2023-0994501I7 Non-resident non-arm's length transfer of property

Principal Issues: Does subparagraph 13(7)(e)(ii) apply to a transferee taxpayer when a capital property (that is depreciable property for the transferee) is acquired from a non-arm's length non-resident corporation.

Position: Yes, subparagraph 13(7)(e)(ii) applies to the transferee taxpayer regardless of whether the non-arm's transferor corporation is a resident or non-resident corporation.

Reasons: Previous technical interpretations and the wording of subparagraph 13(7)(e)(ii).

Author: D'Angelo, Sandro
Section: 13(7)(e), 248(1) - definition of taxpayer, 54 - definition of capital property, 13(21) - definition of depreciable property, 20(1)(a), ITR 1102(3)

Minh-Thi Truong                                                     HEADQUARTERS
Manager                                                                 Income Tax Rulings Directorate
Legislative Application Section
Domestic Tax Division                                            S. D’Angelo, CPA, CMA
International and Large Business Directorate
Compliance Programs Branch

ATTN: Noémie Dansereau                                     2023-099450

Re: Non-arm’s length acquisition of trademarks

This is in reply to your memo dated October 11, 2023, from Noémie Dansereau, asking for our views regarding a referral that was submitted to you by the XXXXXXXXXX Tax Services Office (“TSO”) pertaining to whether subparagraph 13(7)(e)(ii) of the Income Tax Act (“Act”) applies to a non-arm’s length acquisition of trademarks from a non-resident transferor (a non-resident corporation in this case).

We have summarized the key facts as follows:

In XXXXXXXXXX, a non-resident corporation (“US Corp”) sold XXXXXXXXXX trademarks with an adjusted cost base of XXXXXXXXXX (“Trademarks”) to a non-arm’s length Canadian resident corporation (“Canadian Corp”) for US XXXXXXXXXX (CD XXXXXXXXXX). US Corp reported a capital gain of US XXXXXXXXXX on the disposition of the Trademarks. The Canadian Corp included the Trademarks as Class 14.1 property at a capital cost of CD XXXXXXXXXX and claimed capital cost allowance (“CCA”) accordingly. In XXXXXXXXXX, the Canadian Corp also acquired Trademarks from US Corp worth CD XXXXXXXXXX. US Corp reported a capital gain of US XXXXXXXXXX.

Issue

You have indicated that, initially, the TSO was of the view that subparagraph 13(7)(e)(ii) of the Act applied to the acquisition of the Trademarks by Canadian Corp. XXXXXXXXXX, Tax Manager of Canadian Corp (the “Representative”), has submitted an extensive analysis explaining why, in his view, subparagraph 13(7)(e)(ii) should not apply to the acquisition of the Trademarks. After considering the Rep’s representations, the TSO is questioning whether subparagraph 13(7)(e)(ii) should apply.

In light of the TSO’s concerns and the comments in several court cases that have been cited by the Representative, you have asked whether subparagraph 13(7)(e)(ii) of the Act is intended to apply only to a non-arm’s length transferor who is a person liable for tax under Part I of the Act. In other words, whether in fact the non-resident transferor could be considered a taxpayer for purposes of subparagraph 13(7)(e)(ii) and whether property that is depreciable property for a transferee could be considered capital property of a non-resident transferor.

The Representative’s View

The Representative’s arguments are summarized as follows:

It is the Representative’s view that a textual, contextual and purposive analysis of subparagraph 13(7)(e)(ii) of the Act shows that subparagraph 13(7)(e)(ii) was intended to apply only where the non-arm’s transferor was a person liable for tax under Part I of the Act. It is the Representative’s view that subparagraph 13(7)(e)(ii) is intended to prevent a non-arm’s length transferee from obtaining an increased deduction for CCA purposes beyond the amount which the transferor was required to include in income for purposes of the Act. If Parliament had intended to limit CCA to only that portion of the gain that was taxable in Canada, the non-arm’s length transferee would not be entitled to any CCA in excess of the original cost to the non-resident.

