16 May 2018 IFA Roundtable

This reproduces the written questions provided at the Annual IFA CRA Roundtable held in Calgary on 16 May 2018, as well as summarizing the CRA oral responses. The CRA presenters were:

Milled Azzi, CPA, CA, Director, International Division, Income Tax Rulings Directorate, Legislative Policy and Regulatory Affairs Branch

Lori Carruthers, CPA, CA, Manager, International Division, Income Tax Rulings Directorate, Legislative Policy and Regulatory Affairs Branch

This does not summarize the oral elaboration of the questions provided by Lynn Moen (tax consultant) and Doug Powrie (VP, Tax, Tech Resources Ltd.). Certain comments of Mr Azzi, which were indistinct for mechanical transmission reasons, will be manifested with publication of the official responses in June.

Q.1 - U.S. GILTI tax and Treaty

One of the measures introduced under United States (“U.S.”) tax reform is the “global low-taxed intangible income” or “GILTI” rules in the Internal Revenue Code section 951A. Under those rules a U.S. corporation may be subject to tax on a current basis with respect to active business income earned by a controlled Canadian subsidiary, even if that Canadian subsidiary does not have a permanent establishment in the U.S. Under Article VII of the Canada-U.S. Tax Convention (“Convention”), however, business profits of a corporation resident in Canada that does not have a permanent establishment in the U.S. shall be taxable only in Canada.

Will the CRA agree to accept requests for competent authority relief under Article XXVI of the Convention on the basis that the taxes imposed under the GILTI rules may be in violation of Article VII of the Convention?

Preliminary Response

Milled Azzi: Under Article XXVI of the Convention (Mutual Agreement Procedure), the Canadian-resident taxpayer who considers that actions taken by the US will result in taxation for him not in accordance with the provisions of the Convention, may present his case cases to the Canadian competent authority and, if the objection appears to be justified, the Canadian competent authority will engage in discussions with the US competent authority.

It should be noted, however, that regarding whether the GILTI rules are in violation of Article VII (“Business Profits”), under Para. XXIX(2) the Convention cannot affect the taxation by the US of its own residents, except to the extent provided in Para. XXIX(3).

Article VII is not one of the exceptions in Article XXIX, which means that the Convention does not provide for a mechanism to resolve the double-tax situation involving double-taxation arising from the new GILTI rules.

That being said, we understand that the US GILTI rules allow for tax credits for Canadian taxes paid on active business income of a controlled Canadian subsidiary. As a result, in most instances there should not be appreciable US tax payable by the US parent.

However, if there is double-taxation, that is, under the US tax rules applicable to US foreign tax credits, there is no tax credit respecting the GILTI tax, then under the Convention no relief from double taxation will be available under Art. XXIV.

Official response

16 May 2018 IFA Roundtable Q. 1, 2018-0748181C6 - New U.S. GILTI Tax

Q.2 - MLI Principal Purpose Test

In Question 8(d) at the 2017 Canadian Tax Foundation Annual Tax Conference CRA Roundtable, the CRA refrained from commenting on the examples set out in paragraphs 182 and 187 of the Commentary to Article 29 of the then draft 2017 OECD Model Tax Convention (“OECD Model”) with respect to the “object and purpose” clause within the principal purpose test (“PPT”) of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, commonly referred to as the Multilateral Instrument (“MLI”).

(a) Now that the OECD Council has approved the contents of the 2017 update to the OECD Model, will the CRA comment on what weight it will give to the examples in paragraphs 182 and 187 of the Commentary on Article 29 of the 2017 OECD Model in determining whether a particular structure or transaction satisfies the object and purpose clause within the PPT of the MLI?

(b) As it is our understanding that Canada intends to ratify the MLI in 2018, what additional guidance does the CRA intend to provide in 2018 (on a unilateral or bilateral basis with specific treaty partners) to provide investors with sufficient certainty/clarity in determining when the PPT of the MLI may apply, particularly with respect to private equity and other collective investors?

