Response of Revenue Canada - customs, excise and taxation to questions posed at TEI liaison meeting on income tax issues.
Housing Cost Reimbursements
A. Revenue Canada (RC) was asked whether a taxable benefit would arise, and if so, how the benefit would be calculated in the following examples. RC responded that all reimbursements of principal are taxable.
B. RC's general view is that cost of living should be distinguished from expenses that are directly related to the move. Accordingly, housing cost reimbursements are not considered to be moving expenses.
RC continues to disagree with the Phillips and Lao decisions, and has appealed these decisions.
A. Principal Business
The question posed by TEI concerned the amalgamation of two separate leasing companies leasing different commodities (automobiles and computers) with substantially different annual revenues ($800,000 and $200,000 per annum), and whether the amalgamated company would be subject to Regulation 1100(15) or 1100(16)(a)(ii). RC responded that it would be a question of fact whether the amalgamated company was running separate businesses or one combined business.
RC suggested it would look to see whether the same employees carried out functions pertaining to both businesses of the amalgamated company or whether there were separate employees in each business. Another factor to be considered would be whether the businesses were run or eventually would be run from the same location or whether they were conducted at different locations. A third consideration might be whether separate accounting records continued to be maintained. RC is in the process of referring the problem to Finance.
B. Separate Class Election -- Proposed Regulation 1101(5p)
Input and output devices such as printers that are attached to general purpose electronic data processing equipment will qualify.
A. Refinancing Prior to a Divisive Corporate Reorganization
Based on its policy regarding acquisitions of property in contemplation of butterfly transfers, RC does not feel it is necessary to promulgate regulations identifying types of refinancing activities permitted during the period a butterfly is under consideration. This policy is discussed in the following Canadian Tax Foundation Annual Tax Conference papers.
* 1989, The Butterfly Reorganization: Revenue Canada's
Approach, Michael A. Hiltz, at 20:32.
* 1991, An Update of Revenue Canada's Approach to
the Butterfly Reorganization, Ted Harris, at 14.1.
RC's policy as set out in the above papers can be summarized, as follows: Property will not necessarily be considered to have been acquired in contemplation of a butterfly reorganization merely because it is intended to carry out the butterfly at the time the property is acquired. There must be some connection between the acquisition and the reorganization. If that property would have been acquired at that particular time whether or not a butterfly would be subsequently undertaken, the acquisition will not be considered to have occurred in contemplation of the butterfly. Where the structure or timing of the acquisition is affected by the butterfly, the acquisition will be considered to have occurred in contemplation of the butterfly.
B. Proposed Amendment To Subsection 55(3.1)
If the other shareholders receive their dividends during the same series of transactions as the non-residential shareholder, then the proposed amendment will preclude them from using the butterfly exemption. RC recognizes there are problems with this proposal and suggested that TEI raise its concerns directly with the Department of Finance.
Meaning of the Term "Corporation"
RC does not, at present, intend to revise IT-343R. Generally, RC looks for limited liability and separate entity status in the foreign jurisdiction in determining whether an entity is to be treated as a corporation for Canadian tax purposes.
Taxpayers requiring clarification should contact the foreign section of RC's Rulings Directorate.
Foreign Currency Denominated Shares
Because a similar issue is currently under objection within the Appeals Division, RC declined to comment on this matter. Once that objection has been dealt with, clarification on this question may be provided.
Provincial Tax Allocation
It is unlikely that there will be any sort of binding arbitration agreement among the Federal Government and the non-agreeing provinces. (The agreeing provinces also have concerns.) Although there does not seem to be a trend of disagreement on allocations, the issue presumably will become less complex as Alberta becomes an agreeing province. There is currently no prospect of a binding formal resolution mechanism, but discussions with the non-agreeing provinces are ongoing and any particular interpretation concerns should be sent to Ed Campbell.
Employee Source Deductions
A. RC considers the Canadian subsidiary to be the employer in the situation described and requires a T4 slip to be issued to the individual who is now resident in Canada and working for the Canadian subsidiary. If the U.S. parent continues to handle the payroll from the United States, it should set up an employer's source deductions remittance account with RC and issue T4 slips to the employee.
B. The Pension Adjustment must be reported on the T4 slip even though the employee is paid via a foreign payroll.
Permanent Establishment Issues -- Cross Border Managment Services
The answer to this question depends on the facts in the particular situation. The general principles that would apply are:
Carrying on Business. Section 248(l) of the Income Tax Act defines business. Section 253 defines the extended meaning of carrying on business. There is also extensive case law on the definition of carrying on a business. If the provision of consulting services is part of the U.S. company's business, RC considers the U.S. company to be carrying on business in Canada, as stated in paragraph 26(g) of Interpretation Bulletin IT-27OR2. As for whether the U.S. parent would be considered to be carrying on business in Canada for GST purposes, RC had no comment.
