News of Note
Smith – the provision of a free monthly parking pass to an employee was a taxable benefit
Email this ContentA flight attendant would not have received a taxable benefit from the provision to him, pursuant to a collective agreement, of a free monthly parking pass at the Calgary airport if it had been demonstrated that his employer (Jazz) provided the pass primarily for its benefit. This was not demonstrated, given that employees were free to choose any available means to get to the airport – and, in the case of the taxpayer, who had no other available means of transport to the airport, he would have gotten there on time even if he had to pay for his pass.
Neal Armstrong. Summary of Smith v. The Queen, 2017 TCC 62 under s. 6(1)(a).
CRA considers that s. 152(4)(b)(iii) permits a reallocation of taxable income among provinces where a taxpayer’s sales revenue has been increased under s. 247(2)
S. 152(4)(b)(iii) extends the normal reassessment period for an additional three years for reassessments made “as a consequence of” a transaction involving the taxpayer and a non-arm’s length non-resident.
A s. 247(2) transfer-pricing adjustment (“TPA”) was reassessed by CRA within the three years after the normal reassessment period to increase the sales proceeds on a cross-border sale. CRA then performed a provincial income allocation audit, also within the additional three-year period. The Directorate found that CRA was also authorized by s. 152(4)(b)(iii) to reassess so as to reallocate both the pre-TPA and additional TPA revenue among the provinces – apparently even though this might only affect relative provincial taxable income and not affect federal taxable income (given that the TPA reassessment had already occurred).
Neal Armstrong. Summary of 16 January 2017 Internal T.I. 2016-0651411I7 under s. 152(4)(b)(iii).
CRA indicates that a sole shareholder who did not receive salary every year could receive a death benefit
CRA considers that if a sole shareholder was paid “over the years” for his or her employment services, the receipt only of dividends for the two years preceding death would not preclude an amount paid by the corporation after death from qualifying as a death benefit. CRA also stated that “the payment of the death benefit may be staggered over more than one taxation year.”
Neal Armstrong. Summary of 14 March 2017 External T.I. 2016-0656101E5 Tr under s. 248(1) – death benefit.
NR4s are required even where there is no Part XIII tax
CRA confirmed that the NR4 filings are required even if interest paid to a non-resident is not subject to withholding.
Neal Armstrong. Summary of 26 April 2017 IFA Roundtable, Q.8 under Reg. 202(1).
CRA interprets the s. 95(2)(a)(ii)(D)(IV)2 reference to “income” to include “loss,” but indicates that s. 95(2)(a)(ii)(D)(IV)2 does not work re an LLC interest that is sold before year end
S. 95(2)(a)(ii)(D) may recharacterize interest received by a non-resident sub (“CFA”) of Canco as active business income if the loan was made by CFA to a non-resident subsidiary (FA2) to finance FA2's purchase of FA3 shares that are excluded property. However, where one or both of FA2 and FA3 are fiscally transparent LLCs, s. 95(2)(a)(ii)(D)(IV)2 requires that their members at the end of their relevant taxation year be subject to U.S. tax on substantially all of such FA's income for that year.
CRA considers that this requirement will be satisfied even if, in the particular year, FA2 or FA3 experiences a loss rather than income. However, it considers that the words simply are not satisfied respecting, say, FA3, if FA2 (in this example, a C Corp.) disposes of its membership interest in FA3 before the end of the year, so that FA2 cannot satisfy the s. 95(2)(a)(ii)(D)(IV)2 requirement that it be a member of FA3 at the end of that year. This latter issue has been forwarded to Finance.
Neal Armstrong. Summary of under s. 95(2)(a)( 26 April 2017 IFA Roundtable, Q.7 under s. 95(2)(a)(ii)(D)(IV)2.
Formula One - Supreme Court of India finds that a UK company with operational control over annually-recurring 3-day Grand Prix races in India had a PE (the racing circuit of a local company)
A UK corporation ("FOWC"), which held the worldwide rights to commercially exploit the Formula One World (car-racing) Championships, agreed with an Indian corporation (“Jaypee”) that, in consideration of US$40 million payable by Jaypee, Jaypee would host, stage and promote the Formula One Grand Prix event at a racing circuit in India to be constructed by it. This agreement had a term of five years (renewable for another five years) and gave FOWC access to the circuit for a period of up to six weeks leading up to and encompassing each annual (three-day) F-1 Championship event. Jaypee immediately gave back media and title sponsorship rights to three FOWC affiliates, which generated revenue therefrom.