(c) Once the MLI becomes effective, there will be increased uncertainty with respect to the application of treaty benefits under its PPT. In order to allow investments and distributions to be made on a timely basis, will the CRA commit to providing rulings on the PPT of a particular covered treaty on an expedited basis? If so, can the CRA provide an estimate on how long it expects that it would take between when a completed PPT ruling is submitted to the time that such a ruling is issued (assuming timely responses by the taxpayer to any factual queries that may be raised by the CRA)?

Preliminary Response

Review of coming-into-force timing

Lori Carruthers: Before I respond to the specific question, I would like to provide a reminder of the time line that is relevant for the entering-into-force of the MLI, which would include the PPT of paragraph 1 of its Article 7.

On March 22^nd of this year, Slovenia deposited a notice of ratification with the OECD. This was the fifth notice deposited, resulting in the MLI entering into force for these first five jurisdictions on July 1^st of this year, and having effect for their existing covered treaties in 2019.

Our government began procedures to ratify the MLI by tabling it in the House of Commons. This took place on January 31^st of this year. The next step will be to introduce an implementation bill. We don’t know precisely when that will be tabled. Once all of our domestic procedures are complete, the final step would be for Canada to deposit a Notice of Ratification with the OECD. The portion of the MLI adopted by Canada would then enter into force three months later.

The MLI will only take effect, for withholding taxes, for a particular covered treaty, on or after the first day of the next calendar year that begins on or after the latest day that the MLI enters into force for Canada and that particular treaty partner. For all other taxes, the MLI applies for taxable periods beginning six months on or after the latter of the coming-into-force dates for Canada and its treaty partner.

Q.2a – Weight of examples in 2017 OECD Model Commentary to Art. 29

Lori Carruthers: The Supreme Court of Canada observed in Crown Forest that the Model Convention has worldwide recognition as a basic document of reference in treaty application and interpretation. Canada has not placed a reservation on Article 29 of the Model, which contains a principal purpose test in paragraph 9 that is almost identical to the PPT in the MLI. Canada also has not placed an observation on the Commentary on Article 29.

Paragraph 182 of the Commentary has 13 examples that illustrate the application of the model’s principal purpose test. It also states that the six examples in paragraph 187 should also be considered, and it emphasizes the importance of the facts and circumstances of each case in determining how the principle purpose test in the model applies to the case.

Whether the CRA will apply the principle purpose test of the MLI, to situations similar to those in the above examples, will have to be examined in light of the facts and circumstances of each case, the relevant Canadian statutory law and jurisprudence, and the wording, object and purpose of the relevant cover treaty.

In other words, there are no simple answers. Once the MLI is in effect for a particular Treaty, taxpayers who would like certainty with respect to the application of the PPT to a proposed transaction are welcome to request an Advance Income Tax Ruling.

Q.2b – CRA guidance on PPT

Lori Carruthers: Given that each situation is likely to be unique, we again recommend Advance Income Tax Ruling as the best source of certainty.

Whether the PPT of the MLI will apply to prevent any particular form of collective investment vehicles, or their investors from obtaining treaty benefits, will depend on the facts of each case. It is not the intention of the CRA to frustrate the ability of taxpayers to access treaty benefits agreed to in a particular covered treaty.

However, where a collective investment vehicle represents an attempt to gain preferential treaty benefits that would not be available if the investors held the underlying investments directly, this would suggest an examination of whether the PPT of the MLI applies. During that examination, we would take a look at a number of different things such as giving consideration to other articles in the particular covered treaty, for example, paragraph 7(a) of the Canada-France Treaty. Consideration would also be given to any relevant competent authority agreement, for example the Canada-Netherlands agreement regarding closed funds for mutual account. Consideration would also be given to any existing ruling that had been issued in the past, for example those on Switzerland contractual investment funds and Ireland common contractual funds.

Thus, there are some available precedents to inform CRA’s position on some of these issues.

Q.2c – Expedited rulings

Lori Carruthers: No, we will not commit to an expedited basis, although we are sensitive to the need for all taxpayers to receive a response to a ruling request as quickly as possible, and we are working towards that.

As we continue to explore methods of addressing the PPT of the MLI in a consistent manner, we anticipate, similar to GAAR rulings, that these methods may include consultation with various areas before any ruling on the issue.

