News of Note

GST/HST Severed Letters September 2022

This morning's release of three severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their September 2022 release) is now available for your viewing.

The revised EIFEL rules require attention to detail

Observations on the revised draft EIFEL rules include:

  • Under the excluded entity definition, the test of all or substantially all of the businesses, undertakings and activities of each eligible group entity in respect of the taxpayer being carried on in Canada throughout the entity’s taxation year appears to apply on an entity-by-entity basis, so that the failure of the test by even an insignificant group entity will cause the whole group to not qualify for the domestic exception.
  • Also under the excluded interest definition, the test of the total fair market value of all property of a foreign affiliate of the taxpayer or of an eligible group entity in respect of the taxpayer not exceeding $5 million applies irrespective of whether the taxpayer has a 10% interest or 100% interest in the foreign affiliate – and even an insignificant interest in a special class of shares causing a non-resident corporation to be a foreign affiliate, would require the fair market value of its property to be considered in applying the $5 million threshold.
  • The anti-avoidance rule in s. 18.2(9) would be engaged where a Canadian-resident subsidiary with a foreign business or holding of a significant foreign affiliate was sold by the taxpayer so that the excluded entity test could be met, whereas a direct sale by the subsidiary of its non-Canadian business or of its shares of the foreign affiliate would not engage s. 18.2(9).
  • The inclusion under para. (g) of the interest and financing revenues definition of the relevant affiliate interest and financing revenues (“RAIFR”) of a controlled foreign affiliate of the taxpayer, is generally reduced by any deduction under s. 91(4) in respect of foreign accrual tax to the extent that it relates to the RAIFR, even where there is a deduction under s. 91(4) in a subsequent taxation year – so that taxpayers may be required to estimate their foreign accrual tax deductions that will be claimed in subsequent years.
  • Any over-designation, including an immaterial one, will invalidate a transfer of excess capacity under s. 18.2(4). An amended transfer election may be filed, but only as provided in s. 18.2(4)(i).
  • Under s. 18.21(2), if an election is made that allocates an amount greater than the specified limits, the allocated group ratio amount will be deemed to be nil – a potentially punitive result for what might be a small error.

Neal Armstrong. Summaries of Saira Bhojani and Eivan Sulaiman, “EIFEL Rules,” Draft 2022 CTF Annual Conference paper under s. 18.2(1) – excluded entity – (c)(i), (c)(ii), (c)(iii)(A). s. 18.2(9), s. 18.2(1) – interest and financing revenue – (g), excess capacity, s. 18.2(4), and s. 18.21(2).

We have translated 6 more CRA interpretations

We have published a further 6 translations of CRA interpretations released in November of 2003. Their descriptors and links appear below.

These are additions to our set of 2,324 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 19 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
2003-11-14 3 November 2003 Internal T.I. 2003-0044817 F - Copies of Electronic Documents
Also released under document number 2003-00448170.

Income Tax Act - Section 231.1 - Subsection 231.1(1) CCRA auditors may take electronic copies of taxpayer records
Income Tax Act - Section 231.5 - Subsection 231.5(1) CCRA audit right to take electronic copies and to print out
5 November 2003 Internal T.I. 2003-0036737 F - BOURSES D'ETUDES
Also released under document number 2003-00367370.

Income Tax Act - Section 56 - Subsection 56(3) $3,000 exemption unavailable where education tax credit not available in the same taxation year
5 November 2003 Internal T.I. 2003-0043277 F - Benefit-Use of Automobiles
Also released under document number 2003-00432770.

Income Tax Act - Section 246 - Subsection 246(1) - Paragraph 246(1)(a) s. 246(1)(a) application re mother’s use of a car of Opco controlled by her son’s Holdco to her rather than son turned on whether her minority Holdco had significant influence over Opco
Income Tax Act - Section 15 - Subsection 15(5) application of s. 15(5) to shareholder’s use of company automobile
Income Tax Act - Section 10 - Subsection 10(1) automobiles in car dealer inventory used for employee’s personal use remained in inventory, cf. if converted primarily to personal use of shareholder (which would not be a disposition)
Income Tax Act - Section 9 - Computation of Profit conversion of automobile in car inventory to personal use of CEO would not entail its deemed disposition nor would the conversion of car inventory to personal use of shareholders
2003-11-07 30 October 2003 External T.I. 2003-0037465 F - Subsections 40(3.3) & 40(3.4)
Also released under document number 2003-00374650.

Income Tax Act - Section 40 - Subsection 40(3.4) non-application of s. 40(3.4) where taxpayer acquires then immediately disposes of an additional block/ application of formula where it partially dips into existing block
4 November 2003 External T.I. 2003-0042295 F - CONVENTION DE RETRAITE REVENU D'INTERET
Also released under document number 2003-00422950.

Income Tax Act - Section 207.5 - Subsection 207.5(1) - Refundable Tax - Paragraph (b) requirement to include interest income under s. 12 in computing refundable tax at end of year
31 October 2003 External T.I. 2003-0045795 F - DEDOMMAGEMENT POUR PERTE DE REVENU
Also released under document number 2003-00457950.

Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) Quebec government compensation to pension plan members for cessation of employer contributions was not itself pension or other income
Income Tax Act - Section 3 - Paragraph 3(a) lump sum government compensation for loss of employer pension plan contributions was not income from a source

CRA comments suggest that the rule against accumulations can be problematic for lifetime benefit trusts

Under the rule against accumulations in Ontario (and other provinces), any trust income after a specified period (“surplus income”) may not be accumulated in or added to the capital of the trust and must go to the person(s) who would have been entitled to it had the accumulation not been directed. A trust established for a dependent mentally-infirm child (the “Dependent Beneficiary”) in such a province could address the rule by directing the surplus income to be paid to a designated beneficiary (a “designated beneficiary clause”) or stipulate that the surplus income be paid to the person(s) entitled to receive that income (an “accumulation clause”). Such a clause would cause the trust not to meet the requirements under s. 60.011(1)(b) for being a lifetime benefit trust (“LBT”) if (as might normally the case, due to the mental infirmity of the Dependent Beneficiary) someone other than the Dependent Beneficiary was named in a designated beneficiary clause or the accumulation clause was drafted to have a similar effect.

Absent such a clause, the surplus income would become part of the residue of the estate and be distributed in accordance with the residuary clause, so that the recipient of the surplus income would receive it by operation of law. However, using this operation-of-law approach would not solve the desire to avoid having the surplus income distributed to the Dependent Beneficiary.

CRA did not suggest any solutions to this dilemma, and stated:

[T]he mere possibility that pursuant to the terms of the trust or will, or by operation of law, a person other than the Dependent Beneficiary can receive the surplus income will cause the trust not to comply with the conditions of subsection 60.011(1). Therefore, such a trust will not qualify as an LBT from the time that the trust is created.

Neal Armstrong. Summary of 14 October 2022 External T.I. 2021-0913801E5 under s. 60.011(1)(b).

FTI Consulting - Quebec Court of Appeal finds that an ITC claim arising under ETA s. 182 after a CCAA filing could not be set off by the ARQ against a pre-filing tax debt

The ARQ, along with CRA, were owed approximately $13.4 million of tax by a corporation immediately before it was placed into protection under the CCAA. Over three years later, the monitor for the corporation made partial payment of damages claims which generated input tax credit claims of approximately $7.5 million as a result of the deemed supplies occurring pursuant to ETA s. 182 and the Quebec equivalent. Whether the ARQ could set off the ITC claims against the amount of tax owing to it (which clearly was a pre-CCAA filing claim) turned principally on whether the ITC claims were pre-filing claims (set-off available) or post-filing claims (set-off likely unavailable).

The ARQ essentially argued that, since the contracts to which the damages related had been entered into before the filing, the damages themselves should be treated as a pre-filing claim. In rejecting this and other ARQ submissions and in finding that the ITC claims were post-filing claims, Kalichman JA stated:

[I]t was only when the interim distribution was made three years after the initial CCAA filing, that payment for the supply of a taxable service was deemed to have been made and the taxes due in respect of that payment were deemed to have been collected. …

The set-off was not permitted.

Neal Armstrong. Summaries of Agence du revenu du Québec v. FTI Consulting Canada Inc., 2022 QCCA 1740 under ETA s. 182 and Statutory Interpretation - Similar Statutes/ in pari materia.

CRA indicates that employer payments made directly to the insurers rather than through the trustee do not disqualify the plan as an ELHT

CRA indicated that an employee life and health trust (ELHT) can qualify as such under s. 144.1(2) even where the trustee in accordance with the terms of the plan requires participating employers to pay premiums directly to the insurance carriers providing benefits under the plan rather than having the employers make contributions into the plan to fund such premiums. Indeed, CRA stated:

[A] trust established to provide [designated employee benefits] to employees and certain related persons may qualify as an ELHT absent employer contributions. For example, a trust established by a union may qualify an ELHT where the union or participating employees have the legal obligation to fund the entire cost of DEB’s (i.e., an employee-pay-all plan).

Neal Armstrong. Summaries of 29 June 2020 External T.I. 2018-0782541E5 under s. 144.1(2) and s. 144.1(4).

Income Tax Severed Letters 11 January 2023

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

The expanded s. 212(13.1)(a) could impose Part XIII tax on transactions with minimal connection to Canada and could be problematic to foreign fund partnerships

The August 9, 2022 proposals would amend s. 212(13.1)(a) to deem a partnership to be a person resident in Canada in respect of the portion of payments made by the partnership to a non-resident person that is deductible in computing a partner’s share of the partnership’s income or loss, to the extent that the partner’s share is taxable under Part I of the Act. This reference to Part I taxability extends to a partner with Part I income resulting from a s. 216 election.

This amendment contemplates a partnership having withholding tax obligations when making payments to a non-resident even if the partnership does not have Canadian-source income.

