News of Note
Saramac – Quebec Court of Appeal confirms the voiding of a search warrant based on failure to disclose that lawyers worked at the targeted premises
Email this ContentWhen the ARQ laid the information seeking a search warrant for a search of the taxpayers’ office, it did not disclose, despite being aware that this was likely, that a lawyer and notary worked at those premises, and the search warrant accordingly was issued by the magistrate without knowledge of this. After noting that in fact there had been issues as to the proper protection of legal privilege, Mainville JCA affirmed the annulment by Dallaire JCS below of the search warrant and his order to return the seized documents.
Neal Armstrong. Summary of Agence du revenu du Québec v. 9229-0188 Québec Inc. (Saramac Schokbéton Québec Inc.), 2018 QCCA 1039 under s. 231.3(3).
Safe income should be calculated on a share-by-share rather than class-by-class basis
If a shareholding of the same class has been purchased over time, this is thought to mean that the older shares will have earned more safe income. This suggests that if a dividend of $X per share is paid on that class, it is insufficient to know that on a global basis there is enough safe income on hand of the class to cover that dividend.
Neal Armstrong. Summary of Henry Shew, "Safe Income May Vary Within Shares of the Same Class", Canadian Tax Focus, Vol. 8, No. 3, August 2018, p. 3 under s. 55(2.1)(c).
CRA rules that a double transfer of shares under ss. 85(1) and 85.1(3) would not affect the shares’ capital property status
CRA provided s. 55(3)(a) rulings in the usual guarded form respecting a spin-off by one Canadian subsidiary (CanSub1) of a public company of CanSub1’s foreign subsidiary (ForSub1) to another wholly-owned Canadian subsidiary (CanSub2) of the public company. The summary stated respecting the non-application of GAAR that “there is no creation or streaming of cost base and the preferred shares ... are cross-redeemed for notes that are set-off and cancelled." The Additional Information stated that the proposed transaction is not expected to affect the trading in the shares of the public company.
It was proposed that the acquisition by CanSub2 of the ForSub1 shares be followed by their s. 85.1(3) drop-down to a foreign subsidiary of CanSub2. CRA ruled that this double transfer of the ForSub1 shares would not result in those shares not qualifying as capital property.
Neal Armstrong. Summaries of 2016 Ruling 2016-0648991R3 under s. 55(3)(a) and s. 85.1(3).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretation released in May 2013, as fully translated by us.
These (and the other full-text translations covering all of the 621 French-language Interpretations released in the last 5 1/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-05-15 | 23 November 2012 External T.I. 2012-0449101E5 F - Production exclue - CIPCMC | Income Tax Regulations - Regulation 1106 - Subsection 1106(1) - Excluded Production - Paragraph (a) - Subparagraph (a)(iii) - Clause (a)(iii)(A) | 5-year test was violated when successor to production company became controlled by an unrelated person |
| 13 September 2012 Internal T.I. 2012-0442671I7 F - Dédommagement pour la perte de bénéfices | Income Tax Act - Section 248 - Subsection 248(1) - Death Benefit | damages received for loss of life insurance coverage were not rendered a death benefit under the surrogatum principle | |
| Income Tax Act - Section 6 - Subsection 6(3) | damages received by former employees of insolvent company for cancellation of their life insurance coverage were received in lieu of remuneration for their employment services | ||
| Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(b) | legal fees paid to recover damages for employer cancellation of insurance coverage, and medical plan, qualifed and did not qualify, respectively | ||
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i) | damages received after 2011 by employees of an insolvent company for cancellation of their medical plan have become taxable | ||
| 6 December 2012 External T.I. 2012-0461711E5 F - Paiements indirects / Indirect payments | Income Tax Act - Section 56 - Subsection 56(2) | 56(2) inapplicable to incorporated artist respecting producer paying mandatory contributions to the fund for the artist’s union | |
| Income Tax Regulations - Regulation 200 - Subsection 200(1) | no T4A slip to be issued by producer paying mandatory contributions to the fund for the union of the artist whose corporation receives fees from the producer | ||
| 18 April 2013 Internal T.I. 2013-0485481I7 F - Balance of sale price without interest | Income Tax Act - Section 16 - Subsection 16(1) | s. 16(1) inapplicable if sale price including non-interest bearing balance does not exceed sold assets’ FMV | |
| 21 January 2013 Internal T.I. 2012-0442021I7 F - Assessing 163(2) penalty | Income Tax Act - Section 163 - Subsection 163(2) - Paragraph 163(2)(c.2) | penalty is computed on total RMES adjustment, not just the false portion | |
| Income Tax Act - Section 163 - Subsection 163(2) - Paragraph 163(2)(c) | false RMES claim by husband does not generate any penalty for resulting overstatement of CCTB, WITB and GSTC by wife, assuming she made no false statement | ||
| Income Tax Act - Section 163 - Subsection 163(2) - Paragraph 163(2)(a) - Subparagraph 163(2)(a)(i) | deduction against increase to income attributable to a false statement can be reduced by QPP contribution increase or by discretionary CCA claim that is wholly related to that income source | ||
| 20 March 2013 Internal T.I. 2012-0463181I7 F - Revenu des entrepreneurs | Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) | completion method unavailable for communication and electricity structure installations |
Ardmore Construction – Court of Appeal of England and Wales accepts that the determination of source of income is to be made on a multifactorial and practical basis
In Folio S5-F2-C1, CRA states that the source of interest generally is in the country of residence of the debtor.
