News of Note
CRA has published a memorandum on when corporations and partnerships are closely related for purposes of the ETA s. 156 election
Email this ContentCRA has published a new memorandum regarding when Canadian partnerships and corporations will be considered to be closely related to each other for purposes of the ETA s. 156 (nil consideration) election.
CRA notes that since a limited partner does not have the right to direct the business and affairs of the partnership, it will not be closely related to the partnership.
CRA provides numerous and helpful examples of structures showing the operation of these rules. None of the results are startling. For instance:
- In Example 3, three stacked Canadian partnerships, which thus form a closely related group, are closely related to a fourth Canadian partnership jointly owned by them.
- In Example 7, where each member of a qualifying group – consisting of a holding partnership (X) holding 90% of a partnership (Y) and 90% of a corporation (Z) – holds 1/3 of Corporation L, each such entity is closely related.
- In Example 9, where two grandchildren subsidiaries of AB Corp each hold a 50% partnership interest in a Canadian partnership (XY), each corporation in that chain, as well as each corporation in another wholly-owned stack beneath AB Corp, is closely related to XY.
Neal Armstrong. Summaries of GST/HST Memorandum 14-8 Closely Related Canadian Partnerships and Corporations for Purposes of Section 156 June 2023 under ETA s. 156(1.3)(b)(i), s. 156(1.3)(b)(iii), s. 156(1.1)(a)(i)(C), s. 156(1.2) and s. 156(1.1)(b)(iii)(C).
GST/HST Severed Letters May 2023
This morning's release of 11 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their May 2023 release) is now available for your viewing.
CRA releases a memorandum on the GST/HST closely related corporation rules
CRA has released a new memorandum on the rules regarding when corporations qualify as closely related for ETA purposes
Points covered include:
- CRA considers that a Canadian permanent establishment is not deemed by s. 132(2) to be a Canadian resident person for purposes of being potentially considered to be part of a closely related group of persons.
- Conversely (and at least somewhat contrary to the CIBC World Markets case, which is not mentioned), the closely-related status of a Canadian corporation can extend to the activities carried on by it through a foreign permanent establishment notwithstanding s. 132(3).
- Where a corporation (C) is owned equally by two unrelated corporations (A and B), s. 128(4) will deem a wholly-owned subsidiary (D) of C to not be closely related to C if A holds the voting rights (e.g., under a voting proxy arrangement?) to the shares held by C in D.
Neal Armstrong. Summaries of GST/HST Memorandum 14-7 Closely Related Corporations June 2023 under ETA s. 132(2), s. 132(3), s. 128(1)(a), s. 128(1.1), s. 128(1.1)(a)(i)(B), s. 128(4) and s. 128(2).
CRA confirms that T1142 reporting requirements can arise once a foreign estate has been fully administered
S. 233.6(1) provides that foreign reporting (on Form T1142) is not required for a distribution from a foreign trust where the distribution is from an estate that arose as a consequence of the death of an individual.
CRA confirmed its position that once the estate has been administered, the Canadian beneficiary of any ongoing non-resident testamentary trust is required to file a T1142 in any year where a distribution is received from a trust, or where a Canadian beneficiary becomes indebted to the trust. Generally, an estate is considered to be fully administered when the assets in the estate have been distributed and, if applicable, a clearance certificate is requested.
Neal Armstrong. Summary 20 June 2023 STEP Roundtable, Q.17 under s. 233.6(1).
CRA indicates that a damages annuity to a child for a parent’s death would generally need to be under a structured settlement to be exempt
Ss. 81(1)(g.1) and (g.2) generally provide that income earned from any property acquired by or on behalf of a person, for damages in respect of physical or mental injury to that person, is exempt in computing their income until the end of the year in which that person turns 21.
Regarding damages received on behalf of a child of parents killed in an accident, CRA indicated that where the amount received was not awarded as damages in respect of mental injury suffered by the child, ss. 81(1)(g.1) and (g.2) would not apply and the investment income would be taxable. Where an annuity contract was purchased by a taxpayer or taxpayer’s representative with the proceeds of a lump-sum award received for damages for personal injury or death, the income component of the annuity could only be exempted under ss. 81(1)(g.1) and (g.2) on the same basis.
The lump-sum award could also be organized as a structured settlement, which would entail the casualty insurer being the owner of an annuity contract and reporting the interest element inherent in the annuity contract in its income. Provided the conditions in IT-365R2, para. 5 were met, the payments received by the claimant would be non-taxable.
Neal Armstrong. Summary 20 June 2023 STEP Roundtable, Q.16 under s. 81(1)(g.1).
CRA has officially released the 2022 CTF Roundtable
For convenience of reference, here is a table of the CRA Roundtable items from the November 29, 2022 CTF Annual Conference together with links to our summaries of these items (mostly prepared almost eight months ago) and brief descriptors.
Income Tax Severed Letters 19 July 2023
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The expanded reportable transaction rules should not impose reporting obligations on lawyers who negotiate contractual protection for a conventional fee
The revised reportable transaction rules in s. 237.3 raise the familiar issue of “lines” demarcating problematic and non-problematic transactions in fact being blurry. Suppose that a lawyer assisted in negotiating and drafting terms providing for contractual protection as contemplated by the contractual protection hallmark in s. 237.3(1) – reportable transaction – (c), and charged a fee based on hours of work, is the lawyer obligated to report on the basis that this “is a fee … in respect of any … transaction … that is in respect of contractual protection,” as set out in s. s. 237.3(2)(c)(ii)?
