News of Note
CRA found that the SDA rules applied to a purported DSU that had a potential change-of-control redemption trigger (and continues to frown on Code s. 409A triggers)
Email this ContentCRA found that a purported deferred share unit plan did not come within the Reg. 6801(d) safe harbour, and was a salary deferral arrangement, since the terms of the plan provided for the potential redemption of units in the event of a change of control of the corporate employer (which would not necessarily result in the employee’s termination) or, in the case of U.S. participants, on the occurrence of a retirement as contemplated under Code s. 409A. 2015-0610801C6 would have grandfathered units that were credited to a participant's account after November 24, 2015 if the plan were offside by virtue only of its having the Code 409A triggering event. However, here the participants were required to recognize income on a current basis under ss. 6(11) and (12) because the plan also was offside due to the potential change-of-control triggering event.
For example, if an advance election has been made by a participant in the 2014 taxation year to have the plan apply to a bonus earned and payable in 2015 and deferred units were thereby credited to his or her account in 2015, the participant would then include in 2015 income the value of units received in respect of the deferred bonus and any dividend equivalents to which the participant was entitled at the end of 2015. If an earlier year was involved that was statute-barred, CRA would assess the s. 6(11) and (12) amounts for the first year that was not statute-barred.
Neal Armstrong. Summaries of 21 November 2016 Internal T.I. 2016-0641961I7 Tr under Reg. 6801(d) and s. 6(11).
Satoma Trust – Tax Court of Canada finds that is was abusive to use s. 75(2) as a surplus-stripping tool
In order to strip surplus of an Opco, Opco (indirectly) paid dividends to Holdco 1, which made a capital contribution of those funds to Holdco 2, which then paid those funds to a family trust (Satoma Trust) as a dividend on special shares that Satoma Trust held in Holdco 2. Due to some engineering, s. 75(2) applied to that dividend, so that all of that dividend was attributed under s. 75(2) to Holdco 1, which excluded the dividend from its taxable income under s. 112(1).
Lamarre ACJ thought that it was abusive to use s. 75(2) to avoid tax rather than prevent income splitting, and also indicated that the “intercorporate” dividend deduction was not intended to avoid tax to individuals such as Satoma Trust. Before confirming CRA’s approach of including the dividend in the income of Satoma Trust under s. 245(2), she stated:
The object and spirit of these two provisions is not to allow the transfer of funds from a corporation to a trust by taking advantage of a total tax reduction. The avoidance transactions at issue run counter to the purpose of these provisions.
Neal Armstrong. Summaries of Fiducie Financière Satoma v. The Queen, 2017 CCI 84 under s. 245(4), s. 245(1) - tax benefit and s. 75(2).
Canada has registered reservations on all MLI provisions other than the minimum standards and binding mandatory arbitration
Canada and 67 other countries signed the Multilateral Convention (the ``MLI``) on June 7, 2017. 10 other countries have expressed their intention to sign the MLI.
Canada also provided the OECD with a provisional list of countries it wishes to connect with under the MLI, so that its bilateral income tax conventions with those countries will be modified accordingly. The list has 75 counties which are, according to the Backgrounder released by the Department of Finance on June 7, 2017, "almost all countries and jurisdictions that were members of the ad hoc group that developed the Multilateral Convention and that have a bilateral tax treaty with Canada."
However, the Backgrounder also notes that "for the modifications to apply to a tax treaty listed by Canada, Canada's treaty partner must also ratify the Multilateral Convention and list its tax treaty with Canada." Such intentions of all the countries who signed yesterday have been published by the OECD.
Art. 28(7) and 29(4) of the MLI contemplate that at the time of signing, the signatories are to provide a provisional list of reservations and notifications, which Canada has done. As noted in the Backgrounder, Canada is not adopting, at this time, any part of the MLI other than the minimum standard provisions and binding mandatory arbitration (although "Canada will continue to assess whether to adopt these [other] provisions at the time the Multilateral Convention is ratified.") Thus, it is adopting (with willing partners) at this time the treaty shopping rules (and is opting for a principal purpose test, not a limitations-on-benefits Article) as well as binding arbitration and beefed up mutual agreement procedures and a general statement of intent to prevent treaty shopping. (The Backgrounder goes on to state that "Where appropriate, Canada will, over the longer term, seek to negotiate, on a bilateral basis, a detailed limitation of benefits provision that would also meet the minimum standard.")
Canada did not list the US, Germany and Switzerland. The US has not adopted the MLI and Canada, contemporaneously with the signing, announced bilateral negotiations with the latter two.
Nat Boidman and Neal Armstrong. Go to OECD BEPS - Canadian Adoption to see ``Department of Finance, Status of List of Reservations and Notifications at the Time of Signature,`` 30 May 2017 and Department of Finance, ``Backgrounder: Impact of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting,`` 7 June 2017 .
Hughes – Tax Court of Canada prefers the more lenient French version of the repeated-failure-to-file penalty in s. 162(2) to the English version
One of the conditions for the application of the repeated-failure-to-file penalty of up to 50% under s. 162(2), contained in both the English and French versions, is that CRA have sent a demand under s. 150(2) to file a return for the year, whereas the French version contains an additional condition that the taxpayer have failed to file the return within the time limit specified in the demand. Jorré J found that the French version made more sense and, therefore, was to be preferred over the English version.
As the Crown had failed to advance evidence as to whether the taxpayer had filed a return within the demanded period, Jorré J found that the taxpayer was not subject to the penalty.
Neal Armstrong. Summaries of Hughes v. The Queen, 2017 TCC 95 under s. 162(2).
