News of Note
CRA clarifies how the equity-contribution component of the equity amount of a trust in determined for thin cap purposes
Email this ContentThe branch of the calculation of the “equity amount” of a trust for thin cap purposes that relates to equity contributions is ambiguously worded. CRA provided a clarifying example indicating how the average equity contribution is determined:
Using the example of a calendar 2015 taxation year, this means calculating the total contributions for each of the twelve months of 2015 (i.e., the twelve calendar months that end in the year). For each of those months, the total contributions from a specified non-resident beneficiary from the creation of the trust until the end of the calendar month immediately prior to the calendar month in question would be used. Therefore, for January 2015, the total contributions would be calculated from the creation of the trust until the end of December 2014. For February 2015, it would be the contributions from the creation of the trust until the end of January 2015, and so on. The average of the twelve totals would then be calculated.
Neal Armstrong. Summary of 19 August 2016 External T.I. 2015-0585471E5 under s. 18(5) – equity amount – (b).
CRA applies its position on fractional share exchanges under 85.1(1) domestic exchanges to 85.1(5) exchanges
Except for it entailing an exchange of shares of a non-resident corp for (treasury) shares of another non-resident corp, the rollover in s. 85.1(5) is similar to that in s. 85.1(1).
The similarities extend to the CRA treatment of cash consideration. S4-F5-C1 states in the s. 85.1(1) context that cash can also be received – so that the rollover applies only to the exchange of a fraction of each share of the vendor for treasury shares (with the remainder fractions of shares being exchanged for cash on a non-rollover basis) – provided that this is clearly specified in the terms governing the exchange.
This position also extends to s. 85.1(5). However, the foreign merger parties often will be insensitive to Canadian tax considerations, so that the allocation requirement in the Folio will not be satisfied – as appeared to be the case in the example considered by CRA.
Neal Armstrong. Summary of 23 August 2016 External T.I. 2015-0614981E5 under s. 85.1(5).
Investimentos Imobiliários e Turísticos – ECJ finds that mere technical non-compliance with VAT requirements for complete invoices should not prevent input tax claims
A law firm’s invoice paid by a Portuguese registrant, which simply referred to “Fees for legal services rendered until the present date,” did not satisfy the EU Directive respecting the requisite detail to be provided on an invoice. However, the Portuguese registrant then provided the Portuguese authority with other documents (not in invoice form, as technically required) containing the missing particulars. The European Court of Justice found that an input tax deduction should not be denied, stating:
[T]he fundamental principle of the neutrality of VAT requires deduction of input VAT to be allowed if the substantive requirements are satisfied… . It follows that the tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the conditions required by…[the] Directive…if they have available all the information to ascertain whether the substantive conditions for that right are satisfied.
This interpretive approach would be helpful to a Canadian registrant who is claiming an input tax credit where it has good documentary support that nonetheless does not technically comply with the Input Tax Credit Information (GST/HST) Regulations.
Neal Armstrong. Summary of Barlis 06 - Investimentos Imobiliários e Turísticos SA v. Autoridade Tributária e Aduaneira, ECLI:EU:C:2016:690 (Case C-516/14) (European Court of Justice (Fourth Chamber)) under ETA s. 169(4).
Income Tax Severed Letters 4 January 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Our translations of severed letters now go back a year
The table below links to full-text translations of the technical interpretations released last week as well as on January 6, 2016 and December 30, 2015. We thus have now gone back a full year in providing full-text translations of French-language technical interpretations and Roundtable items.
The translations are paywalled in the usual (3 work-weeks per month) manner. You currently are in the “open” week for this month.
CRA accepted that a U.S. resident with only a Canadian services PE was subject only to federal income tax on his income
CRA recently agreed with the position of a U.S.-resident individual who had a services permanent establishment in Canada under the Canada-U.S. Treaty but did not otherwise have a Canadian permanent establishment, that he did not earn income in any province. Accordingly, rather than being subject to provincial tax on his servicing income, he was subject to additional federal tax thereon of only 48% of federal tax.
The same analysis would apply (at least for the common law provinces) to a U.S. corporation which had only a Canadian services PE, so that it would enjoy an additional federal rate of 10% (in effect imposed under s. 124(1)) rather than facing provincial rates running from 12% to 16%.
