News of Note
Société générale valeurs mobilières – Federal Court of Appeal finds that a Brazilian tax sparing provision did not permit the taxpayer to shelter Canadian-source income
Email this ContentDid a tax sparing provision in the Canada-Brazil Treaty, which deemed a Canadian taxpayer to have paid 20% Brazilian withholding tax on interest received by it from Brazil, have the effect of providing to it a Canadian foreign tax credit equal to the amount of that fictional tax, even though its effective Canadian tax rate on that interest income was much lower than 20% (perhaps because of applicable leverage)? This question turned on the meaning of a proviso in the Treaty, which stated that the FTC otherwise required by the Treaty to be accorded by Canada:
shall not… exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.
Paris J, in rejecting the taxpayer’s position (and affirming the Crown's position that the FTC effectively should be limited to the low effective Canadian tax rate on the Brazilian interest income), had stated:
…The proper test for determining which amounts of the Canadian resident taxpayer should be included or deducted from the gross interest arising from sources in Brazil is that found in subsection 4(1) of the Income Tax Act.
This was confirmed by Woods JA, who stated:
[T]he ordinary meaning of the text takes into account not only the gross income which may be taxed by Brazil, but also the actual Canadian tax as computed under the Income Tax Act, which is based on net income.
Neal Armstrong. Summary of Société Générale Valeurs Mobilières Inc. v. The Queen, 2017 FCA 3 under Treaties - Article 24.
CRA comments favourably on a safe income strip using a preferred share stock dividend
Opco pays a stock dividend on its common shares (having a nominal paid-up capital and adjusted cost base) held by Holdco. The stock dividend is comprised of preferred shares with a nominal paid-up capital and a redemption amount equal to Opco’s safe income of $700,000. Opco then redeems the preferred shares for $700,000 and Holdco sells its Opco common shares to a third party for proceeds that reflect the $700,000 strip.
CRA indicated that s. 55(2) would apply to the preferred share redemption if the Part IV tax exception did not apply. However, given that the amount of the preceding stock dividend would be deemed by 55(2.2) for various s. 55(2) purposes to be $700,000, that amount would come out of the safe income of Opco under s. 55(2.3)(b) which, in turn, would mean that the cost of the preferred shares to Holdco would be deemed by s. 52(3)(a)(ii) also to be $700,000.
Accordingly, the application of s. 55(2) to convert the deemed dividend arising on the preferred shares redemption into proceeds of disposition would not result in any capital gain, given the stepped-up tax basis in the redeemed shares.
Neal Armstrong. Summary of 12 December 2016 External T.I. 2016-0668341E5 Tr under s. 55(2.3)(b).
CRA states that co-owners of specified foreign property with aggregate $100K cost amounts have T1135 reporting obligations even if they did not contribute to a particular property
Does a taxpayer with a joint interest in specified foreign property but who did not contribute to its acquisition, e.g., a child who was added as joint owner for estate planning purposes, have a reporting obligation? In the joint ownership case, must the taxpayer be the beneficial owner or would strictly legal ownership require reporting? After stating that the term “specified foreign property” in s. 233.3(1), which refers to property “of” a person or partnership, means property “owned” by the person or the partnership, and after referencing its discussion in S1-F3-C2 of beneficial ownership, CRA answered the first question (but seemingly not the second) as follows:
[A] reporting entity would typically be the owner (including a beneficial owner) of the property whether such ownership is jointly with another person or otherwise and irrespective of the financial contribution made by the reporting entity towards the acquisition. In the case of joint ownership, each reporting entity would report their ownership interest in the specified foreign property (i.e., if the total cost amount of specified foreign property to the entity exceeds $100,000).
Neal Armstrong. Summary of 9 December 2016 External T.I. 2016-0639481E5 under s. 233.3(1) – specified foreign property.
Income Tax Severed Letters 18 January 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Bombardier India - Ahmedabad Income Tax Appellate Tribunal finds that technical services under the Canada–India Treaty, Art. 12 must entail know-how transfers
Art. 12(4)(b) of the Canada-India Treaty assimilates to royalties “payments of any kind… in consideration for the rendering of any technical or consultancy services…if such services…make available technical knowledge, experience, skill, know-how, or processes….” Bombardier Canada provided a wide range of administrative and management services to Bombardier India through use of its broad platform of software. In finding that Bombardier India’s payments for these IT-related services were not deemed to be royalties, the ITAT applied a statement in a 2012 decision of the Karnataka High Court that:
[T]o fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end.…
The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider.
Since there was no such transmission of know-how to Bombardier India, the fees paid by it were not royalties under Art. 12, and were free of withholding tax.
Neal Armstrong. Summary of DCIT vs. Bombardier Transportation India Pvt. Ltd, ITA No.555/Ahd/2016 under Treaties – Art. 12.
10 fully translated 2015 APFF Roundtable items are available
Full-text translations of the first 10 questions from the 2015 APFF Roundtable are now available and are listed and briefly described in the table below. Q.5 (respecting the timing of child care deductions) was not answered at the time, so that the table below instead references the answer which was released a few weeks later as a technical interpretation.
