News of Note
Iberdrola - ECJ (1st Chamber) finds that a developer was entitled to VAT credits for reconstructing a sewage plant for free, as this advanced its own project
Email this ContentA developer (Iberdrola) contracted with a Bulgarian municipality to reconstruct, for free, a waste-water pumping station serving a holiday village at which it was building apartment buildings. At issue was whether Iberdrola was entitled to deduct the VAT borne by it on the pumping-station reconstruction work in accordance with a European VAT provision, which provided such a deduction for inputs to “goods and services [that] are used for the purposes of the taxed transactions of a taxable person.” The First Chamber of the European Court of Justice stated:
It is clear … that, without the reconstruction of that pump station, it would have been impossible to connect the [apartment] buildings …to that pump station, with the result that that reconstruction was essential for completing that [apartment] project… .
Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality … and a taxed output transaction by Iberdrola since it appears that the service was supplied in order to allow the latter to carry out the construction project… .
The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established … .
This case may assist in thinking about ETA s. 141.01(4), which deems the occurrence of impenetrable consequence “to the extent that” a supplier acquires a property or service “for the purpose of making the free supply of that property or service or for consumption or use in the course of making the free supply.” It might be considered that Iberdrola was not incurring the pumping-station reconstruction costs for the purpose of or in the course of making a free supply to the municipality but, rather, as inputs to its own apartment project.
Neal Armstrong. Summary of Director of the ‘Appeals and Tax and Social Insurance Practice’ Directorate of Sofia v. Iberdrola Inmobiliaria Real Estate Investments, C-132/16, ECLI:EU:C:2017:683 (European Court of Justice (First Chamber)) under ETA s. 141.01(4).
Development Securities – U.K. First-Tier Tribunal finds that a Jersey sub, whose Jersey board approved a decision contrary to the sub’s interests, resided in the U.K.
A U.K. tax avoidance scheme, which entailed Jersey subsidiaries (a majority of whose directors were Jersey residents who also served as directors of numerous other client companies) acquiring assets from their UK parent (DS Plc) or its U.K. subsidiaries at prices corresponding to the assets’ historical cost plus an inflation-indexation adjustment and then, after the Jersey-resident directors had resigned, selling those assets back to the DS group at their much lower fair market value, thereby triggering a tax loss that could be used in the DS group. The scheme depended on considering that these subs had their central management and control in Jersey at the time of the acquisitions. In finding that the subs instead were resident in the U.K., Morgan J stated:
Unlike Wood v Holden… this was not a case where the board considered a proposal and, having taken appropriate advice, decided that it was in the best interests of the companies to enter into it. Given that the transaction was clearly not in the interests of the companies and indeed could only take place with parental approval, the inescapable conclusion is that the board was simply doing what the parent, DS Plc, wanted it to do and in effect instructed it to do. In the circumstances, the line was crossed from the parent influencing and giving strategic or policy direction to the parent giving an instruction. The Jersey board were simply administering a decision they were instructed to undertake by DS Plc, in checking the legality of the plan and then administering the other consequent actions prior to handing over completely to the UK group.
Neal Armstrong. Summary of Development Securities (No. 9) Ltd & Ors v HMRC, [2017] UKFTT 565 (TC) under s. 2(1).
Joint Committee provides its submissions on draft ss. 84.1(2)(a.1) and 246.1
The expanded s. 84.1 rule produces a greater impediment to the transfer of family businesses from one member to another, whether from one generation to another or between siblings (and during lifetime or post‐mortem), with the result that the tax system would favour third‐party sales. In the case of a post-mortem transfer, this is because neither the estate nor the child can now use pipeline planning to avoid double tax on death, as for purposes of s. 84.1 the ACB to the estate or the child will be reduced by the capital gain deemed to be realized by the deceased, and because solving this is very difficult.
An inter vivos example is where Bob sells the shares of Opco (having a FMV of $6 million and nominal PUC and ACB) directly to his children, and receives a $6 million promissory note as consideration. The children subsequently transfer the Opco shares into a new holding company and repay the promissory note to Bob over time using cash flow and the debt capacity of Opco. Under proposed s. 84.1, on the transfer by the children of the Opco shares to the holding company, the children’s ACB for s. 84.1 purposes would be reduced from $6,000,000 to nil because of the capital gain realized by Bob, a non‐arm’s length party. As a result, they would be deemed to receive a taxable dividend on the $6,000,000 ultimately paid to them to fund payments under the promissory note.
A few comments on draft s. 246.1:
- It is unclear if, for example, there is receipt of, say, a promissory note, there is a deemed dividend on such receipt or only on subsequent distributions (principal payments).