The Canadian surplus and FAT rules are not equipped to handle the proposed EU common consolidated corporate tax base
The European Commission draft EU directive package of October 2016 proposed the adoption of a common consolidated corporate tax base (“CCCTB”) under which EU-resident companies (and EU-located branches of third-country companies) would have one common set of rules for computing taxable income, companies within the same group would consolidate their individual results, and the group's consolidated taxable income would be allocated among the individual group members on the basis of a formula giving equal weight to sales, labour, and assets.
Where EU earnings of European subsidiaries of a Canco were active business earnings, determining earnings on the proposed apportionment basis could result in substantial discrepancies between the surplus balances for Canadian purposes of a particular subsidiary and its cash available for distribution. Even if it were more appropriate to determine the earnings as the pre-consolidated before-tax income computed in accordance with the CCCTB, taxes then determined in accordance with the CCCTB could still have the effect of shifting surplus inappropriately from one foreign affiliate to another.
If the European subsidiaries generated foreign accrual property income, the potentially major discrepancy between how FAPI and the local taxes was determined under Canadian principles and the CCCTB methodology, respectively, would often give rise to inability to obtain a deduction in computing FAPI under the foreign accrual tax rules.
Neal Armstrong. Summaries of Michael Black, "Cross-Border Consolidation and the Foreign Affiliate Rules," Canadian Tax Journal (2017) 65:1, 173-89 under Reg. 5907(1) – earnings – (a)(i), Reg. 5907(1) – taxable surplus, s. 95(1) – foreign accrual tax and Reg. 5907(1.3)(a).
Income Tax Severed Letters 7 June 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Joint Committee points out draconian effects of the new SBD rules
The definition of “specified corporate income” in the new small business deduction rules references the concept of a Canadian-controlled private corporation providing services or property to a private corporation in which any person, who does not deal at arm’s length with a shareholder of the CCPC, has “a direct or indirect interest.” This concept is quite ambiguous. For example, Mr. Smith has units in the iShares Dow Jones Fund, which holds Ford Motors which, in turn, holds Ford Canada. This may indicate that an auto parts manufacturer of which he is a shareholder loses the SBD on its income from Ford Canada.
The tainting effect of there being “any” related shareholder of the private company purchaser also can be harsh. For example, a small contractor could lose SBD access on income from a significant contract with a large private corporation having a very small employee-shareholder who was related.
Neal Armstrong. Summary of 2 June 2017 Joint Committee Submission to Finance respecting the Small Business Deduction, appending Submission to Randy Hewlett of the Income Tax Rulings Directorate dated 14 February 2017, under s. 125(1) – specified corporate income – (a)(i), specified partnership income – (c).
Six further full-text translations of CRA technical interpretations are available
Full-text translations of the six French technical interpretations that were released last week and between February 4, 2015 and January 28, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 28 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for June.
SLFI Group - Invesco Canada – Tax Court of Canada finds that an SPV funding MFT brokerage commissions was providing a GST-taxable management service
Citibank in the U.S. agreed to fund the payment of the upfront brokerage commissions that were payable on the issuance of units in the Invesco/Trimark funds (the “Funds”) in consideration for receiving an assignment of X% of the management fees that otherwise would have been earned by the Invesco manager (the “Manager”). More precisely, the Manager agreed to relinquish its receipt of that X% of its fees, and the Funds agreed to pay the same percentage amounts to a special purpose non-resident Citibank-formed vehicle (“Funding Corp”) in consideration for Funding Corp paying the brokerage commissions. Funding Corp then immediately sold its fee-amount entitlements to Citibank.
The Funds argued that they were receiving a GST/HST exempt financial service from Funding Corp – so that this arrangement in effect eliminated the GST or HST on the portion of the management fees that was assigned to Funding Corp. This turned principally on whether this consideration paid by the Funds to Funding Corp was tainted under para. (q) of the financial service definition on the basis that Funding Corp provided any management or administrative service to the Funds.
V.A. Miller J indicated that taking care of the brokerage commissions was part and parcel of the management duties of the Manager, and delegating that duty to Funding Corp did not detract from its performance being a management function. Therefore, the consideration paid by the Funds to Funding Corp was tainted as Funding Corp was providing a management service.
Neal Armstrong. Summary of SLFI Group - Invesco Canada Ltd. v. The Queen, 2017 TCC 78 under ETA, s. 123(1) – financial service - (q).
Bellil – Federal Court of Appeal states that the absence of an intent to defraud is irrelevant to whether an individual has knowingly made a false statement
An unemployed engineer spent 11 weeks in Tunisia. On his weekly Employment Insurance declarations he answered “no” to the question, was he outside Canada, and was assessed a penalty under s. 38(1) of the Employment Insurance Act for making a statement that he “knew” to be false or misleading.
De Montigny JA found that the Social Security Tribunal, Appeals Division had committed an error, which required the case to be remitted for a fresh hearing, when it had reversed the penalty on the grounds that the engineer had had no intent to defraud the system. He stated:
[T]he only requirement imposed by the legislature is that a claimant made a representation that the claimant “knew’’ was false or misleading, that is to say, with full knowledge of the facts. The absence of fraud or having integrity is irrelevant.
This decision may inform the interpretation of "knowingly" used in ITA s. 163(2) (the French versions of ss. 38(1) and 163(2) both use “sciemment.”)
Neal Armstrong. Summaries of Canada (A.G.) v. Bellil, 2017 CAF 104 under Employment Insurance Act, s. 38(1)(a) and ITA, s. 163(2).