News of Note
CRA indicates that the replacement of an “2nd-tier” upstream loan to a non-resident parent by a PLOI will not occur as part of the same series
Email this ContentCanco indirectly distributed $10M to its non-resident parent (NRco) in 2010 through a capital contribution to a new foreign subsidiary (FA) and a loan of the $10M by FA to NRco. In order to unwind this upstream loan structure by the August 19, 2016 deadline for doing so, NRco will repay the $10M loan owing to FA, FA will pay a $10M dividend to Canco out of pre-acquisition surplus and Canco will make a fresh (direct) loan to NRco, which it will elect to be a “pertinent loan or indebtedness.”
CRA confirmed that the new PLOI loan will not cause the old loan to be considered to have been “repaid…otherwise than as part of a series of loans or other transactions and repayments,” so that a $10M income inclusion to Canco under the upstream loan rules will be avoided.
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 4 under s. 90(8)(a).
CRA indicates that a Canadian corporation with a USD functional currency can be subject to Part XIII withholding obligations on its USD prefs resulting from FX fluctuations
CRA considers that a Canadian corporation which has the U.S. dollar as its elected functional currency nonetheless is required to keep track of the paid-up capital of its shares, so that if it issued U.S.$100,000 of shares when the Canadian dollar was at par and redeemed those shares when their Canadian-dollar equivalent was $125,000, there would be a resulting deemed dividend to its shareholder (unless the shareholder was a Canadian corporation that also had the U.S. dollar as its functional currency for the relevant period.) However, there would be no Part VI.1 tax, as that would relate to the tax results of the corporation rather than its shareholder.
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 3 under s. 84(3).
CRA continues to not accept the deduction of notional expenses from the profits of PEs of (non-U.S.) non-residents
Notwithstanding a somewhat revised OECD approach, CRA continues to consider (in light of Cudd Pressure and s. 4(b) of the Income Tax Conventions Interpretations Act) that notional expenses are not deductible in computing the profits attributable to a Canadian permanent establishment for Treaty purposes – with the exception of PEs of qualifying U.S. residents, as to which there is an overriding agreement with the U.S. competent authority.
Neal Armstrong. Summary of 2016 IFA Roundtable, Q. 2 under Treaties – Art. 7.
CRA requires Florida and Delaware LLPs and LLLPs to convert to “true” partnerships before 2018
CRA has finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes in light inter alia of their separate legal personality and limited liability. However, CRA is prepared as an administrative matter to continue accepting that an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) is a partnership if it is clear that the members are carrying on business in common with a view to profit, all members and the LLP or LLLP having been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018.
Neal Armstrong. Summary of 2016 IFA Roundtable, Q. 1 under s. 248(1) – corporation.
CRA provides example of deduction of loss deduction under s. 88(1.1) being postponed until year in which sub is dissolved
CRA has provided a simple example of the proposition that a Canadian parent generally may deduct a loss of a subsidiary that has been wound up in any taxation year of the parent commencing after the winding-up.
The subsidiary, which has losses for its taxation years ending on June 30, 2013 and June 30, 2014, commences its winding-up on June 15, 2014 and is dissolved in October 2015. The parent can deduct those losses only in its 2015 calendar taxation year, and not in its 2014 year, as 2015 is the year of the dissolution.
Neal Armstrong. Summary of 2015-0618211E5 under s. 88(1.1).
CRA states that no intention to claim exemption on future recognition of a capital gains reserve claimed on a s. 84.1 transfer to a purchaser corporation is irrelevant to the operation of the ACB grind
CRA considers that s. 84.1(2.1) essentially treats a resident individual who. having made a non-arm’s length transfer of shares to a purchaser corporation, then claims a capital gains reserve on the disposition, to have claimed a capital gains deduction on the disposition to the extent of the individual’s unused capital gains exemption room in that year, irrespective of whether such exemption was actually claimed and regardless whether there is no intention to claim the deduction when the reserve is recognized in future years.
Neal Armstrong. Summary of 2015-0594461E5 under s. 84.1(2.1).
Income Tax Severed Letters 25 May 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that an employee received a retiring allowance under a “non-compete” if it compensated for a loss on an investment sale occurring because of his termination
CRA indicated that an amount received by a former employee from his employer under a non-compete agreement entered into after the termination of his termination of employment would generally be deemed to be employment income to him pursuant to s. 6(3)(b). However, in this case, the amount paid to the employee was equal to the loss he sustained on disposing of an investment following his termination. CRA stated that if the investment was sold only because of the termination, i.e., the investment would not otherwise have been sold, the amount received from the employer could reasonably be regarded as compensation for loss of employment, so that it would be a retiring allowance.
Neal Armstrong. Summary of 2015-0599581E5 under s. 248(1) – retiring allowance.
Adobe – Delhi High Court finds that India had no ability under Art. 7 of the U.S. Treaty to tax Adobe US on R&D servicing by its Indian sub whose fees already were subject to Indian tax in accordance with the arm's length pricing standard
Adobe U.S. received software-related R&D services on a cost plus 15% basis from its wholly-owned Indian subsidiary ("Adobe India"). The assessment officer (AO) had assessed Adobe India on the basis that its fees did not accord with the arm’s length standard. Adobe India had successfully appealed that assessment to the ITAT, and an appeal by the AO of that loss to the High Court of Delhi was in process. Bakhru J found that even if the taxpayer had a permanent establishment in India, the AO had no ability under Art. 7 of the U.S.-India Treaty to tax Adobe U.S. respecting the R&D services business of Adobe India as the latter’s fees already was subject to Indian tax in accordance with the arm's length pricing standard.
He went on to find that Adobe U.S. had no PE in India given that it had no right to use Adobe India’s premises – and there was no service PE as the only Adobe U.S. “service” potentially provided in India that the AO could point to was the right to audit Adobe India’s performance.
Neal Armstrong. Summaries of Adobe Systems Inc. v. ADIT, W.P.(C) 2384/2013 (Delhi High Ct) under Treaties Art. 7, Art. 5.
Air Canada – Quebec Court of Appeal finds that ARQ is obligated to send a copy of its notices of further reassessment to the lawyer who was its contact on a tax dispute
The lawyer acting for Air Canada in a tax dispute with ARQ was copied on a letter to Air Canada indicating that ARQ would be reassessing in a smaller amount than the original reassessment under dispute. This occurred several weeks later, but without the lawyer being copied. The Montreal head office of Air Canada forwarded the reassessment to its Winnipeg office (which dealt with tax matters), where something went awry, so that no action was taken. The lawyer did not find out about this until the 90-day objection period had expired.
The Quebec Court of Appeal found that, in light of considerations of procedural fairness, the Quebec equivalent of ITA s. 165(3) should be read as if it contained the additional bolded words noted below:
[T]he Minister shall … reconsider the assessment and … make a reassessment, and send the Minister's decision to the person by mail and to its designated representative, if any.
The same reasoning could apply federally.
Notwithstanding that ARQ thus had made a procedural error, the Court nonetheless declined to grant an extension of the 90-day appeal period under the more stringent Quebec equivalent of s. 166.2, which required that the taxpayer demonstrate that “it was impossible in fact” for it to appeal promptly. Air Canada, in the absence of any evidence as to why nothing had happened after the reassessment was forwarded to Winnipeg, had not established due diligence.
Neal Armstrong. Summaries of Air Canada v. ARQ, 2016 QCCA 710 under s. 165(3) and s. 166.2(5).