- The Explanatory Notes indicate that the amount receivable by an individual subject to s. 246.1 could be received indirectly through a trust. In many (or perhaps most) cases, though, the rule could apply to the trust itself, i.e., there is an issue of potential double application.
- Under ss. 246.1(2)(c)(i) and (ii) (re dispositions of property and changes in paid‐up capital) it appears possible for arm’s length transactions to be the basis for the application of s. 246.1.
- One of the purposes of the transaction or series must be to effect a significant “reduction or disappearance” of assets. The language of the provision suggests that assets for this purpose are to be determined on some type of consolidated or look‐through approach but there is no guidance on the manner in which this is to be done.
The Joint Committee has also released its submissions on the 18 July 2017 passive income proposals, and on the split income proposals which we will partially summarize at another juncture.
Neal Armstrong. Summaries of 2 October 2017 Joint Committee Submission on 18 July 2017 Finance Proposals re Converting Income into Capital Gains under s. 84.1(2)(a.1) and s. 246.1.
Income Tax Severed Letters 4 October 2017
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Wynter – Federal Court of Appeal defines “wilful blindness” as deliberate ignorance
In the context of a routine gross negligence case, Rennie JA stated:
[R]equiring an intention to cheat to establish wilful blindness [as contended by the taxpayer] is inconsistent with the well-established jurisprudence that wilful blindness pivots on a finding that the taxpayer deliberately chose not to make inquiries in order to avoid verifying that which might be such an inconvenient truth. The essential factual element is a finding of deliberate ignorance, as it “connotes ‘an actual process of suppressing a suspicion’”: Briscoe [2010 SCC 13]… .
Neal Armstrong. Summary of Wynter v. Canada, 2017 FCA 195 under s. 163(2).
Flavor Net – Tax Court of Canada finds that a substantial technical challenge was not sufficient to render a novel product development effort SR&ED
A taxpayer in the energy drink business sought to develop a beverage containing a mixture of 800 milligrams of plant sterols in a two-ounce format. This was more challenging than what Cargill had succeeded in doing, which was to disperse 400 milligrams in an eight-ounce serving. Notwithstanding this challenge (which was not met), the taxpayer’s work did not qualify as SR&ED given that it used only methods and techniques that were available in the industry, and there was no formulation of specific hypotheses related to technological risk or uncertainty. Although D'Auray J did not dwell on this, it also did not help that the research assistant lacked a science background.
Neal Armstrong. Summary of Flavor Net Inc. v. The Queen, 2017 TCC 179 under s. 248(1) – SR&ED.
Six further translated technical interpretations are available
Full-text translations of the six technical interpretation released between June 18, 2014 and June 4, 2014, are listed and briefly described in the table below.
These (and the other translations covering the last 40 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for October.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2014-06-18 | 20 May 2014 External T.I. 2013-0516121E5 F - Debt forgiveness | Income Tax Act - Section 12 - Subsection 12(2.2) | s. 12(1)(x)(iv) inclusion from BIA settlement of GST interest and penalties could be offset against related expense |
| Income Tax Act - Section 248 - Subsection 248(26) | unremitted GST and QST were not obligation "issued" by debtor | ||
| Income Tax Act - Section 80 - Subsection 80(1) - Commercial Debt Obligation | BIA settlement of unremitted GST interest | ||
| Income Tax Act - Section 9 - Forgiveness of Debt | BIA settlement of unremitted GST on sales was on capital account | ||
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(iv) | BIA settlement of GST interest and penalties included under s. 12(1)(x)(iv) | ||
| 28 May 2014 External T.I. 2013-0486111E5 F - RRSP, prohibited investment | Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage | no advantage on s. 51 exchange | |
| Income Tax Act - Section 207.01 - Subsection 207.01(13) | s. 51 exchange of transitional prohibited property does not trigger s. 207.04(1) tax | ||
| Income Tax Act - Section 207.05 - Subsection 207.05(4) | s. 207.05(4) status is preserved following s. 51 exchange | ||
| 2014-06-04 | 12 May 2014 External T.I. 2013-0503531E5 F - Discretionary Dividends Shares | Income Tax Act - Section 85 - Subsection 85(1.3) | grandchild wholly owned by individual directy and through immediate subsidiary is wholly-owned corporation |
| 22 May 2014 External T.I. 2014-0519811E5 F - Droit d'usage au Québec pré-1991 | General Concepts - Ownership | usufructuary of duplex unit was de facto owner thereof | |
| Income Tax Act - Section 248 - Subsection 248(3) | effective grandfathering of right as usufructuary which arose before 1991 | ||
| Income Tax Act - Section 54 - Principal Residence | usufructuary of duplex unit (with her right acquired pre-1991) entitled to claim principal residence exemption on post-1991 disposition | ||
