News of Note
CRA provides an opinion that the new s. 55(2) rules do not apply to a loss-shifting transaction
Email this ContentProfitco is wholly-owned by Lossco, which is wholly owned by Parent. Rather than engaging in a triangular loss shifting transaction (see, e.g, 2012-0437881R3) Profitco will simply borrow from Profitco (at an interest rate reflecting the loan’s subordinated status) and subscribe for non-voting cumulative redeemable retractable preferred shares of Lossco. Parent will agree, in a support agreement with Lossco, to make capital contributions to fund Lossco’s payment of the dividends, which will occur on the unwinding of the transactions.
Consistently with the policy announced at the 2015 annual CTF conference, CRA provided an opinion that, after giving effect the July 31, 2015 draft amendments, s. 55(2) will not apply to this dividend.
Neal Armstrong. Summary of 2015 Ruling 2015-0604071R3 under s. 111(1)(a).
Whether an individual is a de facto director or merely a manager partly engages the question, what are the core functions of directors
The question whether an individual is a de facto director and, thus, has potential liability under ITA s. 227.1 and similar provisions in other statutes turns, in part, on whether the individual is doing the things that generally directors do. However, this is also a comparative exercise, as a director may have more success in avoiding liability if there is someone else who is playing a more key role and, conversely, it is very difficult for a sole director and shareholder to cease to be a director.
In situations where the individual has not performed any of the definitive or major acts that only a director could perform but has instead been involved in the corporation's administration or operations, what seems to matter is the extent of the lesser acts that cumulatively may signal the existence of a de facto directorship.
Neal Armstrong. Summary of Brian M. Studniberg, "Identifying the De Facto Director," Canadian Tax Journal, (2015) 63:4, 1073-95 under s. 227.1(1).
CRA automatically assigns a corporate income tax account to non-residents who voluntarily register for GST purposes
Where a non-resident which is not carrying on business in Canada (and, therefore, is not subject to any Canadian income tax liability under Part I) voluntarily registers for GST purposes, CRA will automatically assign a corporate tax account irrespective of the non-resident's wishes. In order to be de-registered for income tax purposes, the non-resident must confirm that it has no obligation to file a corporate income tax return, and then close the corporate income tax account by phone or by sending in the right form (an RC 145).
Neal Armstrong. Summary of 2015 CBA Roundtable, Q.26 under ETA s. 240(3)(a).
It may be advantageous for a CCPC to structure so that it earns foreign source income as FAPI
It generally will be advantageous for a Canadian-controlled private corporation to earn ordinary passive income, such as a royalty, as foreign accrual property income through a controlled foreign affiliate in a jurisdiction that imposes tax at around a 25% rate, rather than directly. A 25% foreign rate is sufficient to generate a full foreign accrual tax deduction and is lower than the rate of tax paid by the CCPC on aggregate investment income.
On the other hand, it generally will be disadvantageous to have a CFA of the CCPC realize and distribute a capital gain. The reason is that the non-taxable portion of the gain (when distributed as a dividend out of exempt surplus) merely generates an addition to the CCPC’s general rate income pool rather than to its capital dividend account. There generally is a better result if the CCPC holdco for the CFA instead sells the CFA shares, as this will generate an addition to its CDA. However, a s. 93 election may be made instead if the sales proceeds are to be reinvested rather than distributed to Canadian individual shareholders.
A further alternative, where the CCPC holding the CFA is, in turn, held by another CCPC, is for the top CCPC to sell its shares of the CCPC holding the CFA. Here, similar considerations (deferral v. absolute reduction in total tax) govern the choice between accessing safe income or sticking with capital gains treatment.
Neal Armstrong. Summaries of Paul Dhesi and Korinna Fehrmann, "Integration Across Borders," Canadian Tax Journal, (2015) 63:4, 1049-72 under s. 91(4), s. 95(2)(b), s. 93(1), s. 55(2)(d), Reg. 5907(2.1).
