Recent Canadian Developments

Transcription

1 Recent Canadian Developments Moderator: Michael Kandev, Davies Ward Phillips & Vineberg LLP, Montreal Presenters: Kim Maguire, Borden Ladner Gervais LLP, Vancouver Carrie Smit, Goodmans LLP, Toronto Christopher Steeves, Fasken Martineau DuMoulin LLP, Toronto Julie Vezina, PricewaterhouseCoopers LLP, Montreal YIN Rapporteur: Audrey Dubois, KPMG LLP, Montreal Tuesday April 25 & Wednesday April 26 Metro Toronto Convention Centre

2 Legislative Developments

3 Budget Life Insurance Branches Extension of base erosion rules to foreign branches of Canadian life insurers Current rules apply to include in FAPI income from insurance of Canadian risks of a controlled foreign affiliate New rules in 138 and 95(2) 3 K. Maguire

4 Budget Life Insurance Branches Application o 10% gross premium income earned by foreign branch is premium income in respect of Canadian risks o Deem insurance of Canadian risks to be part of Canadian taxpayer s business and policies to be policies in Canada Anti-avoidance rules o Insurance swaps or ceding of Canadian risks o Foreign branch insured foreign risks and purpose test Apply to taxations years of Canadian taxpayers beginning on or after March 22, K. Maguire

5 Foreign Division 15(1.4)(e) Applies on division of a foreign corporation Current: deems original foreign corporation to confer a benefit on shareholder Amendment: If shares received by shareholders on a pro rata basis o pro rata distribution equal to FMV of shares 90(2) dividend or 90(3) capital reduction o No gain/loss to foreign corporation b/c share distribution o Cost of new shares = FMV under 52(2) o Deemed FMV proceeds and cost to foreign corporations Application: divisions occurring after October 23, K. Maguire

6 Stub Period FAPI Recent Canadian Developments Structure of new rules o 91(1.1) sets out requisite conditions for 91(1.2) application o 91(1.2) operative rule for taxpayer and connected corporations and partnerships o 91(1.3) meaning of connected o 91(1.4) and (5) circumstances in which taxpayers may elect for 91(1.2) to apply o Related amendments in Reg. 5907(8) and (8.1) In force July 12, K. Maguire

7 FAD Amendments Ss (1) is amended to expand the application provision. Previously applied to a investment by a corporation resident in Canada (CRIC) in a non-resident corporation if: o the non-resident corporation is (or becomes as part of series) an FA of CRIC; and o CRIC is (or becomes as part of series) controlled by a non-resident corporation. NR Parent CRIC FA C. Smit

8 FAD Amendments Now rules apply to an investment by a CRIC in a nonresident corporation if: o the non-resident corporation is (or becomes as part of series) an FA of CRIC or an FA of a corporation that does not deal at arm s length with CRIC (the OCC ) (para (1)(a)); and o CRIC or OCC is (or becomes as part of series) controlled by a non-resident corporation (para (1)(b)). C. Smit

9 FAD Amendments Mischief: Recent Canadian Developments NR Parent Canco 1 Canco 2 FA Investment Canco 2 is the CRIC making the investment, Canco 1 is the OCC. Does amendment to para (1)(a) address this? Why need amendment to para (1)(b)? C. Smit

10 FAD Amendments OCC is defined a corporation that does not deal at arm s length with the CRIC (in this subsection referred to as the other Canadian corporation ) o Must an OCC be a Canadian resident corporation? Explanatory notes suggest yes. o Does this include para. 251(5)(b) rights? Question of fact? C. Smit

11 FAD Amendments Examples provided by Joint Committee Public CanPubco CanSub FA Investment NR Corp Canco Assume CanPubco has an agreement to acquire shares of Canco, or Canco has an agreement to acquire shares of CanSub. Canco would be a corporation which is NAL with CanPubco, and Canco is controlled by NR Corp. Is CanPubco s investment in FA subject to FAD rules? C. Smit

12 FAD Amendments Brother US USco CanSub Brother Canada Canco FA Investment CanSub is a corporation which is NAL with Canco, and is controlled by USco. Is Canco s investment in FA subject to FAD rules? Issues arise due to amendment to para (1)(b). Should OCC in para 212.3(1)(b) be an OCC in which the subject corporation is an FA? C. Smit

