News of Note
CRA will not provide relief where the lack of congruence between the 3-year late PLOI election and 2-year Part XIII refund deadlines bites
Email this ContentA potential anomaly arises because a late PLOI election to eliminate Part XIII tax on a s. 15(2) loan can be made by the Canadian lender (the "CRIC") within 3 years from its filing due-date for the year the loan was made whereas, if it actually was bone-headed enough to remit the Part XIII tax, a s. 227(6) refund application must be made within 2 years after the end of the calendar year in which the Part XIII tax was paid – so that a scenario, in which the CRIC was precluded from getting a refund of the retroactively eliminated Part XIII tax, theoretically could arise.
Neal Armstrong. Summary of 7 November 2014 T.I. 2014-0542061E5 under s. 227(6).
CRA indicates that a non-commercial arrangement (low rent to a relative) is not subject to the transfer-pricing rules
Where a non-resident individual not carrying on business in Canada leases a Canadian property to a related resident individual at less than fair market value rent, there will be no Part XIII tax exigible on imputed rent in excess of that paid because "the transfer pricing rules in section 247… would generally not be applied to adjust the amount of rent under the circumstances." However, municipal taxes (but not utilities) paid by the tenant will be treated as amounts or credited to the non-resident for the use of the property.
Although rents from a rental property which is not a source of income are not required to be reported for Part I purposes by a resident recipient, rents from such a property nonetheless are subject to Part XIII tax when paid to a non-resident.
Neal Armstrong. Summary of 3 October 2014 Memo 2014-0532051I7 under s. 212(1)(d).
CRA narrows the portion of reinsurance premiums paid to related non-residents which it considers to be taxable loading for GST/HST purposes
Since 2005, financial institutions have been required to self-assess GST or HST on various ITA-deductible expenses incurred outside Canada relating to their Canadian activities. Until recently (see Firth), CRA had been taking the position that a very substantial portion of reinsurance premiums paid by Canadian insurers to affiliated non-resident reinsurers represented taxable "loading," i.e., giving rise to an obligation to self-assess HST or GST under the above rules (as also expanded in 2010) if not already charged.
Finance indicated in November 2014 that its policy intent was that the Canadian insurers be taxable only on the portion of related-party financial services that are largely administrative in nature and not on amounts that are fundamentally financial in nature. CRA has now published revised policies in Notice 287 which ostensibly accord with this intent. In approximate terms, loading is largely restricted to the administrative component, so that amounts paid to reinsurer over and above the best estimate of losses (to reflect the transfer of risk) are excluded, as are ceding commissions and expense allowances for Canadian services of the Canadian primary insurer. There also is a safe harbour (treating all the reinsurance premiums as exempt) where there is arm's length pricing for separate properly-scoped "service level agreements" between the Canadian primary insurer and non-resident affiliates.
Neal Armstrong. Summary of GST/HST Notice 287 "CRA Administrative Positions on the Application of the Import Rules for Financial Institutions to Reinsurance Contracts" under ETA – s. 217 – loading.
CRA considers that directors of a corporate GP face potential exposure for unremitted source deductions of the LP
CRA applied Laxton to indicate that where there has been a failure of an LP to remit source deductions or GST, the resulting liability generally will be that of the general partner, so that its directors face potential liability under ITA s. 227.1 or ETA s. 323.
Neal Armstrong. Summary of 4 December 2014 Memo 2014-0531251I7 under s. 227.1(1).
CRA considers that the EU does not qualify as a state government for FTC purposes
CRA does not consider that taxes withheld by an EU organization, on pensions paid by it to a former employee who now has retired to Canada, are eligible for a foreign tax credit. The EU "is an international organization and … would not be considered a government of a country other than Canada," whereas s. 126(1) requires that the tax be paid to such a government. (CRA did not explicitly address a potential argument that the EU is a collection of governments of countries other than Canada so that, on a look through basis and reading s. 126(1) in the plural, the credit is available - although it likely would not have been receptive.)
The credit under s. 126(3) for taxes paid on income from employment with a qualifying international organization such as the EU also is not available because this instead is pension income.
Neal Armstrong. Summaries of 30 October 2014 T.I. 2013-0500491E5 under s. 126(1), s. 126(3) and s. 110(1)(f)(i).
