TEI liaison meeting with Canada Revenue Agency on income tax questions: December 8, 2009.

• Position: Tax Executives Institute

On December 8, 2009, Tax Executives Institute held its annual liaison meeting on income tax issues with officials of the Canada Revenue Agency. The agenda for the meeting, which is reprinted below, was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Rodney C. Bergen of The Jim Pattison Group. Jeffery P. Rasmussen, TEI Tax Counsel, serves as legal staff liaison to the committee. The minutes of the meeting will be posted to TEI's website when they become available.

Tax Executives Institute welcomes the opportunity to present the following comments and questions on income tax issues, which will be discussed with representatives of the Canada Revenue Agency (hereafter "CRA" or "the Agency") during TEI's December 8, 2009, liaison meeting. If you have any questions about the agenda in advance of the meeting, please do not hesitate to call Sherrie Ann Pollock, TEI's Vice President for Canadian Affairs, at 416.955.7373 or Rodney C. Bergen, Chair of the Institute's Canadian Income Tax Committee, at 604.488.5231.

1. International Financial Reporting Standards (IFRS)

   During last year's liaison meeting, CRA provided a report on the steps it is undertaking in preparation for the incorporation of IFRS into Canadian GAAP. Being one year closer to the January 1, 2011, effective date, would CRA provide an update on the effects of the change and its planning for that change?

2. Subsection 17(8)

   Subsection 17(8) of the Income Tax Act, Canada (hereafter "the Act") provides that subsection 17(1) does not apply to an amount owing to the taxpayer by a controlled foreign affiliate (CFA) "to the extent that it is established that the amount owing" is used by the CFA for certain eligible purposes. For audit purposes, how does CRA establish "the extent ... that the amount owing" is for one of the eligible purposes described in subsection 17(8)? TEI recommends that CRA employ the approach described in paragraph 12, et seq. of IT-533 (Interest Deductibility and Related Issues (October 31, 2003)) in respect of the "use of borrowed money." We invite CRA's comments.

3. Eligible Dividend Designations

   Subsection 89(14) states that "a corporation designates a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom it pays all or any part of the dividend that the dividend is an eligible dividend." The written and contemporaneous designation requirement in subsection 89(14) ensures the certainty of the tax treatment of the distribution to the recipients, but imposes an administrative burden on dividend payers. To reduce the burden on public corporations with large numbers of corporate entities within the group, CRA has adopted an administrative position in respect of the designation requirement that affords relief in certain situations.

   Where a wholly owned subsidiary of a corporation pays a dividend to its parent (a public corporation or a corporation controlled by a public corporation), would CRA accept as a written and contemporaneous designation a dividend resolution that is signed by the officers of the subsidiary? In many instances, the officers of the paying corporation are the same as the officers of the receiving corporation and thus the tax policy objective of affording certainty to the recipient will be satisfied. Adopting TEI's recommendation would reduce compliance costs for public companies with large numbers of corporate entities within the group. We invite CRA's response.

4. Definition of "Qualifying Person" under the Canada-U.S. Treaty

   Paragraph 1 of Article XXIX-A of the Convention between Canada and the United States of America, signed on September 26, 1980, as amended by the Fifth Protocol on December 15, 2008 (hereafter "the Treaty"), contains a limitation on benefit (LOB) clause that states that only a "qualifying person" is entitled to all benefits of the Treaty. Under subparagraph 2(c) of Article XXIX-A, a "qualifying person" includes a company whose principal class of shares is primarily and regularly traded on one or more recognized stock exchanges. The term "principal class of shares" is defined under subparagraph 5(e) of Article XXIX-A as shares that represent the majority of the voting power and value of the company. Where no single class of shares represents the majority of the aggregate voting power and value of the company, the "principal class of shares" consists of the classes that in the aggregate represent a majority of the aggregate voting power and value of the company. Once the several classes of shares have been aggregated to constitute the principal class of shares, the deemed principal class of shares must be considered regularly traded in order to satisfy the definition of qualifying person.

   The term "regularly traded" is not defined in the Treaty, but the Technical Explanation (TE) provides that the term is defined by reference to the domestic tax laws of the respective countries. In the case of the United States, the term has the meaning given by U.S. Treas. Reg. [section] 1.884-5(d)(4)(i) (B). Under the regulation, a class of shares is considered to be "regularly traded" if (i) trades of the class of shares are made in more than de minimis quantities on at least 60 days during the taxable year (hereafter the "de minimis test"), and (ii) the aggregate number of shares in the class traded during the year is at least 10 percent of the average number of outstanding shares during the year (hereafter the "10-percent test").

   The TE states that, subject to the adoption of other definitions by Canada, the U.S. interpretation of "regularly traded" will apply, but with modifications as circumstances require for purposes of Canadian taxation. In Canada, many publicly traded companies have multiple classes of voting shares. If each class of shares must be considered separately for purposes of satisfying the de minimis or 10-percent tests in the U.S. tax regulations, very few Canadian corporations with multiple classes of voting shares...