News of Note
Income Tax Severed Letters 28 February 2018
Email this ContentThis morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that a set-off right of an issuer of a TFSA put the TFSA offside
S. 146.2 (2)(a) requires that a TFSA generally “be maintained for the exclusive benefit of the holder,” and s. 146.2 (2)(b) prohibits “anyone that is neither the holder nor the issuer of the arrangement from having rights under the arrangement relating to … distributions.” Ss. 146.2(3) and (4) provide that these conditions do not apply to prevent the holder of a TFSA from using his or her interest in the TFSA as security for a loan or other indebtedness.
CRA concluded that a TFSA specimen plan (respecting a deposit with a bank) that gave the issuer the right to apply a positive balance from the account to satisfy any debts owing by the holder to the issuer or any of its affiliates was offside. Respecting s. 146.2 (2)(a), CRA noted that the “arrangement benefits the issuer and its affiliates,” so that it was not for the exclusive benefit of the TFSA holder. S. 146.2 (2)(b) was not complied with because the issuer’s affiliate had set-off rights.
The terms are not saved from offending the conditions in paragraphs 146.2(2)(a) and (b) by subsections 146.2(3) and (4) because the right of setoff does not confer a property interest on the issuer or its affiliates and so does not rise to the level of security.
Although the quoted passage is opaque at best, CRA’s analysis seems to suggest that the TFSA would have been offside even if the set-off rights had only been accorded to the issuer – which may be at odds with the most likely interpretation of ss. 146.2(2)(b) and 146.2(4) as setting out a safe harbour for lender security.
Neal Armstrong. Summaries of 22 January 2018 Internal T.I. 2017-0727421I7 under s. 146.2(2)(a) and s. 146.2(4).
Two further translated Technical Interpretations are available
The table below provides descriptors and links for two technical interpretations released in December 2013 as fully translated by us.
These (and the other full-text translations covering the last 50 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for March.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-12-18 | 26 November 2013 External T.I. 2012-0449631E5 F - Amount deductible under paragraph 20(1)(e.2) | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.2) | reduction of deductible premium amount re pledged policy where net cost of pure insurance (“NCPI”) is lower than premiums |
| 15 November 2013 Internal T.I. 2013-0478621I7 F - Transfer of intangibles - TP adjustments | Income Tax Act - Section 247 - New - Subsection 247(2) | group sale with Canco not charging for intangibles should engage s. 247(2) | |
| Income Tax Act - Section 56 - Subsection 56(2) | secondary adjustment re group sale with Canco not charging for intangibles | ||
| Income Tax Act - Section 69 - Subsection 69(4) | s. 69(4) inapplicable where grandchild Canco undercharges for asset sale, enhancing sales proceeds received by ultimate U.S. parent |
CRA indicates that the deemed U.S. income inclusion from an IRA on renouncing U.S. citizenship or relinquishing a green card also is recognized for ITA purposes
Where a U.S. long-term resident relinquishes her green card (or a U.S. citizen renounced citizenship) after having become a Canadian resident, there would be a deemed taxable distribution to her of the amount in her IRA for Code purposes – which by virtue of ss. 56(1)(a)(i)(C.1) and 56(12) would be deemed to be included in her income at that time for ITA purposes as well. This generally would accommodate a s. 126(1) foreign tax credit.
Subsequent (actual) withdrawals of the IRA funds generally would not be subject to further Canadian taxability.
Neal Armstrong. Summary of 29 January 2018 External T.I. 2017-0682301E5 under s. 56(1)(a)(i)(C.1) and s. 126(1).
CRA restrictively interprets “series of loans or other transactions and repayments” in the upstream loan rules
An LLC subsidiary of a Canadian subsidiary (Canco3 - that was lower down in a corporate group controlled by a U.S. Pubco) received the repayment of a loan that it had made to a non-resident affiliated corporation (Forco2, which was not a foreign affiliate of Canco3), and used the repayment proceeds to purchase note receivables from group companies within the Forco2 silo and also to pay a dividend to Canco3 – which then lent some of this money “back” to Forco2 and also repaid loans owing to Canadian affiliates held in a separate silo from the Canco3 or Forco 2 silos.
CRA ruled that the repayment by Forco2 of its loan from the LLC would not be considered to be made “as part of a series of loans or other transactions and repayments” for the purpose of s. 90(8)(a) or 90(14). This is consistent with the favourably narrow interpretation that CRA has accorded to the quoted phrase in a s. 15(2) context.
The loan owing by the LLC had had a maturity date that was automatically extended for consecutive one-year terms unless terminated by either party. The “Additional Information section of this ruling letter stated that these automatic extensions did not result in a new loan being made for the purposes of s. 90(6).
Neal Armstrong. Summary of 2017 Ruling 2016-0670971R3 under s. 90(8)(a).