CRA considered that a negative ACB deemed gain from shares situated in Japan had a Canadian source for FTC purposes (i.e., no FTC)
Canco paid Japanese income tax on the capital gain reported on the distribution by it of its shares of a Japanese subsidiary ("Forco") to its non-resident parent as a dividend-in-kind, and claimed a foreign tax credit against the Canadian income tax payable on the taxable portion of the s. 40(3) gain realized as a result of a dividend distribution from Forco earlier in the year. Canco took the position that the s. 40(3) gain had a Japanese source because that was the location of the shares and Forco. However, CRA indicated that "a taxable capital gain resulting from a deemed disposition of property is considered to be Canadian-source income, which therefore cannot be included in the foreign non-business income for purposes of claiming a FTC." Moreover, Article 21 of the Treaty did not apply to re-source the s. 40(3) deemed gain to Japan because it was not taxed in Japan.
A further difficulty was that the gain on the distribution was subsequently determined to be nil (as the shares had a nil value) – yet Canco did not apply for a refund of the Japanese capital gains tax and instead claimed the FTC as described above. Not surprisingly, CRA applied Meyer to state that "the tax paid to the Japanese tax authorities was voluntary and as such, should not be considered to be a ‘tax’."
Neal Armstrong. Summaries of 23 July 2014 Memo 2014-0525231I7 under s. 126(1) and Treaties- Art. 24.
Income Tax Severed Letters 28 January 2015
This morning's release of 25 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Solutions Mindready R&D – Tax Court of Canada finds that decisive influence at the management level is sufficient to establish de facto control
Similarly to Lyrtech, Favreau J found that a supposed Canadian-controlled private corporation which carried on R&D for and at the direction of a public company and whose shares were held by a trust whose two trustees were key directors of the public company and whose beneficiaries were group companies, was controlled de facto by the public company. He stated that "a decisive economic role permitting a corporation to be in a position to impose its will on the management of the affairs of another corporation is sufficient to constitute control in fact."
Neal Armstrong. Summary of Solutions Mindready R&D Inc. v. The Queen, 2015 CCI 17 under s. 256(5.1).
U.S. tax prohibition against secured guarantees of Canadian sub can scupper the de minimis safe harbour under the back-to-back loan rules
A "de minimis" rule provides a potential safe harbour from application of the back-to-back loan rules respecting situations where the debt owing by Canco to the intermediary is one of a number of debts owing by a group of related debtors to the same creditor, and the same assets which secure the Canco debt also secure the other debts owing by those group members. This safe harbour would not be available, for example, where there are secured loans to both a U.S. parent and its Canadian subsidiary and, for U.S. tax reasons, the Canadian assets are provided as security only for the Canadian obligation and not for the U.S. obligation.
Neal Armstrong. Summary of Edward A. Heakes, "The Proposed Revisions to Back-to-Back Loan Rules," International Tax Planning (Federated Press), Vol. XIX, No. 4, 2014, p. 1357 under s. 212(3.1)(e).
S. 40(2)(e.1) should have paramountcy over s. 40(2)(g)(ii)
If there is an intra-group transfer of a non-interest-bearing debt, there generally will be a preference for a resulting loss to be denied by s. 40(2)(e.1) (intra-group transfer) rather than s. 40(2)(g)(ii) (no income-producing purpose), because the denied loss can then be added back to the adjusted cost base of the debt under s. 53(1)(f.1) or (f.11). It is appropriate to consider that s. 40(2)(e.1) has paramountcy because "presumably, Parliament did not intend the debt parking rules to apply as a result of capital losses realized within the related group," and the ACB add-back protects against the application of those rules.
Although CRA has ruled on occasion that s. 40(2)(e.1) rather than s. 40(2))(g)(ii) applied, it is not clear that these are paramountcy rulings as the non-interest-bearing debt in question may have been considered to have been acquired for an income producing purpose (e.g., a loan from a shareholder).
Neal Armstrong. Summary of Mike J. Hegedus, "Paragraph 40(2)(e.1) Versus Subparagraph 40(2)(g)(ii): Potential Conflict?" Resource Sector Taxation, Vol. IX, No. 4, 2014, p.684 under s. 40(2)(e.1).