News of Note
Use of a professional corporation is more challenging where a shareholder is a U.S. citizen
Email this ContentAlthough there may be significant advantages for a Canadian-resident professional to incorporate, challenges arise where the professional (or a spouse) is also an American citizen. Perhaps the most significant challenges arise where there is a “mixed” marriage between a US citizen and a (Canadian) non-resident “alien.” If the professional is the American, the professional corporation (PC) is a controlled foreign corporation (CFC). If a family member (other than the professional) is an American, the PC may be a passive foreign investment company (PFIC) given its control by the professional. (Medical and legal corporations often qualify as PFICs because they rarely hold much in the way of active business assets.)
To help address the CFC issue in the first situation, it is suggested that the non-resident alien family members set up an investment company to which PC lends excess funds at a market rate of interest.
Ontario, Alberta and Newfoundland generally prohibit corporate ownership (e.g., through a holding company set up by alien family members) of a PC. In this context, a possibility for dealing with the PFIC issues in the second situation is to issue Neuman (discretionary) shares, having a modest value, to the U.S. spouse, who then gifts them to the professional. From a U.S. perspective, dividends paid on the shares are legally the property of the non-resident alien professional, and thus not subject to U.S. tax.
For Canadian tax purposes, the gift will cause dividends on the shares to be subject to attribution under s. 74.5(1).
There is a risk that the CRA would see this gifting strategy as abusive, and apply an anti-abuse rule [in s. 74.5(11) that would void the attribution.
…It could be argued [however] that in this case, the family member would retain the shares but for the US tax consequences of doing so. The attribution merely puts the family member in the same position as he or she would be absent the gift.
Neal Armstrong. Summary of Kevyn Nightingale, "American Professionals in Canada", Canadian Tax Journal, (2017) 65:4, 893-937 under s. 126(1).
Five full-text translations from 2013 APFF Roundtable are available
The table below provides descriptors and links for five items from the October 2013 APFF Roundtable, as fully translated by us – as well as for the two French Ministerial letters released last week (which essentially repeat previously-released letters.)
These (and the other full-text translations covering the last 4 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA notes that two unrelated 50% shareholders potentially could both be related to the corporation based on Duha USA rights and s. 251(5)(b) rights
An “individual pension plan” as defined in Reg. 8300(1) of the Regulations includes a defined benefit registered pension plan having fewer than four members if at least one of them is related to a participating employer in the plan. Respecting where two unrelated individuals each held exactly 50% of the (voting common) shares of the employer, CRA noted that under Duha, “the determination of whether a person exercises de jure control … must also take into consideration whether any specific or unique limitation on a shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the company, is manifested in either the constating documents of the corporation, or any unanimous shareholder agreement” (USA), so that either individual could have de jure control and be related to the employer under s. 251(2)(b)(i).
Either individual could also be related by virtue of a s. 251(5)(b) right, as to which CRA noted that it was possible that both unrelated individuals could be related to the employer:
While paragraph 251(5)(b) does not deny that actual control is held by the person who has the direct ownership of shares, another person could have control simultaneously as a result of the application of one of the rules in paragraph 251(5)(b).
Neal Armstrong. Summary of 11 May 2017 Internal T.I. 2016-0665931I7 under Reg. 8300(1) - individual pension plan, s. 251(2)(b)(i) and s. 251(5)(b).
Canada, like the other oddball (Portugal), has reserved to limit “mandatory” MLI arbitration to only factual disputes
Under the new Multilateral Instrument binding arbitration provisions, only those cases that have been accepted by both competent authorities are to be resolved, either in the mutual agreement process or through arbitration, so that cases that have been rejected by either authority cannot be resolved through arbitration.
Of the 26 states that have signed up for mandatory arbitration, only eight states (including Belgium, Luxembourg, the Netherlands, Switzerland and the U.K.) have not made any reservations with regard to the scope of the arbitration. Of the other 18 states (including Australia, Austria, Finland, Germany, Ireland, Italy, Portugal and Spain), the most common reservation is for excluding cases concerning the application or interpretation of anti-abuse provisions from arbitration.
Some states (e.g., Finland, France, Germany, Italy, Portugal and Spain) exclude cases that do not involve double taxation from the scope of arbitration.
It is unfortunate that these reservations have been made, as cases of double non-taxation or low taxation may be entirely legitimate under a tax treaty and not be the result of aggressive tax planning. For instance, many tax treaties apply a 0% withholding tax rate on dividends paid to jurisdictions that apply a participation exemption.
Certain states (e.g., Italy) also exclude from arbitration cases involving dual resident persons, and some states (e.g., France, Spain and Sweden) exclude cases where both competent authorities agree that the case is not suitable for arbitration.
Canada and Portugal essentially limit arbitration to more factual transfer pricing cases and the question of the existence of a permanent establishment.
Neal Armstrong. Summaries of Gerrit Groen, "The Nature and Scope of the Mandatory Arbitration Provision in the OECD Multilateral Convention (2016)," Bulletin for International Taxation, November 2017, p. 607 under Treaties – MLI – Art. 20, Art. 19 and Art. 28(2).