The broadest interpretation of s. 237.3(2)(c)(ii), that the adviser is required to report in these circumstances, “seems absurd and runs counter to the 2023 explanatory notes’ clearly expressed intention that the rules do not impose an undue compliance burden.”
It would be inappropriate to give the phrase “in respect of” its widest possible meaning (which Nowegijick described as “words of the widest possible scope”) and, instead, a narrower interpretation of s. 237.3(2)(c)(ii), according with the context and purpose of the reportable transaction rules, is required.
The 2012 Explanatory Notes, which clarify that Parliament intended advisers only to have a reporting obligation in respect of contractual protection hallmark where the adviser was providing the contractual protection, suggest that if a party to a transaction receives contractual protection, the adviser should have a reporting obligation only where the adviser receives a fee for providing the contractual protection.
Neal Armstrong. Summary of Jack Silverson, Matias Milet, Christopher Anderson and Andrew Spiro, “Canada’s Reportable Transaction Rules: A Measured Approach to Adviser Reporting,” Tax Notes International, Vol. 111, No. 29, July 15, 2023 under s. 237.3(2)(c)(ii).
Marine Atlantic – Tax Court of Canada finds that a registrant is not required to expand the information already in its possession in using an ITC allocation method
The appellant (MAI), which operated a ferry service between Newfoundland and Nova Scotia, allocated all its inputs between the taxable and exempt supplies made by it (nearly all of which were made on the vessels) by measuring the areas on its ferries used exclusively in making taxable supplies (including the provisions of passenger cabins, and restaurant and dining facilities) and those used exclusively in making exempt supplies (the general seating areas and vehicle passenger decks) to determine relative percentages for those two categories of use, and then treating those percentages as also being applicable to the use of the common areas on the ferries (including corridors, walkways, stairways, public washrooms, the exterior deck, crew cabins, the engine room and navigation facilities), and to the terminal and corporate office areas and the use of fuel.
In accepting MAI’s methodology, D’Arcy J stated:
A GST registrant is entitled to use any method that is fair and reasonable provided that it complies with the provisions of the GST Act. The CRA cannot simply substitute its method for that of the GST registrant. …
[A] GST registrant should be entitled to determine its input tax credits on the basis of information in its possession without having to resort to hiring expensive third parties, such as valuators or, as I will discuss, engineers to measure spaces on its ships or experts to try to determine what percentage of fuel is consumed to propel a ship and what percentage is consumed to produce electricity, heat or hot water. …
He also noted that the taxpayer’s method appeared to be better than the output-based method used by it in earlier reporting periods and accepted by CRA.
Neal Armstrong. Summaries of Marine Atlantic Inc. v. The King, 2023 TCC 95 under ETA s. 141.01(5) and ETA s. 335(5).
We have translated 6 more CRA interpretations
We have translated a further 6 translations of CRA interpretations released in April and March of 2003. Their descriptors and links appear below.
These are additions to our set of 2,527 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 20 1/3 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 |
|---|---|---|---|
| 2003-04-04 | 24 February 2003 Internal T.I. 2002-0165537 F - Le détachement d'employés et l'article XV
Also released under document number 2002-01655370.
|
Treaties - Income Tax Conventions - Article 15 | exemption in Art. 15 of US Treaty unavailable where Canadian employee seconded to US affiliate, which reimburses for his payroll |
| 24 March 2003 Internal T.I. 2002-0177587 F - XXXXXXXXXX EN CONSIGNATION PERTE
Also released under document number 2002-01775870.
|
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs | business commences when a significant activity is initiated that is part of an income-generating process | |
| Income Tax Act - Section 9 - Timing | loss when inventory disappears is deducted when the loss is discovered | ||
| 11 March 2003 Internal T.I. 2003-0000087 F - Projet agricole au sens de 122.3(1)b)(i)(B)
Also released under document number 2003-00000870.
|
Income Tax Act - Section 248 - Subsection 248(1) - Farming | woodlot management can be farming | |
| 18 February 2003 Internal T.I. 2003-0182997 F - Calcul du revenu net étranger à 126(1)b)(i)
Also released under document number 2003-01829970.
|
Income Tax Act - Section 126 - Subsection 126(9) - Paragraph 126(9)(a) | qualifying income not reduced by s. 110(1)(d) deduction | |
| 2003-03-28 | 26 March 2003 External T.I. 2003-0008645 F - Non-Arm's Length Sale of Shares | Income Tax Act - Section 84.1 - Subsection 84.1(1) | no presumption that a transaction between companies owned by couple and nephew, respectively, is not arm’s length |
| Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | family relationship (e.g., uncle/nephew) are more likely to give rise to NAL transaction | ||
| 24 March 2003 External T.I. 2002-0165265 F - REMBOURSEMENT DE PRIMES | Income Tax Act - Section 146 - Subsection 146(8.1) | election cannot be made with surviving spouse if bequest of RRSP is to surviving adult child |