News of Note
CRA discusses whether a USco can be subject to Part I tax as a result of Canadian home offices of employees
Email this ContentRegarding whether USco (a US C-Corp and a “qualifying person” for purposes of the Canada-US Treaty) would be considered to be carrying on business in Canada by virtue only of some of its employees being Canadian residents who worked from their homes for two or three days a week and, if so, whether USco would be considered to be earning income through a permanent establishment (PE) in Canada, CRA indicated:
- Internal support activities such as those of an accountant or an HR professional providing services only to USco would generally not constitute USco carrying on business in Canada.
- However, where a Canadian resident employee worked from home as part of a team providing consulting services, the Canadian physical location of that individual might inform where the services were performed, with it also being relevant if the clients were resident in Canada.
- If such a Canadian resident employee acted in a product development role, this might engage s. 253(a), which references “creating or improving, in whole or in part, anything in Canada”.
- S. 253(b) might also be engaged, which was described as generally including “actively seeking and attempting to obtain customers in Canada, beyond ‘a mere invitation to treat’ or advertisement.”
- The employee’s home office would not constitute a “fixed place of business” through which the business of USco was partly or wholly carried on under the PE Article assuming that such office was not rented by USco or was otherwise at its disposal.
- Regarding Art. V(5), “if a contract entered into by a Canadian employee requires approval by the U.S. office to be binding, such contract would not necessarily be viewed as entered into in Canada, provided the approval by the U.S. office is not merely a formality.”
Neal Armstrong. Summaries of 17 May 2023 IFA Roundtable, Q.5 under s. 115(1)(a)(ii), s. 253(a), s. 253(b) and Treaties – Income Tax Conventions – Art. V.
CRA indicates that Class 2 licensees under the Barbados Insurance Act receive a “special tax benefit” for purposes of the Treaty-benefit exclusion
Art. XXX(3) of the Canada-Barbados Treaty provides that the provisions of Arts. VI to XXIV of that Treaty do not apply to any person or other entity entitled to any “special tax benefit” in Barbados under indicated statutes including the Insurance Act (Barbados). The Barbados general corporate income tax rates range from 5.5% on the first BBD 1 million down to 1% on amounts in excess of BBD 30 million; whereas under the Insurance Act, the corporate tax rate on all insurance companies with a Class 2 licence (which permits the company to insure third-party risks wherever situated) is 2%.
CRA indicated that the preamble to Art. XXX is broadly worded, making reference to “any special benefit” received by any person or other entity under the Insurance Act or any “substantially similar law.” Given that there is a tax regime in Barbados that is specific to insurance companies, a Class 2 licensee is considered by CRA to receive a special tax benefit for the purposes of Art. XXX(3), so that it would not be entitled to benefits under Arts. VI to XXIV.
Neal Armstrong. Summary of 17 May 2023 IFA Roundtable, Q.4 under Treaties – Income Tax Conventions – Art. 29.
CRA confirms that a pro rata distribution by an LLLP to its members is a dividend
CRA indicated that given that ss. 90(2) and (5) provided a comprehensive definition of what constituted a dividend (namely, a pro rata distribution on the shares of a foreign affiliate), pro rata distributions to its members by an LLLP or LLC that was a corporation for purposes of the Act would be treated as a dividend, including for disclosure in a T1134 supplement.
CRA further indicated that where the taxpayer does not have all the information required to fulfill the reporting requirements under Form T1134 in respect of its foreign affiliate, it should file the T1134 form on time, indicating clearly in the disclosure section of the T1134 that some information is missing. In this scenario, the availability of the due diligence exception under s. 233.5, or the reasonable efforts exception under s. 162(5), will depend on the facts of the transaction, and give rise to the requirements to file reasonable disclosure of the unavailable information to be reported in the T1134 return.
Neal Armstrong. Summaries of 17 May 2023 IFA Roundtable, Q.3 under s. 90(2) and s. 233.5.
