News of Note
Six further full-text translations of CRA technical interpretations are available
Email this ContentFull-text translations of six French technical interpretations that were released last week and between January 28, 2015 and January 21, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 28 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
St-Pierre – Tax Court of Canada finds that the judicial nullification rather than rectification of a premature capital dividend declaration gave rise to a s. 15(2) income inclusion
A private corporation that sold eligible capital property in 2008 declared a capital dividend in the year in an amount which included the untaxed portion of this sale receipt. This was a mistake, as the addition to the capital dividend account for this amount does not occur until the beginning of the following year. When CRA discovered this mistake a number of years later, it indicated that it would not assess the corporation for Part III tax provided that the mistake was rectified through an order of the Quebec Superior Court.
What CRA likely had in mind was that the court order would simply change the effective dates of the dividend payable dates. As it happened, only a small portion of the dividend made payable in 2008 was actually paid in 2008, so that the CDA addition from the sale was not needed to cover that dividend payment. Accordingly, all that was necessary to fix the problem was to get the court order to declare the payable date for most of the dividend to be on or after January 1, 2009.
What the corporation instead sought and obtained was a court order dated January 6, 2014 that retroactively annulled the dividend and ordered the individual shareholder to repay the dividend, which he then did, and with a fresh capital dividend then being declared and paid. The corporation’s counsel sought this nullification order notwithstanding that CRA, on being apprised of this nullification plan, had a number of months previously assessed the individual under s. 15(2).
Favreau J upheld the s. 15(2) assessment. Although he did not consider that the court-declared obligation of the individual to effect restitution to the corporation of the dividend amounts had retroactive effect so as to give rise to indebtedness at the time of the s. 15(2) assessment, he considered that the dividend payments gave rise to indebtedness of the individual to the corporation under the unjust enrichment principle.
Neal Armstrong Summaries of St-Pierre v. The Queen, 2017 CCI 69 under s. 15(2) and General Concepts - Estoppel.
Granofsky – Federal Court of Appeal confirms that a taxpayer’s counsel can consent in writing to reassessment of the taxpayer
S. 169(3) provides that the Minister may at any time reassess, with the consent in writing of “the taxpayer.” D’Auray J in the Tax Court found that this requirement can be satisfied through a signature of the taxpayer’s counsel acting within the scope of her mandate (and went on to find that, in the case before her, counsel had the mandate). Scott JA in the Court of Appeal agreed with this finding, stating that "the counsel of record…was entitled to provide, for the purpose of executing the [settlement] Agreement, the ‘consent in writing’ referred to in subsection 169(3)."
Neal Armstrong. Summary of Granosky v. The Queen, 2016 TCC 181, aff’d 2017 FCA 119 under s. 169(3).
CRA rules on a phantom stock plan for a Canadian wholly-owned subsidiary of a non-resident company
CRA provided a ruling (albeit, guarded in its wording), that a phantom stock plan provided by a wholly-owned sub of an non-resident SA to five of its key employees would not be treated as a salary deferral arrangement. Speaking generally, the plan provided that on the occurrence of a “Triggering Event” an employee would receive a cash payment equal to the excess of the “Market Value” of the employer’s shares on the Triggering Event over their Market Value on grant. Except where the Triggering Event was one which disclosed a value (namely, an acquisition of control, amalgamation, business sale or IPO), the “Market Value” was computed as nine times the average adjusted EBITDA for the previous two fiscal years plus working capital, as adjusted, and minus long-term debt. In addition to the “Material Change” Triggering Events referenced above, a Triggering Event included the employee’s death, departure or retirement, and termination of employment for any reason other than for things like theft.
Neal Armstrong. Summary of 2015 Ruling 2014-0546131R3 F under s. 248(1) - salary deferral arrangement.
CRA does not rule out generating a s. 207.7(2) refund where an RCA trust distributes a life insurance policy to its employee beneficiary
CRA considered, respecting an RCA trust with an employee as its sole beneficiary, that its “holding of a life insurance policy with life insurance coverage (death benefit) in a year is a benefit that is conditional on the existence of the RCA” and, thus, was a benefit described in para. (a) of the RCA “advantage” definition.
