News of Note
The s. 212(3.7) formula can allocate a disproportionate part of a direct loan to Canco as being from a non-resident shareholder of the lender
Email this ContentThe formula in s. 212(3.7) can operate as a boon or a bane where shareholder funding of a non-resident intermediary might be tainted by the connectivity test in s. 212(3.6)(a)(ii).
If Canco owes $30 to the intermediary and the intermediary, in turn, owes $40 in debt to a non-resident that is tainted under the connectivity test in s. 212(3.1)(c), then it does not matter that the intermediary has also been funded with tainted equity from another non-resident: the $40 non-resident creditor will be treated under the formula as the sole ultimate funder of the $30 direct loan to Canco.
On the other hand, if there instead is no indirect debt and the $30 direct debt to Canco is funded entirely or at least as to $20 out of surplus funds derived from the intermediary's operations, the shareholder of the intermediary effectively will be considered under the formula to have funded the entire amount of the $30 direct loan even though its share capital account was only $10 – so that Canco will be deemed under the formula to have paid all the interest under the direct loan to that shareholder.
Neal Armstrong. Summaries of Peter Lee, "The Character Substitution Rules", International Tax (Wolters Kluwer CCH), June 2017, No. 94, p. 10 under s. 212(3.7) and s. 212(3.6)(a)(ii).
S. 95(2)(a)(ii)(D) is drafted too restrictively in light of the underlying policy to extend s. 95(2)(a)(ii)(B)
S. 95(2)(a)(ii)(D) (“Cap D“) has been drafted too narrowly in relation to its underlying policy, which is to expand the basic rule in s. 95(2)(a)(ii)(B) in order to accommodate the indirect internal funding of an FA Opco (“FA3”) through internal debt financing By FA1 of a holding company (“FA 2”) for FA3. In particular:
- Cap D imports the narrow s. 20(1)(c) terminology, whereas s. 95(2)(a)(ii)(B) applies to any amount as long as the deductibility criterion therein is met. “Thus, for example, it is not clear why Cap D is not available in respect of royalties.”
- The requirement for a throughout-the-year connection between FA2 and FA3 can pose difficulties for mid-year reorganizations.
- “The subject to tax criterion has generally been the most problematic condition of Cap D.” Although the rule has been relaxed to somewhat accommodate US LLCs, “as becomes obvious from the questions put forward at the recent IFA seminar [2017-0691221C6], certain issues remain in this area.”
Neal Armstrong. Summary of Michael N. Kandev, "Putting on our Thinking Cap About "CAP D", International Tax (Wolters Kluwer CCH), June 2017, No. 94, p. 5 under s. 95(2)(a)(ii)(D).
CRA indicates that a testamentary trust could be a beneficiary or beneficially interested in an estate
S. 70(3) provides that the rights and things election under s. 70(2) is unavailable if the rights or things (the “Property”) have been distributed by the estate before the deadline for making the election has expired to beneficiaries or other persons beneficially interested in the estate. In the situation where the will bequeathed the Property to a testamentary trust, CRA considered that:
[T]o the extent that the testamentary trust is, under applicable private law, a beneficiary of the estate at the time of the transfer or distribution of the Property by the estate, the testamentary trust could be considered a beneficiary or a person beneficially interested in the estate of the deceased individual for the purposes of subsection 70(3).
Neal Armstrong. Summary of 28 June 2017 External T.I. 2016-0653921E5 Tr under s. 70(3).
CRA has remitted to Finance the issue that deductions for ads by Canadian advertisers on foreign websites are not limited by the foreign broadcaster and periodical rules
After noting that the ss. 19 to 19.1 rules, which essentially deny a deduction for ads directed at the Canadian market on foreign broadcasting, newspaper and periodical outlets, “do not apply to the deductibility of advertising expenses on foreign Internet websites,” CRA stated:
The Department of Finance…is aware of this issue and of the CRA’s position.
Neal Armstrong. Summary of 20 June 2017 Ministerial Correspondence 2017-0697751M4 under s. 19.1(1).
