News of Note
Encore Cellular – Tax Court of Canada finds that a Canadian buyer could not generate ITCs under ETA s. 178.8 on goods bought from non-residents without showing they had borne GST
Email this ContentThe taxpayer claimed that it was entitled to input tax credits (ITCs) pursuant to s. 178.8 respecting cellphone and other goods which it had acquired, for resale in Canada by it, from non-registrant, non-resident suppliers. After noting that the general purpose of s. 178.8 was to potentially generate ITCs to a Canadian purchaser where the non-resident supplier bore non-creditable GST on the goods’ importation, and stating that s. 178.8 “only deems tax to have been paid or payable to the extent that tax was in fact paid or payable on importation,” MacPhee J rejected the taxpayer’s ITC claim given inter alia that it had not rebutted CRA’s “assumption that no GST/HST was paid upon importation,” i.e., that the non-resident suppliers had not borne GST on the goods’ importation.
Neal Armstrong. Summaries of Encore Cellular Inc. v. The King, 2024 TCC 35 under ETA s. 178.8(2) and s. 180.
Income Tax Severed Letters 17 April 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hargreaves Property – English Court of Appeal explains the “well established” concept of beneficial ownership, and equates it with beneficial entitlement
Whether the UK taxpayer (“Hargreaves”) was liable for failure to withhold UK tax on interest paid by it to a non-arm’s length UK company (“Houmet”) turned on whether, under a domestic UK tax provision, Houmet was “beneficially entitled” to such income. As part of a UK tax avoidance plan, Houmet purchased the interest coupon and the related principal one or two days before the due date, and was required to pay essentially all of the amount received by it from Hargreaves on the due date to the person from whom it had been assigned the coupon and principal.
In finding that Houmet had no beneficial entitlement to the interest, Falk LJ first stated (at paras. 49, 52 and 54):
[T]he concept of beneficial ownership is well established … . In essence, it means ownership for the benefit of the person in question … .
[C]onsistent with the fundamental requirement of ownership for the benefit of the person in question, or "ownership with benefits", a person who is the legal owner of property will not be its beneficial owner if they do not in fact have any of the benefits of ownership, such that they hold only a "mere legal shell". …
[T]he concept of "beneficial entitlement" should be construed with regard to the authorities that consider the concept of beneficial ownership. In broad terms, therefore, it can be construed as "entitlement with benefits". If the person in question would, in truth, have none of the benefits that entitlement would ordinarily bring, they will not be beneficially entitled.
Before dismissing Hargreaves’ appeal, she referred to the following findings:
Hargreaves was unable to establish that, viewed realistically, the transactions conferred any benefit of an entitlement to the interest. There was no evidence to suggest that Houmet could have used the funds received for any other purpose [other than to pay for the assignment to it], or that it could benefit from them in any other manner. … Further, Houmet's involvement was entirely ephemeral … . There is no suggestion that Houmet was either at risk as to the amount that might be paid, such that it might not be put in funds to pay for the assignment to it, or that it might be able to benefit from the receipt being higher than anticipated.
Neal Armstrong. Summary of Hargreaves Property Holdings Ltd v Revenue And Customs [2024] EWCA Civ 365 under General Concepts – Ownership.
CRA indicates that an exceptional COVID-related withdrawal from a Chilean pension plan qualified as an exempted pension under the Canada-Chile Treaty
The Chilean government, in response to the pandemic, adopted an exceptional measure in 2020, permitting the withdrawal of up to 10% of the pension savings in the individual pension accounts managed by the Chilean pensions authority. CRA noted that such a withdrawal could qualify as a superannuation or pension benefit for Canadian purposes (and, therefore, apparently as a “pension” payment for purposes of the Canada-Chile Treaty) notwithstanding being an exceptional single foreign-source payment. It then indicated that if it so qualified and was paid to a Canadian resident, it would only be taxable in the state in which it arose (Chile), so that the recipient would be entitled to a taxable-income deduction under s. 110(1)(f)(i).
Neal Armstrong. Summary of 12 December 2023 External T.I. 2021-0881541E5 under Treaties – Income Tax Conventions – Art. 18.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in February of 2002. Their descriptors and links appear below.