Official response

16 May 2018 IFA Roundtable Q. 2, 2018-0749181C6 - Principal Purpose Test in MLI

Q.3 - Interaction of ss. 91(5) and 93.1(2)(d)(i)

Subsection 93.1(1) of the Income Tax Act (the “Act”) allows some of the foreign affiliate rules, including the rules in section 113 of the Act, to apply to corporate structures that include partnerships. Subparagraph 93.1(2)(d)(i) of the Act limits the amount deductible by a corporation resident in Canada (Cco) under section 113 of the Act in respect of a dividend received by a partnership, of which the Cco is a member, from a non-resident corporation that is deemed to be a foreign affiliate of Cco for purposes of section 113. In this case, the maximum amount deductible under section 113 of the Act shall not exceed the portion of the amount of the dividend that is included in Cco’s income pursuant to subsection 96(1) of the Act.

At the 2000 Conference Round Table of the Association de planification fiscale et financière (“APFF”), the Department of Finance (“Finance”) was asked the following question: “…the income attributed to a member under subsection 96(1) of the Act is a net amount, that is to say, an amount obtained after subtracting the expenses related to this source of income. When the partnership receives a dividend from a foreign corporation and incurs certain allowable expenses regarding the share in respect of which the dividend was received, is the Department of Finance of the view that the limitation in subparagraph 93.1(2)(d)(i) is equal to the gross amount of the dividend received or to the net amount (after subtraction of the allowable expenses)?”. Finance’s response was: “The limitation in subparagraph 93.1(2)(d)(i) is the gross amount of dividends included for the purposes of determining the partner’s income.”

Assume the following hypothetical facts:

• A taxable Canadian corporation and its wholly owned Canadian subsidiary (collectively “Canco”) have always owned 100% of a partnership (“LP”).
• LP has always owned 100% of a non-resident corporation (“FA1”).
• Canco, LP and FA1 have a December 31 fiscal year end.
• At December 31, 2016, FA1 had an exempt surplus balance of $3,000 and a taxable surplus balance of $2,000 in respect of Canco, as those terms are defined in subsection 5907(1) of the Income Tax Regulations (the “Regulations”).
• The taxable surplus balance consists of undistributed foreign accrual property income (“FAPI”) that was included in LP’s income, and there is no underlying foreign tax.
• In its 2017 taxation year, FA1 had no FAPI or any other income or loss.
• In 2017 FA1 paid a $3,000 dividend to LP.
• LP’s income/loss for its 2017 fiscal year consisted solely of the $3,000 dividend received from FA1 (the “partnership dividend”), and interest expense of $300 on a borrowing used to acquire the FA1 shares (in addition to the subsection 91(5) deduction discussed below).
• In its 2017 taxation year, Canco had no income or loss other than the amount of LP’s income or loss that Canco was required to include in its income or loss under paragraph 96(1)(f) of the Act.
• The $3,000 dividend paid by FA1 to LP in 2017 is, under subsection 5901(1) of the Regulations, deemed to be a $3,000 dividend paid out of the exempt surplus of FA1 in respect of Canco.

In computing its income for 2017, LP would be entitled to a subsection 91(5) deduction of $2,000 as a result of subsection 5900(3) of the Regulations, resulting in LP having net income of $700 (i.e. $3,000 dividend - $2,000 s. 91(5) deduction - $300 interest expense). As such, this $700 would be included in computing Canco’s income for its 2017 taxation year by virtue of paragraph 96(1)(f).

In addition, subject to the limitation set out in subparagraph 93.1(2)(d)(i), Canco would be entitled to a subsection 113(1) deduction in computing its taxable income in respect of the dividend paid by FA1 to LP.

In the hypothetical facts, is the subsection 91(5) deduction allowed to LP taken into account in determining the amount referred to in subparagraph 93.1(2)(d)(i)?

Preliminary Response

Lori Carruthers: We are using the term “Canco” to refer collectively to Canco and Subco.

If Canco had always directly owned the FA shares, and had directly incurred the $300 interest expense, its taxable income in 2017 would have been a $300 loss. It would have had $3,000 in dividend income, with an offsetting $3,000 subsection 113(1) deduction, and a $300 interest expense. Here, however, we have ownership through a partnership, and this brings in subsections 91(5), 96(1) and 93.1(2).

