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CRA rules on the use of special voting shares which keep corporations related for s. 55(3)(a) purposes

A DC which holds a rental property and an investment portfolio and is owned by Parent and his four children will spin off its investment portfolio in reliance on the s. 55(3)(a) exception to four TCs mostly owned by each of the four children. However, parent will have control of each TC by being issued special voting shares on their incorporation.

The CRA tags mention s. 55(4) as a provision that it considered relevant. In this regard:

  • access to the s. 55(3)(a) exception was assisted by or depended on Parent controlling all the corporations involved in the transactions;
  • the special voting shares of Parent likely had minimal economic attributes; and
  • Parent’s will bequeathed them to the respective children.

To help address this, the ruling letter represents that Parent is in good health and will control the TCs in order to protect his economic interest in notes that will be owing to him by the TCs.

Neal Armstrong. Summaries of 2018 Ruling 2018-0749491R3 under s. 55(3)(a)(ii), s. 55(4) and s. 186(1)(b).

CRA finds that entering into an agreement to pool administrative support services triggered an obligation to register for GST/HST purposes

A non-resident insurer which otherwise was only making exempt (insurance policy) supplies in Canada was found to have been required to register for GST/HST purposes as a result of entering into an agreement with another party under which each agreed to provide administrative services to the other at cost, to be billed annually. ETA 136.1(2) typically deems periodically billed services to be supplied at the beginning of each billing period, so that presumably the effective date of required registration was the effective date of this administrative services agreement.

Neal Armstrong. Summary of 30 August 2018 Ruling 185770 under ETA s. 240(1).

The new look-through rule in ss. 212.1(5) and (6) may defeat the purpose of a pipeline transaction

Estates commonly use “pipeline” transactions (to take advantage of the step-up to them, under s. 70(5), of the cost of the shares of Opco) under which they sell their Opco shares to Newco for Newco notes. However, under the new look-through rule in ss. 212.1(5) and (6), a non-resident residuary beneficiary will be deemed to have sold a pro-rata portion of the Opco shares to Newco for s. 212.1 purposes. Given that the non-resident (by virtue of being an estate beneficiary) will also be deemed by ss. 212.1(3)(b) and (a) to not be dealing at arm’s length with Newco, a deemed dividend generally will arise to the non-resident beneficiary under s. 212.1, thereby defeating the purpose of the pipeline.

Neal Armstrong. Summary of Henry Shew, “Post-Mortem Pipeline Fails for Non-Resident Beneficiaries,” Canadian Tax Focus, Vol. 9, No. 1, February 2019, p. 1 under s. 212.1(6).

CRA finds that a course prepping students to write an English proficiency test was not GST/HST exempt

CRA found that the supply by a private corporation of instruction in a preparation course for the students’ writing of the International English Language Testing System (IELTS) test did not qualify as “language courses that form part of a program of second-language instruction in either English or French” as required under ETA Sched. V, Pt. III, s. 11, so that such supply was not exempt.

Neal Armstrong. Summary of 27 September 2018 Ruling 187397 under ETA Sched. V, Pt. III, s. 11.

CRA confirms the efficacy of a prepaid concurrent lease financing structure for HST purposes

CRA commented on the use of a prepaid concurrent lease structure to finance equipment leases. The Lessor leases equipment to consumers. The Trust, which has raised money from somewhere, is then leased the Lessor’s reversion, so that the Trust is interposed as lessee and sublessor between the Lessor and the consumers. The Trust uses its financing to prepay most of the rent (plus HST thereon) under the concurrent lease between it and the Lessor. An ETA s. 177(1.1) election also is made for the Lessor to collect the HST on the rents from the consumers owing under what now are subleases, as agent for the Trust.

CRA gave interpretations that it would respect the ETA s. 177(1.1) election and the efficacy of the concurrent lease, so that it considers there to be a supply of the equipment by the Lessor to the Trust pursuant to ETA s. 136(1).

Neal Armstrong. Summary of 21 September 2018 Interpretation 167678 under ETA s. 136(1). See also 5 December 2003 Interpretation 44874.

Lapierre – Tax Court of Canada finds that a Canadian resident working for a UN-authorized agency in Afghanistan was not exempted

A Canadian resident, who was an employee of the International Security Assistance Force (ISAF) in Afghanistan serving as an international civilian consultant, would have been exempted on his salary if the ISAF had qualified as a UN-affiliated agency or if it was a non-military body that was a subsidiary body to the NATO Council. The ISAF did not so qualify because it instead was merely authorized by the UN rather than being a UN agency, and it also was a military body that was not a subsidiary body of NATO. His salary was taxable. This case essentially confirms 2012-0461051E5 F.

Neal Armstrong. Summaries of Lapierre v. The Queen, 2019 TCC 18 under Reg. 8900(1)(b) and s. 81(1)(a).

Income Tax Severed Letters 6 February 2019

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Monsell – Tax Court of Canada finds that CRA had the onus of substantiating assessments underlying s. 160 assessments where it had superior records access

The taxpayers (a husband and wife) received payments from a corporation that had been reassessed for its 2005 to 2007 taxation years and had not objected thereto. Their only ground of appeal to s. 160 assessments was that these “underlying” reassessments were incorrect.

D’Auray J quoted the principle in Mignardi that

where the facts concerning the underlying reassessments are exclusively or peculiarly within the knowledge of the Minister, the onus will shift to the Minister to show the correctness of the underlying reassessments

before finding that the onus was on the Minister to demonstrate the correctness of the underlying reassessments for the 2005 and 2006 years. This was so because the taxpayers did not have access to the corporate records for those years, whereas CRA had been given such documents and then lost them. The Minister failed to discharge this onus.

However, for the 2007 year, no audit was performed and the Minister reassessed solely on the basis of the information contained in the corporate tax returns. Thus, the onus instead was on the taxpayers to demonstrate that this reassessment was incorrect, which they failed to do.

Since the amount of this underlying reassessment for 2007 was greater than the amount of the two payments made to the taxpayers, their s. 160 assessments were upheld.

Neal Armstrong. Summaries of Monsell v. The Queen, 2019 TCC 5 under s. 160(1) and s. 125(3)(b).

CRA indicates that coverage for employee's U.S. medical expenses would qualify if they were substantially METC-type expenses

CRA indicated that premiums paid by an employer under a Blue Cross plan, that would reimburse an employee for certain medical and health care costs incurred while in the U.S., would not be a taxable benefit (based on the exemption for private health services plans) provided that “‘all or substantially all’ of the premiums paid under the plan relate to medical expenses that are eligible for the medical expense tax credit (METC).” CRA further indicated that such “eligible medical expenses are not restricted to those paid in Canada or for medical services provided in Canada” – and that the insurer of the plan should determine whether this test in fact was being met.

Neal Armstrong. Summary of 12 December 2018 External T.I. 2017-0718661E5 under s. 248(1) - private health services plan.

CRA finds that monthly payments to cover employed bus driver costs were taxable since no receipts required

CRA found that fixed monthly payments to school bus drivers to cover such employees’ cost of the use of a personal cellular phone, bus washing (e.g., at a car wash), and electricity consumption (to cover the cost for plugging in the employer’s school bus at the employees’ residence to ensure that the bus would start in the morning) should be included in the employees’ income under s. 6(1)(b) given that the employees were not required to submit receipts.

Neal Armstrong. Summary of 13 April 2018 External T.I. 2017-0682891E5 under s. 6(1)(b).