Permanent Establishment. Article 5 of the Canada-U.S. treaty defines permanent establishment (PE). Whether or not the U.S. company has a PE in Canada is a question of fact. One of the factors considered is whether the U.S. place of business is in the Canadian premises. If the Canadian company makes space available in its premises for the U.S. company, on a lengthy, recurring basis, then the U.S. parent may have a Canadian PE, as occurred in the Fowler case. The OECD model commentary on space availability is relevant with respect to determining if there is a PE. If the U.S. company is found to have a PE in Canada, the U.S. employee will be subject to Canadian Part I tax.
Employee. If the employee comes to Canada and exercises duties for a Canadian company, and the costs are borne either directly or indirectly by the Canadian company, RC presumes that the employee is an employee of the Canadian company and subject to Part I tax. If it can be established that there is no employer/employee relationship with the Canadian subsidiary, the individual would be subject to Part I tax on any remuneration relating to services rendered in Canada unless paragraph 2 of Article 15 of the Canada-U.S. treaty applies to exempt such remuneration from Part I tax.
Non-Arm's-Length Party Purchase and Sales Arrangements
The general rule is that subsection 69(1) will apply and require the purchase price or proceeds to be adjusted in non-arm's-length situations. An adjustment may not be made by RC, however, if the transaction is consistent with industry practice. Interpretation Bulletin IT-405, paragraph 5, may also apply in the case where the transfer occurred at an amount other than fair market value by reason of honest error. It is not the intention of RC to place non-arm's-length parties in a worse position than arm's-length parties.
Option Agreements in Non-Arm's-Length Situations
RC is of the view that paragraph 69(1)(b) would be applied in a non-arm's-length transaction as described. It is unlikely, however, that the paragraph would be applied when the facts of the particular case established that every step in the transaction was within standard industry practice and at fair market value. RC has also expressed the following view in paragraph 5, of Interpretation Bulletin IT-405:
Where it can be shown that the transfer of property
occurred at an amount other than the fair market
value by reason of an honest error and not by a
deliberate attempt to evade or avoid tax, the Department
may permit an adjustment in the amount
of the proceeds of disposition or purchase price to
reflect the amounts deemed by paragraph 69(1)(a)
or 69(1)(b) to have been paid or received. The onus
will be on either or both taxpayers, as the case
may be, to substantiate a claim that the incorrect
valuation was caused by an honest error. It is not the intention of RC to place non-arm's-length parties in a worse position than arm's-length parties.
Annual Limit on Claiming Investment Tax Credits
The formula in the draft regulations does not reflect the intent of the law, which is that the investment tax credit claimed be limited to the amount of federal tax payable prior to the corporate surtax. The draft regulation results in the example II -- total tax of $1.16. The intent of the law is the $2.00 of total tax, as calculated in example I.
Life Insurance Premiums -- Benefit Calculation
The technical answer is that the company would have to amend the prior year's T4 slips in both of the situations outlined by TEI. RC will, however, consider administrative relief on a case-by-case basis.
Reliance on Interpretation Bulletins
A. Interpretation Bulletin IT-259R2
It should be noted that the comments in the July 25, 1991, memorandum relate to a particular situation and should not necessarily be construed as having broad or general application. Interpretation Bulletin IT-259 will be reissued in 1994.
B. Interpretation Bulletin IT-114
RC's Rulings Division has reviewed comments on a number of situations well beyond the intent and the scope of the bulletin. RC agrees that IT-114 is in a state of flux. It is outdated with respect to the current market use of premiums and discounts in financial products. Taxpayers can anticipate that the bulletin may be canceled in 1994. RC will continue to consider requests for opinions and rulings regarding specific provisions of the law relating to the taxation of discounts, premiums, and bonuses on debt obligations.
C. Interpretation Bulletin IT-233R
Generally, taxpayers can depend on the comments in a bulletin being applicable until the date of a change. Taxpayers should be aware, however, that Interpretation Bulletins are not law. TEI can anticipate a revision to IT-233 in 1994.
Premiums on Debt Obligations
An announcement will be made early in 1994 regarding the status of Interpretation Bulletin IT-114. The problem faced by RC is that financial products are getting very specific and detailed with taxpayers attempting to apply the general comments in the bulletin to very specific products. In particular, taxpayers are now contracting for lower interest rates by the inclusion of non-taxable premiums. The policy regarding the non-taxability of the premium as outlined in paragraph 29 of IT-114 is being reviewed.