Under subsection s. 96(1)(c), LP is required to compute its income on a source-by-source basis. Under 96(1)(f), LP’s income retains its source when attributed to Canco. In our example, LP’s $2,000 s. 91(5) deduction and its $300 interest expense are both wholly applicable to its dividend income. Therefore, the portion of the $3,000 dividend that is included in Canco’s income pursuant to 96(1) for the purpose of s. 93.1(2)(d)(i) is $700 - the $3,000 dividend income, minus the $2,000 subsection 91(5) deduction and the $300 interest expense.

However, it has also been the CRA’s longstanding position that expenses such as interest relating to acquisitions by a partnership of foreign affiliate shares are not to be taken into account in applying the limitation in s. 93.1(2)(d)(i). Therefore, in this example, it would be appropriate to consider that only the subsection 91(5) deduction is taken into account when determining the limit referred to in s. 93.1(2)(d)(i).

Therefore, Canco’s taxable income for the 2017 year would be its partnership income of $700, minus a s. 113(1)(a) deduction of $1,000 (i.e. the $3,000 dividend reduced by the $2,000 partnership’s s. 91(5) deduction) for a loss of $300, which of course is the same amount as if Canco had held the shares of the FA directly.

We would also add that it is our view that we think it is appropriate, in this example, to reinstate $2,000 of exempt surplus of the FA in respect of Canco, and to reduce its taxable surplus in respect of Canco by the same amount. That would bring the surplus accounts into line with Canco’s position.

Official response

16 May 2018 IFA Roundtable Q. 3, 2018-0749171C6 - Interaction s.91(5) s.93.1(2)(d)(i)

Q.4 - Non-filing penalties for non-residents with erroneous PE view

According to current CRA publications, non-resident persons that earn income from carrying on business in Canada during a year are subject to the same rules as residents regarding the filing of income tax returns. However, for tax years after 1998, non-resident corporations that carry on a “treaty-protected business” as defined in subsection 248(1) of the Income Tax Act (the “Act”), during a tax year are required to attach a completed Form T2SCH91, Schedule 91, Information concerning claims for treaty-based exemptions, to their T2 Corporation Income Tax Return to support claims for treaty exemption.

Assume a non-resident files a treaty-based return, as described above, based on a reasonable belief that the non-resident was not taxable in Canada as it did not have a permanent establishment in Canada. If it is later determined by the CRA that the non-resident was unable to claim treaty protection (e.g., on the basis that it did have a permanent establishment in Canada), would the CRA seek to impose late-filing penalties, such as for not timely filing T106 forms, and/or penalties for failing to complete contemporaneous documentation under section 247 of the Act? Would the CRA consider providing relief under subsections 220(3) and (3.1) of the Act?

Preliminary Response

Milled Azzi: Generally, yes.

The Income Tax Act requires the filing of returns, forms, documents, and elections in a timely manner. Where a non-resident taxpayer carries on a business in Canada through a permanent establishment, a failure to meet statutory deadlines will carry the associated statutory penalties.

CRA will consider, on a case-by-case basis, requests under s. 223(3) and (3.1) for relief of the resulting interest and penalties.

Official response

16 May 2018 IFA Roundtable Q. 4, 2018-0748171C6 - Penalties for Non-Residents

Q.5 - Meaning of “merged or combined” in s. 40(3.5)(c)(i)

Assume the following hypothetical facts:

• Canco holds all of the shares of Subco, and both corporations are resident in Canada.
• In a prior year, Canco sold all of the shares of a wholly-owned foreign affiliate (“FA”) to Subco and realized a capital loss.
• Pursuant to subsection 40(3.3) and paragraph 40(3.4)(a) of the Income Tax Act (the “Act”) the capital loss was suspended in the hands of Canco (“the Suspended Loss”).
• In the current year, Subco will wind-up FA and will make the requisite election to treat the wind-up as a qualifying liquidation and dissolution (“QLAD”) under subsection 88(3) of the Act to defer the accrued gain on the FA shares.

As it relates to the Suspended Loss, do the deemed continuity rules in subparagraph 40(3.5)(c)(i) of the Act apply on the wind-up of FA?