13 FAD Amendments NR Corp CanHoldco 40% CanPubco FA Public 60% Investment Assume CanHoldco is factually NAL with CanPubco. Do the FAD rules apply to CanPubco s investment in FA? Changes FAD test from a non-resident de jure control test to a de facto control test. C. Smit

14 FAD Amendments Consequence is deemed dividend paid by the CRIC to the nonresident parent Non-resident parent may not own any shares of CRIC: o Treaty rate o PUC reduction Mr. X NR Corp Canco 1 (CRIC) Investment Canco 2 (OCC) FA C. Smit

15 FAD Amendments Joint Committee suggested eliminating amendments and replacing with a deeming rule: o For the purposes of this section, if at any time a nonresident corporation is a foreign affiliate of a particular corporation resident in Canada, the non-resident corporation shall at that time be deemed to be a foreign affiliate of every corporation resident in Canada that is at that time related to the particular corporation (otherwise than because of a right referred to in paragraph 251(5)(b)). Similar to ss.17(13) and para. 95(2)(n). C. Smit

16 Para 95(2)(b) Comfort Letter December 23, 2016 comfort letter issued by Finance. Will recommend an amendment to paragraph 95(2)(b) to provide a rule similar to clause 95(2)(a)(ii)(D). C. Smit

17 Para 95(2)(b) Comfort Letter Recent Canadian Developments Foreign Manager (FA 1) Canco Service Fee Other Shareholders Foreign Holdco (FA 2) Foreign Opco (FA 3) Active Business Foreign Manager provides management services to Opco and Foreign Holdco pays for those services. Service fee is deductible in computing Foreign Holdco s FAPI causes FAPL. Service fee is FAPI to Foreign Manager under para 95(2)(b). If Service fee were paid by Foreign Opco, would not be FAPI. C. Smit

18 Para 95(2)(b) Comfort Letter Comfort letter recommends that subclause 95(2)(b)(i)(B)(I) not apply in respect of income of an FA (FA 1) from providing services, if conditions analogous to those in clause 95(2)(a)(ii)(D) are met: o income is derived by FA 1 from amounts paid by another FA (FA 2) in consideration for services; o amount paid is for expenditures incurred by FA 2 for the purpose of gaining or producing income from property; o property is shares of another FA (FA 3) which are excluded property; and o Canadian taxpayer has a QI in FA 1, FA 2 and FA 3. Any FAPL of FA 2 would be eliminated. C. Smit

19 Judicial Developments

20 Canadian Forest Navigation Co. Ltd. v The Queen 2017 FCA 39 Facts o 2005/6: Quebec company received dividends from Barbados and Cyprus subsidiaries o 2010/11: Rectification orders from Barbados and Cyprus courts declaring payments were loans not dividends o Informed CRA after orders obtained Issue: Whether CRA is bound to treat payments as loans? 20 K. Maguire

21 Canadian Forest Navigation Co. Ltd. v The Queen Tax Court o Barbadian and Cypriot court orders did not bind CRA because not homologated by a Quebec court Federal Court of Appeal o Lack of homologation irrelevant o Barbadian and Cypriot court orders are proof that corporate resolutions have been rectified o BUT what remains to be determined is the foreign orders effect vis-à-vis the Minister depend on the evidence adduced by the parties weight ascribed to the foreign orders as facts determinations for the Tax Court 21 K. Maguire

22 Canadian Forest Navigation Co. Ltd. v The Queen Tax is an accessory system o See e.g. Lagueux & Frères 74 DTC 6569 (FCTD) and Perron 60 DTC 554 (TAB) Form matters? No mention of Fairmont 22 K. Maguire

23 Alta Energy Luxembourg S.a.r.l v. The Queen Upcoming TCC case. Is Alta Energy Luxembourg S.a.r.l. (Luxco) entitled to treaty benefits on the sale of shares which are TCP? Luxco Sale Alta Canada C. Smit