Lady Justice Arden noted the agreement of the parties before her that the question of source was a “multifactorial” one, so that the residence of the debtor would not always be determinative, and also referred to jurisprudence indicating that the question of source should be determined from a practical rather than juristic perspective. However, in circumstances where the debtor actually used the borrowed funds in its active business in the country of its residence, she considered the finding of the Tribunals below that the source was in that country should not be interfered with.
Neal Armstrong. Summary of Ardmore Construction Ltd v Revenue and Customs [2018] EWCA Civ 1438 under s. 126(1).
Lin – New Zealand Court of Appeal finds that Chinese tax spared on Chinese CFC income and attributed under a CFC regime to a New Zealand shareholder was not “in respect of” income derived by that shareholder from China
As a result of having a 30% interest in four companies which were resident in China, the taxpayer had the active business income of those companies of $4.6 million attributed to her in New Zealand under the New Zealand controlled foreign companies (CFC) regime. The New Zealand income tax payable by her on that income was reduced by the Chinese tax actually paid by those companies, but not by approximately $0.6 million of tax that the Chinese companies were spared from paying due to tax concessions granted to them under Chinese domestic law.
Art. 23 of the China- New Zealand Double Taxation Agreement provided in relevant part that “Chinese tax paid … in respect of income derived by a resident of New Zealand from sources in the [PRC] … shall be allowed as a credit against New Zealand tax payable in respect of that income,” and that for such purposes, such Chinese tax “shall be deemed to include any amount which would have been payable as Chinese tax for any year but for an exemption from, or reduction of tax granted for that year … under [specified] provisions of Chinese law.”
In finding that Art. 23 did not require the Commissioner to grant a foreign tax credit for the spared Chinese tax, Harrison J stated:
[W]e are satisfied that art 23(2)(a) requires the tax to have been paid by a New Zealand resident on income derived by him or her in China, not by a third party CFC; that is the essential precondition to a credit in New Zealand. …
The fact that the ultimate source is income attributed to Ms Lin from the Chinese CFCs does not justify treating the two income streams, earned separately by the CFCs and Ms Lin, as one for revenue purposes, and ignoring the plain foundation of art 23(2)(a) on the source of “the income derived by a resident of New Zealand”, Ms Lin.
In commenting on this case, Brian Arnold suggests that it accorded with the literal meaning of Art. 23, but went on to suggest that it is strange that the taxpayer did not raise the issue of whether the Treaty prevented the application of New Zealand's CFC rules, which were introduced after the Treaty and, by extending to business income of CFCs, were very broad in scope:
[T]here is a strong argument - based on a broad purposive interpretation of tax treaty, the unusually broad scope of New Zealand's CFC rules, the OECD Commentary as it read at the time the treaty was signed, and the absence of any specific provision in the treaty allowing New Zealand to apply its CFC rules - that the treaty should have been interpreted to prevent New Zealand from applying its CFC rules and imposing tax on the taxpayer with respect to the income of the Chinese CFCs. The Lin case is significantly different from the Canadian case [Canada-Israel Development] in this regard because the Canada-Israel [Treaty] contained an explicit provision to the effect that nothing in the treaty prevents Canada from applying its CFC rules.