These are additions to our set of 2,806 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2002-02-01 | 7 December 2001 Internal T.I. 2001-0108597 F - Crédit d'impôt emploi étranger Art. 122.3 | Income Tax Act - Section 122.3 - Subsection 122.3(1) - Paragraph 122.3(1)(b) - Subparagraph 122.3(1)(b)(i) | contract can be with a related person |
| Income Tax Act - Section 248 - Subsection 248(1) - Business | there is a business if profit generated even if the activity was not undertaken primarily for the purpose of earning a profit | ||
| 6 December 2001 Internal T.I. 2001-0110047 F - Revenu d'emploi organisation intern. | Income Tax Act - Section 126 - Subsection 126(3) | organization that brought together states, government agencies and non-governmental organizations did not qualify as an intergovernmental organization | |
| 2002-01-18 | 29 January 2002 External T.I. 2000-0053605 F - REVENU DES PECHEURS | Income Tax Act - Section 9 - Nature of Income | factors for allocating catch between individual holding fishing licence and his fishing corporation |
| 11 February 2002 External T.I. 2001-0092975 F - MOMENT DE L'INCLUSION DANS LE REVENU | Income Tax Act - Section 9 - Timing | retroactive fee increases were not income until that date that the Order in Council ordering their payment took effect | |
| 6 February 2002 External T.I. 2001-0100565 F - CHANGEMENT D'USUAGE ET PERTE FINALE | Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) | change to personal use of assets on cessation of proprietorship could trigger terminal loss/ no application of s. 13(7)(a) if they are not used at all after the cessation | |
| Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) | change to personal use of assets on business termination engages ss. 45(1)(a) and 13(7)(a), but not if all use ceases | ||
| 7 February 2002 External T.I. 2002-0118535 F - REMBOURSEMENT DE PRIMES - ENFANT MINEUR | Income Tax Act - Section 146 - Subsection 146(1) - Refund of Premiums - Paragraph (b) | financial dependence condition can be established even where child not living with parent |
Lark Investments – Crown’s vague pleading that GAAR applied to convert a CCPC to non-CCPC was struck, but with leave to amend
A week before realizing a $119 million capital gain, the taxpayer, which until then was wholly-owned by a Canadian-resident individual, issued voting preference shares to his non-resident children (who thereby acquired de jure control), but not to a resident son. CRA had decided not to take the position that the taxpayer had remained a CCPC by virtue of continued de facto control by the resident individual, but that GAAR should instead be applied. CRA assessed the taxable capital gain on sale, so as to deny the general rate reduction under s. 123.4 and impose refundable tax under s. 123.3, on this basis.
Based on the Crown’s submissions at the hearing of this motion, its position appeared to be that, although Lark was no longer a CCPC because of the de jure control of the non-resident children, there was a GAAR abuse because de facto control was maintained in Canada. However, this position was not reflected in the Reply, which instead contained vague references to the integration system and abuse of ss. 123.3 and 123.4, and did not refer to de facto control.
St-Hilaire J found that the relevant part of the Reply “may prejudice the fair hearing of the appeal and is an abuse of process” and should be struck – but with leave to the Crown to amend its pleadings.
Perhaps the amended pleadings will indicate a Crown position that, although a Canadian corporation that is subject to de jure control of non-residents and de facto control of a resident Canadian is not a CCPC as a technical matter, it may be treated as a CCPC after applying GAAR.
Neal Armstrong. Summary of Lark Investments Inc. v. The King, 2024 TCC 30 under Rule 63 and Rule 8.
Kute Knit – Quebec Court of Appeal confirms denial of supervisory SR&ED salary claims under Reg. 2900(2)(b) which were asserted rather than proven
The taxpayer, which was acknowledged by the ARQ to be engaged in SR&ED, had claimed percentages (ranging from 15% to 75%) of the salaries incurred during its 2011 and 2012 taxation years for various management and supervisory employees as being the times that they were directly supervising the prosecution of SR&ED within the meaning of the Quebec equivalent of Reg. 2900(2)(b). These same percentages had been used for the managers and supervisors since 2006.
Before dismissing the taxpayer’s appeal of the full denial of taxpayer’s related claims, the Court of Appeal stated:
The only evidence the appellant submitted was a table in which it listed the names of the employees in the two groups and attributed to each of them a percentage of the total time it stated had been spent on the SR&ED projects. Other than this table, the appellant did not file supporting documents regarding the percentages set out therein, be they time sheets, SR&ED progress reports, correspondence, minutes of meetings, internal notes or emails related to these tasks, nor did it … call any of the employees from these two groups as witnesses to support these percentages … .
