News of Note

We have translated 8 more CRA severed letters

We have translated 2 translations of a CRA interpretation and ruling issued last week and a 6 further CRA interpretations released during April of 2002. Their descriptors and links appear below.

These are additions to our set of 2,718 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 21 3/4 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
2024-01-31 2023 Ruling 2022-0955451R3 F - Post mortem pipeline Income Tax Act - Section 84 - Subsection 84(2) conventional post-mortem pipeline transaction
22 June 2023 External T.I. 2018-0746741E5 F - Eligible dividend allocation Income Tax Act - 101-110 - Section 104 - Subsection 104(19) eligible and non-eligible dividend can be wholly designated to two respective beneficiaries
Income Tax Act - 101-110 - Section 104 - Subsection 104(13) a discretionary trust can wholly allocate each of an eligible and a non-eligible dividend to each of two recipient beneficiaries
2002-04-26 22 May 2002 Internal T.I. 2001-0106577 F - APPARIEMENT DES REVENUS ET DEPENSES Income Tax Act - Section 9 - Timing following Canderel, an upfront payment made under a multi-year supply contract is currently deductible
14 May 2002 Internal T.I. 2001-0109517 F - SECTION DE LA LOI248(28) Income Tax Act - Section 248 - Subsection 248(28) disallowance of interest deduction to partnership on loans to corporate partners whose amount was included in their income under s. 15(2), was not contrary to s. 248(28)
8 May 2002 Internal T.I. 2002-0135737 F - REGIME DE CONGE A TRAITEMENT DIFFERE Income Tax Regulations - Regulation 6801 - Paragraph 6801(a) - Subparagraph 6801(a)(vi) s. 6(11) income recognition when apparent that the leave would not commence within 6 years/ Reg. 6801(a)(vi) does not to extend 6-year period but deals with leaves over one year
2002-04-12 3 May 2002 External T.I. 2001-0110145 F - avantage imposable-vetements Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) reimbursing a professor for a briefcase needed in connection with work would be non-taxable
3 May 2002 External T.I. 2002-0132615 F - PERTE DECOULANT D'UN PAIEMENT A UN RPDB Income Tax Act - Section 147 - Subsection 147(8) creation of a business loss from making a DPSP contribution is not necessarily inconsistent with the DPSP rules
1 May 2002 External T.I. 2002-0133145 F - RAP - BAIL & ACTIONS Income Tax Act - Section 146.01 - Subsection 146.01(1) - Qualifying Home unit consisting of a leasehold interest and shares of the corporation owing the property could qualify as qualifying home

CRA concludes engaging the “one of the main purposes” test in Art. 10(8) of the Canada-UK Treaty for accessing reduced withholding resulted in a 25% withholding rate

Art. 10(8) of the Canada-U.K. Convention provides:

The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.

The day before a dividend was paid to it by a Canadian-resident corporation, a UK corporation undertook transactions to ensure that it owned shares giving it control of 10% of the total votes of the Canadian corporation, and claimed the reduced rate of 5% pursuant to Art. 10(2) of the Treaty.

After reviewing the history of Art. 10(8) (in particular, the expansion of the purpose test in 2003) and the OECD Commentaries, the Directorate concluded that “the intention of both Canada and the UK [was] that paragraph 8 of Article 10 of the Treaty not be limited to situations where the degree of connection of the ultimate dividend recipient with Canada is questioned,” i.e., it was not limited to situations of treaty-shopping.

The Directorate also concluded that application of Art. 10(8) would result in the UK corporation being subject to a withholding rate of 25% (on the basis of denying any benefits under Art. 10), rather than the rate being 15% on the basis of only the benefit of Art. 10(8)(a) being denied.

Neal Armstrong. Summary of 16 June 2020 Internal T.I. 2019-0792651I7 under Treaties – Income Tax Conventions – Art. 10.