Logging employees working at a remote logging site were not able to deduct their fees for room and board
Logging employees travelled from home to a remote forest camp where they received board and lodging and were driven daily from there to the logging site. They could not deduct under s. 8(1)(h) the board and lodging fees charged to them because the remote logging camp constituted a place of business of their employer – so that they were not travelling away from their employer's place of business.
Neal Armstrong. Summary of 12 April 2017 External T.I. 2016-0642571E5 under s. 8(1)(h)(i).
CRA illustrates the streaming of safe income that occurs on a stock dividend to a corporate shareholder
CRA has provided a simple example illustrating the operation of s. 55(2.3), which streams safe income to stock dividend shares and away from the shares upon which the stock dividend is paid, where the dividend recipient is a corporation.
Opco’s two shareholders (Holdco and Ms. X) each own a bloc of 50 common shares with an ACB, FMV and safe income on hand of $5,000, $500,000 and $450,000, respectively. Opco pays a $700,000 stock dividend consisting of preferred shares with an aggregate redemption amount and PUC of $700,000 and $1, respectively.
Because the amount of the stock dividend is deemed to be $350,000 for s. 55(2) purposes, Opco’s safe income that contributes to gain on the 50 Opco common shares of Holdco is deemed to be reduced by $350,000. Holdco now owns half the preferred shares with an ACB pursuant to s. 52(3)(a) of $350,000, and 50 common shares with a FMV of $150,000 and an ACB of $5,000, resulting in an inherent capital gain of $145,000. Thus, Opco has $100,000 of safe income that contributes to the inherent capital gain on Holdco’s original 50 common shares and the other $350,000 of safe income is now reflected in the ACB of Holdco’s preferred shares of Opco.
As for Ms. X, Opco’s safe income of $450,000 that contributes to the gain on her 50 common shares is not reduced by the stock dividend paid, and this safe income of $450,000 will be apportioned between her preferred shares received as a stock dividend, and her original 50 common shares, based on their respective accrued gains, as determined after the payment of the stock dividend.
Neal Armstrong. Summary of 6 June 2017 External T.I. 2016-0658351E5 under s. 55(2.3).
CRA elaborates on its grandfathering of LLPs and LLLPs
At the 2017 IFA Roundtable, CRA announced that it will allow Delaware & Florida LLPs and LLLPs formed before April 26, 2017 to continue filing as partnerships, provided that three requirements are satisfied. CRA has now elaborated on this grandfathering relief.
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 an LLC was converted before April 26, 2017 to a Delaware & Florida LLP or LLLP would not prevent it from 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.
Neal Armstrong. Summary of 21 July 2017 Email of the CRA Delaware/Florida Working Group entitled “General answer for Delaware/Florida Working Group Submissions” under s. 96.
Income Tax Severed Letters 26 July 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a deposit to be used in the construction industry was not a mineral deposit
Capital cost allowance may be claimed under Sched. V for an industrial mineral mine, which excludes a “mineral deposit” – which is defined to include a “base or precious metal deposit” and “a mineral deposit in respect of which the Minister of Natural Resources has certified that the principal mineral extracted is an industrial mineral contained in a non-bedded deposit.” IT-492 states that “industrial mineral” means “a non-metallic mineral capable of being used in industry.” In explaining the denial of a certification request respecting a deposit of nephrite (a type of jade), CRA stated:.
The Minister of Natural Resources has advised that the principal mineral, nephrite, to be extracted from the Properties is not an industrial mineral contained in non-bedded deposits as it will be used as a construction material.
See also 2016-0674541E5.
Neal Armstrong. Summary of 16 June 2017 External T.I. 2016-0673551E5 under s. 248(1) – mineral resource.
Six further full-text translations of CRA APFF Roundtable items are available
Full-text translations of six of the APFF Roundtable items released on December 10, 2014 are listed and briefly described in the table below.
These (and the other translations covering the last 31 months of CRA severed letter releases) are subject to the usual (3 working weeks per month) paywall.