News of Note
Income Tax Severed Letters 23 May 2018
Email this ContentThis 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).
CRA may review the overlap between T1134 and CbC reporting
CRA uses T1134s in risk-assessment. Generally, the T1134 reporting requirements are more detailed, while CbC reporting provides a higher level of information and uniformity of reporting across jurisdictions. As it gains more experience, it may consider reviewing the overlap to reduce duplication.
Neal Armstrong, Summary of 16 May 2018 IFA Roundtable, Q. 9 under s. 233.4(4).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for a French Technical Interpretation released last week and for five Interpretations released in October and December of 2013, as fully translated by us.
These (and the other full-text translations covering the last 4 2/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2018-05-16 | 12 April 2018 External T.I. 2016-0640651E5 F - Swiss Pension | Income Tax Act - Section 248 - Subsection 248(1) - superannuation or pension fund or plan | Swiss vested benefits policy was a “superannuation or pension fund or plan” |
| Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) | a Canadian resident was not subject to Canadian tax on income accruing in a Swiss vested benefits policy | ||
| 2013-10-02 | 10 April 2013 Internal T.I. 2013-0475991I7 F - Montant- période de raccordement | Income Tax Act - Section 5 - Subsection 5(1) | terminated employee treated as continuing to be an employee due to employer’s continued treatment as an employee for EI, CPP and RPP purposes |
| 2013-09-25 | 5 October 2012 Roundtable, 2012-0453231C6 F - Creditor's Group Life Insurance and CDA | Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) - Subparagraph (d)(ii) | Innovative case extended to individual policy: credit to borrowing CCPC’s CDA |
| 2013-09-11 | 13 August 2013 External T.I. 2012-0471401E5 F - FMV - partnership interest | General Concepts - Fair Market Value - Other | deferred tax liability re deferred (s. 34) partnership income recognition reduces partnership interest FMV |
| Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(c) | FMV of professional partnership interest would normally discount the value of s. 34-elected WIP for income taxes | ||
| Income Tax Act - Section 34 | FMV of partnership interest reduced re deferred income taxes on WIP subject to s. 34 election | ||
| 6 August 2013 External T.I. 2012-0469481E5 F - Benefit under trust | Income Tax Act - 101-110 - Section 105 - Subsection 105(1) | taxable benefit on sale to beneficiary at undervalue was not eliminated under s. 105(1)(a) when beneficiary sold the property | |
| Income Tax Act - Section 52 - Subsection 52(1) | benefit on estate sale to beneficiary at under-value added to property's ACB | ||
| Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | taxable benefit added to acb | ||
| 5 July 2013 Internal T.I. 2013-0489821I7 F - Application of subsection 18(3.1) | Income Tax Act - Section 18 - Subsection 18(3.1) | realty taxes or premiums related to land which is renovation object are capitalized |
CRA declines to rule that a French SLP was a partnership
CRA essentially repeated the points made in the 21 July 2017 Email of the CRA Delaware/Florida Working Group respecting grandfathering of existing LLPs/LLLPs, namely:
- Respecting a requirement that the LLP/LLLP not take positions that are inconsistent with corporate treatment, CRA will accept the filing of a T2 return or of a T1134 or T106 (as well as obtaining a Business Number) based on the announcement at the 2016 IFA Conference that the LLPs/LLLPs were corporations.
- Respecting a requirement that there is no significant change in its membership or activities, this will not be considered to occur by virtue of a transfer of membership between parties not dealing at arm’s length or the issuance of additional memberships to them.
- The fact that the Delaware & Florida LLP or LLLP resulted from a previous conversion from an LLC would not by itself prevent accessing the grandfathering relief.
- The above relief will be applied to LLPs and LLLPs of other jurisdictions having similar (corporate) attributes where they were set up before April 26, 2017.
CRA also declined to rule that a specific French SLP (Société de Libre Partenariat) was a partnership for ITA purposes. Although it had separate legal personality, that was not sufficient to render it a corporation. However, there was no legal authority to support an effective entitlement on the part of the members to share profits and losses earned through the entity: the computation of earnings at the SLP entity level, with a distribution mechanism for its members akin to the declaration and payment of dividends, was found to be very relevant.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.8 under s. 96.
