News of Note
Joint Committee comments on the short-term rental rules
Email this ContentComments of the Joint Committee on the proposed rules in s. 67.7 denying the deduction of expenses for non-compliant short-term rentals include:
- The wording of non-compliant amount does not reflect the different timing for various deductions and instead simply refers to “outlays made, or expenses incurred, in the taxation year.”
- It would seem inappropriate to include bad debt expenses in the non-compliant amount since the effect is to impose tax on more than the revenues collected.
- It would seem appropriate to add the limitation that the short-term rental definition refers to short-term rentals by the taxpayer to address, for example, situations where the taxpayer leases the property on a long-term basis, but the tenant subleases it on a short-term basis.
- Most, if not all, municipalities and provinces, that have restrictions for short-term rentals use 30 consecutive days, not the 90 consecutive days used in the “short-term rental” definition.
- Quaere whether it was really necessary to provide no time limit on CRA assessments under s. 67.7.
- Non-residents who are not subject to Part I tax have a tax advantage over Canadian residents regarding the taxation of non-compliant short-term rentals.
Neal Armstrong. Summaries of Joint Committee, “Subject: Proposed section 67.6 of the Income Tax Act”, 5 February 2024 Joint Committee Submission under s. 67.7(1) - non-compliant amount, short-term rental, s. 67.7(2) and s. 67.7(4).
Income Tax Severed Letters 7 February 2024
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
9154 – Court of Quebec finds that the ARQ contravened its role by assessing a taxpayer for QST on a property transfer while continuing to collect QST as if the taxpayer was still owner
The ARQ assessed the appellant (9154-6093) for its failure to collect and remit QST on its transfer of a condo unit to the couple who were its shareholders for stated consideration. Alcindor JCQ accepted that the transfer was made to them for the purpose of obtaining mortgage financing on the unit and that they acquired the unit as nominees for 9154-6093 (so that no QST was payable), stating:
[D]espite the assignment, 9154-6093 rented Unit 54 to third parties, declared the income from such rentals, and collected the taxes and remitted them to Revenu Québec. …
Just before the sale of the Unit in October 2019 [the shareholders] retroceded the building to 9154-6093, which collected and remitted the GST and QST [on the sale] … to Revenu Québec.
She further stated that in light of this reporting of the 2019 sale:
[A]llowing Revenu Québec to recover QST on the 2009 transaction means that 9154-6093 is remitting QST twice on the same housing unit. … [T]his runs counter to both Revenu Québec's role and tax policy in this regard.
Neal Armstrong. Summary of 9154-6093 Québec Inc. v. Agence du revenu du Québec, 2023 QCCQ 10241 under General Concepts – Ownership.
GST/HST Severed Letters September 2023
This morning's release of four severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their September 2023 release) is now available for your viewing.
Serres Toundra – Court of Quebec finds that a greenhouse operation is farming, not manufacturing or processing
The Quebec manufacturing and processing credits claimed by Serres Toundra in connection with equipment acquired for use by it in its greenhouse cucumber-growing operation turned on whether such equipment was Class 29 property. A Quebec regulation (similar to the exclusion in (a) of the ITA definition in s. 125.1(3) of “manufacturing or processing”) excluded “farming” from “manufacturing or processing.” In finding that the greenhouse operation was farming, so that the exclusion applied, Vaillant JCQ stated:
Greenhouse cucumber growing at Serres Toundra requires the same elements as those needed for cultivation in home gardens or farmers' fields: soil, water, light, heat and fertilizers. …
[The] food-grade mineral fibre substrate [used] instead of soil … plays the same role as soil … .
Neal Armstrong. Summary of Serres Toundra Inc. v. Agence du revenu du Québec, 2023 QCCQ 10441 under s. 248(1) – farming.
We have translated 8 more CRA severed letters
We have translated 2 translations of a CRA interpretation and ruling issued last week and a 6 further CRA interpretations released during April of 2002. Their descriptors and links appear below.
These are additions to our set of 2,718 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 21 3/4 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 |
|---|---|---|---|
| 2024-01-31 | 2023 Ruling 2022-0955451R3 F - Post mortem pipeline | Income Tax Act - Section 84 - Subsection 84(2) | conventional post-mortem pipeline transaction |
| 22 June 2023 External T.I. 2018-0746741E5 F - Eligible dividend allocation | Income Tax Act - 101-110 - Section 104 - Subsection 104(19) | eligible and non-eligible dividend can be wholly designated to two respective beneficiaries | |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(13) | a discretionary trust can wholly allocate each of an eligible and a non-eligible dividend to each of two recipient beneficiaries | ||
| 2002-04-26 | 22 May 2002 Internal T.I. 2001-0106577 F - APPARIEMENT DES REVENUS ET DEPENSES | Income Tax Act - Section 9 - Timing | following Canderel, an upfront payment made under a multi-year supply contract is currently deductible |
| 14 May 2002 Internal T.I. 2001-0109517 F - SECTION DE LA LOI248(28) | Income Tax Act - Section 248 - Subsection 248(28) | disallowance of interest deduction to partnership on loans to corporate partners whose amount was included in their income under s. 15(2), was not contrary to s. 248(28) | |
| 8 May 2002 Internal T.I. 2002-0135737 F - REGIME DE CONGE A TRAITEMENT DIFFERE | Income Tax Regulations - Regulation 6801 - Paragraph 6801(a) - Subparagraph 6801(a)(vi) | s. 6(11) income recognition when apparent that the leave would not commence within 6 years/ Reg. 6801(a)(vi) does not to extend 6-year period but deals with leaves over one year | |
| 2002-04-12 | 3 May 2002 External T.I. 2001-0110145 F - avantage imposable-vetements | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | reimbursing a professor for a briefcase needed in connection with work would be non-taxable |
| 3 May 2002 External T.I. 2002-0132615 F - PERTE DECOULANT D'UN PAIEMENT A UN RPDB | Income Tax Act - Section 147 - Subsection 147(8) | creation of a business loss from making a DPSP contribution is not necessarily inconsistent with the DPSP rules | |
| 1 May 2002 External T.I. 2002-0133145 F - RAP - BAIL & ACTIONS | Income Tax Act - Section 146.01 - Subsection 146.01(1) - Qualifying Home | unit consisting of a leasehold interest and shares of the corporation owing the property could qualify as qualifying home |
CRA concludes engaging the “one of the main purposes” test in Art. 10(8) of the Canada-UK Treaty for accessing reduced withholding resulted in a 25% withholding rate
Art. 10(8) of the Canada-U.K. Convention provides:
The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.