CRA rules on post-mortem pipeline

CRA ruled on a conventional post-mortem pipeline: following preliminary transactions to generate a capital loss for carryback to the terminal year pursuant to s. 164(6), the estate sold its shares of “Investco” (described as carrying on a “business” of investing in GICs and other portfolio investments) to a Newco for consideration consisting mostly of a note, with Newco amalgamating with Investco after at least one year, and the note repaid on a quarterly basis thereafter.

Neal Armstrong. Summary of 2022-0955451R3 F under s. 84(2).

CRA rules on the application of the FAT and underlying foreign tax rules to the investment of a CFA in a US private REIT (holding LLC rental properties) through tiered US partnerships

Canco wholly-owns a US corporation (FA1), which (with third parties) holds the units of a US limited partnership (USLP1), whose only significant asset is its holding of all of the USLP2 units. USLP2 holds all the common shares of a US private REIT (FA2) which holds rental properties through subsidiary LLCs (which are disregarded for US purposes unless owned jointly with a third party) or LPs. FA2 generates FAPI for Canadian purposes.

FA1 will include in its US taxable income its share of the US taxable income of USLP1, which will include the distributions received by it from FA2. In addition to actual distributions, FA2 might declare a consent dividend, i.e., a dividend that is not actually paid but is deemed under US tax law to be distributed and then contributed back to FA2 (as additional paid-in capital).

The proportionate economic interest of FA1 directly or indirectly in USLP2 is expected to decline over time due to arm’s length investors subscribing for USLP1 or USLP2 units, so that FA2 and the underlying LLCs will eventually cease to be foreign affiliates of Canco.

CRA ruled:

  • US income tax paid by FA1 on FA1’s share of the distributions paid by FA2 and on any consent dividends will be “foreign accrual tax” (as defined in s. 95(1)) applicable to amounts that are included in Canco’s income under s. 91(1) in respect of the FA1 shares, to the extent that those distributions (and any consent dividends) can reasonably be regarded as distributions of amounts that are included, directly or indirectly, in computing income of USLP2 under s. 91(1).
  • Provided that, at any time in a particular taxation year, the total equity percentage in FA2 of Canco, and of persons related to Canco taking into account the rules in s. 93.1(1) is at least 10%, such US income taxes paid by FA1 will not be underlying foreign tax of FA1 in respect of Canco by reason of the application of Reg. 5907(1.03).
  • Conversely, if this 10% test is not met, such US income tax will be underlying foreign tax of FA1 in respect of Canco to the extent that FA1’s share of the FA2 distributions (and of any consent dividends) can reasonably be regarded as distributions of amounts that are included, directly or indirectly, in computing income of USLP2 under s. 91(1).

Neal Armstrong. Summary of 2022 Ruling 2020-0859851R3 under s. 95(1) – foreign accrual tax.

CRA finds that a discretionary trust can wholly allocate each of an eligible and a non-eligible dividend to each of two recipient beneficiaries

A discretionary trust received an eligible dividend in a year and immediately allocated and distributed it to a beneficiary; and later in the same year, received an ordinary (non-eligible) dividend which it immediately allocated and distributed to a second beneficiary, also in accordance with the discretions accorded by the trust deed. CRA found that the two respective dividends could be designated under s. 104(19) exclusively to the respective beneficiaries rather than being required to be designated on a pro rata basis.

Neal Armstrong. Summary of 22 June 2023 External T.I. 2018-0746741E5 F under s. 104(19).

Income Tax Severed Letters 31 January 2024

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Windsor Clinical Research – Tax Court of Canada notes that the taxpayer or Crown can amend their pleading to change the process or reasoning underlying their position

SR&ED claims of the taxpayer for various projects had been denied. The Crown now sought to amend its Reply to allege that the work conducted was in the field of psychology rather than dermatology and make related submissions.

