News of Note
CRA narrows the portion of reinsurance premiums paid to related non-residents which it considers to be taxable loading for GST/HST purposes
Email this ContentSince 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).
CRA sort-of clarifies when tax dispute resolution fees become deductible
S. 60(o) provides a deduction for professional fees incurred in "preparing," instituting or prosecuting an objection or appeal "in relation to" an income tax assessment. CRA states that generally "a taxpayer can deduct professional fees from the moment when he or she is informed by the CRA that his or her income or tax for a taxation year will be revised," which suggests that CRA does not consider that costs dealing with a 30-day letter would generally be deductible under s. 60(o).
As for the deductibility under general (ss. 9 and 18(1)(a)) principles of professional fees incurred in connection with a voluntary disclosure, CRA states that "professional fees incurred in this context are not intended to produce income, because the VD instead permits a taxpayer to correct omissions made in the context of dealings with the CRA. Consequently, the deduction of the professional fees incurred in this context is restricted by paragraph 18(1)(a). However… expenses of preparing the tax returns, could be deductible."
This is questionable. The taxpayer in the Egg Marketing case (65302) did not pay its fine for an income-producing purpose, but the fine nonetheless was deductible because the conduct which triggered the fine was business-oriented. Similarly, the belated reporting of business income arises as a result of the process of having generated that income in the first place.
Neal Armstrong. Summaries of 17 October 2014 T.I. 2014-0532121E5 F under s. 60(o) and s. 18(1)(a) – legal fees.
CRA rules that a corporation can issue DSUs which indirectly track units through the use of tracking shares
The safe harbor in Reg. 6801(d) for deferred share unit plans is restricted to DSUs issued by a corporate employer or related corporation which are based on the fair market value of shares of a corporation in the group.
Employees of a public corporation managed a publicly listed LP of which a corporate subsidiary was the GP. CRA ruled that the corporation could get around the share restriction by having a Newco subsidiary issue a few tracking shares (i.e., shares which were redeemable and retractable for the trading price of the LP units) and then issuing DSUs to the managing employees which, in turn, tracked the tracking shares.
Neal Armstrong. Summary of 2014 Ruling 2012-0457101R3 under Reg. 6801(d).