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2013 Canadian tax foundation roundtable

04 February 2014   (0 Comments)
Posted by: Author: Crystal Taylor
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Author: Crystal Taylor (Miller Thomson LLP)

On November 26, 2013, the Canada Revenue Agency ("CRA”) participated in the annual roundtable session at the 65th Annual Tax Conference of the Canadian Tax Foundation held in Toronto, Ontario (the "Roundtable”).

The CRA was represented by Randy Hewlett, Director of Income Tax Rulings; Mark Symes, Director of Income Tax Rulings; and Jeff Sadrian, Director of Compliance Programs Branch.  The Roundtable was chaired by Elio Luongo of KPMG LLP and John Tobin of Torys LLP.

The Roundtable session was presented in a question and answer format.  The following questions and answers on international issues are from the Roundtable and may be of interest to non-residents carrying on business in Canada:

Q5(a) – Article XXIX-A of the Canada-US Tax Treaty

Article XXIX-A of the Canada-US Tax Treaty contains several tests to determine which persons are entitled to treaty benefits.  Under Article XXIX-A(2)(c), a "qualifying person” includes a company whose principal class of shares is primarily and regularly traded on a recognized stock exchange.  The question asked to CRA was asked what issues have been considered with respect to this provision.

The panellists noted that the CRA evaluates each class of shares separately to determine if it qualifies and satisfies the "regularly traded” requirements in Article XXIX-A(2)(c).  The panellists noted that in one situation the CRA refused to rule that "super-voting shares” closely held by a corporation satisfied the test and were "regularly traded”.  In CRA Document No. 2011-0429261R3, "Article IV(7)(b) Loan Restructuring” (2011), a Canadian subsidiary of a US corporation with one class of traded shares was given a favourable ruling with the qualification that the parent company had to maintain its listing and trading.

The following is the question put to the CRA and the CRA’s PowerPoint response at the Roundtable:

Q5(a) – Article XXIX-A of the Canada-US treaty – "Qualifying person”

Under paragraph 1, a "qualifying person” is entitled to all of the benefits of the Canada-US treaty and a person that is not a "qualifying person” (with certain exception) is not entitled to treaty benefits.  Paragraph 2 sets out the test for "qualifying person”.

What issues has the CRA recently considered regarding paragraph 2?

Q5(a) – Article XXIX-A of the Canada-US treaty – "Qualifying person” – Recent Ruling Not Given/Favourable Ruling

Qualifying person – ruling not given

Qualifying person – favourable ruling given

>2011-0429261R3

Q5(b) – Article XXIX-A Active Trade or Business

The CRA was also asked to comment on paragraph 3 of Article XXIX-A, which allows non-qualifying persons to obtain treaty benefits for income derived from the other contracting state if the "active trade or business” test is satisfied.  The CRA considers the relative size of assets number of employees, and other factors to determine if this test is met.  For views on Article XXIX-A paragraph 3, see, for example, CRA Document Nos. 2012-0458361R3, "Cross-Border Financing” (2012); 2009-0317941E4, "Canada-US Tax Conversion Art XXIX-A” (April 12, 2010); and 2009-0345881C6, "Article XXIX-A:3 of the Canada US Tax Treaty” (November 2, 2009).

The CRA has also given favourable rulings in the context of bankruptcies.  For example, see CRA Document No. 2012-0435211R3, "Article XXIX-A(3) of the Canada-US Tax Convention” (2012).

The following is the question put to the CRA and the CRA’s PowerPoint response at the Roundtable: 

Q5(b) – Article XXIX-A of the Canada-US treaty – Active trade or business test

 Paragraph 3 contains the "active trade or business test”, which if met, entitles certain non-qualifying persons to treaty benefits in respect of income derived from the other contracting state in connection with or incidental to that trade or business.

Can the CRA comment on recent rulings on this test and offer any insights?

