News of Note

CRA’s policy re employee discounts on merchandise does not extend to discounted services, e.g., no commissions on insurance

CRA stated that as its “administrative position concerning discounts on merchandise and commissions from personal purchases does not apply to discounts on services,” employees of an insurance broker who acquired insurance coverage for personal purposes (e.g., home or automobile insurance) should generally recognize a taxable benefit equal to the commission customarily charged by their employer for such coverage and which was not charged to them.

Neal Armstrong. Summary of 26 March 2019 External T.I. 2017-0729441E5 under s. 6(1)(a).

6 more translated CRA interpretations are available

We have published a further 6 translations of CRA interpretations released in March 2012. Their descriptors and links appear below.

These are additions to our set of 837 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2012-03-30 20 February 2012 Internal T.I. 2011-0429461I7 F - OBNL et profits accessoires Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(l) articles of NPO should have prohibition on profit-seeking by it and any successor
12 March 2012 Internal T.I. 2011-0431631I7 F - Catégorie d'amortissement- maison flottante Income Tax Regulations - Schedules - Schedule II - Class 7 portable floating home qualified as “vessel”
Income Tax Act - Section 13 - Subsection 13(21) - Vessel vessel is as defined in Canada Shipping Act, 2001
Statutory Interpretation - Interpretation Act - Section 44 - Paragraph 44(h) IA s. 44(h) applied to reference definition in replacement Canada Shipping Act
2012-03-23 14 March 2012 External T.I. 2011-0422551E5 F - Application du paragraphe 98(5) Income Tax Act - Section 98 - Subsection 98(5) s. 98(5) unavailable where rental-property LP is wound up into a partner who operated the business in the leased property
13 March 2012 External T.I. 2012-0433661E5 F - Notion de dépense engagée Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense expense not incurred if obligation therefor dependent on future contingency
Income Tax Act - Section 118.2 - Subsection 118.2(2.1) expense incurred if obligation has come into existence
16 March 2012 External T.I. 2012-0432101E5 F - Acquisition d'un séparateur d'huile Income Tax Regulations - Schedules - Schedule II - Class 1 oil separator Class 1 if sufficiently attached to garage
14 March 2012 External T.I. 2011-0423291E5 F - Fiducie pour soi-même sans limite d'âge Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) - Subparagraph 73(1.01)(c)(ii) joint protective trust would not satisfy s. 73(1.01)(c)(ii)
Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) - Subparagraph 73(1.01)(c)(iii) - Clause 73(1.01)(c)(iii)(A) two spouses separate from their children can create a joint spousal or common-law partner trust
Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Testamentary Trust tainting effect of joint spousal or common-law partner trust on subsequent testamentary trust
Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(1) - Paragraph 107.4(1)(a) joint protective trust would not satisfy paras. (a) and (e) of "qualifying disposition"

Resource Capital Fund IV LP – Full Federal Court of Australia finds that the effecting of a share sale pursuant to an Australian Scheme of Arrangement pointed to an Australian source

Two Caymans investment LPs with mostly U.S.-resident limited partners realized income-account gains from the disposal, pursuant to an Australian Scheme of Arrangement, of a significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held leases in Australia and carried out an operation there of mining lithium ores and processing them. Pagone J had found that such gains were derived from an Australian source notwithstanding that significant decisions were made outside Australia by the general partner’s investment committee and that the manager was outside Australia.

In affirming this finding, the Full Court stated:

Here, each respondent’s “enforceable right” to the proceeds of the sale of the interests and shares in Talison Lithium arose from the scheme of arrangement. That arrangement took place in Australia, and accordingly, because the scheme was the “proximate” origin of the profits earned, and because of the other connections with Australia summarised by the primary judge … including the location of the mine in Western Australia, those profits had a source in Australia.

Pagone J had also found that the shares of Talison Lithium were not taxable Australian real property because their value was attributable more to the “downstream” lithium processing operations than to the “upstream” mining operations. The Full Court reversed this finding, partly based on its view that the on-site processing operations were part of the mining operation, so that most of the processing assets also were mining assets (and the associated leases, effectively mining leases).

Neal Armstrong. Summaries of Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51 under s. 152(1), s. 115(1)(a)((ii) and s. 248(1) – taxable Canadian property – para. (d).

CRA recognizes the binding nature of audit settlement agreements

CRA has released its communiqué on audit settlement agreements (i.e., an agreement between the taxpayer and CRA for settlement of an audit issue). CRA recognizes that Rosenberg found audit agreements to be binding. However, CRA does not explicitly acknowledge the point made in Savics and the cases cited therein that, notwithstanding s. 169(2.2), “if a settlement-implementing reassessment is not in keeping with the agreement that the taxpayer and the fiscal authority have reached, a waiver of the right to appeal will not preclude the taxpayer from appealing in respect of the aspect of the reassessment that does not coincide with the settlement agreement.”

CRA recognizes the Galway principle, stating:

Auditors cannot contravene provisions of the ITA or ETA in negotiating and finalizing an audit agreement. They must assess taxes on the basis of the facts as determined, in accordance with legislation and [in a CRA editorial addition] CRA policies. This means that audit agreements normally relate to subjective audit issues.

