News of Note
CRA claims that it will read each Reportable Transaction form
Email this ContentCRA has released the prescribed form for reporting "reportable transactions" (avoidance transactions with specified markers).
Bill C-48 provided that reporting in respect of transactions for 2011 and 2012 is due on October 24, 2013 (i.e., 120 days after royal assent), rather than on June 30 of 2012 or 2013, as the case may be. The last page of the form acknowledges the 120 day extension for 2011 transactions, but not for 2012 transactions. I understand from my partner Chris Anderson that CRA has been notified of this error.
The form also states that "each return will undergo a preliminary review."
Neal Armstrong. Link to RC312 Reportable Transaction Information Return (2010 and later tax years) under s. 237.3(2).
Dissolve – and turf everything two years later?
S. 230(4) provides that important corporate records (minute books, G.L. and key agreements) must be retained until two years following dissolution, whereas the less important stuff can be turfed (prudence aside) after 6 years. CRA considers that, under the somewhat odd-looking rule in Reg. 5800(1)(b), once the corporation is dissolved all the records on hand must be retained for a further flat two years.
This interpretation is reminiscent of a conversation with a retired senior CRA official, who indicated that CRA’s policy was for audits (presumably outside the context of a voluntary disclosure) to not go back more than 6 years even where misrepresentation was suspected.
Neal Armstrong. Summary of 14 June 2013 T.I. 2012-0461301E5 F under Reg. 5800(1).
CRA confirms feasibility of both types of cross-border stock option recharge agreements (Black-Scholes grant-date reimbursement, or in-the-money exercise-date reimbursement)
CRA has published a second (internal) interpretation on an apparent recharge agreement between a Canadian subsidiary and its public US parent in which Canco reimbursed USCo for the fair value of the stock options granted to Canco employees on the grant date – but with more granularity than the first one (29 April 2013 T.I. 2010-0356401E5). Among other points:
- It is acceptable to use either recharge method (reimbursing for the fair value of options when granted, or reimbursing for the in-the-money value when exercised)
- The Black-Scholes option pricing method (with the appropriate adjustments) is acceptable
- If the recharge agreement (in this case, a possible oral agreement) was not in place from the beginning, and was subsequently entered into, "only the portion of the fair value of the options on grant date attributable to the vesting period after the new agreement is in place" could be paid to USCo without ss. 15(1) and 214(3)(a) applying
Neal Armstrong. Summaries of 1 May 2013 Memorandum 2009-0321721I7 under s. 15(1) and General Concepts - Fair Market Value - Options.
Income Tax Severed Letters 3 July 2013
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
OECD proposes that non-compete payments be taxable only in the country of residence of the recipient
An OECD Working Group has released a draft proposal to add commentary on the treatment of payments received by an employee following cessation of employment. For example, they suggest that severance payments be treated as remuneration derived from the State where the employment was exercised when the employment was terminated, and that non-compete payments generally be treated as taxable only in the State where the recipient resides during the period covered by the payments.
Neal Armstrong. Summary of OECD Discussion Draft, Working Party 1 "OECD Model Tax Convention: Tax Treatment of Termination Payments" under Treaties – Art. 15.
CRA confirms use of s. 214(6) deemed dividend designation as a planning tool
At the IFA Conference in May, CRA addressed the situation where, as a result of the new thin cap rules, interest paid to an affiliated non-resident is deemed to be a dividend, and orally indicated that s. 214(16) designations effectively may be used to determine the timing of such deemed dividend.
In the written response (available on the IFA website but not yet released by CRA), CRA added a simple numerical example, showing that such designations could be made to "back-end" the deemed dividend to the last interest payment(s) of the year, thereby reducing or eliminating interest charges.
Neal Armstrong. Summary of IFA Conference, Q. 7, Written Response under s. 214(6).
CRA permits the consolidation of reclamation trusts
The definition in s. 211.6(1) of a "qualifying environmental trust" refers to a trust that is maintained solely for the purpose of funding the reclamation of "a" qualifying site. CRA has provided favourable rulings respecting the settlement of a single new reclamation trust with respect to multiple mining sites of the taxpayer.
For purposes of the related reclamation obligations of the taxpayer, each mining site will include "any land, water or watercourse used or disturbed by the construction or operation of the site." If the mine happened to be close to a river, this means that the "mining site" could extend for hundreds of miles beyond the mining shaft – see the post below.
Neal Armstrong. Summaries of 2013 Ruling 2012-0463471R3 under s. 211.6(1) - qualifying environmental trust, and Interpretation Act – s. 33(2).
CRA interprets qualifying environmental trust provisions purposively
Paragraph 20(1)(ss) provides a current deduction for a contribution to a "qualifying environmental trust," e.g., a trust to secure reclamation obligations at a mine. The related "qualifying site" definition refers to "a site in Canada that is or has been used primarily for…the operation of a mine…[or] the deposit of waste."
In granting a ruling, CRA stated that to "define the mine site narrowly, such that only the shaft is included, does not support the policy of a QET," so that the whole of the site as defined in the reclamation agreement with the Province qualified. See also the post immediately above.
Neal Armstrong. Summary of 2013 Ruling 2012-0463621R3 under s. 211.6(1) – qualifying site.
Liquidity rights do not cause flow-through shares to be prescribed shares
Individuals subscribing for flow-through shares of a listed resource company will immediately donate a portion of their shares to registered charities and sell the balance. Lining up independent "Liquidity Providers" to purchase such shares for their fair market value from the charities and directly from the individuals will not cause those shares to be prescribed shares (i.e., bad shares for flow-through purposes).
Neal Armstrong. Summary of 2012 Ruling 2012-0466731R3 under Reg. 6202.1.
CRA considers that servers can be permanent establishments for provincial income allocation purposes
CRA considers that servers, that are leased (or owned) by a Canadian corporation to host its websites for its internet business, will be permanent establishments (i.e., fixed places of business) for purposes of the inter-provincial allocation rules.
Neal Armstrong. Summary of 9 May 2013 T.I. 2012-0435401E5 F under Reg. 400(2).