News of Note
CRA confirms that EPSP beneficiaries are not entitled to a s. 20(11) or (12) deduction
Email this ContentThe 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).
Income Tax Severed Letters 21 February 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Five full-text translations of 2013 APFF Roundtable items and Technical Interpretations are available
The table below provides descriptors and links for two items from the October 2013 APFF Roundtable, as fully translated by us – as well as for three technical interpretations released in January 2014.
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.
RCF IV – Federal Court of Australia finds that gains of U.S. limited partners from sales of an Australian resource company were not Treaty exempt but were not TCP-type gains
Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. The gains were held to be on income account given that this investment was handled consistently with the LPs’ modus operandi, which was to “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit,” and were derived from an Australian source given inter alia that RCF personnel were active board members. Before finding that the U.S.-resident partners’ share of the partnership gains from selling the shares of Talison Lithium were not exempted under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 (as expanded in Australian domestic legislation) for dispositions of (deemed) real property situated in Australia, Pagone J found that such gains were from “entreprises of” the U.S. limited partners, stating that this expression encompassed “a passive investment activity.”
The appeals of RCF IV and RCF V (regarded effectively as appeals of their component U.S. partners) nonetheless were allowed on the basis that the shares of Talison Lithium were not taxable Australian real property because their value was attributable more to the “downstream” lithium processing operations than to the “upstream” mining operations.
The same approach might also be applicable to determining whether shares of a Canadian mining company are “taxable Canadian property” (whose definition, unlike the Australian TARP definition and the definition of “Canadian property mutual fund investment” in Part XII.2 of the ITA) uses “derived from” rather than “attributable to” language.
Neal Armstrong. Summaries of Resource Capital Fund IV LP v Commissioner of Taxation [2018] FCA 41 under Treaties – Income Tax Conventions – Art. 3, Art. 13, s. 248(1) – taxable Canadian property – (d), s. 115(1)(a)(ii), s. 9 – capital gain. v. profit – shares, General Concepts – stare decisis, s. 152(1).
Viterra – Tax Court of Canada finds that consequential ETA reassessments are subject to essentially the same limitations as under the ITA
CRA reassessed a company well beyond the normal reassessment period in order to allow input tax credits, which it previously had denied within the normal reassessment period (being GST on fees charged by the investment manager for employee pension plans), but made an offsetting addition of GST to the reassessment on the basis that the company was resupplying the investment management services to the pension plans and had failed to charge GST on the fees therefor imputed by CRA.
CRA argued unsuccessfully that ETA s. 298(3) was less limiting than ITA s. 165(5), so that it was “not precluded from reassessing on the basis of different transactions or even from increasing net tax.” D'Arcy J instead found that s. 298(3) was quite similar to s. 165(5), stating that CRA could not use it “to increase the net tax of the GST registrant or to take into account different transactions that the ones that formed the basis of the reassessment that was made within the statutory reassessment period.”
However, here it was unclear that the reassessment of the resupply did not relate to the same transaction as the previous assessment of the third-party manager supplies, so that he left it to the trial judge to sort this out (this being a Rule 58 application that was devoid of evidence).
Neal Armstrong. Summary of Viterra Inc v. The Queen, 2018 TCC 29 under ETA s. 298(3).
CRA finds that an interest-free loan from a CFA of Canco to a NR sister of Canco was subject to Part XIII tax
A foreign subsidiary of Canco (Opco) in turn wholly-owned a non-resident “Finco,” which made an interest-free loan to a non-resident sister of Canco (Foreign Sub), that was repaid within two years. As the loan was not exempted under the inter-foreign affiliate exemption in s. 80.4(8), the deemed interest-free benefit imputed under s. 80.4(2) was, in turn, deemed by s. 15(9) to be a benefit conferred on “a” shareholder, which CRA interpreted as being Foreign Sub. S. 214(3)(a) then deemed this benefit to be paid “to the taxpayer as a dividend from a corporation resident in Canada.” CRA considered Foreign Sub to be the “taxpayer” and effectively treated Finco as the deemed corporation resident in Canada, so that Finco was liable under s. 215(1) for failure to “withhold” and remit Part XIII tax on the imputed benefit.
CRA then noted that this tax liability of Finco could attach under s. 160(1) to dividends that flowed up the chain to Canco. There also was potential liability of the directors of Finco under s. 227.1 (so that in establishing a due diligence defence, they might have to explain how they could have missed such palpably obvious points of Canadian tax law.)
No mention of Oceanspan or principles of territoriality. CRA doubtless was focused on the fact that value was leaving the Canco silo, but note that under its technical analysis, CRA was purporting to impose s. 215(1) liability on a foreign person (Finco) in respect of a deemed benefit that was conferred by it on another non-resident (Foreign Sub).
Neal Armstrong. Summaries of 16 August 2017 Internal T.I. 2015-0622751I7 under s. 15(2.9), s. 160(1) and s. 227.1(1).