Income Tax Severed Letters 24 May 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA discusses filing relief re FAs in a war-torn country
Will CRA grant any administrative relief in relation to the reporting requirements of Canadian multinationals for their subsidiaries in the Ukraine or Russia, such as country-by-country reporting, and forms T1134, given that financial reporting from these subsidiaries may not be available for 2022? CRA indicated:
- For forms T1134 and T1141, the due diligence exception in s. 233.5 would be available if the taxpayer provides: the available information; the circumstances making the other information unavailable; and an explanation of the steps taken to obtain the information.
- Relief may also be granted under s. 220(2.1), which could include the unconsolidated financial statements of the foreign affiliate that otherwise would have to be filed along with the T1134.
- A Canadian multinational should present its request for relief under s. 220(2.1) to its Tax Services Office in advance of the filing due-date for the subject form.
- CRA can also exercise discretion in cancelling penalties and interest under s. 220(3.1). The request should be submitted after the information return has been filed and processed.
Neal Armstrong. Summaries of 17 May 2023 IFA Roundtable, Q.2 under s. 233.5 and s. 220(2.1).
Finance confirms that Pillar 2 is on track
In an update on Pillar 2, Trevor McGowan noted that the continued aim is to release draft implementing legislation for the income inclusion rule (IIR) and domestic minimum top-up tax in the coming months, with draft legislation for the “under-taxed profits rule” (UTPR) to follow next year.
The legislation is being drafted using Canadian legislative drafting conventions, but seeks to follow the OECD model closely. The legislation needs to be recognized by other countries as “qualified rules,” so that they respect Canada’s primary right to tax in accordance with the Pillar 2 framework. The government intends to submit Canada’s draft legislation for peer review soon after it is publicly released, with a view to securing “qualified” status for Canada’s legislation, thus giving taxpayers certainty as to which countries’ rules will apply before the rules come into effect.
Neal Armstrong. Reference: 17 May 2023 IFA Finance Update under “Pillar 2.”
Finance official indicates that s. 245(4.1) is not engaged where the legal and economic substance of transactions differs, and was not intended to upend the GAAR
Comments made by Trevor McGowan on proposed s. 245(4.1) included:
- It was part of the elected government’s election platform and part of the Prime Minister’s mandate letter to the Minister of Finance to update the GAAR, including through the introduction of an economic substance component. Accordingly, there was no question of whether or not to introduce an economic substance component – rather, it was a question of how to do so while not at the same time upending the GAAR rule and throwing out 30 years of caselaw.
- S. 245(4.1) is not engaged where there is a mismatch between the economic and legal substance of a transaction, e.g., where there is a sale and repurchase of an asset that economically is a financing, and it instead is engaged where there is a lack of economic substance to the transactions, i.e., where there is virtually nothing that is really happening, for example, just a circular flow of funds with no change in anybody’s economic position.
- Whether there is a change in economic position may be guided by whether there is a change in the opportunity for making profit or in the risk of loss.
- No one of the listed factors in s. 245(4.1) will be dispositive in every case, and depending on the circumstances, some may be more relevant than others.
Neal Armstrong. Summaries of 17 May 2023 IFA Finance Update under s. 245(0.1), s. 245(3)(b) and s. 245(4.1).
We have translated 7 more CRA severed letters
We have a translated an interpretation released by CRA last week and a further 6 translations of CRA interpretations released in May of 2003. Their descriptors and links appear below.
These are additions to our set of 2,471 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 19 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2023-05-17 | 15 February 2023 External T.I. 2022-0953991E5 F - Paragraph 84.1(2)(e) and amalgamation | Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(e) | loss of s. 84.1(2)(e) safe harbour on an amalgamation of the purchaser and subject corporation |
| 2003-05-30 | 5 May 2003 External T.I. 2002-0140805 F - Arrangements funéraire - Provision de 20(1)m)
Also released under document number 2002-01408050.
|
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) | non-refundable prepaid funeral amounts not held in trust were not eligible for the reserve |
| 23 April 2003 External T.I. 2002-0155125 F - Rétribution Questionnaires - Actionnaires
Also released under document number 2002-01551250.
