News of Note
CRA finds that a non-resident airline with no Canadian PE is required to withhold from the remuneration of its non-resident employees unless a Reg. 102 waiver is obtained
Email this ContentThe exemption under s. 81(1)(c) for income of a non-resident (here, a U.K. resident) from income earned in Canada from the operation of an aircraft in international traffic is available (assuming its home jurisdiction provides reciprocal relief) even if it is earning that income by lending out its aircraft and crew to a Canadian airline (so that it does not receive ticket revenues from the passengers.) Its U.K. employees generally would be Treaty-exempt on their remuneration (as they would not be present in Canada for more than 183 days in any 12-month period and their U.K. employer would not have a Canadian permanent establishment) - but according to CRA, this would not eliminate the requirement for Reg. 102 withholding from their remuneration unless a waiver is obtained.
This is starting to engage the Exida.com principle ("the obligation to file could only extend to those that had some connection with Canada,") and the presumption against extra-territoriality (Society of Composers).
Neal Armstrong. Summaries of 16 June 2014 T.I. 2013-0515431E5 under s. 81(1)(c), s. 115(3), Treaties – Art. 15, and Reg. 102.
CRA confirms its position that the lossco in a loss shift should have an independent source of income
CRA has quoted with approval its statement in Income Tax Technical News No. 30 dated May 21, 2004 that in a transaction to shift losses from a parent company to its subsidiary, the parent should have "other assets … that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary."
Neal Armstrong. Summary of 16 June 2014 T.I. 2013-0515431E5 under s. 111(1)(a).
CRA confirms that use of the Canada-Brazil Treaty FTC provisions is not limited by the federal s. 126 strictures (but also does not generate an Ontario FTC for tax spared amounts)
The Ontario Taxation Act incorporates by reference the foreign tax credit rules in the federal Act (i.e., s. 126) together with any other federal statutory (including Treaty) provisions which affect the application of those rules. However, a Canadian taxpayer who wishes to rely on the FTC provisions of the Canada-Brazil Treaty including a tax sparing provision (i.e., a provision that deems Brazilian withholding tax to have been levied even if it has not) applies those provisions independently of s. 126, so that it is not entitled to an Ontario FTC for the tax sparing amount.
Before so concluding, CRA noted in passing that where the Treaty FTC provisions are applied federally, "none of the provisions of section 126 of the Act, including subsections 126(4.1) and (4.2) can be applied to deny such a Federal FTC claim."
Neal Armstrong. Summaries of 16 June 2014 Memo 2014-0525961I7 under Taxation Act, s. 34(1) and Treaties - Art. 24.
A s. 90(2) distribution is made at the time of payment
Subject to exceptions, s. 90(2) deems a pro rata "distribution made" by a foreign affiliate to be a dividend. CRA considers that a distribution is not made until it is paid (including payment by note issued in satisfaction of the distribution), so that there is no distribution at the time of declaration of the distribution. This aligns deemed dividend recognition under s. 90(2), with that under s. 90(1) respecting the payment of what is a dividend under general corporate principles (see Banner Pharmacaps).
Neal Armstrong. Summaries of 17 June 2014 T.I. 2013-0506731E5 under s. 90(2) and s. 128.1(1).
The two types of PLOI elections operate differently for partnerships
A "PLOI" election can be made under s. 15(2.11) to avoid an income inclusion under s. 15(2) for a loan made made by a partnership between a CRIC (controlled by a non-resident corporation) and other Canadian corporates to a connected non-resident corporation. The election must be made by the filing due date for "the" CRIC. CRA considers that where more than one foreign controlled CRIC is a partner, this filing due date references the latest of the relevant filing-due dates of those CRICs.
On the other hand, such a partnership would be a look-through for purposes of the PLOI election which is available under the foreign-affiliate dumping rules for a loan made by the partnership to a subject corporation, so that the PLOI election would only be made by the subject corporation and the CRIC based on the CRIC’s proportionate share of the loan.
Neal Armstrong. Summaries of 18 June 2014 T.I. 2014-0534541I7 under s. 15(2.11) and s. 212.3(11).
CRA publishes its position on standard convertible debentures
CRA has published its statements at the 2013 annual CTF Conference that the interest coupons, and any premium realized, on "standard" convertible debentures are not participating interest.
Neal Armstrong. Summary of 26 November 2013 Annual CTF Roundtable, Q. 8, 2013-0509061C6 under s. 212(3) – participating interest.
Income Tax Severed Letters 2 July 2014
This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Graymar – Alberta Court of Queen’s Bench suggests that the Juliar rectification line of cases incorrectly imputes a tax avoidance purpose in transactions where specific tax consequences were not addressed at the time
Brown J found that transactions which were carried out for debt restructuring reasons could not be rectified to avoid a s. 15(2) inclusion, as this tax issue was not identified until later. He stated:
Juliar sits uneasily with Supreme Court’s direction in Performance Industries and Shafron that rectification is granted to restore a transaction to its original purpose, and not to avoid an unintended effect. While, therefore, rectification is available in order to avoid a tax disadvantage which the parties had originally transacted to avoid, it is not available to avoid an unintended tax disadvantage which the parties had not anticipated at the time of transacting.
Comments like this increase the odds that at some point the Supreme Court will review the correctness of the Juliar line of cases.
Neal Armstrong. Summary of Graymar Equipment (2008) Inc v Canada (Attorney General), 2014 ABQB 154 under General Concepts – Rectification.
Joint venture participants include their pro rata shares of JV payroll for provincial income allocation purposes
The general inter-provincial income allocation formula in Reg. 402(3) gives equal weighting to the relative payroll and gross revenues attributable to permanent establishments in the respective provinces. CRA considers that where there is a joint venture carried on by the participants through an operator, for purposes of this formula each JV participant will include the share of the JV payroll incurred by the operator for which it has "legal responsibility."
Neal Armstrong. Summary of 19 February 2014 Memo 2013-0508121I7 under Reg. 402(3).
Transfer to a new family trust was not a disposition
CRA has ruled that s. (f) of "disposition" in s. 248(1) applied (i.e., no disposition) to the transfer of the property of one family trust to a new family trust with a different division date, pursuant to a term of the deed of trust for the old trust that permitted such a transfer. A paragraph (f) of "disposition" transfer, or a s. 107.4 transfer, is something to consider as an alternative to amending or varying a trust.
Neal Armstrong. Summary of 2013 Ruling 2013-0492831R3 under s. 248(1) - "disposition" – (f).