Preliminary Response

Milled Azzi:

At the end of the day, Canco owns Subco, which owns FA. The question is whether s. 40(3.5)(c)(i) applies. S. 40(3.5)(c)(i) applies, for purposes of the s. 40(3.4) and (3.5) stop-loss rules, to the disposition by a transferor of a share of a particular corporation and, after the disposition, the corporation is merged or combined with one or more other corporations, otherwise than in a transaction referred to in s. 40(3.5)(b).

Where s. 40(3.5)(c)(i) applies, the corporation formed on the merger or combination is deemed to own the share while the corporation so formed is affiliated with transferor.

In this particular hypothetical case, the transferor would be Canco, the particular corporation would be FA, which was previously disposed of to Subco, and the question is whether FA was merged or combined with Subco on the tax-deferred wind-up. Another interpretive issue is whether Subco can be considered to be "formed” on the merger or combination for the purposes of s. 40(3.5)(c)(i).

It is CRA’s position that the phrase “merged or combined” as used in s. 40(3.5)(c)(i) is broad and encompassing, and may include a winding-up or liquidation. This wording is used in a number of the provisions in the Act referring to a merger, that is, a number of provisions carve out a winding up or liquidation from a “merger” including s. 87(1), 87(8.1), 7(8.2), and the definition of “Canadian corporation” in s. 89(1), and 128.2(3). These provisions exclude a wind-up from a merger, and this supports the interpretation that the term “merger” generally includes a wind-up. In addition, s. 40(3.5)(c)(i) carves out from a merger or combination a number of reorganizations referred to in s. 40(3.5)(b), which in turn refers to ss. 51, 86, 87, and 85.1. This also supports the interpretation that “merger or combination” is to be interpreted broadly.

CRA also broadly construes the word “formed” as used in s. 40(3.5)(c)(i) in a broad manner, as the context requires, such that the reference to the corporation “formed” in this case would refer to Subco. As previously noted, “merger” includes a wind-up, and the transactions that listed in s. 40(3.5)(b) would follow a merger or combination, and this implies that the word “formed” as used in that provision is to be interpreted broadly and would include an entity in place after a reorganization (for example, a s. 86(1) reorganization), even though no new entity may be formed in the traditional sense.

In our view, this textual analysis, when combined with a textual and purposive analysis of s. 40(3.5), supports a conclusion that the deemed continuation rules in s. 40(3.5)(c)(i) apply to the wind-up of FA in this case. Specifically, with respect to context, s. 40(3.5) extends the application of the suspended loss rules to a number of reorganizations. Although the proposed example does not fall within the ambit of s. 40(3.5)(c)(ii) or (iii), it is our view that subparagraph (c)(i) applies to the wind-up.

We also note that, based on the text, context, and purpose and the overall policy of the suspended loss rules, that there are a number of variations of this scenario that may result in the same interpretation.

Official response

16 May 2018 IFA Roundtable Q. 5, 2018-0745501C6 - Meaning of “merged or combined” in 40(3.5)(c)(i)

Q.6 MAP and APA applications

Q.6A - Mutual Agreement Procedure (“MAP”) Program

The Canadian Competent Authority Services Division (“CASD”) has not released a Mutual Agreement Procedure (“MAP”) report since 2014/15. During this time the OECD has released additional guidance on Base Erosion and Profit Shifting issues. With this in mind, are you able to comment on any trends that the CASD has identified in respect to MAP cases over the last few years? Has there been an increase or decrease in the number of MAP cases received by CASD?

Preliminary Response

Lori Carruthers: The 2016 MAP report was published last month on April 13^th. Its delay was a result of aligning reporting period statistics to the calendar year to match the OECD MAP statistics reporting timeframe. That is why the question refers to 2014-15, whereas now we are talking about calendar years only, 2016. Our Competent Authorities Services Division [“CASD”] is pleased to report that, in 2016, Canada accepted 124 negotiable MAP cases, and that this is within its average. It also accepted 164 non-negotiable cases. This is slightly fewer cases than in prior years, but still considered to be within norms.

Regarding the specific question about trends, all I can say is that CASD reports that it has not noticed any major trends over the past few years.