CRA confirms that EPSP beneficiaries are not entitled to a s. 20(11) or (12) deduction
The beneficiary of an employees profit sharing plan who has been allocated a share of the non-realty foreign income from property of the plan may claim the employee’s share of the non-business income tax (NBIT) of up to 15% that is paid by the plan on that income. CRA confirmed that such employees are not permitted an s. 20(11) or (12) deduction for the foreign taxes paid on such income in excess of a 15% rate because “unlike paragraph 144(8.1)(b) … there is no provision of the Act which deems any portion of the foreign NBIT paid by an EPSP to have been paid by an employee beneficiary for the purposes of subsection 20(11) or 20(12).” (This absence of a flow-through provision also is relevant, for example, to the unitholders of a mutual fund trust.)
If the total foreign NBIT paid to all foreign countries is not more than $200, CRA does not require an individual to do a separate calculation for each country in order to claim a foreign tax credit. CRA confirmed that andy NBIT deemed to be paid by the individual under s. 144(8.1)(b) is included in this $200 basket.
Neal Armstrong. Summaries of 31 January 2018 External T.I. 2016-0676431E5 under ss. 125(1), s. 144(8.1)(b) and s. 20(11).
bcIMC – B.C. Court of Appeal indicates that enforcement of a reciprocal taxation agreement was possible pursuant to the Federal Court Act
bcIMC is a BC Crown agent which was formed to manage and hold investments for the provincial pension plans. The governing Act created a statutory trust under which each pension plan only had an entitlement to units in the investment pools managed by bcIMC and did not have ownership in any investment pool assets.
CRA took the view (and ultimately assessed bcIMC for $40M in uncollected GST on the basis) that ETA s. 267.1(5)(a) deemed the statutory trust to be a person separate from bcIMC as agent for the provincial Crown, so that the investment services of bcIMC were supplied to that separate person. Willcock JA found that s. 267.1(5)(a) indeed had this effect, which was an “effect of separating the Crown from its assets” and that instead “bcIMC is immune from Canada’s taxation” under s. 125 of the Constitution Act, 1867.
However, he found that such immunity was taken away by the reciprocal taxation agreement between B.C. and Canada in which the Province committed itself and its agents to pay any tax imposed under the ETA. He stated that “agreements between the federal and provincial governments may be mere political agreements,” but found that the terms of the Agreement here evinced an intention to be legally bound, and stated that “enforcement of the [Agreement] is possible” pursuant to s. 19 of the Federal Court Act (Canada) and s. 1(1)(a) of the Federal Courts Jurisdiction Act (B.C.).
Neal Armstrong. Summary of British Columbia Investment Management Corp. v. Canada (A. G.), 2018 BCCA 47 under Constitution Act, 1867, s. 125.
CRA states that expenses “likely” cannot be streamed to minimize SCI
Where some of the business income of a Canadian-controlled private corporation is ineligible for the small business deduction because of the “specified corporate income” (SCI) provisions, can it allocate expenses to the activities generating the latter type of income in order to maximize its SBD?
CRA responded that “only the expenses that are reasonable to consider to be attributable to the activities generating the [SCI] income … should be considered” as deductions from the SCI income. The CRA ruling summary stated more succinctly: “Likely not.”
Neal Armstrong. Summary of 7 February 2018 External T.I. 2017-0706401E5 under s. 125(1)(a)(i)(B).
CRA finds that an amalgamation of a former partner with a former partnership subsidiary within 3 months of the partnership wind-up ousts s. 98(5)
A partnership transfers its business on a rollover basis to a Newco, and then is wound-up as described in s. 85(3), so that its general and limited partner (GPCo and LPCo) receive the Newco shares on a pro rata basis. GPCo then is wound-up into LPCo, raising the possibility in the correspondent’s mind that the s. 98(5) rollover could also apply, as a former partner (LPCo) now holds all the former partnership property (the Newco shares).
Be that as it may, LPCo then is amalgamated (within three months following the partnership winding-up) with Newco. In CRA’s view, this would preclude the application of s. 98(5), as the Amalco is a new corporation that will not have been a member of the partnership immediately before the partnership ceased to exist
Neal Armstrong. Summary of 15 January 2018 External T.I. 2017-0722961E5 under s. 98(5).
CRA confirms that a distributor is not required to produce goods in respect of which it pays a copyright royalty
S. 212(1)(d)(vi) exempts a copyright royalty “in respect of the production or reproduction of any … artistic work.” CRA found this exemption to be available for a Canadian subsidiary which, in connection with distributing products in Canada that had been manufactured by its U.S. parent, was required to pay to a U.S. third party a copyright royalty for the use of an artistic work that was used in connection with the manufacture and sale of the products (e.g., some sort of artistic work appearing on the product itself?) Thus, it did not matter that the Canadian subsidiary did not itself manufacture the goods that it distributed.
Neal Armstrong. Summary of 5 January 2018 External T.I. 2017-0697811E5 under s. 212(1)(d)(vi).