News of Note

S. 15(1.4)(c) assimilates a benefit conferred on an individual related to a shareholder to s. 15 benefits conferred on that shareholder. In a situation where there was personal use of a corporate aircraft by the individual shareholder (Mr. A) of the "grandfather" (indirect parent) of the corporate owner of the aircraft and by Mr. A’s father (Mr. B), CRA (surprisingly) indicated that there would be no taxable benefit from such use by the father for the years under review before the effective date of s. 15(1.4)(c) – but thereafter, the value of the benefits enjoyed by the father were taxable to his son (Mr. A). CRA’s analysis was that, under Massicotte (a.k.a. Pub Création), the conferral of a benefit by a corporation on the shareholder of its parent (or, in this case, of the grandparent) constitutes an indirect benefit to the shareholder of the grandparent which is a taxable benefit to him (Mr. A) under s. 246(1), given that a benefit conferred on him directly by the grandparent corporation would have been taxable to him under s. 15(1). S. 15(1.4)(c) would then apply to add the benefit conferred on Mr. A’s father to the benefits which were taxable to Mr. A under s. 246(1).

As for the valuation of those benefits, CRA concluded after reviewing four Court of Appeal decisions (Youngman, Fingold, Schroter and Anthony) that the valuation of the benefits should be based on their fair market value (corresponding "to the price the user would have paid an independent corporation for a similar benefit") rather than their cost – although, here, the denied operating expenses and CCA of the corporate owner "can be used to establish the value of the benefit conferred on Mr. A and Mr. B., to the extent that it can be demonstrated that this value approximates the FMV of the benefit received."

CRA has now taken the trouble to provide an official translation of this interpretation, thereby signifying that it considers it to be important. This is indicated by the “2” before the I7 in the assigned number.

Neal Armstrong. Summary of 2014-0527842I7 under s. 246(1)(c), s. 13(7)(c) and s. 15(1.4)(c).

The table below links to full-text translations of French technical interpretations that were released last Wednesday and (before that) on October 19, as well as in the week of January 20, 2016. They are paywalled in the usual (3 work-weeks per month) manner.

Some of the points made by Paul Stesco, a Manager in the International Advisory Services Section, International Tax Division:

• BEPS Actions 8 to 10 (re transfer pricing) were examined and determined to not require any changes to the s. 247 rules, and the Action 8 DEMPE (“Development, Enhancement, Maintenance, Protection, and Exploitation”) guidelines respecting of intangible assets are generally reflective of the things CRA already was looking at. However, CRA considers that there are changes in direction respecting: the risk-free rates of return, e.g., to the bare IP owner (which is something the OECD is still working on); and the treatment of low-value-added services.
• Respecting Action 13 (re documentation), Canada expects to have between 100 to 120 Canadian multinational parents reporting under the Country-by-Country Reporting (CbCR) rules.
• The U.S. has not yet “signed on” to the automatic CbCR exchange, and CRA and Finance are coming up with a policy as to how to deal with that.
• Most of the CbCR reporting received in Canada from other countries will be centered in the Head Office and used to assist in tier-1 risk assessment.
• CRA considers that the CbCR information received is confidential information that is protected under ITA s. 241, and thus to be used only in the same way as information exchanged under competent authority. However, “there are jurisdictions suggesting that they would make this information public,” and CRA is awaiting their final decision on this point.
• CRA internally reorganized, so that CRA International and Avoidance specialists are now embedded within large case-file audits and report directly to the large case manager. However, all of the economists, who have a significant effect on transfer pricing audits, are in Ottawa.
• BEPS is causing CRA to review TPM-15 on intra-group services given the new guidelines on low value-added services.
• CRA has increased its scrutiny of business “restructurings” (including changes to contracts) in order to get a complete picture of the situation before and after, and may do a “fulsome” audit regarding the change.
• The penalty recommendations by the Transfer Pricing Review Committee have declined from 51% (for referrals received up to 2012) to 44% thereafter – there is more and better contemporaneous documentation.
• Ss. 247(2)(b) and(d) "recharacterizations aren’t done on a regular basis. They are the outliers."

Neal Armstrong. November 2016 Toronto Centre Canada Revenue Agency & Tax Professionals Seminar on International Tax Issues.

The stub period accrual rules originally were motivated by situations as simple as that where foreign accrual property income of a controlled foreign affiliate of a Canadian taxpayer accrues during the first portion of the year, but the CFA then becomes a subsidiary of someone else before year end, so that none of that FAPI is required to be picked up by the taxpayer. Several observations (among many) of Angelo on the revised stub period accrual rules in draft ss. 91 (1.1) to (1.5) (which inter alia can operate to trigger a stub taxation year in a CFA where there has been a change (e.g., a decrease, as in the above example) to a relevant taxpayer’s surplus entitlement percentage (SEP) respecting that CFA):

• There is an exception to this rule in s. 91(1.1)(b)(i), where the decrease to the taxpayer's SEP in the particular CFA is matched by an increase to the SEP in the particular CFA of one or more taxpayers, each of which is a taxable Canadian corporation that does not deal at arm's length with the taxpayer immediately after the particular time. Two points:

First, the decrease and increase(s) must be in respect of the same particular CFA. Thus, if there is some sort of reorganization involving two particular CFAs and the taxpayer's SEP in one of them decreases but the taxpayer's (or a non-arm's length taxable Canadian corporation's) SEP in the other one increases, that does not fit within this exception even if the total amount of attributable FAPI remains unchanged. Moreover, this exception would apply only where the increased SEP lands in a non-arm's length taxable Canadian corporation - and thus would not apply where the other non-arm's length taxpayer is an individual or a trust or even a partnership, notwithstanding that the SEP decrease is to be "determined as if the taxpayer were a corporation resident in Canada."

• The deemed (s. 91(1.2)) year end respecting, e.g., a particular CFA of the Canadian taxpayer, applies also respecting each resident corporation not dealing at arm's length with the taxpayer (and each partnership where the particular taxpayer or a non-arm's length corporation resident in Canada is, directly or indirectly, through one or more partnerships, a member thereof.)
• Ss. 91(1.4) and (1.5) provide in specified circumstances for an election to be made for there to be a deemed CFA stub year under s. 91(1.2). Two examples in the Explanatory Notes illustrate where this is desirable. However, it is unclear why these measures are elective, since it is difficult to see any circumstance where this result would not be desirable from the perspective of the particular taxpayer in the situations where the elections are available.

Neal Armstrong. Summaries of Angelo Nikolakakis, "Guess Who's Back? The Revised Stub Period Rule for FAPI," International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 8 under s. 91(1.1), s. 91(1.2). s. 91(1.4) and s. 91(1.5).