of such supplies of insurance were zero-rated under Sched VI, Pt. IX, s. 2(d), which covers insurance under a policy “that relates to risks that are ordinarily situated outside Canada,” on the basis that this wording referenced the ordinary location of the insured vehicles, and there was no evidence on that point – and accordingly confirmed the denial of Northbridge’s related input tax credit claims.
Before allowing Northbridge’s appeal, Webb JA stated:
“[R]isks” means the risk of a claim arising from an accident or other insurable event. To the extent that any insurance policy issued by Northbridge covered such risks that were ordinarily situated in the United States, the supply of such a policy would be a zero-rated supply. The risks would be ordinarily situated in the United States based on the historical data for claims arising from accidents in the United States.
The Tax Court had not considered the evidence relating to this point, and the matter was referred back to it for such consideration.
Neal Armstrong. Summary of Northbridge Commercial Insurance Corporation v. Canada, 2023 FCA 211 under ETA Sched VI, Pt. IX, s. 2(d).
CRA indicates that amounts paid to reiki practitioners are ineligible for the medical expense tax credit
CRA indicated that amounts paid for reiki treatments performed by reiki practitioners (i.e., hovering their hands over the body to guide energy throughout it) would not qualify as medical expenses under s. 118.4(2)(a) given the absence of any apparent “legislation that authorizes the practice of reiki in any of the Canadian jurisdictions” so that “reiki practitioners are not considered to be medical practitioners under paragraph 118.4(2)(a).” However, the College of Massage Therapists of Ontario seemed to allow registered massage therapists to integrate “First Degree Reiki” into massage therapy treatment plans, in which case, their services would still be considered to be registered massage therapy, with the associated fees being eligible as medical expenses.
CRA was inclined to doubt that the amounts could qualify under s. 118.2(2)(l.9) given that it seemed unlikely that a “reiki practitioner would administer reiki treatments or therapy under the general supervision of a medical practitioner,” with there also being the additional hurdle that CRA must have determined that the patient receiving reiki treatments is eligible for the disability tax credit.
Neal Armstrong. Summaries of 11 August 2023 External T.I. 2023-0974121E5 under s. 118.2(2)(a) and s. 118.2(2)(l.9).
CRA indicates that ransomware payments generally are deductible
Regarding whether amounts related to ransomware attacks and business email compromise (“BEC”) scams, including ransom payments, payments to a BEC scammer, and recovery costs, were deductible, CRA stated:
[E]xpenses resulting from a ransomware attack or BEC scam appear to be an inherent risk of most businesses in an increasingly digital age. Accordingly, we would generally consider them to be deductible in computing income from a business where the expense is reasonable compared to the income earning activities of the business.
Neal Armstrong. Summary of 21 September 2023 External T.I. 2023-0984251E5 under s. 18(1)(a) – income-producing purpose.