24 Alta Energy Luxembourg S.a.r.l v. The Queen In 2011, an LLC was formed to develop O&G properties in North America. The LLC formed a Canadian subsidiary (Alta Canada). Alta Canada acquired O&G properties in Canada. In 2012, the shares of Alta Canada were transferred to Luxco as part of internal reorganization. Section 116 certificate issued on basis there was no gain. In 2013, Luxco sold the shares of Alta Canada to an unrelated purchaser. Purchaser required s.116 certificate notwithstanding possible treaty relief (see para. 116(6)(i)). Gain realized was over $380 million. Luxco filed a Canadian tax return and claimed treaty relief. C. Smit

25 Alta Energy Luxembourg S.a.r.l v. The Queen Lux Treaty o Article 13(4) taxes gain from sale of shares if value of shares is derived principally from immovable property situated in Canada. o immovable property does not include property in which the business of the company was carried on. C. Smit

26 Alta Energy Luxembourg S.a.r.l v. The Queen CRA claims that Alta Canada s O&G properties were not properties in which its business was carried on: o No employees o Management services contracted to a US LLC o Minimal drilling activity C. Smit

27 Alta Energy Luxembourg S.a.r.l v. The Queen CRA s Reply asserts that Alta Canada did not exploit its assets on a regular, continuous and substantial basis, and its minimal activities were only window dressing. Prior CRA positions apply exception to mines, timber properties, motels, manufacturing plants, etc.: o Generally, mineral and timber rights that are beneficially owned by a company and which are actively exploited by the company in the conduct of its business would be considered property in which the business of the company was carried on. (CRA T.I ) C. Smit

28 Alta Energy Luxembourg S.a.r.l v. The Queen CRA also asserts that Luxco was not a resident of Luxembourg for purposes of the Lux Treaty. Under Lux Treaty, a resident is any person who, under the laws of Luxembourg, is liable to tax therein by reason of domicile, residence, place of management, etc. No substance requirement. C. Smit

29 Alta Energy Luxembourg S.a.r.l v. The Queen CRA also asserts GAAR: o transfer to Luxco was undertaken to avoid Canadian tax o misuse of provisions of Act and Lux Treaty. FCA decision in R. v. MIL (Investments) S.A.: o did not find object and purpose underlying Article 13 of Lux Treaty in order to justify departure from plain words o rejected double non-taxation argument. C. Smit

30 Transfer Pricing Transfer pricing issues continue to be a significant focus for the Canadian government and the CRA Budget 2017 Significant transfer pricing cases o decided Sifto Canada Corp. o working their way through Canadian courts or settled 30 C. Steeves

31 Transfer Pricing Budget 2017 Budget 2017 refers to how newly required countryby-country reports for multinational enterprises will enable [tax authorities] to better assess high-level avoidance risks such as the potential for mispricing of transactions between entities of the group in different jurisdictions Budget 2017 also states that CRA is now applying the revised international guidance on transfer pricing arising from the OECD BEPS project as these revisions provide an improved interpretation of the arm s length principle found in Canada s tax laws 31 C. Steeves

32 Sifto Canada Corp. v. The Queen (2017 TCC 37) Issue: whether CRA is entitled reassess a taxpayer where the additional taxable income related to transfer pricing adjustments in respect of the same transactions that were part of an agreement between competent authorities under the mutual agreement procedure ( MAP ) of the Canada-U.S. Tax Convention ( Treaty ) 32 C. Steeves

33 Sifto Canada Corp. v. The Queen (2017 TCC 37) In 2007, Sifto Canada made a voluntary disclosure reporting additional income for taxation years from 2002 to 2006 (approx. $13 million in the aggregate) Taxpayer s new transfer pricing methodology resulted in increased profits relating to the sale of rock salt by Sifto Canada to a related U.S. corporation ( NASC ) CRA accepted and the voluntary disclosure and in April, 2008, CRA issued reassessments for the 2002 to 2006 years ( Reassessments ) reflecting the additional income reported by Sifto Canada as part of the voluntary disclosure 33 C. Steeves

34 Sifto Canada Corp. v. The Queen (2017 TCC 37) Without a corresponding reduction in the income of NASC for U.S. tax purposes, the Reassessments would result in double taxation Sifto Canada requested assistance from the Canadian competent authority ( CCA ) for relief from double taxation under Articles IX (Related Persons) and XXVI (MAP) of the Treaty CCA and the U.S. competent authority ( USCA ) correspondence and discussions about the Sifto Canada request began in August, C. Steeves