Q.6B - Advance Pricing Arrangements (“APAs”)

The latest Advance Pricing Arrangement (“APA”) program report (2016 fiscal year) reflects a 50% reduction in APA applications accepted. We are unsure if this trend has continued into 2017 and 2018, but the CASD appears to be conducting a full review of the issues prior to accepting an APA submission. This appears to be turning away good candidates for the program given the investment in time required, without any guarantee of acceptance. Does CASD intend to stay the course in its approach regarding how it accepts files into the APA program?

Preliminary Response

Lori Carruthers: Regarding 2017, CASD is currently finalizing the APA report and expects publication soon.

We can report that overall interest in the APA program has remained consistent with prior years. We think this is good news. As is noted in the question, there was a decrease in applications accepted in 2016. However, there was also an increase in applications pending. That means those that were submitted but not accepted yet.

CRA recognizes the importance of tax certainty and, while we exercise tremendous effort to ensure that submissions are complete prior to their acceptance, and will continue to do so, we also strive to maximize efficiency in the process.

Official response

16 May 2018 IFA Roundtable Q. 6AB, 2018-0748191C6 - MAP Program, APAs

Q.7 – Undertaking to repay and s. 39(2)

Consider the following hypothetical facts:

• Canco owns 100% of the common shares of Canco 1 which owns 100% of the common shares of Canco 2.
• Canco, Canco 1 and Canco 2 do not deal at arm’s length and are related and affiliated corporations for purposes of the Income Tax Act (the “Act”).
• In year 1, Canco 1 realized a capital gain.
• In the same year, Canco advanced an amount to Canco 1 as a US dollar denominated loan (the “Loan”).
• In year 2, as a result of the fluctuation in the value of the Canadian dollar relative to the US dollar, Canco has an unrealized foreign exchange gain in respect of the Loan and Canco 1 has a corresponding unrealized foreign exchange loss.

The following transactions will be undertaken in year 2:

• Canco 2 will agree to repay the Loan on behalf of Canco 1 at maturity and as consideration for that undertaking, Canco 1 will issue a Canadian dollar denominated note (the “Canco 1 Note”) payable to Canco 2. The principal amount of the Canco 1 Note will equal the Canadian dollar equivalent of the US dollar principal amount of the Loan based on the exchange rate at the time of issuance of the Canco 1 Note. The fair market value of the Canco 1 Note at the time of issuance will be equal to its principal amount.
• Canco 1 will retain its obligations under the Loan and there will be no change to the principal amount, interest rate or maturity date of the Loan.
• Under the relevant provincial law, Canco 2’s undertaking to repay the Loan on behalf of Canco 1 will not result in:
  • a novation in respect of any portion of the Loan;
  • a substitution of all or any portion of the Loan by a new debt; or
  • a discharge, rescission or extinguishment of all or any portion of the Loan.

Will the undertaking by Canco 2 in year 2 to repay the Loan on behalf of Canco 1 result in Canco 1 sustaining a loss that subsection 39(2) of the Act will deem to be a capital loss from the disposition of currency other than Canadian currency that Canco 1 can carry-back to offset the capital gain that it realized in year 1?

Preliminary Response

Milled Azzi: In MNR v. Consolidated Glass (1956), the Supreme Court of Canada found that the words “loss sustained” must be interpreted consistently with the realization principle. The Court stated that in this context loss sustained has the meaning of absolute and irrevocable finality. It is well established that foreign exchange losses are recognized by the debtor under s. 39(2) on the repayment of the debt, and generally when there is a legal novation of the debt.

As a result, It is our view that foreign exchange gains or losses in respect of a debt obligation are considered to realized or sustained only on the settlement or extinguishment of the debt. This would occur on the repayment or legal novation or legal rescission and substitution, and would also result in the creditor realizing a corresponding foreign exchange gain or loss, as the ease may be.

In the circumstances of this case, the legal obligation to Canco under the Loan will continue to remain outstanding, and the undertaking by Canco 2 to repay the Loan will not result in the legal novation of Loan, the substitution of the Loan, or the rescission or extinguishment of the Loan. Consequently, the undertaking by Canco 2 to repay the loan on behalf of Canco 1 will not result in Canco 1 sustaining a loss under s. 39(2).

