News of Note
CRA indicates that a Canadian corporation controlled by a s. 94 (deemed resident) trust is not a CCPC
Email this ContentThe fact that a trust which is factually non-resident is deemed to be resident in Canada for the purposes specifically listed in s. 94(3)(a) will not cause a Canadian corporation controlled by it to qualify as a Canadian-controlled private corporation.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.7 under s. 125(7) - Canadian-controlled private corporation.
CRA will continue its policy of not assessing inter vivos trusts for inadequate instalment payments
After a review announced two years ago (see 2014-0526591C6), CRA has now indicated that its policy, of not assessing penalties and interest where an inter vivos trust has failed to make sufficient instalment payments, will continue.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.6 under s. 220(3.1).
CRA will accept amended beneficiary returns to reflect their transfer of previously-allocated capital gains back to a trust making a s. 104(13.2) designation to absorb a capital loss carryback
A year ago, CRA indicated that a trust can carry back an allowable capital loss realized in a subsequent year and file a late s. 104(13.2) designation to include in the income of the trust a taxable capital gain realized for that previous year that previously had been allocated out to the beneficiaries. In a follow-up response, CRA confirmed that it will reassess the beneficiaries’ returns for the previous year to remove that gain provided that their returns for that year are not statute-barred. Turning to the nitty gritty, CRA indicated that:
- the T3A loss carryback request, and the T3 adjustment request for the previous year, should be filed together so that they can be processed concurrently;
- the trust should issue amended T3s; and
- the beneficiaries would need to file T1 adjustment requests.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.5 under s. 104(13.2).
CRA confirms that the preferred beneficiary election and qualified disability trust election potentially can coexist
Where, for example, four grandparents each established a trust for their mutual disabled grandchild under their wills, with one of the trusts (after death) now being intended to be a qualified disability trust, CRA confirmed that the designation of that trust as a QDT would not restrict the availability of the preferred beneficiary election for the other three trusts (and the fourth trust could make the preferred beneficiary election even if it had elected to be a QDT).
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q. 4 under s. 104(14).
No CRA relief from the tainting of an estate as the beneficiary of an inter vivos trust
CRA has confirmed the obvious (but harsh) point that any contribution of property by an inter vivos trust to an estate causes the estate to cease to qualify as a testamentary trust, so that it cannot qualify as a graduated rate estate.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q. 3 under s. 248(1) - graduated rate estate.
CRA considers in the GRE context that a deceased has one estate even if an offshore will is unknown to the domestic executors
CRA’s position respecting the graduated rate estate rules, that there is only one estate, which encompasses all of the world-wide property of the deceased, applies even where the executors of a domestic will are not even aware of the existence of a second will pertaining to the deceased’s foreign assets. CRA noted that this very well could give rise to problems, without getting granular.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q. 2 under s. 248(1) - graduated rate estate.
CRA considers that the division of an estate into testamentary trusts can accelerate (perhaps to Day 1) the demise of the estate as a GRE
If the will of the deceased provides for the division of the residue into testamentary trusts (e.g., a spousal and children’s trust), the estate can no longer qualify as a graduated rate estate (i.e., even before the passage of 36 months from death) if all the assets become held in those testamentary trusts. Once this occurs, the problem cannot be solved by transferring the assets in the testamentary trusts back to the estate. CRA also considers that the testamentary trusts arise at the time of death.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q. 1 under s. 248(1) – graduated rate estate.
A senior Finance Canada/OECD official comments on BEPS issues including CbC reporting, the Nexus Approach and examples of unilateral downward adjustments
BEPS comments of Kevin Shoom, a senior Finance Canada official who currently is working at the OECD, include:
- Insofar as the OECD is concerned, the country-by-country (CbC) reporting contemplated under Action 13 of BEPS can take the so-called bottom-up approach of working from individual company accounts to create the line in the CbC report for the full country, or the top-down approach of taking the group’s consolidated accounts and then breaking them down for individual countries.
