CRA surmounts technical hurdles and provides favourable responses at the 2015 IFA Roundtable

Highlights from the CRA Roundtable held at the 2015 IFA Conference include:

Q.1 CRA accepts that GWL confirms that there can be a hedge of a net investment where a sufficient linkage can be demonstrated with the underlying hedged assets. CRA will defer providing more comprehensive comments until cases in the pipeline are decided.

Q.2 The GAAR Committee recently approved the application of GAAR to some Treaty shopping cases.

Q.3 CRA recently has been considering whether Florida Limited Liability Limited Partnerships and Florida Limited Liability Partnerships are partnerships under its standard two-step approach, given that their limitation of liability goes beyond that available to Canadian limited partners, and they can convert into an LLC without any change in the ownership of their property.

Q.4 In an extension of its favourable approach in 2013-0488881E5, CRA considers that surplus balances can be apportioned between application to notional dividends made for purposes of eliminating income inclusions under s. 90(9) and application to actual dividends (or deemed pre-acq dividends due to s. 5901(2)(b) elections).

Q.5 CRA will be guided by the policy of the back-to-back loan rules in determining whether a particular debt (by Canco to an intermediary) became owing because an intermediary debt (of the intermediary to a suspect non-resident) was entered into or kept outstanding.

Q.6 CRA, in reversing 2013-0496841I7, concluded that an interest-bearing note was acquired for the purpose of earning income from shares, as required by s. 95(2)(a)(ii)(D), as the note was acquired in order to immediately contribute it to a foreign subsidiary, thereby enhancing the dividend-earning potential of the shares held in that subsidiary.

Q.7 CRA is prepared to interpret the combined operation of Regs. 5905(7.2) and (3), in the situation where FA2, with an exempt deficit and holding FA2 with exempt surplus, is merged into FA1, which has exempt surplus and is the survivor of the merger, so that the exempt deficit of FA2 is not deducted twice in computing the exempt surplus of the merged FA.

Q.8 Where Canco makes a functional currency election before 2016 (the expiry of the s. 39(2.1) rule for letting upstream loans be repaid without giving rise to FX gains), CRA considers that FX gains arising under s. 261(10), respecting the portion of an FX gain on the loan that had accrued before the beginning of the first functional currency year, can also be eliminated under the s. 39(2.1) rule provided that the two companies have the same year end.

Q.9 The s. 95(2)(i) rule is not restricted to money borrowed by the foreign affiliate in question, and also can apply to a note that it issued to acquire qualifying property, or to debt assumed by it on such a purchase.

Q.10 CRA considers that when there is an acquisition of control of a CRIC’s non-resident parent, so that the CRIC steps up the cost of its shares of a foreign affiliate under s. 111(4)(e)(ii), this will represent an investment under the foreign affiliate dumping rules – but as no property would thereby be transferred to the FA, the deemed dividend arising under s. 212.3(2) would be nil.

Q.11 Interest on money borrowed by FA1 (whose only activity is an active business) from FA2 in order to distribute accumulated profits will qualify under s. 95(2)(a)(ii)(B).

Q.12 In a situation where the meaning of the English and French versions of the Swiss-Canada Treaty differs, the version which produces the most favourable result to the taxpayer should be applied.

Neal Armstrong. Summaries under 2015 IFA Roundtable.