Zone3 - Federal Court finds that a failure to give adequate reasons for the rejection of a film tax credit claim required that the claim be reconsidered
Martineau J has ordered the Canadian Audio-Visual Certification Office (“CAVCO”) to reconsider a decision to reject a leading Quebec TV producer’s application for certification of a TV series. The essential problem was that CAVCO’s advance notice of a negative determination - on the basis that the production was “in respect of a game…or contest” and, therefore, ineligible for the Canadian film or video production tax credit under Reg. 1106(1), “excluded production,” (b)(iii) – did not address the taxpayer’s position that the shows’ question-and-answer format merely served as a pretext or vehicle for effectively presenting the informational content, and did not disclose that, in fact, the application had been rejected through the mechanical application of a “decision tree” that the taxpayer did not find out about until later.
Martineau J applied the general principle that:
When the reviewing court is not in a position to determine if the decision on that point or argument falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and the law, the decision will usually be found to be unreasonable, unless the reviewing court can itself reasonably find that the outcome of the proceedings would not have changed even if the point or argument has been dealt with by the tribunal one way or the other.
This principle also potentially applies to discretionary decisions of CRA which cannot be challenged through appeal of an assessment.
Neal Armstrong. Summary of Zone3-XXXVI Inc. v. A.G. (Canada), 2016 FC 75 under Reg. 1106(1) “excluded production” – (b)(iii).
CRA will be cautious about providing the police with evidence of taxpayer criminal conduct
ITA s. 241(9.5) and ETA s. 295(5.04) authorize CRA officials to provide taxpayer information to the police that they have reasonable grounds to be believe affords evidence of serious criminal activity. Last year, CRA indicated that:
… [N]o information will be released to the police or other law enforcement agencies without the approval of the Assistant Commissioner of the Compliance Programs Branch.
… Since enactment in June 2014, the CRA has not exercised its authority under the new legislation.
Neal Armstrong. Summary of 2015 CBA Roundtable, Q. 1 under s. 241(9.5).
Income Tax Severed Letters 4 April 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA is actively collecting the leaked Panama Papers
CRA announced today that it “is actively pursuing the cooperation of its tax treaty partners and the International Consortium of Investigative Journalists to obtain all of the leaked [Panama Paper] records that pertain to Canadian residents.”
Neal Armstrong. Summary of 5 April 2015 CRA Press Release under Treaties – Art. 27.
CRA finds that s. 148(10)(d) (deeming exercise of rights not to be dispositions) does not apply to the exercise of a right to split an insurance policy
S. 148(10)(d) provides that a “policyholder shall be deemed not to have disposed of… an interest in a life insurance policy…as a result only of the exercise of any provision (other than a conversion into an annuity contract) of the policy.” CRA considers that s. 148(10)(d) does not apply to the exercise by a policyholder of a contractual right to split a universal life insurance policy covering two lives into two policies, stating that as “the Act does not contemplate the splitting of a multiple life insurance policy into separate policies…the objective of introducing paragraph 148(10)(d)… was not to provide for a non-disposition of the policy in these circumstances.”
CRA also indicated that whether there was a disposition on general principles (before looking at s. 148(10)(d)) turned on whether “the changes that are made to the terms of the policy…are so fundamental as to go to the root of the policy.”
Neal Armstrong. Summary of 17 February 2016 T.I. 2015-0608261E5 under s. 148(10)(d).
CRA considers that ETA s. 186(1) does not help a parent to qualify for a s.156 election
CRA considers that ETA s. 186(1), which permits input tax credits to be claimed by a registered holding company on expenses incurred for use in relation to shares or indebtedness of a related corporation (e.g., a sub) engaged exclusively in commercial activity, applies “only for the purpose of ITC calculations” and does not have the effect of deeming the holding company to be engaged in commercial activity – so that it would generally not qualify for the purposes of making a s. 156 election with the sub so as to avoid having to charge GST on management fees.
Neal Armstrong. Summary of 2015 CBA Roundtable, Q.21 under ETA s. 186(1), s. 156(1) – qualifying member.