These (and the other translations covering the last 13 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
The B2B rules operate in a formulaic and mechanical manner
The formula in s. 212(3.2) for allocating interest to an ultimate funder for purposes of the back-to-back (BTB) loan rules could result in an ultimate funder being allocated a pro-rata portion of the deemed interest even though it has provided a non-interest-bearing loan or it has not provided any loan at all but has granted "specified rights".
The character substitution rules in ss. 212(3.6) and 212(3.92) et seq. are intended to prevent taxpayers from avoiding the BTB loan or royalty rules by substituting a payment of interest or royalties between an intermediary and a non-resident with payments that are economically similar. In the case of shares, this would suggest that the shares should be debt-like. However, given that once a dividend is declared, it generally gives rise to a debt, these rules may potentially apply to ordinary common shares on which dividends have been declared during the relevant period and where the requisite tests are met.
Neal Armstrong. Summaries of Sabrina Wong, "Bill C-29 Amendments to the Back-to-Back Rules," International Tax, Wolters Kluwer CCH, December 2016, Number 91, p. 5 under s. 212(3.2), s. 212(3.9)(b)(ii) and s. 212(3.6)(a).
CRA finds that the multi-disciplinary preparation of health assessment reports was a taxable supply
CRA found that the preparation of assessments of clients which included physical examinations, diagnostic tests, and lifestyle counselling and resulted in a personalized report of findings (being a compilation of the reports from the different service providers) delivered to the client did not qualify as medical care, so that the part of the facility in which these assessments were made did not qualify as a health care facility. This, in turn, meant that the assessment service was not exempted as an institutional health care service. Riverfront, which found that medical reports prepared for supply to legal and insurance company clients qualified as exempt supplies of medical services, was distinguished on the basis that here, a physician did not review the whole report but instead just did her part of the report, and that the report was “a multi-disciplinary assessment conducted by a number of different service providers” rather than a medical report.
Neal Armstrong. Summary of 29 January 2016 Ruling 163020 under ETA Sched. V, Pt. II, s. 1 – health care facility - (a).
CRA indicates that a CPP death benefit potentially could be excluded from estate income under s. 104(6)
After confirming that, by virtue of the new s. 104(13.3), “the option to include [a] CPP/QPP death benefit in income on a T3 return will no longer be available by making a designation under subsection 104(13.1) if the estate’s taxable income (determined as though the designation were valid) for the year is greater than nil,” CRA then reaffirmed an earlier position that:
where the initial taxation year of a testamentary trust coincides with the executor year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor’s year, the CRA will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24).
Accordingly, depending on the terms of the will, CRA would be amenable to considering that such income receipt could be flushed out to the beneficiaries.
Neal Armstrong. Summary of 25 July 2016 External T.I. 2016-0630781E5 under s. 104(24).
CRA finds that having a trust interest vest indefeasibly in a minor is consistent with the minor not receiving or having any use of the trust capital
A discretionary inter vivos family trust, which was approaching its 21st anniversary, had provisions in its declaration of trust which contemplated that, prior to that anniversary, the trustee would make an irrevocable declaration establishing the respective shares to the trust fund of the family beneficiaries, so that the trust fund would be distributed to those beneficiaries except those who were “designated persons” (i.e., grandchildren who were minors), whose respective shares as so determined would be held for them until they attained the age of majority. Designated person status was relevant under s. 74.4 because of some previous estate freeze transactions.
However, there were “ambiguities” in the declaration of trust respecting this supposedly irrevocable designation. The solution was to get a declaration from the Quebec Superior Court declaring that the ambiguities were resolved as sought by the trustee, and to then transfer all the assets of the old trust to a new trust with the same trustee, and whose terms would “for all practical purposes” be the same as for the old trust but “adjusted to take into account the conclusions of the declaratory judgment rendered.”
CRA ruled that this transfer was deemed not to be a disposition under the exception in para. (f) of the disposition definition (and so that s. 248(25.1) deemed the new trust to be a continuation of the old). CRA also provided an opinion that the making by the trustee of the beneficiary-shares designation (which became irrevocable immediately before the 21st anniversary of the old trust or when he ceased to be a trustee), thereby causing all the interests in the new trust to indefeasibly vest in the beneficiaries in accordance with their declared shares (but with the minor grandchildren’s shares being held in trust for them until 18) did not detract from the minor grandchildren continuing to comply with s. 74.4(4)(b), which requires that the child “may not receive or otherwise obtain the use of any of the income or capital of the trust while being a designated person.” CRA also opined that the 21 year rule did not apply to the new trust notwithstanding that it still held trust property for the minor grandchildren on the 21st anniversary of the settling of the old trust (based on the indefeasible vesting exception to this rule in (g) of the s. 108(1) trust definition.)
Neal Armstrong. Summaries of 2016 Ruling 2014-0552321R3 F under s. 248(1) – disposition – (f), s. 74.4(4) and s. 108(1) - trust - (g).