35 Sifto Canada Corp. v. The Queen (2017 TCC 37) As MAP negotiations with USCA were proceeding, CCA was advised in May, 2010 that CRA audit division was proposing a transfer pricing audit of Sifto Canada for its 2004 to 2006 taxation years CCA advised USCA of the transfer pricing audit and it was agreed that, notwithstanding the audit, they should continue to work to resolve the double tax arising from the Reassessments o USCA indicated that it would likely adopt the Sifto Canada s methodology if any future MAP arose from an audit 35 C. Steeves

36 Sifto Canada Corp. v. The Queen (2017 TCC 37) In December, 2010, CCA and USCA reached an agreement for the avoidance of double taxation in connection with Sifto Canada transfer pricing adjustments from the Reassessments for the 2003 to 2006 years o reduced the income of NASC for U.S. tax purposes, and o allowed NASC to pay Sifto Canada US$11 million free of U.S. withholding tax Sifto Canada was advised of the MAP agreement and accepted its terms which were in accordance with the transfer pricing adjustments in its voluntary disclosure 36 C. Steeves

37 Sifto Canada Corp. v. The Queen (2017 TCC 37) On August 1, 2012, CRA reassessed Sifto Canada in respect of its 2004 to 2006 taxation years o Additional income of $135 million was the result of transfer pricing adjustments by CRA in respect of the sale of rock salt to NASC Sifto Canada objected to and appealed these new reassessments to the Tax Court o argued that the completed competent authority proceedings resulted in a binding agreement with CRA that fixed the transfer price for the sale of salt to NASC Crown argued that there was no agreement with Sifto Canada and, even if there was, the CRA was obliged under the ITA to reassess, once it was in possession of facts revealed by the audit 37 C. Steeves

38 Sifto Canada Corp. v. The Queen (2017 TCC 37) Did the Sifto Canada s acceptance of the MAP agreements constitute a settlement agreement between Sifto Canada and CRA? Owen J.: to be considered a settlement agreement the following requirements must be met (Apotex Inc. v. Allergan, Inc FCA 155): o Mutual intention to create legal relations o Mutual consideration o Certainty of terms Tax Court concluded that these requirements were met in the circumstances; therefore, the MAP agreement constituted settlement agreements 38 C. Steeves

39 Sifto Canada Corp. v. The Queen (2017 TCC 37) Is the CRA required to reassess Sifto Canada notwithstanding the settlement agreements? Crown argued the CRA has a statutory duty to assess the amount taxable on the facts as it has determined (Galway [1974] 1 F.C. 600, FCA) Owen J. states that decisions in Galway and CIBC World Markets (2012 FCA 3) allow the CRA to enter into a binding settlement agreement unless it is indefensible on the facts and the law 39 C. Steeves

40 Sifto Canada Corp. v. The Queen (2017 TCC 37) In this case, the transfer prices adopted by Sifto Canada and accepted by the USCA were at the low end of the comparable range determined using the TNMM CCA and USCA agreed the transfer prices were in accordance with the arm s length principle under Article IX of the Treaty Tax Court stated that it was reasonable to assume that the IRS would not have agreed to Sifto Canada s transfer pricing methodology if it was indefensible o Supported further by the fact that the IRS indicated that it would have insisted on using Sifto Canada s transfer prices even if a new MAP was initiated Tax Court concluded that the MAP agreements were binding on the CRA as settlement agreements with Sifto Canada 40 C. Steeves

41 Sifto Canada Corp. v. The Queen (2017 TCC 37) Owen J. indicated that even if his conclusion is wrong, the MAP agreements were still binding by virtue of Article XXVI of the Treaty By reassessing [Sifto Canada] to increase the income attributed to Canada from the relevant transactions, the Minister has breached Canada s obligations under the [Treaty] by failing to give continuing effect to the MAP agreements Subsection 3(2) of the Canada-United States Tax Convention Act, 1984 gives the Treaty paramountcy in the event the Treaty s provisions are inconsistent with the ITA CRA s power under the ITA to reassess the taxation years covered by the MAP agreements is inconsistent with the power of the CCA and USCA to resolve cases by mutual agreement under Article XXVI accordingly, the Treaty provisions are paramount 41 C. Steeves