Accrued Vacation Pay -- Taxability in Year of Retirement
The question referred to the taxability of a retiring allowance accrued on the books of the company at year end, but paid to the retiree in the following year. The retiree had retired in the earlier mentioned year. RC responded that the answer depends on the facts. If the allowance were available to the retiree in the earlier year, the issue would be one of constructive receipt and would be considered to have received it and be taxable on it in the year it was accrued. One would need to look at the retirement agreement or arrangement to determine the true facts.
If, on the other hand, the retiree were not entitled to the retirement allowance until the subsequent year, he would not be taxed on it until the subsequent year -- regardless of the treatment of the amount by the company. A company may take a deduction for amounts accrued in the year, subject to the requirements of the Income Tax Act, while an employee is only taxed upon receipt of employment income.
Research and Development Proxy Amount -- Salaries and Wages
The answer depends on the facts of the particular case. RC stated that it may accept loaded labour rates on a case-by-case basis. It will not be necessary to identify each individual employee and reconcile the salary to the particular T4. Inasmuch as the proxy amount is intended to represent a portion of the overhead costs, labour rates used must not include any burden or overhead.
Related Foreign Corporation -- Access to Books and Records
RC expects to have access to any relevant information which the related corporation has used. RC will look, however, to the facts of each case including the retention requirements applicable to a related corporation in a foreign jurisdiction, and to any specific reasons why certain records are not available. Some taxpayers may provide that access in Canada, whereas others may prefer to have the auditor travel to the foreign location (at the particular taxpayer's expense). Section 231.6 is used with diligence.
Available for Use Rules
A. In the example given, the equipment would be considered to be "available for use", by virtue of paragraph 13(27)(d) at the time of meeting the test of "capable of being used" for its intended purpose.
B. On the acquisition of control, there is a deemed claim for additional Capital Cost Allowance under subsection 111(5.1). Subsections 13(26) and 13(27) operate only for the purposes of paragraph 20(1)(a).
Guaranteed Debt of Limited Partnership
An answer was not provided by RC, though RC did comment that generally the "at risk" amount should not be affected by the limited partner guarantee.
Transfer of Liability
An answer was not provided since the question was felt to be too broad.
Assumption of Contingent Liabilities on Acquisition of Assets
Generally, contingent liabilities are not recognized until the contingency is eliminated and consequently contingent liabilities would not normally be included in determining the cost of acquisition or proceeds of disposition of an asset. If the value of contingent liabilities can reasonably be determined at the time of purchase/sale, however, then it would be reasonable to recognize such value in determining the proceeds of disposition/cost of acquisition of an asset. For example, if --
* the agreed value of the assets being transferred is
* the parties to the transaction agree that the purchase
price will be satisfied by the assumption of
contingent liabilities and by other consideration of
* the value of the assumption of the contingent liabilities
is $100, then the $100 contingent liability may, if both parties agree, be treated as any other liability assumed on the sale of the assets. To the extent there are additional costs, such costs would be recognized at the time of expenditure.
Information Circular 82.2R2
The information return preparer has an obligation [I.T.A. 237(2)(a)] to make a reasonable effort to obtain the social insurance numbers (SIN). Interpretation Bulletin IT-82-2R2 states the Department's position. Generally, taxpayers keep evidence of written communication and supporting system information to document the effort and procedures undertaken. It is not necessary to keep a copy of the letter if RC can be satisfied that the taxpayer's system will generate the letter requesting the SIN.
Regulation 105 Waiver
It is the responsibility of the non-resident to apply for the waiver even though the transaction may be "non-routine." Absent the waiver, the tax required by Regulation 105 should be withheld.
Retroactive Legislation -- Administrative Concerns
RC feels this is really a question regarding the effective date of legislative amendments which should be posed to Finance. With respect to taxpayers' compliance obligations, RC generally encourages taxpayers to act on the basis of proposed legislation rather than the existing law. RC develops its systems and program changes in January of each year. In doing so, it is most efficient for RC to assume that proposed amendments will be passed.
Residency is a question of fact. RC confirmed that the specific issue that the Institute raised (i.e., a child staying in Canada to attend school) would not in and of itself prevent the taxpayer from severing residential ties with Canada. The automatic response that the individual is resident in the circumstances noted in the question will be reviewed.
Section 259 -- Proportional Holding Election
For paragraph 259(5)(b) to apply, all interests in the trust have to be described by reference to units of the trust and all units have to be identical. RC felt that using "dollar" as the unit of measurement could be acceptable if the interests of all the beneficiaries are identical. Given the wording in paragraph 259(5)(b), it would be prudent to describe interests by reference to "units" in the trust documents to avoid any question about its applicability where the interests are identical except for quantum.
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|Title Annotation:||Canadian Department of National Revenue, Tax Executives Institute|
|Date:||Jul 1, 1994|
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