The day before a dividend was paid to it by a Canadian-resident corporation, a UK corporation undertook transactions to ensure that it owned shares giving it control of 10% of the total votes of the Canadian corporation, and claimed the reduced rate of 5% pursuant to Art. 10(2) of the Treaty.
After reviewing the history of Art. 10(8) (in particular, the expansion of the purpose test in 2003) and the OECD Commentaries, the Directorate concluded that “the intention of both Canada and the UK [was] that paragraph 8 of Article 10 of the Treaty not be limited to situations where the degree of connection of the ultimate dividend recipient with Canada is questioned,” i.e., it was not limited to situations of treaty-shopping.
The Directorate also concluded that application of Art. 10(8) would result in the UK corporation being subject to a withholding rate of 25% (on the basis of denying any benefits under Art. 10), rather than the rate being 15% on the basis of only the benefit of Art. 10(8)(a) being denied.
Neal Armstrong. Summary of 16 June 2020 Internal T.I. 2019-0792651I7 under Treaties – Income Tax Conventions – Art. 10.
CRA rules on post-mortem pipeline
CRA ruled on a conventional post-mortem pipeline: following preliminary transactions to generate a capital loss for carryback to the terminal year pursuant to s. 164(6), the estate sold its shares of “Investco” (described as carrying on a “business” of investing in GICs and other portfolio investments) to a Newco for consideration consisting mostly of a note, with Newco amalgamating with Investco after at least one year, and the note repaid on a quarterly basis thereafter.
Neal Armstrong. Summary of 2022-0955451R3 F under s. 84(2).
CRA rules on the application of the FAT and underlying foreign tax rules to the investment of a CFA in a US private REIT (holding LLC rental properties) through tiered US partnerships
Canco wholly-owns a US corporation (FA1), which (with third parties) holds the units of a US limited partnership (USLP1), whose only significant asset is its holding of all of the USLP2 units. USLP2 holds all the common shares of a US private REIT (FA2) which holds rental properties through subsidiary LLCs (which are disregarded for US purposes unless owned jointly with a third party) or LPs. FA2 generates FAPI for Canadian purposes.
FA1 will include in its US taxable income its share of the US taxable income of USLP1, which will include the distributions received by it from FA2. In addition to actual distributions, FA2 might declare a consent dividend, i.e., a dividend that is not actually paid but is deemed under US tax law to be distributed and then contributed back to FA2 (as additional paid-in capital).
The proportionate economic interest of FA1 directly or indirectly in USLP2 is expected to decline over time due to arm’s length investors subscribing for USLP1 or USLP2 units, so that FA2 and the underlying LLCs will eventually cease to be foreign affiliates of Canco.
CRA ruled:
- US income tax paid by FA1 on FA1’s share of the distributions paid by FA2 and on any consent dividends will be “foreign accrual tax” (as defined in s. 95(1)) applicable to amounts that are included in Canco’s income under s. 91(1) in respect of the FA1 shares, to the extent that those distributions (and any consent dividends) can reasonably be regarded as distributions of amounts that are included, directly or indirectly, in computing income of USLP2 under s. 91(1).
- Provided that, at any time in a particular taxation year, the total equity percentage in FA2 of Canco, and of persons related to Canco taking into account the rules in s. 93.1(1) is at least 10%, such US income taxes paid by FA1 will not be underlying foreign tax of FA1 in respect of Canco by reason of the application of Reg. 5907(1.03).
- Conversely, if this 10% test is not met, such US income tax will be underlying foreign tax of FA1 in respect of Canco to the extent that FA1’s share of the FA2 distributions (and of any consent dividends) can reasonably be regarded as distributions of amounts that are included, directly or indirectly, in computing income of USLP2 under s. 91(1).
Neal Armstrong. Summary of 2022 Ruling 2020-0859851R3 under s. 95(1) – foreign accrual tax.
CRA finds that a discretionary trust can wholly allocate each of an eligible and a non-eligible dividend to each of two recipient beneficiaries
A discretionary trust received an eligible dividend in a year and immediately allocated and distributed it to a beneficiary; and later in the same year, received an ordinary (non-eligible) dividend which it immediately allocated and distributed to a second beneficiary, also in accordance with the discretions accorded by the trust deed. CRA found that the two respective dividends could be designated under s. 104(19) exclusively to the respective beneficiaries rather than being required to be designated on a pro rata basis.
Neal Armstrong. Summary of 22 June 2023 External T.I. 2018-0746741E5 F under s. 104(19).