42 Upcoming Transfer Pricing Cases Cameco Corporation o sale of uranium to Swiss subsidiary o CRA reassessed 2003 to 2015 taxation years o 3 taxation years are currently before the Tax Court CRA arguments (from pleadings): o sham o paras. 247(2)(b) and (d) - re-characterize transactions o paras. 247(2)(a) and (c) transfer pricing adjustments At stake for all years: o ~$7.4B additional income o ~$2.2B in taxes plus interest (and possibly penalties) 42 C. Steeves

43 Upcoming Transfer Pricing Cases Silver Wheaton Corp. o Streaming transactions involving subsidiaries (Cayman Island and Luxembourg) and arm s length foreign mining companies o Service fees charged by taxpayer to its subsidiaries o years are before the Tax Court CRA arguments (from pleadings): o paras. 247(2)(b) and (d) - re-characterize transactions o paras. 247(2)(a) and (c) transfer pricing adjustments At stake for all years: o ~$715.3 million additional income o ~$280.4 million in taxes, interest and penalties 43 C. Steeves

44 Upcoming Transfer Pricing Cases Burlington Resources Finance Company o taxpayer issued $3B bonds guaranteed by U.S. parent o bond proceeds loaned to Canadian operating subsidiaries o guarantee fees paid by NSULC to U.S. parent o years are before the Tax Court CRA arguments (from pleadings): o guarantee fees and certain costs of bond issuance are non-deductible under paras. 18(1)(a), 20(1)(e.1) o paras. 247(2)(a) and (c) transfer pricing adjustments o paras. 247(2)(b) and (d) - re-characterize transactions At stake for all years: o ~$90 million additional income plus potential transfer pricing penalties 44 C. Steeves

45 Settled Transfer Pricing Issue Suncor Energy Inc. (successor to Petro-Canada) o Petro Canada entered into forward contracts with arm s length counterparties to hedge risk associated with price of Brent crude o Later, Petro Canada s UK subsidiary acquired interest in North Sea project expect to produce crude oil o When crude oil prices increased significantly, Petro Canada closed out the forward contracts and suffered $2B in losses o 2007 taxation year before the Tax Court CRA arguments (from pleadings): o paras. 247(2)(a) and (c) transfer pricing adjustments o at arm s length, Petro Canada would have allocated hedging gains to it UK subsidiary and its UK subsidiary would have reimbursed Petro Canada for the hedging losses At stake: o ~$2B additional income plus potential transfer pricing penalties Transfer pricing issue has been dropped by the Crown (consent to judgment) but other issues are proceeding 45 C. Steeves

46 Administrative Developments

47 Upstream loan and debt forgiveness! Upstream Sale of FA shares # Loan forgiven Canco Upstream loan (UL) Canco Third party Canco Third party FA UL FA UL forgiven FA Is the upstream loan considered to have been repaid? Do the upstream loan rules and debt forgiveness rules both apply? 2 J. Vezina

48 Upstream loan and debt forgiveness (cont d) Upstream loan rules Upstream loan rules apply (90(6), 90(9), 90(12)) No repayment for the purpose of 90(8) and 90(14) Inclusion/deduction mechanism may continue indefinitely Debt forgiveness rules No forgiven amount for the purpose of the debt forgiveness rules The loan is considered an excluded obligation Situation remains unchanged whether or not a 90(9) deduction is available/claimed 3 J. Vezina

49 E5 Clause 95(2)(a)(ii)(D) Canco FA Holdco FA Acquisition of shares FA Opco! Cap D Interest-bearing loan - 10 year term # Partial loan repayment before maturity + penalty Does Clause D apply to recharacterize the penalty amount paid by FA Holdco to FA Finco as income from an active business? 49 J. Vezina

