News of Note

Art. 15, para. 2 of most Treaties indicates that employment income of a non-resident employee of a non-resident employer from the exercise of employment in Canada for less than 183 days in any 12-month period will be Treaty-exempt provided that the remuneration is not borne by a permanent establishment in Canada of the non-resident employer. In 2009-0319951I7, CRA indicated that it is the country of residence of the employee (“Country X”) rather than of the employer (“Country B”) which determines which country’s treaty should be applied in determining whether the non-resident employer has a PE in Canada for Art. 15 purposes.

CRA has now quite openly acknowledged that in most instances this means that the employer (“B Co”) will not be considered for these purposes to have a Canadian PE, even if under the treaty between its country of residence (Country B) and Canada it is considered to have a Canadian PE because, for example, it is engaged in offshore drilling activity which is deemed to be a Canadian PE. CRA states:

[O]n a purposive reading, one would expect that Canada (i.e. where the PE is located) should be able to tax Mr. X’s remuneration for employment exercised through the PE since BCo is allowed a deduction from the profits taxable in Canada attributable to the PE for the remuneration. However, we doubt that, when applying subparagraph 2(c) of Article 15 of the Canada-State X treaty, it was intended that Canada or State X should look for a definition in a treaty between Canada and a third country [i.e., Country B] to find out if the remuneration can be taxed in Canada.

Neal Armstrong. Summary of 20 July 2015 Memo 2012-0457671I7 under Treaties - Art. 15.

A Quebec LP (SNF) acquired metal scrap from 12 suppliers, who were registered for GST purposes, but who did not remit the GST which they invoiced to SNF. Each supplier named in the invoices was “a ‘prête‑nom’ and not the actual supplier” (i.e., each supplier acted on behalf of an undisclosed principal). Rip J stated:

That…suppliers may not have carried on a business or were "prête‑noms" does not, on the facts, affect the appellant's right to claim ITCs.

This may be inconsistent with an apparent CRA position that a nominee which does not carry on business cannot issue invoices in its own name which satisfy the documentary requirements for ITCs.

Rip J also found that SNF was not entitled to ITCs in the case of one of the suppliers because it did not meet the following standard:

[A] registrant purchasing supplies or services from a person must use reasonable procedures to verify that the person is a valid registrant, that the registration number actually exists and that the number is registered in the name of that person. In addition, if the registrant suspects the person's legitimacy as a supplier, then the registrant purchases supplies at its own risk. SNF suffered such risk when it dealt with Ms. Bergeron.

In a similar vein, he also stated that there can be no entitlement under ETA s. 261 to a rebate for "an error caused by the [applicant's] own inattention and carelessness." This condition is not stipulated in the section.

Neal Armstrong. Summaries of SNF L.P. v The Queen, 2016 TCC 12 under Input Tax Credit (GST/HST) Regulations – intermediary, ETA s. 169(4) and s. 261.

CRA has often ruled that s. 84(2) will not apply to "pipeline" transactions in which shares of a private company (say, “A Co”), which have been stepped up on death without using the capital gains exemption, are sold by the estate to a new estate subsidiary (Newco) for a promissory note of Newco, Newco and A Co amalgamate a year later, the promissory note is repaid out of the Amalco assets over the following year and the proceeds thereof distributed by the estate to its resident beneficiaries.

A ruling dealt with the complications arising when one of the beneficiaries (“Child 2”) was a U.S. resident and A Co (a portfolio trading company) was a PFIC. The transactions contemplated that A Co redeems a portion of its shares held by the estate, thereby giving rise to a deemed dividend and to a capital loss which can be carried back under s. 164(6) to partially offset some of the terminal year capital gain on the A Co shares – and that such redemption proceeds are allocated and paid (less Part XIII withholding) by the estate to Child 2 through the issuance of a promissory note. The estate then engages in a conventional pipeline transaction (as described above) for the benefit of its resident beneficiaries.

The ruling letter indicates that an objective of the transactions “is to remove Child 2 as a shareholder of A Co in a manner that will ensure that he can receive any distribution from A Co as a capital gain for United States income tax purposes and avoid the complications and negative tax consequences resulting from being a United States resident shareholder of a PFIC.” (The estate acquired its A Co shares with a stepped up basis and they could then be disposed of with no gain being recognized, provided that dividend treatment was avoided through receiving Code s. 331 liquidation treatment.) Accordingly, all the transactions are being undertaken for Code purposes as a “Plan of Liquidation” of A Co, so that Child 2 can enjoy capital gains treatment under s. 331 on his distributions. Among other things, this is stated to depend on Amalco being “dissolved within a reasonable time” following the share repurchase by A Co – so that the transactions contemplate that Amalco will be dissolved fairly soon after the two-year period mandated by CRA for implementing pipeline transactions.

Rather curiously, the CRA ruling summary indicates that the principal issue is "whether estate can elect under subsection 164(6) where there is a non-resident beneficiary" – but no s. 164(6) ruling was given.

Neal Armstrong and Abe Leitner. Summaries of 2015 Ruling 2015-0569891R3 under s. 84(2) and s. 164(6).

ETA s. 128(1)(a) provides that two corporations are “closely related” if the first corporation owns 90% or more of the value and number of the issued and outstanding shares of the capital stock of the second corporation having full voting rights under all circumstances. Accordingly, it is obvious that if 100% of the voting shares and non-voting shares of Corporation C are held by Corporations A and B, respectively, Corporations B and C are not closely related. When asked about this CRA, rather than conceding the point, stated:

It is important to note that the explanatory notes to section 128… refer to a degree of common ownership of at least 90%. Furthermore, the determination of “closely related” is relevant for purposes of the elections under sections 150 and 156… . The explanatory notes to these provisions refer to wholly-owned corporations. Any application of the provisions of section 128… to a particular fact situation should be consistent with the policy intent of the provision.

This illustrates that on the GST side, CRA is generally more reluctant to concede that the ordinary meaning of the statutory wording, if unambiguous, controls the interpretation (see, e.g., Quinco), than for the Income Tax Rulings Directorate.

Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 20 under ETA s. 128(1)(a).