News of Note

Some of the comments of the Joint Committee on some foreign affiliate measures included in the August 2022 draft technical amendments include:

Regarding the proposed expansion of the anti-avoidance rule in s. 85.1(4) (and a similar draft s. 87(8.3) rule, given the breadth of the “series of transactions” concept, the proposed elimination of the purpose test could result in significant uncertainty.

Relevant subsequent dispositions should not extend to dispositions of foreign affiliate shares by a Canadian taxpayer (even if such shares derive value from the shares of the first affiliate) - nor to dispositions of shares of the Canadian taxpayer or of shares further up the chain, since these would be taxable transactions.

Further, proportionality should apply, so that a disposition of shares of another foreign affiliate deriving any of their FMV from the shares of the first affiliate (or substituted property) should only lead to a denial of rollover treatment on a proportionate basis.

The excluded property test should be applied regarding the excluded property status of the property that is disposed of on the subsequent disposition, and the (existing) requirement to test the excluded property status of the property of the first affiliate at the time of the initial transfer should be eliminated.

The s. 95(2)(b)(i)(B) amendments address that, under current legislation, a disproportionate amount of FAPI can arise where the participating percentage in the payee affiliate is higher than the participating percentage in the payer affiliate. However, inequitable results can arise where partnerships are involved, and it is suggested that there could be, for instance, a look-through rule for partnership structures.

Although proposed s. 95(3.03) regarding relief where inter-affiliate services fees are paid by FA Holdco rather than by the underlying FA Opco is modelled on the provision of relief in existing s. 95(2)(a)(ii)(D) where inter-affiliate interest is paid by an FA Holdco rather than being paid by the underlying FA Opco, it is problematic that the various ancillary rules applying for the purposes of s. 95(2)(a) do not extend to proposed s. 95(3.03) to ensure its proper operation, including inter alia regarding the “throughout the year” requirement (ss. 95(2.2) and (2.01)), qualifying interest status (s. 95(2)(n)), and deeming rules for intervening partnerships (ss. 95(2)(y) and 93.1(5) and (6).)

It is problematic that para. (c) of proposed s. 95(3.03) requires that the services fees be paid or payable “by the second affiliate,” since services fees that are paid or payable by a holding partnership in which a FA is a member can be subject to s. 95(2)(b) (i.e., if they are deductible in computing the FAPI of the FA member). Accordingly, a corresponding rule to s. 93.1(4) should be introduced (although “the requirement in subsection 93.1(4) that all members of the partnership be foreign affiliates should not be extended to paragraph 95(2)(b), given that the latter only applies to the extent that the amounts are deductible by a foreign affiliate.”)

While the “subject to tax” requirement in s. 95(3.03) is modelled on the requirements of existing s. 95(2)(a)(ii)(D), there appears to be no policy rationale to base the application of subsection 95(3.03) on whether the payer affiliate and its directly held subsidiaries are subject to tax.

Neal Armstrong. Summaries of Joint Committee, "August 2022 legislative proposals relating to the Income Tax Act and the Income Tax Regulations", 16 February 2023 Joint Committee Submission under s. 85.1(4), s. 95(2)(b)(i)(B) and s. 95(3.03).

It is uncertain whether a s. 216 filer will be a person resident in Canada for purposes of the draft excessive interest and financing expenses limitation (EIFEL) rules.

If, by virtue of s. 216(1)(a) (providing that such filer is liable to pay Part I tax as if it were a person resident in Canada), the answer is yes, the filer would be treated as resident for the purposes of provisions that were likely intended to apply only to actual Canadian residents. For instance, the taxpayer could qualify as an “excluded entity” under para. (b) of that definition (regarding the $1 million “de minimis” net interest test). If the taxpayer was a “fixed interest commercial trust” and was considered resident, it could potentially transfer and receive excess capacity from other eligible group entities.

Being an eligible group entity could also be relevant under the group ratio rules in s. 18.21.

Conversely, if the s. 216 filer is to be treated for EIFEL purposes as non-resident, it would have no “adjusted taxable income” (ATI) because it would have no “taxable income earned in Canada” for the year (as required under para. D(a) of the ATI definition), as that term applies only to taxpayers filing under s. 115. Furthermore, since, by virtue of s. 216(1(c), a s. 216 filer cannot claim any deductions in computing taxable income, restricted interest and financing expenses (RIFE) for a year cannot be claimed as a deduction in any subsequent year even if the taxpayer had excess capacity.

Neal Armstrong. Summary of Ken Griffin, “The EIFEL Rules and Section 216 Filers,” International Tax Highlights, Vol. 2, No. 1, February 2023, p. 7 under s. 216(1)(a).

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

There is an exemption under s. 6(8) of the Underused Housing Tax Act regarding a home of a non-resident/non-citizen individual that is the “primary place of residence” of that individual or spouse thereof for the year in question, or of a child occupying it in connection with qualifying studies – subject to an obligation of a couple to share this exemption where there is more than one such home. CRA has indicated that it will apply its GST/HST policies in P-288 as to what is meant by “primary place of residence” – so that it cannot be secondary (determined generally by the relative degree of use in the year) to another home. Thus, the quoted term is narrower than the ITA concept of “principal residence.”

Ss. 6(1) and (9) generally provides an exemption for a corporate or individual non-resident where there is “continuous occupancy” of the home by an arm’s length individual under a written lease for specified periods amounting to at least about half the year – with a more intricate variant of this test applying where the occupant is not at arm’s length. Here, as well, CRA is applying its GST/HST policy, which is to consider that an “individual’s continuous occupancy of the dwelling unit for a period is not necessarily interrupted by the individual’s physical absence from the dwelling unit at a time in the period if … the individual still has the right to occupy the dwelling unit throughout their physical absence [and] the right to occupy the dwelling unit is not given to another individual for any period during the physical absence.” In other words, occupancy can include constructive occupancy.

Neal Armstrong. Summary of Underused Housing Tax Notice UHTN6 “Exemption for Primary Place of Residence” January 2023 under UHTA, s. 6(8) and summary of UHTN7 “Exemption for Qualifying Occupancy” under UHTA, s. 6(1).