It is also the Representative’s view that as US Corp is a non-resident corporation and is not liable for tax in Canada, it is not considered a taxpayer under the Act, so that it can’t be said to have “capital property.” As a result, subparagraph 13(7)(e)(ii) of the Act cannot apply. In support of this, the Representative refers to the court cases of Office Overload Co. Ltd. v. M.N.R, Lea-Don Canada Limited v. Minister of National Revenue, and Oceanspan Carriers Ltd. v. Her Majesty The Queen. (footnote 1)

Your Views

You have referred to several Income Tax Rulings (“Rulings”) technical interpretations (footnote 2) where the CRA has provided views on similar situations and note that in these documents, there is no mention or reference to the fact that subparagraph 13(7)(e)(ii) of the Act applies only where the non-arm’s length transferor was a person subject to tax under Part I of the Act.

In particular, you refer to Rulings documents 2003-0037685 where the CRA opined that paragraph 13(7)(e) of the Act would apply to a disposition of property from a US sister company to a Canadian sister company if the property acquired by the Canadian company was considered to be a “capital property of the transferor.” It was Rulings’ view that in order to determine whether a property is considered capital property all the relevant facts must be taken into account. Where the disposition of the property resulted in a capital gain (or capital loss) for the transferor, subparagraph 13(7)(e)(ii) would apply.

It is your view that (according to the comments in document 2003-0037685), where the disposition of the property results in a capital gain (or capital loss) for the transferor, such a situation results in the application of subparagraph 13(7)(e)(ii) of the Act. You note that this is the case in the current fact situation.

It is also your view that while the Trademarks are not depreciable property to US Corp, they are property that is capital property to US Corp. However, you note that since the definition of capital property refers to “taxpayer,” you would like confirmation whether US Corp would be considered a taxpayer for purposes of the definition of capital property for purposes of subparagraph 13(7)(e)(ii) of the Act.

Our Comments

The statutory wording of subparagraph 13(7)(e)(ii) of the Act is as follows:

“13(7) – Subject to subsection 70(13), for the purposes of paragraph 8(1)(j) and (p), this section, section 20 and any regulations made for the purpose of paragraph 20(1)(a),

(e) notwithstanding any other provision of this Act except subsection 70(13), where at a particular time a person or partnership (in this paragraph referred to as the “taxpayer”) has, directly or indirectly, in any manner whatever, acquired (otherwise than as a consequence of the death of the transferor) a depreciable property (other than a timber resource property) of a prescribed class from a person or partnership with whom the taxpayer did not deal at arm’s length (in this paragraph referred to as the “transferor”) and, immediately before the transfer, the property was a capital property of the transferor,

….

(ii) where the transferor was neither an individual resident in Canada nor a partnership any member of which was either an individual resident in Canada or another partnership and the cost of the property to the taxpayer at the particular time determined without reference to this paragraph exceeds the cost, or where the property was depreciable property, the capital cost of the property to the transferor immediately before the transferor disposed of it, the capital cost of the property to the taxpayer at that time shall be deemed to be the amount that is equal to the total of

(A) the cost or capital cost, as the case may be, of the property to the transferor immediately before the particular time, and

(B) 1/2 of the amount, if any, by which the transferor's proceeds of disposition of the property exceed the cost or capital cost, as the case may be, to the transferor immediately before the particular time…”

Per paragraph 13(7)(e) of the Act, where depreciable property is acquired from a non-arm’s length person or partnership (referred to as the “transferor”) and, immediately before that time, the property was a capital property of the transferor, special rules determine the capital cost of the property to the purchaser. Subparagraph 13(7)(e)(i) is applicable where the transferor is a Canadian-resident individual or partnership and subparagraph 13(7)(e)(ii) is applicable where the transferor is neither an individual resident in Canada nor a partnership any member of which was either an individual resident in Canada or another partnership. Subparagraph 13(7)(e)(ii) would apply, among other things, where the transferor is a corporation (resident or non-resident).

