News of Note
CRA indicates that the test of a real property security under the Canada-U.S. Treaty is a point-in-time test
Email this ContentThe question of whether a share or trust interest derives its value from Canadian real property for purposes of the Canada-U.S. Treaty is a point-in-time test so that the sale of such share or interest immediately after the sale of the Canadian real property for cash will be exempt, even though under the 60-month look-back rule, the share or interest may be taxable Canadian property.
CRA also stated that in both the Treaty and TCP context,
the phrase “derived principally from real property”… allows one to look through a particular property (which is, for example, a share of a corporation or an interest in a trust) to the real property situated in Canada and held, directly or indirectly, by such corporation or trust
without indicating any exception for where intermediate interests are held as debt.
Neal Armstrong. Summary of 1 March 2017 External T.I. 2016-0658431E5 under Treaties – Art. 13.
Finance proposes to extend the s. 95(2)(a)(ii)(D) safe harbour to inter-FA fees that are deemed FAPI under s. 95(2)(b)(i)(B)(I)
S. 95(2)(b)(i)(B)(I) provides that if FA1 provides services to FA2 then, to the extent that the fees therefor paid by FA2 are deductible in computing its foreign accrual property income, they are included in FA1’s FAPI. This result is inappropriate where the fees so paid by FA2 are deducted in relation to its investment in shares of an Opco that are excluded property. Accordingly, Finance has provided a comfort letter that it will propose that s. 95(2)(b)(i)(B)(I) not apply in this type of situation, which is conceptually described as one where conditions generally analogous to those in s. 95(2)(a)(ii)(D) are satisfied respecting FA1’s services income.
Neal Armstrong. Summary of 23 December 2016 Comfort Letter under s. 95(2)(b)(i)(B)(I).
CRA denied interest expense where a premium was received on extending notes’ maturity
Rather than issuing fresh notes, a company obtained the noteholders’ agreement to extend the current notes’ maturity, and received a significant premium given that the notes' stipulated interest rate was now higher than prevailing yields.
The Directorate did not see anything in this being a reopening rather than a new issuance to change its position in S3-F6-C1, para. 1.96 that “the interest expense will be reduced over the life of the [re-opened] debt with reference to the amount of the premium.” The Directorate also stated (in this 2015 Internal Interpretation) that if the premium was not taxable over time in this manner, the applicable fraction of the premium “could” be included in the company’s income as an eligible capital amount.
Neal Armstrong. Summaries of 11 September 2015 Internal T.I. 2015-0586301I7 under s. 20(1)(c) and s. 14(5) – cumulative eligible capital – E.
Cybernius – Federal Court orders the Minister to make a taxpayer-requested s. 221.2(1) transfer between two taxpayer accounts
S. 221.2(1) gives CRA the discretion to transfer amounts between different tax accounts of a taxpayer. CRA refused a taxpayer request to transfer a credit balance respecting the taxpayer’s Part I tax – which had arisen because CRA had garnished amounts to collect an arbitrary assessment for some taxation years which later turned out not to have any significant Part I tax liability – to satisfy its arrears of source deduction remittances. McVeigh J found that CRA had acted unreasonably in not granting this request – which initially had been refused on the grounds that at the time of the request, a subsequent year’s return was overdue – given that by the time the matter came before her, the taxpayer was no longer delinquent in its filing obligations – and effectively ordered CRA to grant the transfer request.
Neal Armstrong. Summaries of Cybernius Medical Ltd. v. Canada (Attorney General), 2017 FC 226 under s. 221.2(1) and s. 225.1(1).
CRA indicates that the upstream loan rules can be used to avoid the debt forgiveness rules
CRA’s view is that when an upstream loan to Canco from its wholly owned CFA is forgiven following a sale of the CFA, this will not qualify as a repayment of the loan for purposes of the upstream loan rules so that, at best, reserves will need to be claimed under s. 90(9) throughout the indefinite lifetime of Canco. However, the debt forgiveness rules will not apply to the forgiveness because the amount of the upstream loan is included in the income of Canco under s. 90(6) of the upstream loan rules, even though there may be the offsetting s. 90(9) deduction.
