News of Note
The draft ETA s. 132(6) rule does not appear to be substantially undercut by the expansive PE definition
Email this ContentDraft s. 132(6) provides that, subject to s. 132(2), an investment limited partnership (ILP) is deemed to not be resident in Canada at any time if the total value of all interests in it held by non-resident members (other than prescribed members) is 95% or more of the total value of all interests in it. One of the targeted effects of this rule is to permit a general partner (whose Canadian residence otherwise would “taint” the ILP as a resident partnership), to charge general partner draws or fees to the ILP on a zero-rated basis if the membership of the ILP satisfies the 95% test.
The exclusion in s. 132(2) deems a non-resident person to be resident in Canada in respect of activities carried on by it through a permanent establishment in Canada.
On an expansive interpretation of the ETA definition of a permanent establishment, it could be considered that, in fact, there is no circumstance in which an ILP, which has a Canadian-resident general partner (with personnel or agents exercising its functions qua general partner using a Canadian office of the general partner), will be deemed by s. 132(6) to not be resident in Canada, given that essentially all the activities of the ILP will be considered to be carried on through its general partner and, thus, through the Canadian office of the general partner (viewed as a permanent establishment of the ILP).
However, it is understood that Finance considers that the intent was for the s. 132(2) exclusion to apply only where there is a commercial activity being carried on in Canada that could represent a permanent establishment of the investment limited partnership, for example, the holding of a piece of commercial real estate, and that s. 132(2) would not apply to the Canadian office of the general partner. As discussed in our Commentary, this view is consistent with a partnership being a separate person for GST/HST purposes.
A similar analysis suggests that the s. 132(2) exclusion does not undercut the exemption of a 95%-qualified partnership under draft s. 132(6) from the qualifying consideration rule in ETA s. 218.01.
Neal Armstrong. Commentary on ETA draft s. 132(6).
CRA considers amounts received in settlement of employment grievances to be s. 5 income on general principles
CRA found that lumps sums paid to current and former employees in settlement of a grievance regarding the cancellation of various post-retirement health and insurance benefits likely did not qualify as retiring allowances (since current employees were included) and likely were deemed to be s. 5 employment income under s. 6(3)(b) (i,e., they were provided “to an employee (or former employee) to satisfy an obligation outlined in a written or oral agreement made with his or her employer (or former employer), either immediately before, during, or immediately after employment.” CRA also considered the amounts to be s. 5 employment income on more general principles, stating:
The Canadian courts have consistently viewed amounts received as the result of grievances filed by virtue of a contract of employment (e.g., grievance for violation of a collective agreement) to be taxable as employment income.
Neal Armstrong. Summaries of 28 July 2017 External T.I. 2017-0685961E5 under s. 248(1) – retiring allowance, s. 6(3)(b) and s. 5(1).
Tang – Tax Court of Canada finds that translated documents were admissible as they previously had been identified in the list of documents provided to the Crown
Chinese-language documents, that the taxpayer had arranged to have translated into English, were admissible in evidence under Rule 89 given that the list of documents previously provided to the Crown had identified that these documents were translations.
Neal Armstrong. Summary of Tang v. The Queen, 2017 TCC 168 under Rule 89(1)(b).
Pellerin – Quebec Court of Appeal finds that proof that auditors got bonuses for assessing would not change the burden of proof
The Quebec Court of Appeal rejected a submission that proof that an ARQ auditor would enjoy an increased bonus as a result of assessing the taxpayer would reverse the normal burden of proof on the taxpayer to establish prima facie proof of the incorrectness of the assessment.
Neal Armstrong. Summary of Pellerin v. Agence du revenu du Québec, 2017 QCCA 1339 under General Concepts – Onus.