In rejecting the submission of the taxpayer that these amendments “would deprive [it] of its right to rely on the specific approach taken by the auditors and appeal officers”, Jorré J stated:

[T]he ultimate issue on an appeal is: whether the amount of tax is too high, not the process or reasoning by which it was reached? …

[N]either party is bound by their approach prior to the court appeal.

Regarding the statement in Continental Bank ([1998] 2 SCR 298) that “[t]he Crown is not permitted to advance a new basis for reassessment after the limitation period has expired,” Jorré J found (without need to refer to s. 152(9)) that the “proposed amendments do not constitute a new or additional basis of assessment.”

Neal Armstrong. Summary of Windsor Clinical Research Inc. v. The King, 2023 TCC 179 under Rule 54 and s. 152(9).

Castro – Tax Court of Canada finds that a lender-required property transfer to a subsidiary whose shares were pledged, was non-arm’s length

As a condition to receiving a loan to fund the renovation of a property of the Castros, they were required to transfer the property to a corporation of which they were equal shareholders and to pledge the voting shares of the corporation to the lender. Later, in settlement of a dispute, the shares of the corporation were transferred to the lender. The Castros were subsequently assessed for failure to charge GST on the fair market value of the property on the basis that the transfer was a taxable supply, rather than an exempt supply, as reported. The Castros unsuccessfully tried to recover such tax from the corporation, and then claimed a bad debt deduction pursuant to ETA s. 231 to offset the assessment.

In confirming the denial of such claim, Smith J found that the share pledge did not remove the right of the Castros to elect the board of the corporation, so that the corporation and they were related persons pursuant to ITA s. 251(2)(b)(ii) and, thus, did not deal with each other at arm’s length pursuant to ETA ss. 126(1) and (2). Furthermore, in addition to thus not satisfying the requirement of s. 231(1) that the recipient was dealing at arm’s length with the supplier, the Castros had not satisfied the requirement in s. 231(1.1) that they had declared and remitted the tax on the supply. Smith J stated:

It would be altogether too easy to avoid paying the tax if there was simply a failure to include it in the return, followed by a wait of several years for the tax authorities to assess it, only to claim a deduction at that point because the passage of years had rendered the claim uncollectible.

Neal Armstrong. Summary of Castro v. The King, 2024 CCI 3 under ETA s. 231(1).

We have translated 10 more CRA interpretations

We have translated 4 translations of CRA interpretations issued last week and of a 6 further CRA interpretations released during May and April of 2002. Their descriptors and links appear below.

These are additions to our set of 2,710 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 21 3/4 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
2024-01-24 21 December 2023 External T.I. 2016-0654081E5 F - Transfer of life insurance
2020-0866651E5 F is similar
21 December 2023 External T.I. 2019-0822121E5 F - Transfer of life insurance policy from a trust to
2020-0866651E5 F is similar
21 December 2023 External T.I. 2020-0866651E5 F - Transfer of life insurance Income Tax Act - Section 148 - Subsection 148(7)
2016-0654081E5 F and 2019-0822121E5 F are similar

a trust distribution of a life insurance policy to a beneficiary treated as being made for FMV consideration equal to the part of the beneficiary’s capital or income interest that is satisfied

