News of Note
CRA indicates that capital dividend elections must be made in any applicable elected functional currency
Email this ContentCRA is of the view that making a functional currency election does not preclude the electing Canadian corporation from using Canadian dollars (or some other currency which is not the elected functional currency) in its "shareholders'" resolutions (including, presumably, directors' resolutions). However, capital dividend elections (as well as the capital dividend account itself) must be maintained in the functional currency.
Neal Armstrong. Summary of 20 September 2012 Memorandum 2012-0453071I7 under s. 261(5)(a).
CRA switches to OECD method for apportioning employee stock option benefits
CRA has announced a change to its policy for determining what portion of a stock option benefit is attributable to Canada where the employee in question has worked both in Canada and abroad. Rather than apportioning on the basis of the relative days of Canadian employment in the year of grant, CRA will use the methodology in the OECD Commentary, which typically refers instead to the relative days of Canadian employment in the vesting period. This policy change is effective for stock options exercised after 2012.
However, any specific Treaty provisions to the contrary will prevail. For example, there is a somewhat different methodology under Annex B to the 5th Protocol to the Canada-U.S. Treaty, which is based on the relative employment days between grant and exercise, rather than just the vesting period (see 6 July 2012 Memorandum 2012-0440741I7 summarized under Treaties - Article 15).
Neal Armstrong. Summary of 25 September 2012 B.C. Canadian Tax Foundation Conference, Q. 17, 2012-0459411C6 under s. 115(1)(a)(i).
Income Tax Severed Letters 14 November 2012
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is available for your viewing.
CRA issues butterfly ruling letter respecting a foreign spin-off transaction
CRA has issued another ruling letter on a cross-border butterfly, in which a spin-off business is transferred from DC, which is a Canadian sub of a foreign public company (Foreign Pubco), to TC, which is a subsidiary of a non-resident subsidiary (Foreign Spinco Parent) of Foreign Pubco. Foreign Spinco Parent is then distributed as a dividend-in-kind to the public shareholders of Foreign Pubco.
Similarly to the ruling described in an October 28th post, there was a requirement that the equity of TC not represent 10% or more of the equity of ForeignSpinco Parent in order to stay on-side with s. 55(3.1)(b)(i).
Neal Armstrong. Summary of 2012 Ruling 2012-0439381R3 under s. 55(1) - distribution.
CRA provides questionable ruling that fees generated by non-Interac-member provider of point-of-sale terminals are not exempt from GST/HST
CRA has ruled (in 17 May 2012: 62492, with a similar interpretation provided in 5 June 2012: 127795) that "independent sales organizations" or ISOs (i.e., organizations which are not Interac Association Members) which sell point-of-sale terminals to merchants and engage an Interac member to provide payment processing services to the merchants are not providing (GST/HST exempt) financial services as the service provided by them is predominantly the transfer, collection or processing of information and/or an administrative service performed by it without being financially at risk - and therefore is deemed to be a taxable service under the Financial Services (GST/HST) Regulations.
This ruling is questionable given that the Interac member is engaged as a subcontracter of the ISO, so that insofar as the merchant is concerned, what it is getting from the ISO is predominantly a payment service. However, a crucial feature of the structure is that, when the merchant contracts with the ISO, it agrees to pay the fees of the Interac processer out of the per-transaction fees generated from the merchant's customers - so that, arguably, there is a direct supply being made by the Interac processer to the merchant. Having said that, the ruling is internally inconsistent as it also indicates that the ISO is providing a single supply including [Interac] processing services to the merchant.
Neal Armstrong. Summaries of 17 May 2012 Ruling 62492 under Financial Services (GST/HST) Regulations and ETA - s. 123(1) - Financial Service and summary of 5 June 2012 Interpretation 127795 under ETA - s. 123(1) - Financial Service.
CRA rules on joint employment arrangement for avoiding GST/HST on intra-group charges
If a management company is reimbursed for its payroll costs by other group companies, those reimbursement charges generally will be subject to GST or HST except in the limited circumstances where s. 150 or 156 elections are available.
A group company (Company A) was represented to CRA as employing management and IT individuals partly for its own account and partly as agent for two other group companies. CRA ruled that payroll reimbursement payments which Company A will receive from the other two companies wil not be consideration for taxable supplies - notwithstanding that the individuals will be managed by Company A and will be treated only as its employees for source deduction and income tax reporting (T4) purposes.
Neal Armstrong. Summary of 15 May 2012 Ruling Case No. 142436 under ETA - S. 123(1) - Business.
Gallic shareholders are given three tax options on triangular amalgamation with Petromanas
Although a picayune deal, the shareholders of Gallic will have a relative wealth of choices respecting its proposed triangular amalgamation with an acquisition subsidiary of Petromanas: an s. 85.1 exchange (permitting loss recognition); a s. 85 rollover (any elected amount between cost amount and fair market value); or a s. 87(9)(a) rollover (automatic rollover at adjusted cost base if capital property).
Neal Armstrong. Summary of Gallic circular under Mergers & Acquisitions - Triangular amalgamations.
CRA confirms that a CFA taxation year is determined under foreign tax law
CRA has confirmed that the taxation year of a foreign affiliate for purposes of the foreign affiliate rules normally is the taxation year of the foreign affiliate under the taxation laws of its country of residence. Accordingly, an intra-group transfer of the holding company for subsidiaries in a particular foreign country to another non-resident company in the group will not cause a short taxation year. This is so even though this transfer results in the transferee company becoming the company which prepares consolidated tax returns (albeit, still on a calendar year basis) for that foreign country.
In the old days, you could not get CRA to rule on completed transactions. In this ruling, the proposed transaction is the filing of the foreign group consolidation election (i.e., a foreign tax law election) - everything else was a completed transaction.
Neal Armstrong. Summary of 2012 Ruling 2012-0449941R3 under s. 95(1) - taxation year.
CRA indicates that late-filed s. 98(5) designations will be accepted at CRA's discretion
Where a partner carries on a partnership's business after the partnership's dissolution, s. 98(5) of the Income Tax Act allows that partner to make a designation to "bump" the cost amount of non-depreciable capital property. CRA has stated that, although the Act does not provide any mechanism for late-filed or amended designations, CRA may accept such designations at its discretion.
Scott Armstrong. Summary of 20 September 2012 T.I. 2012-0452411E5 under s. 98(5).
Income Tax Severed Letters 7 November 2012
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is available for your viewing.