News of Note
CRA apparently considers that there is no deduction for repaid employment benefits
Email this ContentCRA considers that only reimbursements of remuneration described in s. 8(1)(n) (such as repayments of income received during a leave when the individual did not return to employment) are deductible, so that if an employee is required in a subsequent year to repay employment benefits received, the employee apparently does not receive a deduction for the repayment.
Neal Armstrong. Summary of 16 March 2015 T.I. 2014-0524371E5 F under s. 8(1)(n).
Income Tax Severed Letters 15 April 2015
This morning's release of 20 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers a share subscription by FA Canadian parent as an “investment” by a “Canadian investor” for purposes of the s. 115.2 safe harbour
Where a foreign subsidiary (Forco) of a widely-held Canadian corporation (Canco) receives a treasury share subscription from Canco, this will taint the s. 115.2 safe harbour respecting management services provided by an affiliated Canadian investment manager. CRA notes that this scenario is equivalent to Canco’s investment needs being serviced offshore "through" Forco, contrary to the policy of s. 115.2(2)(b)(i)(B).
Neal Armstrong. Summary of 18 November 2014 TEI Roundtable, Q. E.6 under s. 115.2(2)(b)(i)(B).
CRA confirms that s. 39(3) generally applies only to anonymous bond or debenture repurchases
Where a public corporation repurchases its bonds at a premium "in the open market, in the manner in which any such obligation would normally be purchased in the open market by any member of the public," s. 39(3) generally deems the premium to be a capital loss rather than potentially giving interest treatment to the corporation and the vendors under s. 18(9.1).
CRA has confirmed where the transaction is such that the corporation and the vendor know each other’s identities, the quoted words are not satisfied – so that s. 39(3) generally would not apply to a tender offer or the exercise of a call right.
Neal Armstrong. Summary of 2014 TEI Roundtable, Q. E.3 under s. 39(3).
CRA may delay paying a refund if there is a pending audit
ITA s. 164(1) and ETA s. 229(1) require the Minister to pay refunds with "all due dispatch" after the corresponding return is filed. CRA considers that "this term allows for some discretion on the part of the Minister," so that it can delay paying a refund if there is a pending audit.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 7 under ITA, s. 164(1).
CRA acknowledges that the deemed trust for unpaid GST/HST (or source deductions) does not follow assets in an arm’s length sale
CRA (contrary to alleged practices of some of its collection agents) recognizes that the deemed trust under ETA s. 222(3) over assets of a tax debtor continues to apply, after an arm’s length sale of those assets, to the sales proceeds rather than to the sold assets, so that the arm’s length purchaser should not have to worry about the deemed trust attaching to the purchased assets.
ITA s. 227(4.1) is quite similar, so that the same position should apply where the vendor has unremitted source deductions.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 3 under ETA, s. 222(3).
Charania - Tax Court of Canada applies unintended and unarticulated price adjustment clause
An individual shareholder of a corporation thought that he was the beneficial owner of his home, but everyone else, including his accountants (and ultimately the Tax Court) considered that it was beneficially owned by the corporation. Immediately before his sale of the home at a gain, it was transferred to him by the corporation, with the excess of its book value over the outstanding mortgage amount being booked as a shareholder advance to him.
In reversing a shareholder benefit assessment of the taxpayer equal to the excess of the property’s fair market value over its book value (and stating an "understanding" that the shareholder loan amount would be increased by this difference), VA Miller J found that the failure to debit the shareholder loan account with the higher FMV-based amount was an obvious error (which the taxpayer did not sanction because he was unaware of it) and that there was no intention to confer a benefit.
This goes beyond CRA’s policies (in S4-F3-C1) on price adjustment clauses given that no agreement to transfer at FMV was documented at the time and, in fact, one of the parties was not even aware that he was purchasing the property from the other.
Neal Armstrong. Summary of Charania v. The Queen, 2015 TCC 80, under s. 15(1).
CRA offers streamlined procedure for validating historical GST/HST s. 156 (nil consideration) elections
Since January 1, 2015, group registrants wishing to make an ETA s. 156 election for qualifying supplies between them to be made at deemed nil consideration have been required to file their elections with CRA rather than merely signing them and keeping them on hand. In the case of elections which were made in the old (unfiled) way before January 1, 2015, there is a requirement to file a new election form (on RC4016) with CRA by January 1, 2016.
In order to permit group members to avoid multiple filings, CRA is offering a streamlined procedure under which group members that have existing elections with differing effective dates now only need to file one Form RC4616 indicating December 31, 2014 as the effective date – with CRA effectively ignoring this date provided that the old election forms showing the actual earlier effective dates are retained on file by them.
CRA also has changed its services standard, from responding to GST/HST ruling or interpretation requests (that are not highly technical or precedent–setting) within 45 days of receipt, to so responding within 45 days of receiving all relevant facts and supporting documentation.
Neal Armstrong. Summary of Excise and GST/HST News - No. 95 under ETA – s. 156(2).
Canadian funds which are hybrid entities for FATCA purposes face a dilemma in completing W-8 forms
There are three approaches for a Canadian fund to deal with the situation where it is a hybrid entity for FATCA purposes (i.e., an entity which is a reporting Canadian financial institution for purposes of the Canada-U.S. inter-governmental agreement but a non-financial foreign entity for ITA purposes):
- be timid: register on the IRS portal as, and state on Forms W-8 that it is, a reporting "Model 1" foreign financial institution - and fully comply with the related reporting requirements;
- be bold: take the view that its IRS status is determined by its ITA status when reporting its status (under penalty of perjury) to U.S. withholding agents; or
- be Canadian: register with the IRS and complete W-8s as described in 1 above - but not comply with its the related reporting requirements (on the basis that it will not be subject to FATCA withholding until the IRS affirmatively declares it to be a nonparticipating financial institution).
Neal Armstrong. Summary of Matias Milet, "FATCA and Canadian Investment Entities," Journal of International Taxation, March 2015, p. 29 under s. 263(1) – listed financial institution – (j).
CRA treats a transfer from one testamentary trust to another pursuant to a will direction as a non-tainting contribution from the deceased
If a testator’s will directs that the residue of a spousal trust created under the will be transferred, on the death of the spouse, to a second trust for their child, also established under his will, would this transfer cause the child trust to cease to be a testamentary trust? The testamentary trust definition in s. 108(1) requires that this transfer to it be considered to be a contribution to it by the deceased as a consequence of his death, and s. 248(8)(a) provides that a transfer of property as a consequence of the terms of the will is deemed to be a transfer as a consequence of the deceased’s death (but doesn’t explicitly deem the transfer of the property from the spousal trust to be a transfer made instead by the deceased).
CRA likely will treat the transfer to the child trust as a transfer made to it by the deceased, notwithstanding that this transfer occurred subsequently to his death and in fact was made by the spousal trust – so that the child trust likely will continue to qualify as a testamentary trust.
Neal Armstrong. Summary of 16 December 2014 T.I. 2014-0539841E5 F under s. 108(1) – testamentary trust.