|
Income Tax Act - Section 67 | scenario including non-resident corporation did not comply with ITTN No. 22 | |
| 23 May 2003 External T.I. 2002-0172205 F - FIDUCIE DE BIEN-RE&S
Also released under document number 2002-01722050.
|
Income Tax Act - Section 18 - Subsection 18(9) - Paragraph 18(9)(a) - Subparagraph 18(9)(a)(iii) | s. 18(9)(a)(iii) likely applies where employer makes a payment to a trust which uses insurance to fund employee health services | |
| 26 May 2003 External T.I. 2002-0180455 F - MODIFICATION D'UNE POLICE EXONEREE
Also released under document number 2002-01804550.
|
Income Tax Regulations - Regulation 306 - Subsection 306(1) | question of fact for insurer whether splitting a policy terminates its exempt status | |
| 26 May 2003 Internal T.I. 2003-0002297 F - Fonds commun de placement-Dépenses gén.
Also released under document number 2003-00022970.
|
Income Tax Act - 101-110 - Section 104 - Subsection 104(6) | allocation of expenses permitted to maximize dividend tax credits of MFT beneficiaries | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) | s. 20(1)(bb) deductibility does not turn on the evaluated security being acquired | ||
| 15 April 2003 External T.I. 2002-0139305 F - Immigration
Also released under document number 2002-01393050.
|
Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(c) | ss. 128.1(1)(b) and (c), unlike former s. 48(3), apply also for CCA/recapture purposes | |
| Income Tax Act - Section 126 - Subsection 126(1) | FTC can be generated where recapture of depreciation, and denied capital loss, are realized on a US rental building | ||
| Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) | step-up of partnership interest on immigration to Canada neutralized the capital gain on partnership property when partnership wound up |
CRA indicates that stock-compensation expenses may be relevant to pricing cross-border services charges even where s. 7(3)(b) prohibits their deduction
We have published the text of written questions that were posed, and abbreviated summaries of the CRA oral responses, at the CRA Roundtable held yesterday at the IFA Conference in Calgary.
In Q.1, CRA confirmed that it was appropriate to consider taking into account stock-option compensation expenses incurred by Canco in relation to its Canadian employees as a component of what would be a charge complying with the s. 247(2) transfer-pricing rules for their services to a non-resident affiliate, even where such stock compensation costs were non-deductible pursuant to s. 7(3)(b). Conversely, stock-based compensation expenses of a non-resident affiliate (e.g., expenses recognized by a foreign parent regarding options on its stock issued to employees of Canco) could be relevant in determining what was a charge by the parent to Canco that accorded with the arm’s length principle under s. 247(2).
Neal Armstrong. Summaries of 17 May 2023 IFA Roundtable, Q.1 under s. 247(2) and s. 7(3)(b).
CRA confirms an anomaly under the current s. 84.1(2)(e) rule
S. 84.1(2)(e) as it currently reads deemed a taxpayer who had disposed of qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation (the “subject shares”) to a purchaser corporation to be dealing at arm’s length with it if the purchaser corporation was controlled by one or more children or grandchildren of the taxpayer who were 18 or older and if the purchaser corporation did not dispose of the subject shares within 60 months of their purchase. In addition, s. 84.1(2.3)(a)(i) provided that if, otherwise than by reason of death, the purchaser corporation disposed of the subject shares within 60 months of their purchase, s. 84.1(2)(e) was deemed never to have applied.
CRA confirmed that on this wording, the effect of the purchaser corporation thereafter amalgamating (within the 60-month period) with the “subject corporation” was that, pursuant to s. 87(11)(a), the parent corporation would be deemed to have disposed of the subject shares so that the exclusion in s. 84.1(2.3)(a)(i) would be engaged. CRA considered such loss of the safe harbour to be anomalous, and had notified Finance accordingly.
The draft legislation subsequently released with the March 28, 2023 Budget would substantially amend these rules.
Neal Armstrong. Summary of 15 February 2023 External T.I. 2022-0953991E5 F under s. 84.1(2)(e).