News of Note

Comments on the transfer-pricing penalty rules include:

• It appears unlikely that merely satisfying the documentary requirements in s. 247(4)(a) will provide a safe harbour from the imposition of penalties under s. 247(3).
• “Regardless whether profit allocations can be used under subsection 247(2) in circumstances where they do not permit the determination of specific terms and conditions in respect of a transaction, it is clear that they can be used as a defence against the application of transfer-pricing penalties.”
• There is some judicial support for the proposition that where CRA has made s. 247(4) requests for documentation and has expressed no concern with it, this should be a defence against a penalty being imposed in the future on the basis that the same type of documentation is inadequate.
• TPM-09 to some extent goes beyond what the corresponding OECD Guidelines suggest would be appropriate.
• Where a taxpayer has made reasonable efforts to determine and use an arm’s length price or allocation in respect of the actual transactions it engaged in, there should be no s. 247(3) penalty if its transactions are deemed to be something different under s. 247(2)(d) recharacterization.

Summaries of comments of Richard Tremblay contained in Brian Mustard, Sam Maruca, Charles Thériault, and Richard Tremblay, "Transfer Pricing: What Are 'Reasonable Efforts,' and When should Penalties Apply?" Canadian Tax Foundation, 2015 Conference Report, 32:1-33 under s. 247(3) and s. 247(4)(a).

CRA ruled that expenses of drilling from an abandoned mine to delineate a deposit at the pre-feasibility study phase qualified under para. (f) of the Canadian exploration expense definition. Although the ruling letter is heavily redacted, more details are provided in a ruling (2014-0534121R3) on the project at an earlier stage. The two ruling letters, when read together, may imply that CRA accepted that work conducted between the first and second rulings, which consisted mostly of analyzing data from drill holes that were drilled by previous owners of the mine and from drill core assays left by them, in order to arrive at an inferred or indicated resource, qualified as CEE.

Neal Armstrong. Summary of 2016 Ruling 2016-0639671R3 under s. 66.1(6) - Canadian exploration expense – para. (f).

The taxpayer arranged for drivers to drive back to Canada the cars of those who had suffered an incapacitating medical emergency in the U.S. In finding that this did not qualify as a “service of transporting tangible personal property,” so that it was not zero-rated, V.A. Miller J found that this quoted definition required that the property be carried by some mode of transport such as a vehicle, ship or rail car and that merely driving a car did not qualify as transporting it, stating that:

[T]he vehicle cannot be both the personal property and the means of carrying it at the same time.

Neal Armstrong. Summary of Andrews v. The Queen, 2017 TCC 23 under Sched. VI, Pt. VII, s.1(1) – freight transportation service.

Comments on the taxation of trusts resident in Canada include:

• A CRA indication that a charity is a majority-interest beneficiary of a trust when the trustee has the discretion to make a gift to the charity under the declaration of trust may not be correct, given that “it is unclear whether the charity has the power to compel the administration of the trust, which is generally recognized as a necessary condition for a person to be considered a beneficiary.”
• Given that the CRA has indicated in other contexts that an s. 84.1(1)(b) deemed dividend is not deemed to be paid on shares, this suggests that ss. 112(3) to (7) would not apply to a capital dividend that is deemed to be paid under s. 84.1(1)(b).
• S. 107(1)(c), which generally reduces the amount of a loss realized on a disposition of a capital interest in a trust by dividends received under s. 104(19) or (20) could result in double taxation where the beneficiary is a second trust, and the second trust flows out those amounts to its beneficiaries.
• Although a spousal trust that otherwise would qualify for rollover treatment under s. 70(6) but for having U.S. resident trustees may apply for competent authority relief under Article XXIX B(5) of the Canada-U.S. Treaty, that Article requires that the transfer to the spousal trust be made under a will – which is often a problem because US individuals often use an inter vivos trust to reduce or defer US estate tax.
• The CRA view that a trust funded with insurance does not qualify as a spousal trust for purposes of s. 70(6) if the terms of the trust were not set out in the will appears to be incorrect: “A pre-existing declaration of trust that is funded and created pursuant to the terms of the taxpayer's will should be treated as having been created under the terms of the taxpayer's will because the trust did not exist before the transfer.”
• The CRA view that a trust does not qualify as a spousal trust when its terms permit or require the trust to pay life insurance premiums, also is questionable.
• A fully discretionary trust with resident and non-resident beneficiaries and receiving both dividends from shares of US public corporations and interest from Canadian sources should be able to allocate its dividend income first to its resident beneficiaries so that they can access foreign tax credits under ss. 104(19) and 126(1).

Neal Armstrong. Summaries of Elie Roth, Tim Youdan, Chris Anderson and Kim Brown, Chapter 3: “Taxation of Trusts Resident in Canada,” Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016 including under s. 251.1(4)(d), s. 112(3.2), s. 107(1)(c), Treaties Art. 29B, s. 70(6), 104(19).