News of Note
Income Tax Severed Letters 4 January 2017
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Our translations of severed letters now go back a year
The table below links to full-text translations of the technical interpretations released last week as well as on January 6, 2016 and December 30, 2015. We thus have now gone back a full year in providing full-text translations of French-language technical interpretations and Roundtable items.
The translations are paywalled in the usual (3 work-weeks per month) manner. You currently are in the “open” week for this month.
CRA accepted that a U.S. resident with only a Canadian services PE was subject only to federal income tax on his income
CRA recently agreed with the position of a U.S.-resident individual who had a services permanent establishment in Canada under the Canada-U.S. Treaty but did not otherwise have a Canadian permanent establishment, that he did not earn income in any province. Accordingly, rather than being subject to provincial tax on his servicing income, he was subject to additional federal tax thereon of only 48% of federal tax.
The same analysis would apply (at least for the common law provinces) to a U.S. corporation which had only a Canadian services PE, so that it would enjoy an additional federal rate of 10% (in effect imposed under s. 124(1)) rather than facing provincial rates running from 12% to 16%.
Neal Armstrong. Summary of Kevyn Nightingale and Amir Pourzakikhani, "A Federal Permanent Establishment, But Not a Provincial One," Tax Topics, Wolters Kluwer, November 3, 2016, No. 2330, p. 1 under s. 120(1).
Arsove – Tax Court of Canada finds that there was no s. 126(1) foreign tax credit for US taxes for which a spurious offsetting U.S. credit had been claimed
A Canadian-resident individual and U.S. citizen was subject to US. income tax of 15% on a distribution to her out of her IRA. However, she filed her U.S. income tax return on the specious basis that the U.S. tax on the distribution was eliminated by a U.S. foreign tax credit, and the IRS accepted the return.
Lamarre ACJ found that, as no U.S. tax was “ultimately imposed” on the taxpayer, no Canadian foreign tax credit was available. She also noted that this result was consistent with “the purpose of the foreign tax credit… to prevent double taxation.”
Neal Armstrong. Summary of Arsove v. The Queen, 2016 TCC 283 under s. 126(1).
CRA finds that the advantage tax applies where a specified beneficiary of an RCA assigns her rights to receive distributions from the RCA to secure a personal loan
CRA found that the advantage tax in s. 207.62 applied where a specified beneficiary of an RCA assigned her rights to receive distributions from the RCA in order to secure a personal loan. CRA added:
[T]he advantage tax is equal to the present value of the beneficiary’s savings from the secured borrowing terms as compared to those of an unsecured borrowing. If it had been determined that the loan terms did not reflect arm’s length terms, the full amount of the loan would have been subject to the advantage tax.
Neal Armstrong. Summary of 16 September 2016 Internal T.I. 2013-0500581I7 under s. 207.5(1) – advantage – (a).
CRA gives examples of where the holding by an RCA trust of life insurance policy providing more than a nominal death benefit gives rise to RCA advantage tax
CRA in two interpretations has expanded on its comment in 2013-0481421C6 that the holding by an RCA trust of life insurance policy providing more than a nominal death benefit could give rise to RCA advantage tax.
The first interpretation concerned an RCA trust holding a a universal life insurance policy on the life of the individual who was the sole specified beneficiary of the RCA. The amount of the death benefit under the policy was constant over the duration of the policy, while the cash value increased each year, and the protection component correspondingly decreased each year. CRA stated:
[T]he amount of the protection component of the death benefit under the policy far exceeds the individual’s own entitlement to retirement benefits under the RCA. The amount also far exceeds a reasonable level of survivor benefits and there is no actuarial basis to support the amount as being reasonable. Upon the death of the individual, regardless of the individual’s number of years of service, salary history or age, the funds derived from the proceeds of the protection component of the death benefit (as well as the cash value…) would become available to the individual’s spouse…or… estate.
[T]he yearly life insurance coverage… constitutes an advantage…that is subject to advantage tax.
In a similar vein, in the second interpretation respecting a trusteed defined benefit supplementary pension plan (an RCA) for several key owner-managers, CRA stated that there “would be an RCA advantage if the policy was acquired to, in effect, provide key-person coverage to indemnify the employer for potential loss of profits or additional costs that may be incurred in the event of the death of the insured.”
Neal Armstrong. Summaries of 2015 External. T.I. 2013-0499501E5 and 2015 External. T.I. 2014-0544211E5 under s. 207.5(1) - advantage - (a).
CRA reaffirms rebuttable application (subject to 74.4(4)) of 74.4(2) to estate freeze where trust with minor child acquires common shares
When asked to comment on factors taken into account in deciding if “one of the main purposes” of a transfer or loan is reasonably considered to benefit a designated person, CRA stated:
In…2001-0067725…we stated that in a situation where a trust of which the beneficiary is a minor child of the freezor acquires common shares of the freezor’s Holdco on an estate freeze, the provisions of subsection 74.4(2) will generally apply, subject to subsection 74.4(4). The taxpayer would have to rebut the presumption that “one of main purposes” of the transfer was not to reduce the income of the individual and benefit a designated person.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, Income Tax Q.9 under s. 74.4(2).
CRA’s decision to not appeal University of Calgary does not mean that it would not challenge similar ITC methodologies
University of Calgary found that UC's method of calculating input tax credits was fair and reasonable even though equal weight was given to: (often exempt educational) building space (with all of its infrastructure); and a (commercial) parking lot space. CRA commented:
Although the CRA did not appeal…, in subsequent cases with similar types of entities we will be taking a close look… keeping in mind that, an ITC allocation method must reasonably reflect the actual use of the inputs and the manner in which the person conducts its business generally. For example, a university whose predominant purpose is education and research would generally not acquire its main campus over 40% for the purpose of making taxable supplies for consideration.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.15 under ETA s. 141.01(2).
CRA will try to ignore Miedzi Copper re holding company ITCs
In Miedzi Copper, a holding company whose only significant activity was financing its Lux sub which, in turn, financed exploration companies in Poland, was entitled under ETA s. 186 to full input tax credits for the GST on all the fees charged to it by its executives (who were independent contractors rather than employees) and by professional firms. When asked about Miedzi Copper (and the predecessor Stantec case, which CRA also lost), CRA stated:
Our position on the interpretation of section 186 has not changed. … We will apply the Court’s decision in Miedzi Copper [and Stantec] where the situation has the same facts as that case.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.14 under ETA s. 186(1).
CRA notes requirement to issue two assessments where unclaimed GST/HST rebates are allowed on a s. 296(2.1) assessment of net tax
After noting the requirements under s. 296(2) and (2.1) to allow unclaimed but valid credits when assessing net tax, CRA went on to note:
[B]ecause GST/HST rebates are required to be assessed under section 297, even when the rebate amount is allowed under subsection 296(2.1), the registrant will receive two Notices of Assessments, one for the changes to net tax and one for the GST/HST rebate.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.11 under ETA s. 296(2.1).