In what may be a similar point, CRA also states that “Taxpayer relief requests are to be dealt with on their own merit separately and solely on the basis of the taxpayer relief provisions.”

Additional considerations arise in transfer-pricing disputes, where a Treaty mutual agreement procedure may be engaged.

Neal Armstrong. Summaries of AD-19-01 Audit Agreement and Waiver of Objection Rights Guidelines 2019-02-19 under s. 152(1) and s. 169(2.2).

CRA finds that a public company’s proposed use of an EPSP trust to create the equivalent of a stock option plan for CCPC employees would be abusive tax avoidance

A Canadian public company (Employerco) proposed that the share appreciation right (SAR) units of its employees be converted into an equivalent value of deferred share units (DSUs), with the payout of the referenced number of shares on the retirement etc. of each employee participant to be taken care of by an employee’s profit sharing plan (EPSP) trust (settled by Employerco at the time of the conversion into DSUs). The EPSP trust would use an interest-bearing loan from Employerco to fund its purchase of the matching number of Employerco shares and fund the loan interest with dividends on the shares and annual contributions from Employerco – both of which were taxable income to it but with an offsetting interest deduction, so that there would be no annual income inclusion to the participant under s. 144(3). On retirement, Employerco would make a further contribution (deducted by it under s. 144(5)) to enable the EPSP Trustee to repay the applicable portion of the loan, with that amount being included in the participant’s income under s. 144(3), and with the EPSP trust distributing the shares to the participant. Similar features provided participants with dividend-equivalent DSUs and subsequent pay-out.

CRA found that this plan “failed on technical grounds,” i.e., the conversion of the units from SARs to DSUs and addition of dividend equivalents would be a fundamental change triggering an immediate disposition of the units, thereby resulting in an immediate employment income inclusion – or alternatively, the conversion of the units from SARs to DSUs would breach the post-amble of Reg. 6801(d), resulting in the plan becoming a salary deferral arrangement, with an immediate income inclusion under s. 6(11).

CRA went on to indicate that even if this structure were instead implemented on a prospective basis, it would refer such a plan to the GAAR Committee as being abusive, stating:

[T]he structure is highly artificial, provides significant tax deferral and rate reduction benefits on employment compensation, and represents an abuse of the EPSP rules. Here, there is no profit-sharing in purpose or effect. …

Furthermore … the favourable tax results … are similar … to those available under the employee stock option rules … . even though … the requirements of paragraph 110(d) or (d.1) are not satisfied.

Neal Armstrong. Summaries of February 2019 Internal T.I. 2018-0762101I7 under s. 144(3), Reg. 6801(1)(d) and s. 245(4).

Deans Knight – Tax Court of Canada finds that the absence of an acquisition of effective control of a Lossco also demonstrated an absence of s. 245(4) abuse

The “Tax Attributes” of a Lossco (the taxpayer) were effectively sold to arm’s length investors pursuant to transactions under which:

  • The existing shareholders of Lossco exchanged their Lossco shares for “Newco” shares under a Plan of Arrangement
  • A private company “facilitator” (Matco) acquired a debenture of the Lossco that was convertible into shares representing 79% of its equity shares but only 35% of its voting shares (this occurred before the introduction of s. 256.1). Matco also obligated itself to find a purchaser for the remaining shares of Newco for a pre-agreed price (failing which Matco itself would be required to pay that amount to Newco, without a right ot acquire those shares).
  • Lossco transferred it assets to Newco for a note.
  • Matco then identified a mutual fund management company who wanted to IPO Lossco and use the IPO proceeds (of $100M) for a new bond trading business to be carried on in Lossco.
  • The IPO subscription price for the newly-issued common shares caused the securities of Lossco held by Newco and Matco to appreciate which, in the case of Matco, effectively was its fee.
  • Newco sold its remaining shares of Lossco to Matco for the pre-agreed price notwithstanding that this was at a 20% discount to the shares’ current market value.

Paris J rejected the Crown’s technical argument that the parties effectively treated Newco’s right to sell the remaining Lossco shares to a Matco-located purchaser as a right of Matco to acquire those shares, so that s. 256(8) applied by virtue of a s. 251(5)(b) right to deny use of the Tax Attributes, stating that the Crown, contrary to Shell, was effectively seeking to recharacterize the transactions based on their economic substance.

He also found that there was no abuse of the loss-streaming rules (and, in particular, of ss. 256(8) and 251(5)(b)), stating:

I … find that the object, spirit and purpose of subsection 111(5) is to target manipulation of losses of a corporation by a new person or group of persons, through effective control over the corporation’s actions… .

[T]he circumstances referred to by the Respondent do not, in my view, indicate that Matco had effective control over the majority of the voting shares of the Appellant prior to the IPO … .

Neal Armstrong. Summaries of Deans Knight Income Corporation v. The Queen, 2019 TCC 76 under s. 251(5)(b)(i) and s. 245(4).

