News of Note
CRA indicates that an (s. 149(1)(o.2)(ii)) exempt real estate corp can make “modest and necessary” investments in non-real estate permitted investments
Email this ContentA real estate pension vehicle described in s. 149(1)(o.2)(ii) must limit its activities to the real estate activities or vehicles described in s. 149(1)(o.2)(ii)(A) – while at the same time s. 149(1)(o.2)(ii)(B) prohibits it from making investments other than real estate investments, and permitted investments under pension benefits legislation ("permitted investments"). To what extent can it make permitted investments while still satisfying the activity test?
CRA cautiously responded that "it is possible, in limited circumstances" for permitted investments to be made – for example, it would be OK to make a "modest and necessary" permitted investment in furtherance of the [real estate] activities" in s. 149(1)(o.2)(ii)(A).
Neal Armstrong. Summary of 14 January 2014 T.I. 2012-0453871E5 F under s. 149(1)(o.2).
CRA is willing to treat recurring expenditures on very long-lived assets as currently deductible
CRA considers that the costs of purchasing cranberry plants in setting up a cranberry farm are part of the cost of the land, partly in light of their life span of up to 100 years, whereas the costs of replacing unproductive plants can be currently deductible. If one accepts the somewhat contrived treatment of cranberry plants as land, this is vaguely reminiscent of Johns-Manville, where recurring land expenditures to expand the perimeter of an open pit mine were found to be on income account. CRA has also indicated that replacing orchard trees and vines are on capital and income account, respectively (983283).
Neal Armstrong. Summaries of 18 December 2013 T.I. 2013-0479421E5 F under s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs or running expenses, s. 30, and Sched II: Class 8, Class 17, Class 6.
Application of s. 247(2) to apply a mark-up to seconded employee services provided by Canco to a CFA can also result in FAPI
If Canco seconds employees to its non-resident subsidiary (FA) for use in FA’s services business with arm’s length customers there, CRA will not impute foreign accrual property income to Canco under s. 95(2)(b)(ii) if the employees are provided to FA at cost rather than a mark-up. However, if CRA applies the transfer pricing rule (s. 247(2)) to impute a profit element to Canco on its secondment services, an applicable portion of the profits of FA will become FAPI to Canco.
Neal Armstrong. Summary of 13 January 2014 Memo 2013-0474431E5 under s. 95(2)(b).
CRA considers that “installation should be the main activity” for a project to be an “assembly” or “installation” project PE
CRA considers that the reference in the permanent establishment definition in the Canada-Brazil Treaty to an "assembly project" means essentially the same as the more common reference to "installation project," and interprets this phrase somewhat narrowly, e.g., "installation should be the main activity."
Neal Armstrong. Summary of 10 January 2014 T.I. 2013-0505911I7 under Treaties – Art. 5.
CRA considers that “income” for FTC Treaty purposes includes taxable capital gains
Unlike many other Treaties, the double taxation article of the Canada-Brazil Treaty refers to Canada allowing a foreign tax credit for Brazilian income tax on "income," rather than "income or gains," which may be taxed in Brazil. However, CRA accepts that "income" includes taxable capital gains. Accordingly, a Canadian company which has sold its shares of a Brazilian company is allowed a foreign tax credit, against its Canadian income tax on that gain, for the Brazilian gains tax (notwithstanding that under Canadian domestic principles, that gain may be considered to be from a Canadian source).
Neal Armstrong. Summary of 13 January 2014 T.I. 2013-0512581E5 under Treaties – Art. 24.
Income Tax Severed Letters 29 January 2014
This morning's release of 17 letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that the Part I limitation period rules apply to foreign information reporting penalties
Although foreign asset reporting occurs under information returns required under a separate Part of the Act (Part XV), CRA considers that the statute-barring rules in s. 152(4) for Part I of the Act apply to penalties applicable to delinquent filings of these returns - presumably because these penalties are imposed under a Part I section (s. 162). An implication is that, provided the taxpayer has filed a Part I return and been assessed so that the applicable limitation period (as potentially extended under draft s. 152(4)(b.2)) starts running, the imposition of a penalty respecting, for example, a T1135 information return ultimately can become statute-barred even if the information return is not filed at all. This contrasts, for example, with a Part VI.1 tax reporting obligation, which will never become statute-barred if a Part VI.1 tax return is never filed (see s. 191.4(2)).
Neal Armstrong. Summaries of 12 December 2013 Memo 2013-0497231I7 under s. 152(4)(a), s. 162(7), s. 162(10) and s. 162(10.1).
CRA is prepared to consider that “substantially all” can be less than 90%
Some cases such as Watts and Keefe have found that in particular contexts something in the neighbourhood of 80% could satisfy a "substantially all" test. When asked about this, CRA stated that it will "consider each case in its particular context to determine if a threshold lower than 90% could satisfy the test."
Neal Armstrong. Summaries of 11 October 2013 APFF Roundtable Q. 3, 2013-0495631C6 F under s. 248(1) – small business corporation and s. 110.6(1) – qualified small business corporation share.
Avoiding s. 55(2) may turn on the family patriarch or matriarch staying alive
A technical interpretation illustrates the proposition that if Opco is owned by holding companies which are controlled by Father (Fatherco), a grandchild (Nephewco) and an uncle of that grandchild (Uncleco), a redemption of Fatherco shares by Opco (giving rise to a deemed dividend) will be exempted under s. 55(3)(a), as Nephewco and Uncleco are related to Fatherco. However, as Nephewco and Uncleco are not related, a redemption of Uncleco shares could be subject to capital gains treatment under s. 55(2) unless this redemption does not result in a "significant" increase in the percentage interest of Nephewco in Opco (as opposed to a "small percentage" change.) The application of this test was unclear where Nephewco started off with 5% of the Opco common shares, and somewhat under half of the Opco preferred shares were redeemed by Uncleco - even if it were assumed that the prior introduction of Nephew Co into the structure was not part of the same series.
Neal Armstrong. Summary of 3 January 2014 T.I. 2013-0514021E5 F under s. 55(3)(a).
CRA maintains general prohibition on deducting disability policy premiums
CRA considers (subject to a limited exception in IT-223, para. 2 for overhead expense insurance) that the premiums paid under a disability policy are non-deductible, and the benefits received thereuder are non-taxable, even in the case of a policy of a corporation on its shareholders which it was required to obtain as a condition to receiving a loan to acquire a business asset.
Neal Armstrong. Summary of 8 October 2013 T.I. 2011-0428931E5 F under s. 18(1)(a) – income producing purpose.