News of Note
CRA generally will accept amended business-limit assignments under s. 125(3.2) where the limit was initially indeterminate
Email this ContentUnder the “specified corporate income” (SCI) rules in s. 125, active business income earned by a Canadian-controlled private corporation (the “second CCPC”) from providing services or property to a non-arm’s length person described in the SCI rules is not eligible for the small business deduction (SBD). However, such excluded income may still be eligible for the SBD if another CCPC (the “first CCPC”) that receives services or property from the second CCPC assigns a portion of its business limit (not exceeding the excluded income that the second CCPC earned from the first CCPC in its taxation year in which the first CCPC’s taxation year ended) to the second CCPC pursuant to a prescribed form filed with its return.
CRA was asked to address the situation where the taxation year of the second CCPC (on November 30) ends 11 months after the taxation year of the first CCPC (on December 31), so that at the time for filing the prescribed form, the first CCPC cannot yet know what is the maximum permitted business limit assignment. Would the CRA accept an amended BL assignment when the actual amount can be determined? CRA responded:
[A] reasonable effort to compute an amount would be required at the time of filing the first CCPC’s tax return. When the actual amount is known (e.g., after November 30, 2018), a revised BL assignment would generally be accepted by the CRA, provided that the tax year is not statute-barred.
Neal Armstrong. Summary of 29 January 2018 External T.I. 2017-0713051E5 under s. 125(3.2).
An unrelated CRA assessment of a business limit assignee might invalidate that assignment
The above post on 2017-0713051E5 notes that CRA has a solution (through filing an amended business-limit assignment) when at the time required for the first CCPC to file the assignment it does not yet know what is the maximum permitted assignment amount because the year end for the second (assignee) CCPC has not yet been determined. A similar issue has not yet been addressed by CRA, namely, that the income of the second CCPC might subsequently be reduced due to an assessment (e.g., because CRA applied s. 67 to deny the deductibility to the first CCPC of fees charged to it by the second CCPC – see 2012-0440071E5). This income reduction would retroactively reduce the allowed BL assignment amount, which might invalidate the assignment,
At some point, CRA presumably will be asked whether in this situation as well, an amended assignment can be filed.
Neal Armstrong. Summary of Dino Infanti, "Assignment of Small Business Limit Creates Filing Headaches," Tax for the Owner-Manager (Canadian Tax Foundation), Vol. 18, No. 1, January 2018, p 3 under s. 125(3.2).
Income Tax Severed Letters 14 January 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Morrison – Federal Court of Canada finds that CRA appropriately denied s. 163(1) penalty relief for failure to notice the accountant’s T4 omission
The taxpayer's accountant inexplicably failed to include a T4 for $47,770 in the taxpayer’s return. In confirming that CRA’s decision to deny penalty relief was reasonable, Campbell J indicated that CRA had appropriately focused on the taxpayer’s “responsibility to exercise care to ensure that all income was reported, and to supply evidence that he was prevented from doing so.” It thus is generally incumbent on the taxpayer to review the return (see also Chiasson).
Neal Armstrong. Summary of Morrison v. Canada (Attorney General), 2018 FC 141 under s. 220(3.1).
Solar Power v. ClearFlow – Ontario Superior Court finds that a “discount fee” was interest
A typical loan made by the lender (ClearFlow) to the borrower bore base interest rate of 12% p.a. compounded monthly, an administration fee that was charged when the Loan was initially advanced, and each time it renewed (of, say, 1.81% of the loan balance), and a “discount fee” of 0.003% per day of the outstanding principal. McEwen J found that the administration fee was not interest (it “was compensation for the considerable costs incurred to negotiate, conduct due diligence, set-up, and administer the Loans, and was not simply compensation for ClearFlow not having the use of the money”).
However, the discount fee was interest – as to which he stated his acceptance of the conclusion in Sherway Centre that “an amount paid as compensation for the use of money for a stipulated period can be said to accrue day-to-day.”
He went on to find that because the discount fee was interest, s. 4 of the Interest Act capped the total loan interest at 5% p.a. A clause, that purported to comply with s. 4 by effectively providing a verbal formula for multiplying the stipulated rate by 365 (or 366, as applicable), did not suffice. Furthermore, the formula was defective in that it excluded the effect of compounding.
For a borrower whose business in not money-lending or something similar, the distinction between a fee and interest informs whether deductibility of a lender's charge is to be analysed under s. 20(1)(e) or (e.1), or under s. 20(1)(c).
Neal Armstrong. Summary of Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONSC 7286 under s. 20(1)(c).
Use of a professional corporation is more challenging where a shareholder is a U.S. citizen
Although 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).