Income Tax Severed Letters - 2019-01-23

Conference

27 November 2018 CTF Roundtable Q. 1, 2018-0780061C6 - Allocation of safe income

Unedited CRA Tags
55(2)
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c)
rulings on safe income allocation to discretionary dividend shares

Principal Issues: Whether the CRA has finalized study on the allocation of safe income to discretionary dividend shares.

Position: Study finalized. All positions expressed since the 2015 CTF conference on this matter remain valid. However, future questions on this subject will only be dealt with in the context of a ruling request. See below.

Reasons: see below.

27 November 2018 CTF Roundtable Q. 2, 2018-0780071C6 - Impact of 55(2) deeming rules

Unedited CRA Tags
55(2), 52(2), 52(3), 53(1)(b), 112(3), CDA calculation
Summary Under
Tax Topics - Income Tax Act - Section 52 - Subsection 52(2)
property dividended has cost equal to FMV where subject to s. 55(2)
Summary Under
Tax Topics - Income Tax Act - Section 52 - Subsection 52(3)
cost under s. 52(3) for stock dividend amount to which s. 55(2) applied
Summary Under
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(b) - Subparagraph 53(1)(b)(ii)
no basis reduction for s. 84(1) dividend to which s. 55(2) applied
Summary Under
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) - Subparagraph (a)(i)
53(1)(b)(ii) and 52(3)(a) exclusion limited to where 55(2) did not apply to the stock dividend or PUC increase
Summary Under
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3) - Paragraph 112(3)(b) - Subparagraph 112(3)(b)(i)
stop-loss rule does not apply to the extent of the application of s. 55(2)

Principal Issues: Impact of 55(2) deeming rules on the calculation of cost, the capital dividend account and the application of subsection 112(3).

Position: see below.

Reasons: see below.

27 November 2018 CTF Roundtable Q. 3, 2018-0779891C6 - MLI Issues

Summary Under
Tax Topics - Treaties - Multilateral Instrument - Article 8 - Article 8(1)
overview of removal of provisional reservations

Principal Issues: General comments on the MLI

Position: See below

27 November 2018 CTF Roundtable Q. 4, 2018-0779931C6 - OECD TP Guidelines

Unedited CRA Tags
247
Summary Under
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2)
2017 OECD Transfer Pricing Guidelines reflects the interpretation of OECD countries, including Canada, before their release

Principal Issues: A. Do the guidelines provided in the 2017 OECD Transfer Pricing Guidelines apply retroactively? B. Can taxpayers expect additional guidance on transfer pricing issues identified in the course of the BEPS Project?

Position: A. The guidelines are not being “applied retroactively”. They generally already applied prior to the release of the 2017 OECD Transfer Pricing Guidelines. B. Yes.

Reasons: A. The CRA does not consider that the guidelines are being applied retroactively because content on delineation, risk, intangibles etc. reflects the interpretation and practice of OECD countries, including Canada, before and after the release of the 2017 OECD Transfer Pricing Guidelines. B. The CRA will be updating its policy documents in due course to address some of the transfer pricing issues identified in the course of the BEPS Project.

27 November 2018 CTF Roundtable Q. 5, 2018-0780041C6 - GAAR on PUC reduction

Unedited CRA Tags
245(2), 88(1)(b), 87(11)(a)
Summary Under
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(b)
where Parent acquired the net tax equity in Subco at a bargain price (low share ACB), avoiding a s. 88(1)(b) gain on wind-up through reducing PUC is abusive
Summary Under
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)
avoidance of s. 88(1)(b) where insufficient safe income was abusive
Summary Under
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3)
no challenge of a reduction of PUC of shares of DC held by TC before redemption

Principal Issues: Whether GAAR is applicable to PUC reduction without payment to avoid possible gain on wind-up or amalgamation under 88(1)(b) or 87(11)(a).

Position: The scheme of the act requires a gain to be realized on the winding-up of a subsidiary when the PUC on the shares of the subsidiary exceeds their ACB, in the event where the net cost amount of the assets of the subsidiary is equal to or exceeds the PUC of the shares of the subsidiary. Depending on circumstances, the CRA may seek to apply GAAR to a PUC reduction without payment prior to a winding-up, amalgamation or redemption of shares.

Reasons: See below.

27 November 2018 CTF Roundtable Q. 6, 2018-0779901C6 - Appeal Process Update

Summary Under
Tax Topics - Income Tax Act - Section 165 - Subsection 165(3)
service standard for resolving objections

Principal Issues: Update on CRA commitments regarding the appeal process following the December 2016 AG report.

Position: Update Provided.

Reasons: Update provided by the Appeals Branch.

27 November 2018 CTF Roundtable Q. 7, 2018-0779951C6 - Recent Negligence Cases

Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1)
CRA positions on plain vanilla domestic structures may not be portable to offshore structures

Principal Issues: Effect of recent negligence cases on tax administration.

Position: General comments provided.

27 November 2018 CTF Roundtable Q. 8, 2018-0779961C6 - RPI and Risk-Based Audits

Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1)
IRAS (Tier I risk assessment)

Principal Issues: Update on the Related Party Initiative and Risk-Based Business Audits.

Position: General comments provided.

27 November 2018 CTF Roundtable Q. 9, 2018-0779981C6 - TOSI–Excluded Amount - Non-Related Bus. Exception

Unedited CRA Tags
120.4
Summary Under
Tax Topics - Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Amount - Paragraph (e) - Subparagraph (e)(i)
“derivation” for TOSI purposes of dividends from previously earned income from a related business
Summary Under
Tax Topics - Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Shares
investment business a business for excluded share purposes

Principal Issues: Application of the excluded share and related business exclusions.

Position: General comments provided.