Q5(b) – Article XXIX-A of the Canada-US treaty – Active trade or business test – Recent Favourable Rulings

Active trade or business test

>2011-0424211R3

>2012-0458361R3

Active trade or business test – bankruptcies

>2011-0399351R3

>2012-0435211R3

Q5(c) – Article XXIX-A Derivative Benefits

Paragraph 4 of Article XXIX-A of the Canada-US Tax Treaty provides an exception where a company resident in a contracting state is entitled to treaty benefits even if the company is not a "qualifying person” and does not satisfy the active trade or business test.  This "derivative benefits test” is met if two sub-tests, namely an ownership test in Article XXIX-A(4)(a) and a base erosion test in Article XXIX-A(4)(b), are satisfied.

The CRA was asked to provide an overview of recent ruling requests to paragraph 4.  The panellists commented on a recently released ruling, CRA Document No. 2012-0471921R3, "Deemed Dividend on Return of Capital” (2013), wherein the CRA was unable to rule on the base erosion test but the ownership test was satisfied.  In the ruling, the CRA stated that the "derivative benefits” test was met so long as the base erosion test was satisfied in the present year.

The following is the question put to the CRA and the CRA’s PowerPoint response at the Roundtable:

Q5(c) – Article XXIX-A of the Canada-US treaty – Derivative benefits test

The exception in paragraph 4, the "derivative benefits test”, provides that a company that is a resident of a Contracting State (Canada or U.S.) is entitled to the benefits of Articles X (dividends), XI (interest) and XII (royalties), even if that company is not a qualifying person and does not satisfy the active trade or business test, if the owner of the company would have been entitled to the same benefit had the income been earned directly by that owner.

Can the CRA provide a brief overview of the types of issues considered by the Directorate in recent ruling requests related to paragraph 4?

Q5(c) – Article XXIX-A of the Canada-US treaty – Derivative benefits test – Recent Favourable Ruling

Derivative benefits test 

>2012-0471921R3

Q11 – Cross-border butterfly transactions

The CRA panellists were asked to comment on the increase in favourable rulings for cross-border butterfly transactions in the last few years.

Mark Symes stated that, as of 2007, these transactions began to be structured using the "three-party vaccine” (i.e., a three-party circular exchange so that the foreign "spinco” is never a shareholder of the Canadian distributing company) to avoid problems created by paragraph 55(3.2)(h).  This was held to be not abusive by the CRA.  Recent favourable rulings of such transactions include: 2012-0439381R3, "Cross-Border Spin-Off Butterfly (2012); 2011-0431101R3, "Cross-Border Spin-Off Butterfly (2012); and 2011-0425441R3, "Cross-Border Butterfly” (2012).

The panellists noted that the details in such transactions are critical. The panellists also cautioned that the general anti-avoidance rule ("GAAR”) would be applied to any transactions that were viewed as abusing the third-party exchange and the CRA will always look to determine if a "series” of transactions exists.

The following is the question put to the CRA and the CRA’s PowerPoint response at the Roundtable:

Q11 – Cross-border butterfly transactions – Background (Corporate Structure before Spin-Off) 

Click here to view diagram

Q11 – Cross-border butterfly transactions – Background (Corporate Structure after Spin-Off)

Click here to view diagram

Q11 – Cross-border butterfly transactions

Can the CRA provide any comments on the increase in favourable rulings in the area of cross-border butterflies in the last couple of years (see below for examples)?  What are the key issues that CRA is focused on?

>2012-0439381R3

>2011-0431101R3

>2011-0425441R3

Q11 – Cross-border butterfly transactions

  1. Foreign Spinco incorporates Canco TC
  2. Foreign Pubco exchanges common shares of Canco DC for new common and preferred shares of Canco DC under s. 86

Three-Party Exchange Agreement 

  1. Foreign Pubco transfers preferred shares of Canco DC to Canco TC
  2. Canco TC issues shares to Foreign Spinco
  3. Foreign Spinco issues shares to Foreign Pubco

Click here to view diagram

This article first appeared on lexology.com.



 

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