Sikri J found that the circuit was “a fixed place of business through which the business of [FOWC] is wholly or partly carried on” and, thus, was a permanent establishment of FOWC under Art. 5 of the U.K.-India Treaty. Respecting whether the circuit was a fixed place of business of FOWC, he did not appear to attach much significance to the assignment by FOWC to its affiliates of various rights, stating:
… The … arrangement clearly demonstrates that the entire event is taken over and controlled by FOWC and its affiliates. There cannot be any race without participating/competing teams, a circuit and a paddock. All these are controlled by FOWC and its affiliates.
Respecting whether the circuit was “permanent” notwithstanding the three-day duration of the annual races, he stated (adopting, as indicated, reasons below):
[B]oth the exclusive nature of the access and the [up to 6-week] period for which it is accessed…makes the presence of a kind contemplated under Article 5(1), i.e. it is fixed. …
[T]he OECD commentary and Klaus Vogel's commentary…[state] that as long as the presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business….
A stand at a trade fair, occupied regularly for three weeks a year, through which an enterprise obtained contracts for a significant part of its annual sales, was held [in Fowler] to constitute a PE.
Neal Armstrong. Summary of Formula One World Championship Ltd v. Commissioner of Income Tax, International Taxation – 3, Delhi & Anr., Civil Appeal No. 3849 of 2017 under Treaties - Article 5.
CRA will not provide administrative relief from duplicative T1134 filing requirements resulting from amalgamations or CFA transfers
CRA will not provide any administrative relief from the duplicative T1134 reporting required as a result of the amalgamation of two Cancos in a group, each with controlled foreign affiliates (resulting in two year ends in the calendar year of the amalgamation, assuming Amalco also has a calendar year end) or as a result of transferring CFAs between group members during the year, stating that providing such relief “would diminish the transparency of the offshore structures, which frustrates one of the purposes of the form.”
Electronic filing of T1134s, and T106 returns, by mid-2017 is anticipated. Transmission of supporting financial documentation is still being worked on.
Neal Armstrong. Summary of 26 April 2017 IFA Roundtable, Q.6 under s. 233.4(4).
CRA considers that the FAT denial rule in s. 91(4.7) applies year-by-year based on actual dividend deductibility
The s. 91(4.1) rule for denying a deduction for foreign accrual tax is deemed by s. 91(4.7) to be met if, under relevant foreign law, dividends on shares held by specified owner “are treated” as interest or another form of deductible payment. Under Brazilian law, corporations can choose to make tax deductible distributions to shareholders. CRA considers that this ability to elect deductibility does not engage s. 91(4.7) in any particular year provided that, in fact, no dividends paid to a specified owner are deductible by the paying corporation under Brazilian tax law. If the deductibility election is made in the year that could also by reason of the chain rules (i.e., based on the expansive definitions of “specified owner” and “pertinent person or partnership”) result in the denial of FAT in respect of FAPI for subsidiaries within a stacked chain of foreign affiliates.
Neal Armstrong. Summary of 26 April 2017 IFA Roundtable, Q.5 under s. 91(4.7).
CRA notes the application of s. 261(21) to deny a hedge of a U.S. dollar upstream loan
S. 261(6.1) deems a foreign affiliate, for purposes of computing foreign accrual property income, to have an elected functional currency that is the same as that of the Canadian taxpayer of which it is a FA. Suppose that FA, a U.S. subsidiary of Cansub which has elected to have the U.S. dollar as its functional currency, makes a U.S.-dollar loan to Parent (which has the Canadian dollar as its functional currency and is the parent of Cansub).
CRA considers that any FX loss realized by Parent on maturity of the loan would be denied by s. 261(21) given that the loan made by FA was on FAPI account – even if Parent had entered into a cross-currency swap to hedge its U.S.-dollar exposure under this loan and thus realized a (supposedly) offsetting gain on the swap.
Neal Armstrong. Summary of 26 April 2017 IFA Roundtable, Q.4 under s. 261(20).
CRA further extends grandfathering relief for Florida and Delaware LLPs and LLLPs
CRA has further extended its grandfathering relief from its view of Florida and Delaware LLPs and LLLPs as corporations, so that any such entities formed before 26 April 2017 would be accepted as partnerships for all prior years as well as all future years, provided that none of the following applies:
- one or more members of the entity, or the entity itself, takes inconsistent positions from one taxation year to another, or for the same taxation year, as between partnership or corporate treatment;
- there is a significant change in the membership or the activities of the entity; or
- the entity is being used to facilitate abusive tax avoidance.
CRA also indicated that such entities, if treated as corporations (e.g., they were formed after 26 April 2017), would be treated the same as LLCs for purposes of para. IV(6) of the Canada-US Treaty, and that s. 93.2 would apply to them.
Neal Armstrong. Summaries of 26 April 2017 IFA Roundtable, Q.3 under s. 96, s. 93.2 and Treaties, Art. 4.