Highlights of the CRA Round Table at the 2022 CTF Annual Conference

At the CRA round table at the 2022 CTF annual conference, the CRA responded to 14 questions, 5 of which had an international tax component. This article will highlight the most significant comments.

Taxable Canadian Property

In question 2, the CRA was asked if it would consider a ruling process to confirm whether a property is “taxable Canadian property” (TCP).

The CRA responded that no program is offered to confirm whether a property is TCP. It reiterated that an advance income tax ruling will not determine or confirm the fair market value of a property and that the rulings provided are conditional on the disclosure of all of the relevant facts.

However, the CRA offered an alternative (a pre-ruling consultation) in a case where a particular interpretive issue might inform the determination of a property’s TCP status.

Permanent Establishments

In question 4, the CRA was asked to consider whether, on the basis of the following scenario, the services rendered by USco would be considered (a) “services rendered in Canada” for the purposes of regulation 105; and (b) “services . . . provided in that other State” for the purposes of article V9(b) of the Canada-US tax treaty.

Canco engages Serverco, an arm’s-length server provider, to host Canco’s copy of a software program and the data related to it. Canco also enters into an agreement with USco, a non-arm’s-length provider, which will provide Canco with the right to use the software and to receive updates and support services. The server running the software and storing the data will be located in Canada. US-based employees of USco will remotely access the server in order to provide application support and upgrades, software maintenance and customization, and quality support.

In response to question (a), the CRA stated that although it is a question of fact as to what services are rendered in Canada, it seems likely that all of the support services described above that are provided by USco’s employees are rendered in the United States and delivered through a communication system to Canco and its employees.

In response to question (b), the CRA stated that article V9(b) should not apply in circumstances where services performed or provided in the United States are furnished to customers in Canada through a telephone or computer. Alternatively, USco could be found not to have a permanent establishment (PE) in Canada pursuant to article V6, if the activities are preparatory or auxiliary in nature.

In question 7, the CRA was asked to determine whether, on the basis of the facts in the following scenario, UKco has a PE in Canada under article 5 of the Canada-UK tax convention:

• UKco owns a significant quantity of “mining equipment” —application-specific integrated circuit (ASIC) miners and graphics processing units (GPUs)—that it uses in the process of mining cryptoassets in Canada.
• Hostco, a Canadian company, owns real estate located in Canada that is used to provide hosting services to UKco with respect to the mining equipment. The hosting services include the supply of housing, security, electricity, Internet access, and maintenance/management services to ensure the proper operation of the mining equipment. This equipment will remain at the same location throughout its useful life.
• UKco does not have any employees or a physical presence in Canada except through the use of the mining equipment.
• UKco employees located in the United Kingdom have the capacity to direct the use of the mining equipment remotely through the use of software. However, the employees do not have the ability to physically alter the equipment.

In determining whether services were rendered in Canada, the CRA referred to document no. 2018-0776661I7 (August 8, 2019), which indicates that a miner who receives a bitcoin for validating transactions will be considered to have rendered a service.

The CRA then referred to Income Tax Folio S5-F2-C1, which states that when a service requires little or no human intervention (for example, when the service is provided by automated equipment), the location of the mining equipment will be a significant factor in determining where the business is carried on.

In determining whether UKco had a PE in Canada, the CRA stated that it was a question of fact and referred to the OECD model tax convention to determine when a non-resident miner will generally be considered to carry on business in Canada through a PE. The determination is based on whether the crypto-mining business

• is carried on, wholly or in part, through the operation of crypto-mining equipment;
• is at the non-resident’s disposal (that is, the taxpayer owns or leases the crypto-mining equipment); and
• is used in an identifiable fixed geographic location within Canada.

Questions 4 and 7 were topical, addressing developments related to remote access and artificial intelligence. We note that these questions drew significant distinctions with respect to carrying on business and the PE issue depending on the facts of each situation. Accordingly, the facts of each situation seem to be critical.

T1134

In question 12, various questions were asked concerning the new T1134 form. The CRA did not answer the questions and stated that it is currently working on updating the “Questions and Answers About Form T1134” website to provide responses to the questions from the tax community.

Part XIII Tax

In question 13, the CRA was asked whether its position regarding part XIII tax on royalties paid on broadcasting rights—a position stated at the 2011 IFA Conference (CRA document no. 2011-0404511C6, May 3, 2011)—was still applicable. In 2011, the CRA’s position was that the exception in subparagraph 212(1)(d)(vi) applied to all payments for copyright in respect of a literary, dramatic, musical, or artistic work, unless that payment is for a right referred to in subsection 212(5). Accordingly, it was understood that the exception in subparagraph 212(1)(d)(vi) applied to payments made by a Canadian resident to a non-resident for the right to broadcast live events in Canada, such that they are not subject to Canadian withholding tax.

Following the CRA’s comments, however, the SCC in Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada (2012 SCC 34) analyzed the definition of “copyright” and made a clear distinction between the right to perform in public and the right to produce or reproduce a copyright work.

The CRA responded that, after the SCC decision, broadcast rights payments cannot be viewed as payments made “in respect of the production or reproduction” of copyrighted work, and therefore they are not governed by the exception in subparagraph 212(1)(d)(vi). (This topic is examined in greater detail by Kandev and Vaillancourt, in the following article.)

Samantha D’Andrea
EY Law LLP, Montreal