News of Note
Intrawest – Tax Court of Canada finds that time share fees charged to Canadian and U.S. residents respecting resort condos located throughout North America were 100% GST-taxable
A Canadian-resident non-share corporation, most of whose members had time share points which entitled them to book stays at Canadian, U.S. and Mexican resort condos beneficially owned by the corporation, was found to be receiving its annual fees from them as consideration for a single supply of a service, namely, funding the operating costs of the time share program. This gave rise to a conundrum, as ss. 142(1)(d) and s. 142(2)(d) respectively deem a supply of a service in relation to real property inside Canada or outside Canada to be made in Canada or outside Canada – so that the single supply here which related to both was deemed to be made both inside and outside Canada.
D’Arcy J resolved this quandary by using the following interpretive approach:
[P]aragraphs 142(1)(d) and 142(2)(d)…only apply if the single supply of a service relates solely to real property. The paragraphs do not apply if only a portion of the single supply of the service relates to real property. In such a situation, the supply is subject to the general deeming rules set out in paragraphs 142(1)(g) and 142(2)(g).
The latter general rule deems a supply of a service that is to be performed in whole or in part in Canada to be made in Canada. This produced the tidy result that 100% of the fees was subject to GST - even though many of the members were U.S. residents who were using non-Canadian resort condos. This was also a harsher approach than that of CRA, which was to treat each fee as being taxable only to the extent of 68.5% thereof, being “the ratio of total resort points issued in respect of properties located in Canada to the total resort points issued in respect of all properties."
Following some amendments to jettison the "mirror image rule" (see Toronto Refiners), the distinction between a capital property (a property giving rise to a capital gain) and an eligible capital property (a property giving rise to an eligible capital amount) is completely circular: under ss. 14(1) and 14(5) - CEC-(E), an eligible capital amount is 1/2 of an amount receivable on capital account in respect of a business that is not included in computing a capital gain; and under s. 39(1)(a)(i), a capital gain does not include gain from the disposition of an eligible capital property.
When asked whether a capital property includes an eligible capital property, CRA did not directly discuss this circularity issue, and simply stated:
By virtue of subparagraph 39(1)(a)(i)…the gain from the disposition of an “eligible capital property” is excluded from the meaning of a taxpayer's “capital gain.”
Neal Armstrong. Summary of 13 June 2016 T.I. 2016-0637031E5 under s. 98(5).
Poulin – Tax Court of Canada finds that a sale to the special-purpose Holdco of an independent employee was essentially a surplus-stripping transaction rather than an arm’s length sale
CRA successfully applied s. 84.1 to a transaction in which one of the two major shareholders of a Quebec CCPC (Mr. Turgeon) agreed to sell some preferred shares of the CCPC to a newly formed Holdco of its comptroller (“Hélie Holdco”) in consideration for a promissory note bearing interest at 4% and which was to be repaid over a number of years out of dividends or redemption proceeds received by Hélie Holdco from the CCPC. D’Auray J noted that this employee had no risk, and Hélie Holdco had no upside as its only assets and liabilities were the prefs and the note, both with frozen values – so that Hélie Holdco essentially was just an accommodation party. She stated:
Hélie Holdco served only to participate in the transaction for the benefit of Mr. Turgeon, thereby permitting him to strip the surplus of [the CCPC] free of tax by virtue of utilizing the capital gains deduction.
At the same time as Mr. Turgeon was arranging this “sale” to Hélie Holdco, he formed a new Holdco to purchase preferred shares of the other major shareholder. D’Auray J found this to be an arm’s length transaction (so that s. 84.1 did not apply) even though it occurred on quite similar terms (under advice from a common tax advisor) as the sale to Hélie Holdco, as they each were advancing their own interests (arranging an exit on advantageous terms, and acquiring control of the CCPC, respectively.)
Neal Armstrong. Summary of Poulin v. The Queen, 2016 CCI 154 under s. 251(1)(c).
CRA indicates that recapture of depreciation or eligible capital amounts realized on sales occurring before the safe-income determination time will be included in safe income
Under s. 55(2) (and draft s. 55(2.1)(c)), it is only safe income realized before the safe-income determination time which can be accessed. This creates a technical difficulty in the case of recapture of depreciation and eligible capital amounts, which are stated to arise only at the end of the taxation year in which the related dispositions occurred.
However, CRA has indicated that it nonetheless will accept that such income arose before the safe-income determination time if the sale giving rise to such income occurred before that time – and similarly for terminal losses.
Univar – Tax Court of Canada finds that creating a sandwich structure to access s. 212.1(4) was an abuse of the s. 212.1(1) anti-surplus stripping rule
A non-resident's acquisition of the shares of a Netherlands public company indirectly holding the shares of a valuable Canadian sub (Univar Canada) with nominal paid-up capital was structured to effectively step-up the PUC of the shares of Univar Canada to fair market value by using (or, according to V. Miller J, abusing) the pre-2016 version of s. 212.1(4) rule. This was accomplished by setting up a sandwich structure immediately after the acquisition, under which a new Canadian ULC, capitalized with notes and high-PUC shares, held the shares of a U.S. corporation holding Univar Canada – so that such U.S. corporation could distribute the shares of Univar Canada (on a Treaty-exempt basis) to its controlling Canadian purchaser (the ULC) without technically being affected by the s. 212.1(1) deemed dividend rule.
Her analysis in confirming CRA's application of GAAR (to impose Part XIII tax on the value of the notes issued by the Canadian ULC and to grind the PUC of the shares issued by it) was informed by her starting point, which was to state:
Subsection 212.1(4) is placed as an exception within an anti-avoidance section… . [I]t is reasonable to infer that subsection 212.1(4) cannot be used so that it would defeat the very application of section 212.1. …[S]ubsection 212.1(4) is aimed at a narrow circumstance where the purchaser corporation, which is resident in Canada, actually controls the non-resident corporation without manipulating the corporate structure to achieve that control.
She went on to say:
The exception should not apply in the situation where a non-resident owns shares of the Canadian resident purchaser corporation.
so that effectively she regarded the proposed amendments to s. 212.1(4) in their principal aspect as being enacted for greater certainty – and, in fact, she referred to these amendments as evidencing the policy of the old s. 212.1(4) rule (which might be at odds with s. 45(3) of the Interpretation Act – although she cited Water’s Edge as permitting this approach).
Neal Armstrong. Summaries of Univar Holdco Canada ULC v. The Queen, 2016 TCC 159 under s. 212.1(4), s. 245(4) and Statutory Interpretation - Interpretation Act, s. 45(3).