CRA finds that “sustaining” a s. 39(2) loss on a USD obligation requires more than locking-in the equivalent Canadian-dollar amount
A USD loan owing by Canco 1 to its parent Canco, has an accrued FX loss to it and an accrued FX gain to Canco. Canco 1 would like to “sustain” a loss under s. 39(2) in circumstances where there is no disposition of the debt by Canco. In particular, its FX exposure on the loan would be crystallized if a wholly-owned sub of Canco 1 agreed to undertake to repay the loan on maturity in consideration for issuing an equivalent Canadian-dollar note to Canco 1.
In finding that this did not result in Canco 1 sustaining a loss under s. 39(2), CRA stated that FX gains or losses respecting a debt obligation are realized or sustained only on the settlement or extinguishment of the debt, i.e., on their repayment or legal novation or legal rescission and substitution.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.7 under s. 39(2).
CRA considers that a suspended loss on the sale of CFA to Subco was not de-suspended on s. 88(3) wind-up of CFA
Canco sold all the shares of FA to Canco’s wholly-owned subsidiary (Subco) and realized a capital loss that was suspended under s. 40(3.4). In a subsequent year, Subco wound -up FA under s. 88(3). This would have de-suspended the loss but for s. 40(3.5)(c)(i), which applies if the particular corporation which, in fact, had disappeared (FA) would be considered to have been “merged or combined” with another corporation (Subco) to “form” a corporation.
CRA was not flustered by the latter issues, and considered that the loss continued to be suspended:
- “Merged or combined” encompasses a winding-up or liquidation given inter alia the exclusion, in various provisions listed by it, of a winding up or liquidation from a “merger;” and
- “Formed” includes an entity in place after a reorganization (for example, a s. 86(1) reorganization), even though no new entity may be formed in the traditional sense - so that Subco was considered to have been “formed” on its s. 88(3) winding-up of FA under a “QLAD.”
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.5 under s. 40(3.5)(c)(i).
CRA indicates that a non-resident who incorrectly claimed a no-PE Treaty exemption is exposed to the usual penalties
CRA indicated that it will not provide any special safe harbour for a non-resident corporation that did not make any T2 filings (other than a Treaty-based claim for exemption in an attached Sched. 91) or prepared contemporaneous documentation under s. 247(4) where it had reasonably (but, in CRA’s view, incorrectly) considered that it did not have a Canadian permanent establishment for its business. Accordingly, its failure to meet statutory deadlines will carry the associated statutory penalties – but CRA will consider, on a case-by-case basis, requests under s. 223(3) and (3.1) for relief of the resulting interest and penalties. CRA did not mention the due diligence defence.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.4 under s. 220(3).
CRA treats corporate-owned LP transparently to avoid a surplus anomaly re s. 91(5) dividend
Canco (and its Canadian sub) hold LP which received a $3,000 dividend from a wholly-owned foreign affiliate (FA). Although the dividend came out of FA’s exempt surplus of $3,000, it was deemed insofar as LP was concerned to be deductible as to $2,000 under s. 91(5) respecting previously earned foreign accrual property income.
S. 93.1(2)(d)(i) limits the s. 113 deduction of Canco to the portion of the $3,000 dividend that is included in its income under s. 96(1). Taking into account $300 of interest expense on acquisition debt of LP, the income of Canco (ignoring any other sources and rounding its partnership interest up to 100%) is $700 ($3,000 dividend - $2,000 s. 91(5) deduction - $300 interest expense). However, as CRA does not take into account interest relating to acquisitions by a partnership of FA shares for 93.1(2)(d)(i) limit purposes, the s. 113(1) deduction of Canco is $1,000 rather than $700 – so that in computing its taxable income, Canco would have a loss of $300 (i.e., partnership income of $700, minus a s. 113(1)(a) deduction of $1,000).
CRA considered this to be the appropriate result: there would have been the same $300 loss had Canco directly owned FA ($3,000 dividend - $3,000 s. 113(1) deduction - $300 interest expense). However, CRA considered that it is appropriate to “reinstate” $2,000 of exempt surplus of FA in respect of Canco, and to reduce its taxable surplus in respect of Canco by the same amount.
Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.3 under s. 93.1(2)(d)(i).