As you note, the CRA has opined in several documents that subparagraph 13(7)(e)(ii) of the Act is also applicable where the non-arm’s length transferor is a non-resident. We confirm that this remains our view and that the words in subparagraph 13(7)(e)(ii) that read “where the transferor was neither an individual resident in Canada” include a non-resident transferor.

Is transferred property considered Capital Property of a non-resident transferor

As explained above, the CRA has provided its views on whether subparagraph 13(7)(e)(ii) of the Act is applicable in a situation where the transferor is a non-resident corporation in several public documents. The views expressed in these documents remains our current position. However, in light of comments made on the meaning of the term “taxpayer,” you have also asked whether US Corp is considered a taxpayer for purposes of the definition of “capital property” and therefore whether the Trademarks could be considered to be a capital property of US Corp immediately before the transfer.

In order for subparagraph 13(7)(e)(ii) of the Act to apply, the transferee and transferor must not be dealing at arm’s length and the transferee must have acquired property that is capital property to the transferor and depreciable property to the transferee.

“Capital Property” of taxpayer is defined in section 54 of the Act and means:

    “(a) any depreciable property of the taxpayer, and

(b) any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer;”

“Taxpayer” is defined in subsection 248(1) of the Act and “includes any person whether or not liable to pay tax.” Thus the definition of “taxpayer” in subsection 248(1) is broad and could also include a non-resident taxpayer. However the term “taxpayer” has also been considered by the courts in various situations. For example, in the case of Oceanspan Carriers Limited (“Oceanspan”), the court adopted a restricted meaning of the term “taxpayer.”

In Oceanspan, the corporation was a non resident of Canada and was not carrying on business in Canada prior to June 15, 1976. Upon becoming a resident of Canada, the corporation deducted non-capital losses incurred in 1976 and prior years. The losses were denied. At the Federal Court of Appeal, the representative for Oceanspan essentially argued that “although not liable to pay tax” it “was a “taxpayer” within the broad definition of the word, when its losses were incurred in 1972 to 1976.” The FCA did not accept this argument. In the Court’s view, the non-resident corporation was not a taxpayer for purposes of the Act and for the purpose of accumulating non-capital losses to be used against income taxable in Canada after it became resident.

It is our view that the Oceanspan case demonstrates that the Courts have found it necessary to consider the meaning of the term taxpayer found in subsection 248(1) of the Act in conjunction with the particular situation and the purpose and context of the provisions of the Act in which the term is found. In the current situation, the object and purpose of subparagraph 13(7)(e)(ii) is to establish the resident purchaser’s capital cost of depreciable property acquired from a non-arm’s length transferor for CCA purposes. The purpose is not to determine the tax liability of the non-resident transferor corporation. In our view, this can be distinguished from the situation in Oceanspan.

In conclusion, it is our view that notwithstanding the comments regarding the term “taxpayer” taken in Oceanspan with respect to the scenario in that decision, it is inappropriate to apply the comments in Oceanspan to limit the meaning to be given to the word “taxpayer” in the definition of capital property in section 54 of the Act for purposes of subparagraph 13(7)(e)(ii). As such, subparagraph 13(7)(e)(ii) will apply to determine the capital cost of the Trademarks acquired from US Corp, which is a non-arm’s length non-resident corporation.

We trust these comments will be of assistance to you.

Yours truly,

Pamela Burnley, CPA, CA
Manager
Business and Employment Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Office Overload Co. Ltd. v. M.N.R. 65 DTC 690, Lea-Don Canada Limited v. Minister of National Revenue 70 DTC 6271 (SCC) and Oceanspan Carriers Ltd. v. Her Majesty The Queen 87 DTC 5102

2 XXXXXXXXXX 2003-0014995, 2003-0037685 XXXXXXXXXX

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© His Majesty the King in Right of Canada, 2024

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté le Roi du Chef du Canada, 2024