What then if the RCA trust transferred the policy to the employee and applied s. 207.5(2) to claim a refund under s. 207.7(2) on the basis that the RCA trust no longer holds property. The issue is that, under s. 207.5(3), s. 207.5(2) does not apply if any part of a decline in the fair market value of subject property of the RCA is reasonably attributable to an advantage in relation to the RCA trust - subject to the exercise of CRA discretion. In this regard, CRA stated:
In the situation where an RCA trust is wound up, the Minister may, depending on the circumstances, allow the election by adjusting the amount deemed under subsection 207.5(2) to be the RCA's refundable tax. The deemed amount may, depending on the circumstances, be adjusted to reflect the decline in the FMV caused by a prohibited investment or a benefit that would otherwise not result in a repayment.
This sounds like an invitation to request a ruling.
Neal Armstrong. Summary of 15 May 2017 External T.I. 2015-0580461E5 Tr under s. 207.5(3).
CRA found that the SDA rules applied to a purported DSU that had a potential change-of-control redemption trigger (and continues to frown on Code s. 409A triggers)
CRA found that a purported deferred share unit plan did not come within the Reg. 6801(d) safe harbour, and was a salary deferral arrangement, since the terms of the plan provided for the potential redemption of units in the event of a change of control of the corporate employer (which would not necessarily result in the employee’s termination) or, in the case of U.S. participants, on the occurrence of a retirement as contemplated under Code s. 409A. 2015-0610801C6 would have grandfathered units that were credited to a participant's account after November 24, 2015 if the plan were offside by virtue only of its having the Code 409A triggering event. However, here the participants were required to recognize income on a current basis under ss. 6(11) and (12) because the plan also was offside due to the potential change-of-control triggering event.
For example, if an advance election has been made by a participant in the 2014 taxation year to have the plan apply to a bonus earned and payable in 2015 and deferred units were thereby credited to his or her account in 2015, the participant would then include in 2015 income the value of units received in respect of the deferred bonus and any dividend equivalents to which the participant was entitled at the end of 2015. If an earlier year was involved that was statute-barred, CRA would assess the s. 6(11) and (12) amounts for the first year that was not statute-barred.
Neal Armstrong. Summaries of 21 November 2016 Internal T.I. 2016-0641961I7 Tr under Reg. 6801(d) and s. 6(11).
Satoma Trust – Tax Court of Canada finds that is was abusive to use s. 75(2) as a surplus-stripping tool
In order to strip surplus of an Opco, Opco (indirectly) paid dividends to Holdco 1, which made a capital contribution of those funds to Holdco 2, which then paid those funds to a family trust (Satoma Trust) as a dividend on special shares that Satoma Trust held in Holdco 2. Due to some engineering, s. 75(2) applied to that dividend, so that all of that dividend was attributed under s. 75(2) to Holdco 1, which excluded the dividend from its taxable income under s. 112(1).
Lamarre ACJ thought that it was abusive to use s. 75(2) to avoid tax rather than prevent income splitting, and also indicated that the “intercorporate” dividend deduction was not intended to avoid tax to individuals such as Satoma Trust. Before confirming CRA’s approach of including the dividend in the income of Satoma Trust under s. 245(2), she stated:
The object and spirit of these two provisions is not to allow the transfer of funds from a corporation to a trust by taking advantage of a total tax reduction. The avoidance transactions at issue run counter to the purpose of these provisions.
Neal Armstrong. Summaries of Fiducie Financière Satoma v. The Queen, 2017 CCI 84 under s. 245(4), s. 245(1) - tax benefit and s. 75(2).
Canada has registered reservations on all MLI provisions other than the minimum standards and binding mandatory arbitration
Canada and 67 other countries signed the Multilateral Convention (the ``MLI``) on June 7, 2017. 10 other countries have expressed their intention to sign the MLI.
