TEI meets with Canada Revenue Agency on income tax issues.

• Author: Bergen, Rodney C.
• Position: Tax Executives Institute

December 9, 2008

On December 9, 2008, Tax Executives Institute held is 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. Minutes of the meeting will be posted to TEI's website after 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 (hereinafter "CRA" or "the Agency") during TEI's December 9, 2008, 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)

   In February 2008 the Canadian Accounting Standards Board announced that for periods beginning on or after January 1, 2011, IFRS will be incorporated into Canadian GAAP and all publicly accountable enterprises will be required to use IFRS as the basis for their financial reporting. Since comparative financial statements will be required in the year of adoption, most companies have already begun preparing for the transition. We understand that the Canada Revenue Agency (CRA) is also preparing for the transition to IFRS and we request the opportunity to identify common concerns and solutions to the challenges that are likely to arise. We invite CRA's comments on the steps it is taking in advance of the private sector's implementation of IFRS. Specifically, what is CRA undertaking with respect to:

   * Determining the effect on taxable income;

   * Transitional issues that affect the administration of the Income Tax Act (hereafter the Act) and the filing of tax returns;

   * Staff training;

   * Post-implementation issues that affect the administration of the Act and the filing of tax returns;

   * Understanding the challenges faced by tax administrators in implementing IFRS; and

   * Other initiatives to address the pending changes?

2. Eligible Dividend Designations

   In technical interpretation 2007-0249941E5 (May 2, 2008), CRA was asked whether the following notice to a sole shareholder of a particular class of shares of a Canadian Controlled Private Corporation (CCPC) (referred to as "Canco") would meet the designation requirement for an eligible dividend:

   We are writing on behalf of Canco to inform you that the directors of Canco have determined that an eligible dividend will be paid to you today by Canco by credit to your shareholder's loan account with Canco. The dividend will be paid on your Class X shares. The total amount of the dividend paid will equal the lesser of the amount required to reduce your shareholder loan account to nil as at year-end date of the Canco, and the amount in the general rate income pool (as that term is defined in subsection 89(11) of the Income Tax Act) of Canco on that date. In addition, the taxpayer asked whether the following notification would suffice where more than one shareholder owns a particular class of shares of a CCPC:

   We are writing on behalf of Canco to inform you that the directors of Canco have determined that an eligible dividend will be paid to you today on your Class X shares. The total amount of the dividend paid will equal the amount in the general rate income pool (as that term is defined in subsection 89(11) of the Income Tax Act) of Canco on Year-end date of the Canco. The dividend will be paid to you by Canco by credit to your shareholder's loan account with the company. Under the eligible dividend rules, a designation is made by notifying shareholders in writing that a dividend is eligible when paid. The notifications in this case clearly state that the full amount of the dividend paid will be an "eligible dividend." The technical interpretation, however, concludes that the proposed shareholder notifications failed the requirements of subsection 89(14) because they did not specify the amount of the "eligible dividends" to each shareholder when paid. Under this interpretation, a simple statement by a CCPC that a dividend will not exceed the company's general rate income pool (GRIP) will seemingly not satisfy the designation requirement for eligible dividends.

   The position in the technical interpretation seems unduly stringent in light of the published guidelines (1) for the designation of eligible dividends, including those for public companies. By imposing a quantification requirement for each shareholder's dividend, the interpretation creates a compliance challenge for private companies thereby increasing compliance costs and the risk of noncompliance. (2) Would CRA consider revising interpretation 2007-0249941E5 to make the compliance requirements for CCPCs consistent with those for public companies?

3. Implementation and Interpretation of the New Canada-U.S. Protocol

   1. Article V--Permanent Establishment (PE)

   The 5th Protocol to the Canada-U.S. Income Tax Treaty (hereafter "the Protocol") revises paragraph 9 of Article V to prescribe new rules clarifying when a nonresident cross-border service provider will be deemed to have a PE in the country where the services are performed. Under new subparagraph 9(b), where an enterprise's services are provided in a host State for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who are either residents of the host country or who maintain a PE in the host State, the enterprise providing the services is considered to have a PE in the host State. We invite a discussion about the application of the new PE rules based on the following questions.

1. Paragraph 2 of Annex B to the Protocol (hereafter "the General Note") states that projects are considered "connected" if they constitute a coherent whole, commercially and geographically. Will CRA provide specific examples of what it considers to be the "same or connected project?"

2. The Technical Explanation to the Protocol prepared by the U.S. Treasury Department states that the test in new subparagraph 9(b) "applies only to the provision of services, and only to services provided by the enterprise to third parties." (3) Would CRA define what a "third party" is for purposes of this provision? Are related parties considered third parties, and what constitutes an "enterprise" for this purpose?

3. The U.S. Technical Explanation also states "[t]he competent authorities are encouraged to consider adopting rules to reduce the potential for excess withholding or estimated tax payments with respect to employee wages that may result from the application of this paragraph [9 of Article V]." (4) With the increase in the number of PEs that may arise from this provision and the number of employees that will become taxable under Article XV of the Treaty, has CRA considered affording administrative relief for the resulting increase in administrative and compliance burdens? Will rules be adopted by the competent authorities as suggested by the Technical Explanation in order to reduce the potentially excess employment withholding or tax payments that may result?

4. The provision will apply on a 12-month rolling basis. This will present significant compliance challenges because an enterprise may not be aware that the 183-day threshold will be exceeded by any service provider until after tax-filing deadlines have passed. Will CRA consider establishing an administrative policy to waive penalties and interest...