Reasons: See comments.

27 November 2018 CTF Roundtable Q. 10, 2018-0780081C6 - TOSI – Excluded Shares & Related Business

Unedited CRA Tags
84(2), 120.4(1), 120.4(1.1), 125(7), 248(1)
Summary Under
Tax Topics - Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Shares
exclusion for investment business or passive amounts not derived from a related business

Principal Issues: Comparison of CRA’s response to question 7 of the 2018 STEP CRA Roundtable (2018-074403) and examples 8 and 12 of the Guidance on the Application of the Split Income Rules for Adults.

Position: General comments provided. Answer to question 7 of the 2018 STEP CRA Roundtable was based on the assumption provided in the question that the corporation was not carrying on a business while in examples 8 and 12 of the Guidance it was assumed that the corporations in both examples were carrying on a business. Under the Income Tax Act, a corporation can carry on a business the purpose of which is to derive income from property.

Reasons: According to the law and previous positions.

27 November 2018 CTF Roundtable Q. 11, 2018-0779971C6 - Record Retention Policy Guideline

Summary Under
Tax Topics - Income Tax Act - Section 231.1 - Subsection 231.1(1)
in some circumstances CRA considers that it can require a taxpayer to disclose its uncertain tax positions
Summary Under
Tax Topics - General Concepts - Solicitor-Client Privilege
solicitor-client privilege does not extend to list of uncertain tax positions

Principal Issues: In light of cases such as BP Canada Energy Company v MNR, 2017 FCA 61, which address CRA access to records, is the CRA in the process of updating its published guidelines regarding access to taxpayer records and, if so, when will new guidelines be available?

Position: See comments.

27 November 2018 CTF Roundtable Q. 12, 2018-0785021C6 - Investment management fees

Unedited CRA Tags
207.01(1) "advantage"
Summary Under
Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (b) - Subparagraph (b)(i)
repetition of 2018-0779261E5

Principal Issues: Deferral of implementation date for position on application of advantage tax rules to investment management fees.

Position: Confirmed that position is deferred until Finance completes its review.

27 November 2018 CTF Roundtable Q. 13, 2018-0779991C6 - 20(1)(c) & Triangular Amalgamation

Unedited CRA Tags
20(1)(c), 87(9)
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i)
interest on money borrowed by parent for use in connection with a triangular amalgamation to redeem preferred shares issued by Target can be deductible

Principal Issues: Whether interest on borrowed funds, used to redeem preferred shares issued as part of a triangular amalgamation governed by subsection 87(9), is deductible under paragraph 20(1)(c)?

Position: Interest on borrowed money used to redeem the preferred shares is deductible under subparagraph 20(1)(c)(i) to the extent that the amount of the borrowed money does not exceed the capital of the shares redeemed that is computed prior to the redemption as described in paragraph 1.48 of the Income Tax Folio S3-F6-C1 on Interest Deductibility, and that the capital replaced by the borrowing was previously used for an eligible purpose of earning income from a business or property.

27 November 2018 CTF Roundtable Q. 14, 2018-0779911C6 - Foreign exchange

Unedited CRA Tags
12(1)(c), 12(3), 20(14), 261(2)
Summary Under
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) - Paragraph 261(2)(b)
accrued interest under both ss. 20(14)(a) and (b) is translated at the transfer date spot rate
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(14)
accrued interest translated on transfer date

Principal Issues: What is the appropriate foreign exchange rate to use when computing a deduction pursuant to paragraph 20(14)(b)?

Position: The appropriate foreign exchange rate to use when computing a deduction pursuant to paragraph 20(14)(b) is the relevant spot rate for the day the debt obligation is transferred to the transferee.

Reasons: For the purposes of paragraph 261(2)(b), the day that the “particular amount arose” is the day on which the debt obligation is transferred.

27 November 2018 CTF Roundtable Q. 15, 2018-0780011C6 - Class 14.1

Unedited CRA Tags
Class 14.1, 13(34), 13(35), 13(36), 20(1)(a), 18(1)(y), 18(1)(a), 9(1)
Summary Under
Tax Topics - Income Tax Act - Section 13 - Subsection 13(35) - Paragraph 13(35)(a)
capital expenditures not giving rise to property are deemed to be goodwill property
Summary Under
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 14.1
Class 14.1 “property” need not be property

Principal Issues: Does the CRA consider the reference in the Class 14.1 description to "property" does not have the effect of disqualifying, as Class 14.1 additions, expenditures that would have qualified as eligible capital expenditures if incurred before 2017?

Position: No.

Reasons: Subsections 13(34) to 13(37) provide specific rules in respect of goodwill and expenditures and receipts that do not relate to a specific property of the business. Subject to paragraphs 13(35)(a) to (e), subsection 13(35) provides for a deemed acquisition of goodwill for capital expenditures that are not incurred to acquire an identifiable property.

27 November 2018 CTF Roundtable Q. 16, 2018-0780031C6 - 2018 CTF - Q16 - Passive Income Reduction Rules

Unedited CRA Tags
125(5.1)(b)
Summary Under
Tax Topics - Income Tax Act - Section 125 - Subsection 125(5.1) - Paragraph 125(5.1)(b)
effective date of the passive income rules for non-calendar year associated corporations

Principal Issues: We have been asked to provide guidance on how the new passive investment income business limit reduction rules will apply in a specific fact situation.

Position: The passive income reduction rules will apply for taxation years that begin after 2018. A corporation's adjusted aggregate investment income is the total of all amounts each of which is the adjusted aggregate investment income of the corporation or any corporation with which it is associated at any time in a particular year for each taxation year of the corporation, or associated corporation that ended in the preceding calendar year.

Reasons: Consistent with income tax policy.