Consideration should be given to avoiding an immediate liquidation of an RESP on death
A registered education savings plan will form part of the estate of a deceased sole or last subscriber to the RESP. Accordingly, the will can allow the executors to continue the plan beyond the death of the testator for the benefit of the beneficiary (and contribute to the plan on the beneficiary’s behalf). This would permit future distributions to qualify as educational assistance payments and be taxed at the RESP beneficiary's low marginal tax rate.
Neal Armstrong. Summary of Cole R. Southall, "Continuing RESPs Beyond the Death of the Subscriber," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p.13 under s. 146.1(1) - subscriber - para. (c) and s. 146.1(7.1).
Use of a spousal trust now precludes use of the spouse’s capital gains deduction for trust property
Two suggested drawbacks of using a spousal trust are that (i) any capital gains deduction (CGD) otherwise available to the surviving spouse can only be claimed where the spousal trust sells qualified property during the lifetime of the spouse (which often would defeat the testator's intentions), and (ii) having regard to the repeal of s. 110.6(12) for 2016 and subsequent taxation years, there is no ability to use the spouse's CGD on death.
Neal Armstrong. Summary of Dane ZoBell, "Spousal Trusts Have Limited CGD Access," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p. 15 under s. 104(21.2).
CRA rules that a foreign common contractual fund is a co-ownership arrangement rather than a unit trust
Investors subscribe for units of “Subfunds” of an “Umbrella” fund, both situated in and governed by the laws of a redacted non-resident jurisdiction. The units are described both as a claim against the fund manager and as representing a co-ownership interest as tenant in common in the investment assets of a particular Subfund (with each Subtrust having a different focus as to the bonds or shares it invests in), which are managed by the non-resident fund manager on a discretionary basis and held by a non-resident custodian bank. A unit is specified to not "confer any interest or share in any particular part of the assets of the [funds]."
CRA ruled that the funds were fiscally transparent, so that a non-resident pension fund holding units in a Subfund that, in turn, held Canadian equities, could rely on its exempt pension fund status for Part XIII tax purposes.
This is similar to a less heavily redacted 2014 ruling on an Irish contractual fund (2013-0496831R3 – see also 2009-0345011R3 and 2006-0199741R3), whose description also looked somewhat similar to a unit trust, and was ruled upon to be a co-ownership arrangement.
Neal Armstrong. Summary of 2016 Ruling 2015-0606141R3 under s. 104(1).
Isah – Tax Court of Canada notes obiter that it can address incorrectly computed assessment interest
Imperial Oil indicated that the Tax Court has no jurisdiction to hear an appeal on the computation of refund interest. This is not to be confused with normal assessment interest, as to which Russell J stated:
[I]nterest relief [is] not a matter over which this Court has jurisdiction (unless the wrong interest rate was used or otherwise a wrong calculation of the interest was made, thereby affecting the balance of the appealed (re)assessment).
Neal Armstrong. Summary of Isah v. The Queen, 2018 TCC 28 under s. 171(1).
CRA states that an s. 247(2) transfer pricing adjustment for sales undercharges to a CFA does not decrease the ES of the CFA, nor imply a previous contribution of capital
The Directorate considered that where there was a s. 247(2) transfer pricing adjustment to increase Canco’s income as a result of having undercharged for goods or services provided to a non-resident subsidiary (CFA), s. 247(2) could not also be applied to reduce the exempt surplus or foreign accrual property income of CFA in respect of Canco.
Furthermore, the benefit associated with having undercharged could not be treated as a contribution of capital for purposes of an ACB increase to the CFA shares under s. 53(1)(c). (This CRA comment suggests that the current status of a comment made at the 1987 Annual CTF Roundtable (Q.68) - that on a share subscription, any cost basis denied by s. 69(1)(a) may be treated as a contribution of capital provided there is some increase in the value of the taxpayer's shares – may be uncertain.)
In passing, the Directorate indicated that if there were a transfer pricing adjustment under the foreign tax law, there could be a corresponding adjustment to CFA’s surplus, but stated:
[C]onsideration would have to be given to whether subsection 5907(2) … could reverse that foreign tax law adjustment and to the possible impact of any accompanying transfer of assets to effect a so-called “repatriation” payment.
Neal Armstrong. Summaries of 27 October 2017 Internal T.I. 2017-0694231I7 under s. 247(2), Reg. 5907(2) and s. 53(1)(c).
CRA indicates that a business limit is ground first based on taxable capital before it can be assigned
Under s. 125(5.1), the business limit is reduced on a straight-line basis if the total of the taxable capital of the Canadian-controlled private corporation in question and of associated corporations exceeds $10 million. CRA confirmed that any assignment of a CCPC’s business limit under s. 125(3.2) to another corporation can only occur after its business limit has first been ground under s. 125(5.1). There was no explanation as to why this question might have practical significance.
Neal Armstrong. Summary of 25 January 2018 External T.I. 2017-0709241E5 under s. 125(5.1).