| 20 May 2014 External T.I. 2014-0517331E5 F - CII - exploitation agricole | Income Tax Act - Section 127 - Subsection 127(9) - Qualified Property - Paragraph (c) | test is of intention on acquisition to use over 50%, during months of likely use during the equipment’s lifetime, on farm in the region | |
| Income Tax Act - Section 127 - Subsection 127(27) | no ITC reversal if unanticipated transfer of equipment to a farm outside the region | ||
| General Concepts - Ownership | co-owners entitled to pro rata ITCs | ||
| 14 November 2013 Internal T.I. 2013-0485331I7 F - REÉR et revenu d'un Indien | Other Legislation/Constitution - Federal - Indian Act - Section 87 | RPP benefits exempt if contributions exempt/RRSP withdrawals exempt if contributions not deductible |
Lewski – Full Federal Court of Australia finds that a trust income declaration that was subject to a tax contingency did not result in an income inclusion to the beneficiary
On June 30, 2006, the trustee of an Australian trust declared a distribution to the taxpayer of all its income for the year then ended and at the same time made a further resolution that in the event the Australian taxation authority denied a deduction to the trust, the trust income for that year was instead to be deemed to have been distributed on the same 2006 date to an alternate beneficiary. This contingency in fact materialized, i.e., the ATO denied a loss carryforward by the trust, so that all the income of the trust for that year was now a material amount. The Court accepted that the further resolution made the distribution declaration contingent, so that it did not cause the (now material) income amount to be included in the taxpayer’s hands as an amount to which she was “presently entitled” on that (June 30, 2006) date.
The taxpayer had delegated the handling of all her affairs to her husband, and did not find out about the purported income distribution until over seven years later, at which point she promptly executed a disclaimer of any interest in the distribution. The Court found that she should be imputed with the knowledge of her agent (her husband), so that she had not promptly disclaimed - so that if (contrary to the finding above) the income distribution to her had otherwise been valid, her purported disclaimer thereof would have been ineffective.
Neal Armstrong. Summaries of Lewski v Commissioner of Taxation, [2017] FCAFC 145 under s. 104(24), s. 248(8)(b) and s. 18(1)(a) – incurring of expense.
Evolve Bitcoin ETF will track the results of continually rolling CBOE-traded futures
Evolve Bitcoin ETF, an Ontario unit trust that has applied to be TSX-listed, proposes to have exclusive exposure to the most current month of Bitcoin futures, except that it will be necessary, as the contract approaches maturity each month, to sell it and purchase the next month’s contract. As the Bitcoin futures trade in Chicago, the Trust will take the position that it will not use the futures or any other property in the course of carrying on a business in Canada and, therefore, will not be a "SIFT trust."
Having said that, it will realize gains on income account each month if the futures keep appreciating (unless it elects under draft ss. 10.1(1) and (4) respecting its “eligible derivatives” to annually recognize income on a mark-to-market basis under s. 142.5(2)). Since it will not make any regular cash distributions, it will need to push out its income in late December of each year (in cash or in units) to the extent of income that has not been allocated on unit redemptions. To facilitate this, it will elect under s. 132.11(1) to have a December 15 year-end (so that income distributions made in the following stub period are back-dated to December 15.) Perhaps this will lead to increased trading surrounding that date.
Units are redeemable at any time at NAV provided that they are tendered in multiples of a specified minimum number (a “PNU”) – but to provide greater certainty on open-ended (s. 108(2)(a)) unit trust status, units in smaller quantities are redeemable at any time at 95% of their trading price. The tax disclosure assumes that the units are capital property to individuals.
Neal Armstrong. Summary of Evolve Bitcoin ETF preliminary prospectus under Offerings – Commodity Funds – Cryptocurrency Funds.
CRA rules that drilling on an existing, currently uneconomic, mine site would qualify as CEE
A mine ceased production quite some time ago as a result of the grade of the production being too low to justify continued production. The underground workings were allowed to flood and other historic shafts were sealed. The existing tracks would be unusable without significant work.
The new owner will conduct an exploration program, much of it focused on the existing mine site, in order to expand the “mineralization” (with any reserve identification being much further down the road). CRA ruled, subject to its detailed provisoes, that the expenses of this work would qualify as exploration (under s. 66.1(6) – Canadian exploration expense - para. (f).)
Neal Armstrong. Summary of 2017 Ruling 2016-0635341R3 under s. 66.1(6) – CEE - para. (f).