The Court found no reviewable error in the finding below that the taxpayer had thus failed to “demolish” the ARQ assessments by making out a prima facie case, that the ARQ’s premise — of the taxpayer not having shown that the reported portions of each employee’s salary could reasonably be attributed to the prosecution of SR&ED — was false.
Neal Armstrong. Summary of Manufacture Kute Knit Inc. v. Agence du revenu du Québec, 2024 QCCA 408 under Reg. 2900(2)(b).
BlackRock HoldCo 5 – English Court of Appeal imputes 3rd-party covenants in a transfer-pricing comparison of a cross-border inter-affiliate loan without them
The structure for the acquisition by the BlackRock group of the U.S. target (“BGI”) entailed a BlackRock LLC (“LLC4”) lending US$4 billion to a wholly-owned LLC (“LLC5”) as well as injecting substantial equity into LLC5, with LLC5 using most of those proceeds to subscribe for preferred shares of the transaction Buyco (“LLC6” – which acquired all the shares of BGI). LLC6 was wholly-owned by LLC5 save for the common shares of LLC5 held directly by LLC4. The LLCs (and, thus, the loan) were disregarded for US tax purposes; however, LLC5 was factually a UK resident, so that the loan interest generated losses for UK tax purposes which LLC5 transferred to other UK group members.
The UK transfer-pricing legislation (which was explicitly stipulated “to be read in such manner as best secures consistency” with the OECD’s Transfer Pricing Guidelines) required that the profits and loss of LLC5 be computed as if the transaction which would have been made between two independent enterprises had been made, instead of the actual transaction between LLC5 and LLC4.
In rejecting the HMRC position that the LLC5 interest deductions should be denied under these transfer-pricing rules on the basis that the loan transaction between the two enterprises (LLC4 and LLC5) was not one which would have been made by arm’s-length enterprises (i.e., LLC4 lacked covenants of LLC5 and BGI to ensure the flow of dividends to LLC5 to service the loan), Falk LJ first noted that in the actual transaction, LLC4 had no need of such covenants given its control of LLC6 and its subsidiaries (the “LLC6 sub-group”). She further noted that the OECD guidelines required that, in comparing the actual transaction to the hypothetical transaction between two independent enterprises, “the OECD guidelines contemplate that adjustments may be made to ensure that material differences between ‘economically relevant characteristics’ are eliminated.” She found that in this light:
The appropriate comparison is not between the non-existence of covenants in the actual transaction and the covenants that a third-party lender would require, but between the actual risks in the real world and the risks in the hypothetical transaction. In the hypothetical transaction there are risks that third parties (specifically, the LLC6 sub-group) may take actions that prejudice the performance of the Loans. Those risks do not exist for the parties to the actual transaction. The covenants in the hypothetical transaction effectively bring the risks into line with each other, so that the transactions are comparable.
However, although the interest deduction was not denied for transfer-pricing reasons, it was denied under the UK “unallowable purpose” rule, i.e., in general, the main purpose of the loan was securing a tax advantage.
Neal Armstrong. Summary of BlackRock HoldCo 5, LLC v Commissioners for His Majesty's Revenue and Customs [2024] EWCA Civ 330 under s. 247(2)(b).
Breton - Federal Court finds that failing due to ignorance to transfer funds between the taxpayer’s TFSAs using the qualifying transfer rules, was not a “reasonable error”
The taxpayer accomplished the transfer of the TFSA that he held with Caisse Desjardins to the one held with Banque Nationale by withdrawing the funds from the first TFSA and depositing then to the second TFSA, rather than arranging for Caisse Desjardins to transfer the funds directly as a “qualifying transfer” as defined in s. 207.01(1) (i.e., on a tax-free basis). In finding that the CRA decision to deny his request for relief pursuant to s. 207.06(1) was reasonable, and after having noted that the taxpayer had failed to request a direct transfer “since he was unaware of the obligation to do so,” Régimbald J stated:
The jurisprudence clearly demonstrates that ignorance of the provisions of the ITA and of the obligations of taxpayers in managing their TFSA accounts … do not constitute a "reasonable error" within the meaning of subsection 207.06(1), justifying the exercise of the Minister's discretion … .
Neal Armstrong. Summary of Breton v. Attorney General, 2024 CF 555 under s. 207.06(1).
Income Tax Severed Letters 10 April 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Neal H. Armstrong editor and contributor