- The Action 13 report limits the use of CbC reports by the countries receiving the reports to “assessing high-level transfer pricing risks and other BEPS related risks, and stating that the reports cannot be used, for example, as the sole basis for a reassessment.” These restrictions are also in the competent authority agreements, and are subject to the peer review process.
- The Nexus Approach requires the amount of income eligible for benefits in an IP regime to be proportional to the amount of expenditures undertaken by the taxpayer to develop the IP. “In the process of developing the Nexus Approach, 16 IP regimes were identified in OECD and G20 countries. They were all found to be, in whole or in part, inconsistent with the Nexus Approach.”
- Examples of “unilateral downward adjustments” are the Belgian and Netherlands regimes excluding excess profits from income. “[T]he OECD…is not considering whether they constitute harmful tax practices - but instead relying on transparency, so that tax administrations that provide these regimes are expected to engage in automatic spontaneous exchanges of information on the granting of these benefits under these regimes.”
Neal Armstrong. 2016 IFA Conference transcript and slides of Kevin Shoom on BEPS
Uber Canada – Quebec Superior Court indicates that Uber drivers, as "taxi" operators, should have QST-registered – and ARQ officials on a search could seize computers and smart phones for complete copying
The ARQ obtained a search warrant for searching an Uber Canada office in Montreal. In order to be granted the search warrant, the ARQ employee laying the information was required to have reasonable grounds to believe that Uber Canada was committing an offence. The search warrant was granted inter alia on the suspected grounds (found to be reasonable) that Uber Canada was aiding the drivers in committing the offence of wilfully evading the collection of QST. This was alleged to be occurring inter alia by virtue of its system - for collecting the customer fares (through the customers’ credit cards) - not treating those fares as being subject to QST (or GST).
Cournoyer JCS, in his capacity of judge reviewing the validity of the search warrant after it had been granted and executed, rejected an argument that many of the Uber drivers could be considered to be small suppliers who, thus, were not required to register. Under the Quebec equivalent of ETA s. 240(1.1), a small supplier who carried on a taxi business was required to register, and the Quebec Act respecting transportation services by taxi required the registration of the Uber drivers’ cars as taxis.
On the search, 74 smart phones and 14 computers, which included personal information, were seized. Cournoyer JCS quoted approvingly an American view that given “the massive storage capacity of computers, combined with the ease of hiding evidence inside them,” government officials should be permitted to “seize the entire haystack for subsequent searching off-site.” (He was not über-impressed by the remote rebooting (from San Francisco) of the Montreal office computers when the search commenced, terming this an "obstruction of justice" evidencing an intent to hide illegal conduct.)
It was unnecessary for him to address an alternative alleged offence, namely, that Uber Canada was committing tax evasion by not charging QST on the 20% commissions that it charged its drivers. The judgment (at para. 154) discloses that CRA also has assessed Uber Canada for uncollected HST on its Ontario commissions.
Neal Armstrong. Summaries of Uber Canada Inc. v. ARQ, 2016 QCCS 2158 under ETA s. 240(1.1), ITA s. 231.3(1), General Concepts – Illegality.
CRA notes that the excessive eligible dividend election must be made on a pro rata basis rather than being streamed
When an Canadian-controlled private corporation has been assessed Part III.1 tax for having designated eligible dividends in excess of its general rate income pool (GRIP), it can eliminate that tax by making valid excessive eligible dividend designations (EEDDs) to effectively convert the excess into ordinary (full rate) dividends.
The amount of the EEDD must be pro-rated among the eligible dividends paid in the year. This means, for example, that if three shareholders of a CCPC holding separate classes of shares each received a $30,000 dividend (designated to be an eligible dividend) and CRA then assessed the CCPC on the basis that the year-end GRIP was only $60,000, not $90,000, the maximum EEDD for each dividend would be $10,000 – so that it would not be possible to make the election so that one shareholder would be considered post-election to have received an ordinary dividend of $30,000, with the other two shareholders each continuing to benefit from full eligible dividends of $30,000 each.
The EEDDs for all shareholders can be combined into one letter.
Neal Armstrong. Summary of 2016-0626371E5 under s. 185.1(2)(a).