Neal Armstrong. Summaries of 20 March 2017 External T.I. 2014-0545591E5 under s. 90(9) and s. 80(1) – excluded obligation – para. (a).
Income Tax Severed Letters 5 April 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that there generally is no 3rd party requirement to report benefits under $500
Some points made by CRA in response to submissions on its recent Folio on employee benefits (S2-F3-C2):
- Where sales personnel are awarded trips as an incentive, the value of the benefit can “be reduced to the extent of the employment-related activities” required to be performed on the trip.
- Where employment benefits are provided by someone other than the actual employer, “if the amount of the payment [or benefit] is $500 or less, CRA generally waives the T4A reporting requirement unless income tax was withheld at source…[or in the case of] group term life insurance benefits.”
- CRA will amend the Folio to further clarify that it is following Spence to the effect that benefits should be valued based on their fair market value rather than cost.
Neal Armstrong. Summary of 15 November 2016 TEI Roundtable, Q.2, 2016-0670911C6 under s. 6(1)(a).
Six further full-text translations of severed letters are available
Full-text translations of the French severed letter released last week and five French severed letters released between May 20, 2015 and April 29, 2015 are now available, and are listed and briefly described in the table below.
These (and the other translations covering the last 23 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the "open" week for April.
Nestlé Canada – Tax Court of Canada finds that the mere posting and honouring by Costco of dollar-amount discounts for which it was reimbursed by Nestlé Canada did not come within the GST/HST coupon rules
Nestlé Canada promoted the sale of various of its products at Costco warehouses by having Costco agree to post signs on the shelves indicating per each product item a discount of a fixed dollar amount per item, and then reimbursing Costco for the full amount of all discounts applied to customer purchases at the Costco warehouses. Lamarre ACJ found that these discounts did not qualify as “coupons” as defined in ETA s. 181 because “the customer did not tender any coupon (physical or electronic) to the cashier” but instead simply received a discount. The arrangement instead was characterized by her as the provision of a promotional allowance.
The effect of this finding (as noted by her) was that CRA received a windfall, as the Costco customers had paid GST/HST on the full pre-discount price of the goods, and Nestlé Canada was not entitled to input tax credits for the applicable fraction of the discount amounts (unlike what would have been the case if they had qualified as “coupons.”)
Neal Armstrong. Summaries of Nestlé Canada Inc. v. The Queen, 2017 TCC 33 under ETA s. 181(1) – coupon and s. 231.2.
CRA ruled that annually recurring dividends are not a series of transactions for safe income determination purposes
The safe income determination time is no later than the time immediately before the earliest dividend paid as part of a “series,” which is broadly defined in s. 248(10) and Copthorne. It could be argued that if a corporation has a policy of annually distributing its earnings, the series respecting a dividend paid in, say, Year 10, commenced in Year 1, so that the earnings after Year 1 were not added to safe income. CRA noted that:
In a recent ruling, the CRA took the view that regular, recurring annual dividends would not, in the circumstances of the ruling request, be part of a series of transactions. Accordingly, a ruling confirmed that the safe income determination time in respect of the first and second annual dividends will be immediately before each such dividend.
CRA went on to confirm 2016-0633961E5 (respecting recapture of depreciation realized on sale before safe-income determination time being included in safe income.)
Turning to documentary issues, CRA noted that it would only very rarely accept accounting retained earnings as a “fair proxy” for safe income, and that it “will attempt, in regards to available resources” to accommodate requests to provide copies of older tax returns and assessments that it has on file to those trying to go back in time with a safe income computation.
Respecting a suggestion that Kruco did not permit the deduction of contingent amounts, CRA stated that “safe income should be reduced by actual or potential cash outflows such as non-deductible expenses, contingent liabilities and accounting reserves in the determination of the amount of safe income that can be viewed as contributing to the capital gain on a share.”
Neal Armstrong. Summary of 15 November 2016 TEI Roundtable, 2016-0672321C6 under s. 55(2.1)(c).