News of Note
The new back-to-back royalty rules may require a Canadian taxpayer to determine an arm’s length licensor’s structure and whether it was tax motivated
Email this ContentA key departure in the proposed back-to-back loan rules from the existing rules is that funding provided by an ultimate funder who is entitled to a lower withholding tax rate than the intermediary is incorporated into the calculation of the amount of deemed interest under the rule, thereby potentially reducing the deemed interest paid to other ultimate funders who are subject to higher withholding tax rates. This is illustrated by an example in the article below.
The new back-to-back royalty rules can apply where one or more "ultimate licensors" indirectly lease or license property to a Canadian taxpayer by way of a chain of "relevant royalty arrangements" involving one or more intermediaries. Similarly to the back-to-back loan rules, there is a connection test which considers causal connections between incoming royalty arrangements received by an intermediary and outgoing royalty arrangements provided by the intermediary. When the licensor under an incoming royalty arrangement deals at arm's length with the taxpayer, the connection test will be satisfied only if one of the main purposes of this arrangement is to reduce or avoid withholding tax, or to avoid the back-to-back royalty rules.
This additional condition was added in the October proposals and, according to the Explanatory Notes, is intended to prevent the rules from applying to ordinary, arm's length commercial transactions that are structured without any main tax purposes. However, it may be difficult to rely on this condition in practice because a Canadian taxpayer is not likely to have sufficient information to determine an arm's length licensor's tax motivations.
Neal Armstrong. Summaries of PWC, “Bill C-29 significantly expands back-to-back rules,” Tax Insights PWC International Tax Services, Issue 2016-53, 16 November 2016 under s. 212(3.4), s. 212(3.92)(b)(ii) and s. 212(3.91).
Robinson – Cour du Québec finds that an individual who went to work full-time in Alberta remained resident in Quebec
A Quebecer who obtained employment in Alberta and stayed at employer-provided lodges at the various Alberta work sites was found to still be residing in Quebec. Her remaining significant ties to Quebec included having a son who went to school there and stayed with her mother in Quebec leased premises which the taxpayer helped fund, as well as her returning to Quebec for several weeks each summer and each winter to see him.
Neal Armstrong. Summary of Robinson v. Agence du Revenu du Québec, 2016 QCCQ 11066 under s. 2(1).
CRA considers that the repeal of the s. 55(2) exemption, for dividends for which the Part IV tax is refunded on on-payment to an individual shareholder, busts integration
A dividend is received by Holdco from an Opco, which under the new s. 55(2) rules is no longer exempted from s. 55(2) even though the Part IV tax to which it was subjected is refunded on on-payment as a dividend to the individual shareholder.
CRA considers that the high rate of resulting combined tax cannot be alleviated by treating such s. 55(2) application as permitting an election to treat the applicable portion of the individual shareholder’s dividend as a capital dividend. Instead, such capital gain only generates capital dividend account for use for future dividends.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.4 under s. 89(1) – capital dividend account – (a).
CRA considers that the bearing of RRSP or TFSA fees by the annuitant or holder typically will be subject to the 100% advantage tax, effective 2018
CRA considers that the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder typically will be considered to be an “advantage” for Part XI.01 purposes (i.e., giving rise to a tax equal to 100% of the fee amount). However, to give the investment industry time to make the required system changes, CRA will defer applying this new position until January 1, 2018. Investment management fees that are reasonably attributable to periods ending before 2018, and are paid by the annuitant or holder will have no adverse tax consequences.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.5 under s. 207.01(1) – advantage - (b)(i).
CRA considers that Poulin is consistent with its previous statements on employee buycos
CRA largely repeated a statement made at the 2016 APFF Roundtable, Q.20 (also in response to the Poulin decision) respecting employee buyco arrangements, that the employee buyco could be established to be an accommodation party and, thus, not dealing at arm’s length with the employee-shareholder vendor, where, for example:
- the employee-buyco assumes no economic risks;
- the employee-buyco does not benefit from acquiring the Opco shares;
- the employee-buyco has no interest other than to enable the employee-shareholder to realize a capital gain and benefit from the capital gains deduction; or
- the employee-buyco has no role independent of the employee-shareholder or the operating corporation.
CRA went on to state that this position is consistent with its discussion at the 2012 Annual Conference.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.6 under s. 251(1)(c).
CRA indicates that whether a GAAR proposal letter is issued before a Headquarters/GAAR Committee referral generally turns on whether the GAAR issue is familiar
In discussing the role of the GAAR Committee, CRA indicated that where the transactions under audit by the Tax Services Office are similar to situations which already have resulted in a recommendation to apply GAAR, generally the TSO will go ahead and issue a proposal letter and obtain the taxpayer’s representations - and then subsequently refer the matter to Headquarters, with the taxpayer’s representations, to obtain the GAAR recommendation.
Where the matter instead has not been previously considered by the GAAR Committee, the TSO will refer the matter to Headquarters prior to issuing of the proposal letter – so that it would generally only issue a proposal letter if Headquarters recommends GAAR’s application. Headquarters will generally, in turn, refer the matter to the GAAR Committee for consideration.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.7 under s. 245(2).
CRA indicates that cash is property for 55(2.1)(b) purposes
S. 55(2.1)(b)(ii)(B) contemplates the application of s. 55(2) where one of the purposes of a dividend (otherwise than on a redemption) is to significantly increase the cost of the dividend recipient’s property. After noting that cash is property for s. 55 purposes and that cash received on a dividend can be used to purchase any other property or even additional shares of the dividend payor, with a resulting increase in the cost amount of the shares of the dividend payor, CRA concluded that cash thus is property for s. 55(2.1)(b)(ii)(B) purposes.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.8 under s. 55(2.1)(b).
CRA indicates that BEPS 13 has no effect on the s. 247 documentation requirements
CRA indicated that BEPS Action Item 13 had been dealt with by the introduction of proposed s. 233.8 (respecting country-by-country reporting), which does not include a requirement to produce a Local File or a Master File and has no direct relation to s. 247 (including the contemporaneous documentation requirement in s. 247(4)). CRA stated that Action 13 thus has not altered its criteria regarding whether a taxpayer has made reasonable efforts to determine and use arm’s length transfer pricing.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.9 under s. 247(4).
CRA announces that it will entertain submissions for LLPs and LLLPs to file as corps only on a going-forward basis
Where a Florida or Delaware LLP and LLLP is precluded from converting to a “true” partnership, CRA will entertain submissions to allow it to file as a corporation on a going-forward basis while leaving the previous years’ filings unchanged. CRA will review such submissions to see that there is no unwarranted benefit or undue tax advantage, including a review of the relevant tax attributes.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.10 under s. 96.
Canada may announce to what extent it will adopt the MLI by the time of the next federal budget
Brian Ernewein noted that the OECD’s publication of the multilateral instrument last week is not the equivalent of an endorsement by any country to use it, absent Treaty-changes. He indicated that a decision by the Canadian government as to which items it will choose to adopt might be something that is reported on by the time of the next federal budget.
Neal Armstrong. Brian Ernewein on BEPS.