50 E5 Clause 95(2)(a)(ii)(D) (cont d) 5 Requirement 1. Penalty received by FA Finco must be derived from amount paid/payable by FA Holdco 2. Penalty received must be paid/payable under a legal obligation to pay interest on borrowed money 3. Penalty received is an amount paid/payable by FA Holdco in respect of any particular period in the year * Important given requirement that FA Holdco hold the shares of FA Opco throughout that period, and that the FA Opco shares be EP throughout that same period 4. The borrowed money is used for the purpose of earning income from property that is shares of a FA Is requirement met? Yes. Penalty is considered payable as soon as FA Holdco becomes legally obligated to pay penalty. Yes, if penalty amount is paid. Par. 18(9.1) is then triggered and the amount of the penalty is deemed to have been paid and received as interest on the loan. Yes. Since the penalty payment occurs at a particular time (unlike interest which is accruing on a daily basis over a period of time), the relevant period during which FA Holdco must meet Cap D requirements is the time at which the penalty is paid/received. Yes. As long as FA Holdco holds the shares of FA Opco (source of income) at the time the penalty is received by FA Finco. J. Vezina

51 Profit transfer agreements (PTA) 6 1 class of shares Canco FA-P FA-Sub PTA payment Canada Germany Could PTA payments be deemed to be a dividend under 90(2) to avoid any potential FAPI at FA-P level? CRA position announced at the May 2016 IFA Conference General Approach - PTA payments are income from property that could be recharacterized as income from an active business under 95(2)(a) to the extent that FA-Sub had earnings from an active business IFA 2016 Q.6 CRA answered affirmatively and suggested to limit the application of the General Approach to pre-2017 PTA payments ( IFA position ) J. Vezina

52 Profit transfer agreements (PTA) (cont d) Canco FA-GP FA-P FA-Sub PTA payment Canada Finland or Sweden Does the IFA s position suggest that the CRA no longer follows General Approach? PTA to grand-parent The limitation to pre-2017 PTA payments only meant to apply to situations where the payments were deemed under 90(2) to be a dividend Thus, PTA payments from FA-Sub to FA-GP in Scenario 2 should still be considered income from property eligible for recharacterization under 95(2)(a) under the General Approach 7 J. Vezina

53 E5 - Articles 10 & 11 of Canada-UK Treaty UK GPCo UK Interestbearing loan LP 1 UK Recognized pension plan 7% UK LP Holdco 19% LP 2 UK Co LP 3 UK Recognized pension plan 11% 62%! Dividends Interest payment! Dividends Other arm s length LPs Canco Look-through UK LP to determine if partners are entitled to Treaty benefits in respect of income from the partnership 8 J. Vezina

54 E5 - Articles 10 & 11 of Canada-UK Treaty (cont d) Q1: 5% WHT rate on indirect dividend from Holdco to LP 2 /LP 3? Subpar. (2)(a) of Article 10 - direct or indirect control of at least 10% of the voting power Unless partnership agreement provides otherwise, only GPCo has indirect control over the voting power of Holdco LP 2 and LP 3 not entitled to reduced WHT rate Q2: Holdco indirect dividends to LP1/LP 3 exempt from Canadian WHT? Par. 3 of Article 10 Exemption if dividends beneficially owned by recognized pension plan and if such plan does not own directly/indirectly more than 10% of the capital or voting power of dividend payer LP 1 and LP 3 are considered to indirectly own the shares of Holdco (in proportion to partnership interest %) Requirements of subpar. 3(b) of Article 10 are met for LP 1 only 9 J. Vezina

55 E5 - Articles 10 & 11 of Canada-UK Treaty (cont d) Q3: Interest indirectly paid by Can Opco to LP 1, LP 2, LP 3 exempt from Canadian WHT? Pursuant to ITA, interest paid by Canco to UK LP is subject to a 25% WHT (212(1)(b), 212(13.1), 251(2), 251(1)) Subpar. 3(c) of Article 11, exemption if the beneficial owner is a resident in the UK and is dealing at arm s length with the payer as determined by 251(1), 251(2) (Interpretative Protocol) GPCo is considered to control Holdco and Canco. Considering no LP is related to another LP or GPCo, LP 1, LP 2 and LP 3 are not related to Canco under 251(2) Provided each LP 1, LP 2 or LP 3 is factually dealing at arm s length with Canco, their respective share of interest paid by Canco to UK LP will be exempt from Canadian WHT 10 J. Vezina