Official response

16 May 2018 IFA Roundtable Q. 7, 2018-0750261C6

Q.8 - Update on entity classification

At this conference last year, the Canada Revenue Agency (“CRA”) announced that the CRA Delaware & Florida LLPs/LLLPs Working Group [1] (the “Working Group”) formed to study compliance issues related to Delaware and Florida limited liability partnerships (“LLPs”) and limited liability limited partnerships (“LLLPs”) had decided to build on a prospective approach previously announced by allowing any such entities formed before April 26, 2017, to file as a partnership for all prior and future tax years, provided certain conditions were not met. The CRA indicated that Delaware and Florida LLPs and LLLPs formed after April 25, 2017 will be assessed as corporations for all purposes of Canadian income tax law. The CRA also stated that the Working Group was continuing its study of compliance issues.

Can the CRA provide us: (a) with the current status of the Working Group’s study of compliance issues relating to Delaware and Florida LLPs and LLLPs, and (b) with an update on any new entities or arrangements that have recently been considered?

Preliminary Response

Administrative relief for LLPs and LLLPs

Lori Carruthers: First, a recap:

At last year’s conference, we shared an update on the Delaware & Florida LLPs/LLLPs Working Group regarding administrative grandfathering for these entities formed before 26 April 2017, last year’s IFA CRA Roundtable. That administrative practice allows these entities to file as a partnership for all prior and future taxation years provided:

• the entity and its members have not taken inconsistent filing positions between partnership and corporate treatment;
• there has not been a significant change in the membership or activities of the entity; and
• the entity cannot be being used to facilitate abusive tax avoidance.

Where a Delaware or Florida LLP or LLLP formed before 26 April 2017 is offside any one of these conditions, the CRA may issue assessments to the entities for its members for one or more taxation years on the basis that the entity is a corporation.

Since last year’s conference, the working group received further submissions, and we have continued to listen. I can now share with you the following additional clarification:

• the condition that inconsistent filing positions as between partnership and corporation cannot have been taken will not be met if, because of the IFA 2016 announcement that these entities were corporations for Canadian tax purposes, resulted in protective T1134s being filed or in a business number being requested or granted, or a T2 having been filed;
• the condition that a significant change in the membership of the entity cannot have taken place will not be met as a result of transfers between non-arm’s length parties, or as the result of issuance of memberships to non-arm’s lengths parties;
• if a particular entity was initially set up as an LLC, and then was converted to a Delaware or Florida LLP or LLLP, this would not, in and of itself, prevent the entity from taking advantage of the administrative practice, allowing for the grandfathering of partnership status, to the extent all the other conditions are met; and
• in a similar vein to last year’s announcement, the clarifications that I have just given will apply to an LLP or LLLP under US jurisdiction other than Delaware and Florida provided that they have similar attributes to the Delaware and Florida LLPs or LLLPs and that they were formed before 26 April 2017.

French SLPs

Lori Carruthers: Recently, we were asked to rule that a specific French SLP was a partnership for Canadian income tax purposes. The entity was going to be created as a Société de Libre Partenariat [“SLP”]. I refer you to the upcoming written response for French laws particular to this SLP.

Based on the information that we were given, the SLP would have possessed characteristics of both corporations and limited partnerships. Although it had separate legal personality, that was not enough, in and of itself, to distinguish this SLP from Canadian partnerships.

After consideration of all the information provided to us, including the fact that there was going to be no legal authority to support an effective entitlement on the part of the members to share profits and losses earned through the entity in the case of the SLP presented to us, we were unable to rule that it would be a partnership for Canadian income tax purposes. Another way of putting this would that the fact that the computation of earnings was going to be at the SLP entity level, with a distribution mechanism for its members akin to the declaration and payment of dividends, was found to be very relevant.