Nelson – Tax Court of Canada finds that the agreement between two co-borrowers as to their respective responsibility for joint loans governed for tax purposes
Lafleur J found that although each of a husband and wife was fully liable to the bank for all amounts advanced to either of them under their joint line of credit, an oral agreement between them, that each had 50% several responsibility for the amounts drawn down under the line of credit, should be respected for tax purposes. Accordingly, in dealing with the ETA equivalent (s. 325(1)) of ITA s.160, she found that ½ of the amounts drawn down under the line of credit to fund the husband's company constituted an advance by the wife of money borrowed by her, so that ETA s. 325 did not apply when her husband later transferred real estate to her to pay down that advance.
Neal Armstrong. Summary of Nelson v. The Queen, 2017 TCC 178 under ETA s. 325(1).
CRA indicates that negative interest is deductible under s. 9 if there is a reasonable expectation of receiving (positive) interest
CRA was asked whether a negative interest rate borne on a deposit with a financial institution (which, so far, is a European rather than North American phenomenon) would be deductible by the depositor. Much of the issue was assumed away by positing that in each year there would always be some months in which the deposit bore positive interest.
CRA responded that the negative interest was not a contra item to the interest income generated in the year, but that such negative return would likely be deductible under s. 9 given that there was a reasonable expectation of earning interest income on the deposit in the year.
CRA did not raise any issue of the negative return being on capital account. This is broadly consistent with its longstanding position (e.g., 2004-008091) that all amounts payable or receivable pursuant to an interest rate swap agreement (including a termination payment) will be considered to be on income account, even though the underlying amount being hedged (the interest) generally is a capital expenditure which is deductible only under s. 20(1)(c) and not under s. 9.
Neal Armstrong. Summaries of 14 June 2017 External T.I. 2016-0666411E5 under s. 18(1)(a) – loans and financing charges and s. 40(2)(g)(ii).
CRA finds that s. 143.4(4) caused an immediate income inclusion of prior years’ interest that was to be forgiven at a later date under an approved Plan of Compromise
In Year 1 a Plan was approved which entailed a forgiveness of unpaid interest that had accrued in prior years. However, the Plan’s implementation did not occur until Year 2, when the stipulated conditions precedent were satisfied. Rather than s. 80 applying to the forgiven interest in Year 2, its amount was in CRA’s view included in the debtor’s income in Year 1 under s. 143.4(4). CRA found that:
[T]he Taxpayer’s right to reduce the Interest Debt … falls within the definition of a “right to reduce” in subsection 143.4(1) because it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable [i.e., that the conditions precedent would be thereafter satisfied].
CRA did not discuss whether there still would have been an s. 143.4(4) income inclusion, rather than an application of the debt forgiveness rules, if the Plan had been implemented in the same year. There is possibly a concern that CRA would consider that the debt forgiveness rules can never apply to the forgiveness of interest that accrued in a prior year unless there is no gap of time between the agreement to settle (whether or not subject to conditions) and the actual settlement.
Neal Armstrong. Summaries of 26 May 2016 Internal T.I. 2016-0628741I7 under s. 143.4(1) – right to reduce, s. 80(2)(a) and s. 20(1)(c)(i).
Google Ireland - Administrative Court of Paris finds that Google through its contracting arrangements with French advertisers avoided a French PE
Google Ireland engaged Google France on a cost-plus-8% basis to provide marketing and other services to it in connection with earning “per click” revenues from French advertisers, who wanted their names and brief messages to appear with relevant Google search results. Although it appears that Google France was doing essentially all of the French work, all the contracts were signed by Google Ireland electronically, and Google France did not have the authority to enter into contracts in the name of or on behalf of Google Ireland. This was sufficient for the Parisian Administrative Court to conclude that Google Ireland did not have a permanent establishment in France, so that the French Service had to content itself with French income tax only on the 8% mark-up.
Neal Armstrong. Summary of Google Ireland Ltd. v. France (2017), No. 1505113/1-1 (Tribunal Administratif de Paris) under Treaties – Art. 5.
Six further translated technical interpretations are available
Full-text translations of the technical interpretation released last week and of five released between July 23, 2014 and July 16, 2014, are listed and briefly described in the table below.
These (and the other translations covering the last 38 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Income Tax Severed Letters 20 September 2017
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.