Neal Armstrong. Summary of Commissioner of Inland Revenue v. Lin, [2018] NZCA 38 under Treaties – Income Tax Conventions – Art. 24 and of Brian J. Arnold, “The Relationship between Controlled Foreign Corporation Rules and Tax Sparing Provisions in Tax Treaties: A New Zealand Case,” Bulletin for International Taxation July 2018, p. 430 under Treaties – Income Tax Conventions – Art. 24.
CRA indicates that it can treat a late request for a T5013 amendment as a request to assess the partner returns directly
In situations where CRA has not made a determination of partnership income or loss under s. 152(1.4) and the three-year limitation period specified therein has expired, CRA considers that it may only make a determination under s. 152(1.4) where one of the exceptions specified in s. 152(4) applies, e.g., a timely waiver. However, the receipt of a request to amend a T5013 return can be taken into account to assess the returns of the partners directly if they are not statute-barred.
Neal Armstrong. Summary of 17 April 2018 Internal T.I. 2018-0739141I7 under s. 152(1.4).
CRA confirms that an IC-DISC qualifies as a U.S. resident for Treaty and surplus purposes
Exempt earnings of a foreign affiliate include its net earnings from an active business carried on in a designated treaty country if it is resident in that country. Reg. 5907(11.2)(a) provides that it is deemed to not be resident in that country unless it is resident there for purposes of the relevant Treaty.
CRA confirmed its position that:
[W]here a person’s worldwide income is subject to a particular Contracting State’s full taxing jurisdiction but that Contracting State’s domestic law does not levy tax on the person’s taxable income … we will generally accept that the person is a resident of that Contracting State unless the arrangement is abusive … .
CRA then confirmed that an “Interest Charge Domestic International Sales Corporation,” so qualified, i.e., a U.S. subsidiary of a Canco that earned profit on an exempted basis on the sale of goods manufactured by another U.S. subsidiary for export. CRA’s discussion suggest that it is not confident that such an exempted U.S. corporation would be resident in the U.S. if its central management and control was in Canada (there perhaps is a concern that s. 250(5) only deems corporations to be non-resident generally rather than to be resident in a specific country).
Neal Armstrong. Summary of 24 May 2018 External T.I. 2017-0710641E5 under Reg. 5907(11.2).
CRA indicates that Canco may choose not to deduct interest expense of a CFA so as not to generate a FAPL
The sole activities of FA1, a wholly-owned foreign affiliate of Canco, are to use money borrowed from an arm’s length bank to buy all the shares of a corporation (FA2) carrying on an exclusively active business in a designated treaty country, and use exempt dividends from FA2 to service the bank interest and pay exempt dividends to Canco. CRA confirmed that FA1 would generate foreign accrual property losses equal to the bank interest.
Such FAPLs would generate a taxable deficit. When asked whether Canco could choose to not deduct these interest expenses (so as not to generate FAPLs), CRA responded, yes, the s. 20(1)(c) deduction is discretionary, but added that:
[I]f Canco does not deduct an amount of interest in computing FA1’s FAPI/FAPL for the year in which that interest is paid or payable, that interest may not be deducted in computing FA1’s FAPI/FAPL for any subsequent year.
Neal Armstrong. Summary of 5 June 2018 External T.I. 2017-0738081E5 under s. 95(2)(f).
CRA recommends that executors of non-resident estates that could have Canadian tax liabilities apply for a clearance certificate
A former resident of Canada (and after her death, her non-resident estate, which had exclusively non-resident beneficiaries) received CPP, interest and RRSP/RRIF payments from Canadian sources. Would the non-resident executors be required under s. 159(2) to apply (pursuant to a Form TX19 request) for CRA to issue a clearance certificate?
CRA responded with a somewhat generic answer that might have served equally for resident executors (i.e., they could face personal liability for unpaid taxes of the deceased if they did not do so).
CRA also reiterated its position that there is an obligation of the non-resident beneficiaries who are disposing of capital interests in the estate that are taxable Canadian property, as well as of the estate if it is distributing taxable Canadian property, to apply for a s. 116 certificate.
Summaries of 30 May 2018 External T.I. 2017-0717981E5 under s. 159(2) and s. 116(3).