Official Response

16 May 2018 IFA Roundtable Q. 8, 2018-0749481C6 - Update on Entity Classification

Official response

16 May 2018 IFA Roundtable Q. 8, 2018-0749481C6 - Update on Entity Classification

Q.9 - T1134s and CbC reporting

Large taxpayers must file both T1134 forms and country-by-country (“CbC”) reporting forms. Both are intended to be used by the CRA as risk assessment tools. It is our understanding that one of the objectives of CbC reporting, as a result of the OECD’s BEPS project, is to standardize reporting in different jurisdictions to minimize administrative and compliance costs to both taxpayers and tax authorities.

We recognize that the filing of T1134s and CbC reporting by large taxpayers are mandated by law and that it would take action by the Department of Finance to change those rules. That said, we are interested in the CRA’s views around whether both forms of reporting are required. It is true that the information contained in T1134s is very different than that contained in CbC reporting. However, both were introduced as risk assessment tools. Why is it necessary for a Canadian parent of a multinational group which is obligated to file CbC reporting forms in Canada to also file T1134s? Has the CRA surveyed its large file case managers to enquire whether or not T1134s are, in fact, used as a risk assessing tool in the context of companies of a size that are subject to CbC reporting? Does the CRA have any plan to assess, on an ongoing basis, whether both forms of reporting are required in order for it to efficiently perform its audit function?

Preliminary Response

Milled Azzi: The effectiveness of the risk-assessment process is largely dependent on the information, inputs, and tools used according to conditions to provide relevant, accurate, and complete information, as well as employing online tools to enable a more comprehensive and efficient process.

The information provided in the context of business intelligence and compliance-risk activities is used to identify and assess risk of non-compliance. At this time, the T1134 return is used in risk-assessment. CRA is of the view that the information requirements in the return are relevant to the reporting of income from Canadian-controlled and non-controlled foreign affiliates.

What taxpayers are required to file in CbC reporting and the T1134s overlap in some respects, but they are not identical. In general terms, the existing requirements for reporting in the T1134 are more detailed than for CbC reporting, while the CbC reporting provides a higher level of information and uniformity of reporting across jurisdictions.

As CRA gains more experience with the increased sources and new filing requirements, CRA may consider reviewing this overlap to reduce unnecessary duplication where possible.

Official response

16 May 2018 IFA Roundtable Q. 9, 2018-0748151C6 - T1134s & Country by Country Reporting

Q.10 - Accelerated filing deadline for T1134s

The February 27th, 2018 Federal Budget included an amendment to the due date for the filing of T1134 forms. The amendment will reduce the timeline from 15 months after a taxpayer’s taxation year to six months after a taxpayer’s taxation year, which will align it with the filing of Canadian corporate tax returns.

It had been our understanding that one of the main reasons for the longer timeline for the filing of T1134 forms is the length of time that it takes in some foreign jurisdictions for the finalization of financial statements and tax returns. As the T1134 form requires information regarding the net income and tax paid in the foreign jurisdiction, in many cases the requisite information will not be available to allow a timely filing of the form under the revised timeline. In addition, in many cases taxpayers will not have the resources required to complete the T1134 forms at the same time that they are completing their tax returns (e.g., many employees work overtime to complete their tax returns in a timely manner and simply won’t have the capacity to simultaneously complete additional work on T1134 forms).

Will the CRA confirm that it will provide relief under subsections 220(3) and (3.1) of the Income Tax Act (the “Act”) in the form of extensions and waivers of penalties for all situations in which taxpayers are unable to timely file their T1134 forms, including situations where there is a lack of sufficient financial information available within the newly restricted time period that will be required to complete and file the forms?

Preliminary Response

Lori Carruthers: There will not be a blanket acceptance of things like that, but we would consider a request for relief on a case-by-case basis.

Where a foreign affiliate is a controlled foreign affiliate, in our view, we believe that the information should be available. Where it is not, however, it should still be possible to file the T1134 on time but with some missing information. One has to be bear in mind, of course, that penalties could apply in those circumstance. That being said, taxpayers may find relief in the reasonable effort exception of s. 162(5)(a), or the due diligence exception of s. 233.5(c.2).

CRA will consider a request for relief in the form of extensions and waivers of penalties on a case-by-case basis – although I would expect that the Minister will require more than “they just shortened the deadline from 15 to six months!”

Official response

16 May 2018 IFA Roundtable Q. 10, 2018-0748161C6 - Proposed New Filing Deadline T1134