News of Note
CRA considers that the FAT denial rule in s. 91(4.7) applies year-by-year based on actual dividend deductibility
Email this ContentThe 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.
CRA will not apply s. 247(2) to a CFA earning FAPI if the transaction has been vetted under foreign OECD-based transfer pricing rules
CRA considers that the s. 247(2) rules apply to transfer pricing between a controlled foreign affiliate and non-resident non-arm’s length persons where such transactions affect the computation of the CFA’s foreign accrual property income. However, CRA generally will not apply s. 247 to such a transaction where
- the pricing is reviewed by the tax authority of the country in which the foreign affiliate is resident;
- the pricing is determined to be in accordance with the transfer pricing legislation or guidelines of that country; and
- that legislation (and guidelines) adopt the arm’s-length principle.
Neal Armstrong. Summary of 26 April 2017 IFA Roundtable, Q.2 under s. 247(2).
CRA considers that s. 247(2) generally applies to boost the imputed cross-border interest arising under s. 17
CRA indicated that even though a cross-border loan from Canco to a CFA was subject to s. 17 (so that interest income was imputed at 1%), the total imputed interest inclusion would be 3%, if that were the s. 247(2) arm’s length rate. However, if the loan was of the type described in s. 17(8), but did not (in CRA’s view) technically come within the s. 247(7) safe harbour because it was outstanding for less than a year, CRA would consider that loan to be shielded from the application of s. 247(2).
Neal Armstrong. Summary of 26 April 2017 IFA Roundtable, Q.1 under s. 247(7).
2017 IFA Roundtable is uploaded
The questions posed at yesterday's IFA Roundtable and summaries of the oral answers provided by Dave Beaulne and Lori Carruthers are now available.
CRA indicates that income that is paid to a minor beneficiary in contravention of the trust deed is non-deductible under s. 104(6)
A family trust paid income to the minor children in breach of a prohibition in the trust deed against making distributions to designated persons. Obviously, the trust was still entitled to a s. 104(6) deduction given that s. 104(24) deems an amount to be payable to a beneficiary for s. 104(6) deduction purposes if it was paid to the beneficiary.
Wrong - at least according to CRA, who view s. 104(24) more as a timing rule, so that if the amount cannot be legally payable, actually paying it will not bring it within the s. 104(6) rule. Accordingly, there was no s. 104(6) deduction to the trust, and CRA considered the distributions to be includible in the children’s income under s. 105(1) rather than s. 104(13).
Neal Armstrong. Summaries of 1 November 2016 Internal T.I. 2016-0663971I7 under s. 104(24), s. 105(1) and General Concepts - Illegality.
Income Tax Severed Letters 26 April 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Canada’s MLI reservations and notifications should be available this summer
Stephanie Smith of the Department of Finance tentatively estimated that Canada will sign the MLI in the summer of 2017, at which time it would list its preliminary notifications and reservations. Entry into force might occur on December 1, 2018, in which case entry into effect for withholding tax purposes would occur effective January 1, 2019, and entry into effect for other taxes relating to calendar years would occur for 2020 and subsequent years.
The MLI arbitration clause in significant part bears the imprint of the arbitration provisions in the Canada-U.S. Treaty.
There will be significant work to come up with bilateral Technical Explanations and the like between MLI counterparties.
Neal Armstrong. IFA 2017 Annual Conference - Stephanie Smith on MLI.
Six further full-text translations of Technical Interpretations are available
Full-text translations of the two French technical interpretations that were released last week and of four French technical interpretations released between April 22, 2015 and April 8, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last two years of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for May.