News of Note
Finance has issued a comfort letter respecting a deemed repayment rule for upstream loans
Email this ContentThe upstream loan regime in s. 90 provides for income inclusions under s. 90(6) for certain indebtedness owing to foreign affiliates, and offsetting deductions on repayment under s. 90(14), and contain back-to-back loan provisions in s. 90(7). When the s. 15 shareholder loan rules were expanded to add s. 15(2.17) dealing with back-to-back loans, together with deemed repayment rules in ss. 15(2.18) and (2.19), no similar deemed repayment rule was added to s. 90.
Finance has issued a comfort letter recommending the introduction of repayment rules similar to those in ss. 15(2.18) and (2.19) effective for repayments after April 10, 2018.
Neal Armstrong. Summary of 16 May 2018 IFA Finance Roundtable, Q.10 under s. 90(14).
Finance is considering further significant changes to the foreign demerger rules
Proposed amendments to the foreign demergers rule in s. 15(1.4)(e) disappeared when most of the balance of the 2016 technical amendments were put in Bill form and enacted. Some issues were identified with the s. 15(1.4)(e) amendments and Finance did not proceed with them - but intends to do so once it has made further changes. Whether they are left in s. 15 or reformulated to give them a somewhat different application and scope is still under discussion.
Neal Armstrong. Summary of Comment on s. 15(1.4)(e) in the 16 May 2018 IFA Finance Roundtable under s. 15(1.4)(e).
Finance notes the narrow scope of the s. 15(2.11) PLOI election
S. 15(2.11) PLOI elections can be made to elect out of s. 15(2) only by corporations resident in Canada (CRICs) where controlled by a non-resident corporation. However, similar s. 15(2) issues arise on loans made by CRICs to non-resident sistercos, where they are both controlled by non-resident individuals or a Canadian-controlled private equity fund.
Finance indicated that it has not had time to really consider the broader issues that would be engaged under these structures were this requirement for control by a non-resident corporation to be relaxed. It traced this requirement to its formulation of the foreign affiliate dumping rules.
Neal Armstrong. Summary of 16 May 2018 IFA Finance Roundtable, Q.9 under s. 15(2.11).
Finance acknowledges a drafting deficiency in the relevant cost base rules where FAPI under $5,000
Transfers under ss. 88(3) and 95(2)(c), (d.1) and (e) can be elected under para. (b) of the “relevant cost base” definition in s. 95(4) to occur at up to fair market value rather than on a tax deferred basis where the transferring foreign affiliate is an eligible controlled foreign affiliate (ECFA). To be an ECFA the taxpayer’s participating percentage must be not less than 90%. The participating percentage of a taxpayer in a controlled foreign affiliate is deemed to be nil if the FAPI for the year is less than $5,000, which means that in such cases the FA does not qualify as an ECFA.
Finance acknowledged that this anomaly arises from a drafting error, and that it is considering whether or not to correct this deficiency.
Neal Armstrong. Summary of 16 May 2018 Finance Roundtable, Q.8 under s. 95(4) - eligible controlled foreign affiliate.
Finance official suggests that the expanded U.S. earnings stripping rule should not adversely affect the operation of s. 95(2)(a)(ii)
Among the requirements for s. 95(2)(a)(ii) to deem interest paid by a foreign affiliate to be active business income is that the interest be deductible in computing the amounts prescribed to be the income of the payer from an active business. U.S. tax reform has placed further limitations on interest deductibility.
Dave Beaulne (who recently had moved over to Finance from CRA) indicated that he expected that the current CRA position respecting Code s. 163(j) would apply here as well, meaning that if interest is denied under s. 163(j) (as expanded under the new rules) but is allowed to be carried forward indefinitely, it should be possible to recharacterize it under s. 95(2)(a)(ii).
If interest is permanently denied, under say the hybrid rule, that should also not create difficulties under s. 95(2)(a)(ii) by virtue of Reg. 5907(2)(j). However, both were really questions for CRA to address in a ruling.
Neal Armstrong. Summary of 16 May 2018 Finance Roundtable, Q.6 under s. 95(2)(a)(ii)(B).
Finance confirms that it will be accepting more MLI optional items
Canada will be accepting more optional MLI items, but is not yet willing yet to commit to them. It will be obligated to declare which items those are at the time of ratification. Finance is working on the MLI-implementing legislation, and it is possible (but uncertain) that it will be tabled before the summer.
Neal Armstrong. 16 May 2018 IFA Finance Roundtable, Q.1.
CRA states that all self-directed RRSPs and TFSAs are resident in Canada
CRA considers that because the trust company trustee of a TFSA, RRSP, RRIF, RESP or RDSP is required under the Act “to maintain and exercise key decision-making powers and responsibilities over the trust” (e.g., ensuring compliance with ITA requirements including monitoring for non-qualified investments and ensuring that all transactions occurred at fair market value), it follows that such trusts will have their central management and control in Canada, so that they “will always be considered resident in Canada.” Thus, the non-resident holder of a self-directed TFSA was unsuccessful in her arguments that the trust was resident outside Canada based on her making the investment decisions.
CRA’s interpretation could be argued to be consistent with Discovery Trust, where the work performed by Royal Trust, as the Alberta trustee, was somewhat routine.
Neal Armstrong. Summary of 22 March 2018 Internal T.I. 2018-0738201I7 under s. 2(1).
Income Tax Severed Letters 23 May 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Joint Committee submits that the shortening of the T1134 filing deadline should be reversed
Budget 2018 proposed that the requirement in s. 233.4(4) to file T1134s within 15 months of year end be changed to 6 months respecting taxation years beginning after 2019. Points on this include:
- Some of the G7 countries have filing deadlines that extend beyond 6 months, e.g., (re calendar years): the U.S. – extendible to October 15; the U.K. – December 31; and Germany - extendible to December 31
- Much of the information needed for the T1134s is not required for the Canadian corporate returns due on June 30
- Were there an accelerated filing deadline, 12 months would align with the filing deadline for CbC reporting – but even this would be problematic for jurisdictions such as the U.K. and Germany whose returns might be filed right at the 12-month point.
Neal Armstrong. Summary of 18 May 2018 Joint Committee Submission re accelerated T1134 filings entitled “Reporting Requirements in Respect of Foreign Affiliates” under s. 233.4(4).
CRA may provide filing extensions when the T1134 filing deadline has been accelerated
In the context of the proposed shortening of the T1134 filing deadline from 15 to 6 months, CRA indicated that it will consider a request for relief in the form of extensions and waivers of penalties on a case-by-case basis.
CRA indicated that the information should be available in the case of a controlled foreign affiliate. Where it is not, however, it should still be possible to file the T1134 on time but with some missing information – but bearing in mind that penalties could thereby apply, subject to relief in the reasonable efforts exception of s. 162(5)(a), or the due diligence exception of s. 233.5(c.2). CRA did not mention the jurisprudential due diligence defence.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q. 10 under s. 233.4(4).