Income Tax Severed Letters - 2013-07-10

Principal Issues: Does the GAAR apply to a series of transactions undertaken for the purpose of avoiding the application of subsection 93(2) so as to preserve the portion of a loss on the disposition of FA shares that is attributable to foreign exchange, such that it remains available to effectively offset a foreign exchange gain related to the investment in the FA shares?

Position: Yes, unless the gain sought to be offset is a gain described in proposed subparagraph 93(2.01)(b)(ii).

Reasons: Parliament has specified precisely which related foreign exchange gains realized by a taxpayer are intended to affect the computation of the amount of the loss to be denied on the disposition of FA shares.

Principal Issues: Designating deemed dividends under s. 214(16)(b).

Position: General comments provided.

Reasons: The designation occurs pursuant to the mechanism outlined in that paragraph.

Principal Issues: Questions on the following issues were asked:
(a) Transitional 212.3(10)(f);
(b) Share redemptions and 212.3(9) PUC reinstatement;
(c) 15(2.11) and 212.3(11) PLOI elections - case by case or global;
(d) 212.3(16) – more closely connected
(i) bright line test or question of fact, and
(ii) which entities must be considered;
(e) Cash damming and "indirectly funded" in 17.1(1)(b);
(f) Short-term loans and cash pooling as 212.3(10)(c) investments;
(i) FIFO for tracking repayments,
(ii) what constitutes a series of loans, and
(iii) all loans in the series being repaid;
(g) Internal dispositions and 212.3(9) PUC reinstatement; and
(h) 212.3(3) dividend substitution election when no Qualified Substitute Corporations.

Principal Issues: 1. Is the amount that was added to Canco's ACB of the shares of FA (in respect of previously-taxed FAPI) available for the deduction in proposed subsection 90(9)? 2. Will Canco have an income inclusion under proposed subsection 90(6) in the scenarios described below? 3. Will the CRA use its various positions on subsection 15(2) as a guide for administering proposed subsections 90(6) to (15)?

Position: 1. Yes under 90(9)(a)(i)(D) 2. Yes. 3. See below.

Reasons: 1. As expressed in the Explanatory Notes released with the NWMM on October 24, 2012, it is Finance's intention that the deduction that would have been available under subsection 91(5) if a dividend had been paid, will only be an element of the deduction in proposed subsection 90(9) where the specified debtor is a non-arm's length non-resident person (or partnership). However, if a deduction were not available in respect of a dividend from taxable surplus, it would be expected that the taxpayer would elect under proposed paragraph 5901(2)(b) of the Regulations to deem the dividend to be paid out of pre-acquisition surplus, such that a deduction would be available under paragraph 113(1)(d). 2. Proposed subsection 90(6) provides that the relevant time for determining whether a person receives a loan from a creditor that is an FA and determining whether the person is a specified debtor in respect of the taxpayer for the purpose of determining whether proposed subsection 90(6) will apply, is the time at which the loan is made, even though the creditor may cease to be a FA of the taxpayer resident in Canada before it can be determined whether the exception in proposed paragraph 90(8)(a) applies. 3. Application of proposed 90(6) is a question of fact and determined on a case by case basis.

Principal Issues: Whether the branch tax reduction in Article X(6) of the Canada-US Tax Convention is available to a fiscally transparent LLC that is wholly-owned by US-resident individuals

Position: No

Reasons: Article X(6) only applies if, by reason of Article IV(6), the branch profits of the LLC are considered to be the profits of a company