As an example, a foreign private equity partnership with one or more partners that are resident in Canada may now have a withholding tax obligation on management fees paid to a non-arm’s-length foreign manager if Treaty relief is not available.

Where a foreign fund partnership owns subsidiary foreign partnerships which pay interest to it in order to reduce foreign-country taxation, Part XIII tax will apply to the extent that one or more partners of the fund partnership are Canadian residents.

Neal Armstrong. Summaries of Cynthia Morin and Suhaylah Sequeira, “Withholding Tax Obligations: Proposed Amendments to Subsections 212(13.1) and 212(13.2),” International Tax Highlights, Vol. 1, No. 2 November 2022, p. 2 under s. 212(13.1)(a) and s. 212(13.2).

CRA confirms that shares issued to a Canadian parent in consideration for it issuing shares on a Delaware merger had a cost equal to such shares’ FMV

The acquisition of a non-resident target (Target) by a Canadian corporation (Opco) and its Canadian parent (Parent) entailed:

  • Parent forming two new stacked non-resident subsidiaries (Merger Sub1 holding Merger Sub2);
  • Merger Sub2 being merged into Target with Target being the survivor, with the shareholders of Target having their shares converted into shares issued by Parent and cash paid by Merger Sub1 (which it had borrowed from Opco) and with Merger Sub1 becoming the parent of Target; and
  • Merger Sub2 then immediately being merged into Merger Sub1 with Merger Sub1 as the survivor.

In order that Parent could get basis for having issued the share consideration, it was stated in a funding agreement to have issued such shares in consideration for the issuance to it by Merger Sub1 of common shares of Merger Sub1 – and CRA ruled that indeed those shares issued to Parent had a cost to it equal to the FMV of the shares issued by it in turn to the Target shareholders plus any related costs incurred by it.

CRA also ruled that on the first merger, Merger Sub1 disposed of its shares of Merger Sub2 for those shares’ FMV.

CRA further ruled that on the immediately subsequent contribution by Parent of its shares of Merger Sub1 to Opco, it did not realize gain, and Opco had full cost for those shares pursuant to s. 53(1)(c) – and Opco also was able to increase the PUC of its shares in reliance on s. 84(1)(b) in an amount equal to the FMV of those contributed shares.

Neal Armstrong. Summaries of 2021 Ruling 2021-0911211R3 under s. 54 – ACB, s. 248(1) – disposition – (k)(ii), s. 84(1)(c) and General Concepts – Payment and Receipt.

We have translated 6 more CRA interpretations

We have published a further 6 translations of CRA interpretations released in November of 2003. Their descriptors and links appear below.

These are additions to our set of 2,318 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 19 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
2003-11-21 12 November 2003 External T.I. 2003-0020275 F - RECOMPENSES
Also released under document number 2003-00202750.

Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) $500 gift policy might apply to points awards if redeemable for very limited range of goods/ policy does not apply to sales awards etc.
13 November 2003 Internal T.I. 2003-0039637 F - perte sur creance et frais
Also released under document number 2003-00396370.

Income Tax Act - Section 50 - Subsection 50(1) - Paragraph 50(1)(a) capital loss under s. 50(1)(a) if deferred proceeds became uncollectible
Income Tax Act - Section 54 - Adjusted Cost Base legal fees to recover deferred proceeds of share disposition do not increase the shares’ ACB
2003-11-14 30 October 2003 External T.I. 2003-0037075 F - Associated Corporation and 129(6)
Also released under document number 2003-00370750.

Income Tax Act - Section 256 - Subsection 256(2) corporations associated through s. 256(2) continued as associated for s. 129(6) purposes where the 3rd corporation filed s. 256(2) election not to be associated with either
6 November 2003 External T.I. 2003-0039525 F - Canadian Renewable & Conservation Expenses
Also released under document number 2003-00395250.

Income Tax Regulations - Regulation 1219 - Subsection 1219(1) CCA is not an outlay or expense, and cannot qualify as CRCE
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(a) CCA is not an expense incurred
Income Tax Regulations - Schedules - Schedule II - Class 43.1 - Paragraph (d) - Subparagraph (d)(viii) computers used in operating landfill biogas site might be Class 10 property, and applications software would be Class 43.1 or Class 12 property/ below-surface pipes would not qualify
Income Tax Regulations - Schedules - Schedule II - Class 12 - Paragraph 12(o) applications software used by computers for operation of biogas landfill site would be Class 43.1 or Class 12 property
6 November 2003 External T.I. 2003-0041355 F - Subsections 110.(19) and 85(1)
Also released under document number 2003-00413550.

Income Tax Act - Section 85 - Subsection 85(1) s. 85(1) rollover for stepped-up s. 110.6(19) ACB
5 November 2003 External T.I. 2003-0045085 F - Section 159-Payments on Behalf of Others159(2)
Also released under document number 2003-00450850.

Income Tax Act - Section 159 - Subsection 159(2) trustee in bankruptcy must be acting in that capacity for that exception to apply