Income Tax Severed Letters 17 April 2019

This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA expands its official published positions on the replacement property rules

Folio S3-F3-C1 on the replacement property rules has largely repeated the points in (now-cancelled) IT-259R4, but has also added a few points:

  • Class 14.1 properties (e.g., farm quotas) will not be eligible as former business properties because they are not real property.
  • The s. 44 rollover can be used to reduce a capital gain that otherwise would arise after giving effect to a partial rollover under s. 85(1).
  • A building rented by a partner to a partnership for use in its business would normally be considered to be a former business property of the partner.
  • Where a partnership is wound up under s. 98(3), CRA accepts that the undivided interests received in the former partnership’s property can qualify as former business properties, so that the former partners can now exchange their undivided interests for divided interests on a rollover basis under ss. 44 and 13(4).
  • CRA has added brief comments on the extension in s. 13(4.2) of the former business property concept to limited-period franchises, concessions or licences that have been disposed of or terminated.

Various of the positions carried forward from IT-259R4 are potentially quite helpful, including an expansive interpretation of the concept of similar business.

Neal Armstrong. Summaries of Folio S3-F3-C1 dated 8 April 2019 under s. 13(4.1), s. 13(4.3), s. 44(1), s. 44(1)(e), s. 44(5)(a), s. 44(6), s. 248(1) – former business property, s. 87(2)(l.3) and s. 88(1)(e.2).

CRA comments on criteria for downward transfer-pricing adjustments, and s. 247(2)(d) adjustments process

Comments made by Alexandra MacLean (DG, ILBD) at a recent CTF transfer-pricing seminar included:

  • CRA’s focus respecting when it will consider a downward transfer-pricing adjustment under s. 247(10) to be “appropriate in the circumstances” is on whether there is good evidence that there will be a corresponding upward adjustment in the other jurisdiction (that respects the arm’s length principles), so as to not result in double non-taxation. The International Tax or Audit Division will forward the requested downward adjustment to the Competent Authority Services Division where there is a treaty country on the other side of the transactions.
  • Recharacterization under s. 247(2)(d) entails a three-step process.
    • First, audit staff make a submission to the Transfer Pricing Review Committee. If accepted, the taxpayer is notified.
    • The audit team then conducts additional research, and makes a second submission to the TPRC, and a second review by it determines whether the auditor is permitted to propose an adjustment under ss. 247(2)(b) and (d). The taxpayer is then notified and allowed to make a submission..
    • At the third stage, the TPRC meets, along with representatives from Justice, Abusive Tax Avoidance, and Finance, to make a final recommendation.
  • BP is not a complete bar to access tax accrual working papers, as indicated by Atlas. The Communiqué on “Obtaining Information for Audit Purposes” contemplates reasonableness and restraint, as the focus is on determining the facts and purpose of the transaction, with CRA then making its own determination of the transaction’s legal effects.

  • The threshold for the Audit File Resolution Committee to look at a proposed adjustment is $100 million.

Neal Armstrong. Summaries of 27 March 2019 CTF Seminar - Transfer Pricing under s. 247(10), s. 247(2)(d), s. 233.8(3) and s. 231.1(1)(a).

6 more translated CRA interpretations are available

We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in March 2012. Their descriptors and links appear below.

These are additions to our set of 831 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2019-04-10 2 April 2019 Internal T.I. 2016-0649821I7 F - Unclaimed superannuation or pension benefits Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) subsequent year’s payment of benefit to a previously-unidentified beneficiary is only income in that year as an “in lieu of” pension amount
General Concepts - Payment & Receipt amount received in Year 2 in lieu of pension benefit includes source deductions in Year 1
2012-03-30 12 March 2012 External T.I. 2011-0425361E5 F - Assistance paid by franchisor Income Tax Act - Section 9 - Exempt Receipts/Business reimbursements of business expenses increase income
Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) contest awards paid to franchisees includible under s. 12(1)(x) if not under s. 9
8 March 2012 External T.I. 2011-0426061E5 F - Bien agricole admissible Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c) land that had been farmed for 5 years before being rented out to neighbouring farmer qualified, including farm house
21 March 2012 External T.I. 2011-0423141E5 F - Application du paragraphe 107(4.1) Income Tax Act - 101-110 - Section 107 - Subsection 107(4.1) - Paragraph 107(4.1)(c) s. 107(4.1) applied to distribution to settlor/beneficiary of property acquired with borrowed money
20 March 2012 External T.I. 2011-0424461E5 F - Déduction d'une rétribution à un agent immobilier Income Tax Act - Section 9 - Timing commissions paid for leasing-up a new building generally are fully and currently deductible
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense lease-up commissions were current expenses
16 March 2012 External T.I. 2011-0423191E5 F - Disposition d'une participation dans une SP Income Tax Act - Section 98 - Subsection 98(1) disposition of partnership interest for nil proceeds when partnership dissolved upon winding-up distribution
Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (b) - Subparagraph (b)(i) disposition of partnership interest even though no proceeds received