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 2, 2023-0978631C6 F - CELIAPP - Autoconstruction d'une habitation - FHSA - Self-construction Income Tax Act - Section 146.6 - Subsection 146.6(1) - Qualifying Withdrawal - Paragraph (a) acquisition of home is when it becomes habitable
Income Tax Act - Section 146.6 - Subsection 146.6(1) - Qualifying Withdrawal - Paragraph (c) written agreement for construction before October 1 could be satisfied with agreements with trades by self-constructing individual
2002-05-10 9 May 2002 Internal T.I. 2002-0135307 F - Application du paragraphe 39(2) Income Tax Act - Section 90 - Subsection 90(3) distribution of contributed surplus by Delaware subsidiary likely was a dividend
Income Tax Act - Section 39 - Subsection 39(2) distribution by Delaware subsidiary that did not result in s. 40 application thereby did not engage s. 39(2)
Income Tax Act - Section 248 - Subsection 248(1) - Dividend a dividend is any corporate distribution other than of PUC
2002-04-26 15 May 2002 External T.I. 2001-0107805 F - PLUSIEURS ENTREPRISES Income Tax Act - Section 98 - Subsection 98(5) where the terminated partnership carried on more than one business, s. 98(5) requires the sole proprietor to carry on all of those businesses
Statutory Interpretation - Interpretation Act - Subsection 33(2) reference to “the” business included all the businesses
14 May 2002 External T.I. 2001-0105925 F - TOTALITE DES ACTIFS DE L'ENTREPRISE General Concepts - Illegality in 1996, the transfer of inventories of a Quebec pharmaceutical business to a wholly-owned corporation would have been invalid
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(ii) - Clause 110.6(14)(f)(ii)(A) unclear whether pharmaceuticals inventory could be transferred to a corporation owned by a pharmacist
17 May 2002 External T.I. 2001-0107815 F - APPLICATION DE LA LOI Income Tax Act - Section 34.1 - Subsection 34.1(8) s. 34.1(8) would apply if an old partnership is replaced by a new one, provided no tax avoidance motivation
Income Tax Act - Section 96 s. 249.1(1) overrode the normal perspective that the partnership business was carried on by the partners both before and after a new partnership was formed
21 May 2002 External T.I. 2002-0133105 F - COUT DES ACTIONS Income Tax Act - Section 112 - Subsection 112(5.2) - Variable B s. 47(1) does not apply to determine the loss on mark-to-market property shares for the purposes of B in s. 112(5.2)
21 May 2002 External T.I. 2001-0097215 F - DISPOSITION D'UN BIEN EN IMMOBILISATION Income Tax Act - Section 248 - Subsection 248(1) - Disposition disposition of land when sold by municipality for unpaid property taxes

Arrbab - Court of Appeal of England and Wales restrictively interprets a power accorded in subordinate legislation to amend the primary legislation

Section 124 of the Finance Act 2008 (UK) provided inter alia that Treasury could by statutory instrument make an order in connection with appeals against HMRC decisions which amended the provisions of any Act, provided that a draft of the order had been laid before and approved by resolution of the House of Commons. Treasury made such an order, amending the Tax Credits Act 2002 (UK), which effectively took away the jurisdiction of the First-tier Tribunal to extend the deadline for a taxpayer to challenge a denial by HMRC of working tax credits. Before concluding that such amendment was ultra vires, Falk LJ stated:

Section 124 … is an example of what has come to be referred to as a "Henry VIII power", meaning a provision of primary legislation which permits subordinate legislation to be used to amend primary legislation.

It is now well established that any genuine doubt about the scope of the power conferred by such a provision should be resolved in favour of a restrictive approach. …

(This case broadly accords with the reluctance in Société des alcools and B.C. Ferry to permit Regulations to be applied so as to depart from the intent of the governing legislation.)

A few days before the taxpayer’s appeal was heard before the Court of Appeal, HMRC realized that its denial of the taxpayer’s credits was mistaken, and reversed such denial, so that the appeal was rendered “academic.” Falk LJ stated that the “conditions that will generally need to be met before this court may exercise its discretion to entertain an academic appeal” are that (quoting an earlier decision):

"(i) the court is satisfied that the appeal would raise a point of some general importance; (ii) the respondent to the appeal agrees to it proceeding, or is at least completely indemnified on costs and is not otherwise inappropriately prejudiced; (iii) the court is satisfied that both sides of the argument will be fully and properly ventilated." …

She found that these conditions were satisfied here.

Neal Armstrong. Summaries of Commissioners for His Majesty's Revenue and Customs v Arrbab [2024] EWCA Civ 16 under Statutory Interpretation – Regulations/ Statutory Delegation, and Federal Courts Act, s. 27(1.1).

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