Neal Armstrong. Summary of Kevyn Nightingale and Amir Pourzakikhani, "A Federal Permanent Establishment, But Not a Provincial One," Tax Topics, Wolters Kluwer, November 3, 2016, No. 2330, p. 1 under s. 120(1).
Arsove – Tax Court of Canada finds that there was no s. 126(1) foreign tax credit for US taxes for which a spurious offsetting U.S. credit had been claimed
A Canadian-resident individual and U.S. citizen was subject to US. income tax of 15% on a distribution to her out of her IRA. However, she filed her U.S. income tax return on the specious basis that the U.S. tax on the distribution was eliminated by a U.S. foreign tax credit, and the IRS accepted the return.
Lamarre ACJ found that, as no U.S. tax was “ultimately imposed” on the taxpayer, no Canadian foreign tax credit was available. She also noted that this result was consistent with “the purpose of the foreign tax credit… to prevent double taxation.”
Neal Armstrong. Summary of Arsove v. The Queen, 2016 TCC 283 under s. 126(1).
CRA finds that the advantage tax applies where a specified beneficiary of an RCA assigns her rights to receive distributions from the RCA to secure a personal loan
CRA found that the advantage tax in s. 207.62 applied where a specified beneficiary of an RCA assigned her rights to receive distributions from the RCA in order to secure a personal loan. CRA added:
[T]he advantage tax is equal to the present value of the beneficiary’s savings from the secured borrowing terms as compared to those of an unsecured borrowing. If it had been determined that the loan terms did not reflect arm’s length terms, the full amount of the loan would have been subject to the advantage tax.
Neal Armstrong. Summary of 16 September 2016 Internal T.I. 2013-0500581I7 under s. 207.5(1) – advantage – (a).
CRA gives examples of where the holding by an RCA trust of life insurance policy providing more than a nominal death benefit gives rise to RCA advantage tax
CRA in two interpretations has expanded on its comment in 2013-0481421C6 that the holding by an RCA trust of life insurance policy providing more than a nominal death benefit could give rise to RCA advantage tax.
The first interpretation concerned an RCA trust holding a a universal life insurance policy on the life of the individual who was the sole specified beneficiary of the RCA. The amount of the death benefit under the policy was constant over the duration of the policy, while the cash value increased each year, and the protection component correspondingly decreased each year. CRA stated:
[T]he amount of the protection component of the death benefit under the policy far exceeds the individual’s own entitlement to retirement benefits under the RCA. The amount also far exceeds a reasonable level of survivor benefits and there is no actuarial basis to support the amount as being reasonable. Upon the death of the individual, regardless of the individual’s number of years of service, salary history or age, the funds derived from the proceeds of the protection component of the death benefit (as well as the cash value…) would become available to the individual’s spouse…or… estate.
[T]he yearly life insurance coverage… constitutes an advantage…that is subject to advantage tax.
In a similar vein, in the second interpretation respecting a trusteed defined benefit supplementary pension plan (an RCA) for several key owner-managers, CRA stated that there “would be an RCA advantage if the policy was acquired to, in effect, provide key-person coverage to indemnify the employer for potential loss of profits or additional costs that may be incurred in the event of the death of the insured.”
Neal Armstrong. Summaries of 2015 External. T.I. 2013-0499501E5 and 2015 External. T.I. 2014-0544211E5 under s. 207.5(1) - advantage - (a).
CRA reaffirms rebuttable application (subject to 74.4(4)) of 74.4(2) to estate freeze where trust with minor child acquires common shares
When asked to comment on factors taken into account in deciding if “one of the main purposes” of a transfer or loan is reasonably considered to benefit a designated person, CRA stated:
In…2001-0067725…we stated that in a situation where a trust of which the beneficiary is a minor child of the freezor acquires common shares of the freezor’s Holdco on an estate freeze, the provisions of subsection 74.4(2) will generally apply, subject to subsection 74.4(4). The taxpayer would have to rebut the presumption that “one of main purposes” of the transfer was not to reduce the income of the individual and benefit a designated person.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, Income Tax Q.9 under s. 74.4(2).