56 I7 - Transfer pricing capital adjustment 11 # Forco Purchase of capital property - Year X $10M Sale of capital property - Year X + 7 (arm s length buyer) $15M CRA conducts audit of Year X + 7 ACB of capital property = $1M Capital gain = $14M (15-1) Subsection 247(2) adjustment Year X is statute-barred from reassessment under Part 1 pursuant to 152(4) 247(2) contemplates an adjustment to any amount for any taxation year of Canco (not just the transaction year) Minister can make an adjustment to the property s ACB without triggering an assessment under Part I in Year X Minister can assess a higher capital gain in Year X+7 J. Vezina

57 I7 - Transfer pricing capital adjustment (cont d) # Forco Purchase of capital property - Year X $10M Sale of capital property - Year X + 7 (arm s length buyer) $15M CRA conducts audit of Year X + 7 ACB of capital property = $1M Capital gain = $14M (15-1) Subsection 247(3) penalty The penalty applies for Year X, the year of acquisition under textual, contextual and purposive approach No time limit restricting the Minister s ability to assess a penalty under 247(3) (versus assessment under Part I) Interest will accrue from the day the initial notice of the penalty is sent (161(11)(c)). 12 J. Vezina

58 T7 - Application of 95(2)(a.1) to a capital gain Can Parent Canco Sale of intangible property to related party Unrelated party Can par. 95(2)(a.1) apply to the disposition of an intangible property which generates a capital gain?! Acquisition of intangible property Income from a business other than an active business & capital gains are distinct FAPI components (variables A & B) Capital gains rule is more specific capital gains must be tested for inclusion under variable B (not within scope of variable A). If intangible property is an excluded property, no FAPI should arise If gain on disposition had been qualified as business income (rather than capital gain) incidental to a business other than an active business carried on by FA, it could be included in FAPI under variable A as income from a business other than an active business 14 J. Vezina

59 E5 - Computation of earnings of a FA DTC Country A Branch 1 Canco Singco Canada Singapore Branch2 Non-DTC Country B How should earnings from an active business of a branch of a FA be computed for purposes of 5907(1) of the Regs.? Definition of earnings at 5907(1) to be considered Earnings of Branch 1 and Branch 2 are not required to be computed in Singapore in the year earned Earnings of Branch 1 are required to be computed in Country A (not the case for Branch 2) Pursuant to Regulation 5907(1): Earnings of Branch A need to be computed per laws of country A and its net earnings will be included in its exempt earnings Earnings of Branch B need to be computed per Part 1 of the Act taking into account subsection 5907(2.03). Its net earnings will be included in its taxable earnings 13 J. Vezina

60 E5 - Foreign share for share exchange Foreign Target (Pubco) Canadian partnership Vendor Foreign Purchaser (Pubco) Foreign Target (Pubco) For each share, Vendor receives newly issued shares of Purchaser and cash. Does 85.1(5) rollover apply? Position in point 2 of par. 1.7 of the Folio S4-F5-C1 in the context of domestic share for share exchanges (85.1(1)) equally applies to foreign share for share exchanges (85.1(5)) The purchaser s offer must clearly indicate which fraction of each exchanged share is exchanged in consideration for the newly issued shares of the purchaser and which fraction of each share is exchanged for non-share consideration 85.1(5) rollover not available in this particular situation 15 J. Vezina

61 E5 Article XIII of Canada-U.S. Convention Question raised - Whether shares in a corporation that is resident in Canada (or interest in a trust) are considered to derive their value principally from real property situated in Canada for purposes of XIII(3)(b) of the Treaty? In the domestic and treaty context, this expression allows one to look through a particular property (share of a corporation or interest of a trust) to the real property owned by such corporation or trust The value of a share of a corporation (or interest in a trust) derived from real property is determined at the relevant time. No look-back rule contained in Article XIII(3) (point-in time test versus 5-year look-back rule in definition of taxable Canadian property) If, at the time of disposition, the corporation or the trust only hold cash proceeds from the disposition of real property previously held by the corporation or trust, the shares or interest would not be considered to derive their value principally from real property situated in Canada for purposes of XIII(3)(b) of the Treaty. 61 J. Vezina