Canada also provided the OECD with a provisional list of countries it wishes to connect with under the MLI, so that its bilateral income tax conventions with those countries will be modified accordingly. The list has 75 counties which are, according to the Backgrounder released by the Department of Finance on June 7, 2017, "almost all countries and jurisdictions that were members of the ad hoc group that developed the Multilateral Convention and that have a bilateral tax treaty with Canada."
However, the Backgrounder also notes that "for the modifications to apply to a tax treaty listed by Canada, Canada's treaty partner must also ratify the Multilateral Convention and list its tax treaty with Canada." Such intentions of all the countries who signed yesterday have been published by the OECD.
Art. 28(7) and 29(4) of the MLI contemplate that at the time of signing, the signatories are to provide a provisional list of reservations and notifications, which Canada has done. As noted in the Backgrounder, Canada is not adopting, at this time, any part of the MLI other than the minimum standard provisions and binding mandatory arbitration (although "Canada will continue to assess whether to adopt these [other] provisions at the time the Multilateral Convention is ratified.") Thus, it is adopting (with willing partners) at this time the treaty shopping rules (and is opting for a principal purpose test, not a limitations-on-benefits Article) as well as binding arbitration and beefed up mutual agreement procedures and a general statement of intent to prevent treaty shopping. (The Backgrounder goes on to state that "Where appropriate, Canada will, over the longer term, seek to negotiate, on a bilateral basis, a detailed limitation of benefits provision that would also meet the minimum standard.")
Canada did not list the US, Germany and Switzerland. The US has not adopted the MLI and Canada, contemporaneously with the signing, announced bilateral negotiations with the latter two.
Nat Boidman and Neal Armstrong. Go to OECD BEPS - Canadian Adoption to see ``Department of Finance, Status of List of Reservations and Notifications at the Time of Signature,`` 30 May 2017 and Department of Finance, ``Backgrounder: Impact of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting,`` 7 June 2017 .
Hughes – Tax Court of Canada prefers the more lenient French version of the repeated-failure-to-file penalty in s. 162(2) to the English version
One of the conditions for the application of the repeated-failure-to-file penalty of up to 50% under s. 162(2), contained in both the English and French versions, is that CRA have sent a demand under s. 150(2) to file a return for the year, whereas the French version contains an additional condition that the taxpayer have failed to file the return within the time limit specified in the demand. Jorré J found that the French version made more sense and, therefore, was to be preferred over the English version.
As the Crown had failed to advance evidence as to whether the taxpayer had filed a return within the demanded period, Jorré J found that the taxpayer was not subject to the penalty.
Neal Armstrong. Summaries of Hughes v. The Queen, 2017 TCC 95 under s. 162(2).
The Canadian surplus and FAT rules are not equipped to handle the proposed EU common consolidated corporate tax base
The European Commission draft EU directive package of October 2016 proposed the adoption of a common consolidated corporate tax base (“CCCTB”) under which EU-resident companies (and EU-located branches of third-country companies) would have one common set of rules for computing taxable income, companies within the same group would consolidate their individual results, and the group's consolidated taxable income would be allocated among the individual group members on the basis of a formula giving equal weight to sales, labour, and assets.
Where EU earnings of European subsidiaries of a Canco were active business earnings, determining earnings on the proposed apportionment basis could result in substantial discrepancies between the surplus balances for Canadian purposes of a particular subsidiary and its cash available for distribution. Even if it were more appropriate to determine the earnings as the pre-consolidated before-tax income computed in accordance with the CCCTB, taxes then determined in accordance with the CCCTB could still have the effect of shifting surplus inappropriately from one foreign affiliate to another.
If the European subsidiaries generated foreign accrual property income, the potentially major discrepancy between how FAPI and the local taxes was determined under Canadian principles and the CCCTB methodology, respectively, would often give rise to inability to obtain a deduction in computing FAPI under the foreign accrual tax rules.
Neal Armstrong. Summaries of Michael Black, "Cross-Border Consolidation and the Foreign Affiliate Rules," Canadian Tax Journal (2017) 65:1, 173-89 under Reg. 5907(1) – earnings – (a)(i), Reg. 5907(1) – taxable surplus, s. 95(1) – foreign accrual tax and Reg. 5907(1.3)(a).