News of Note
MELP – Tax Court of Canada finds that a Canadian agent’s services were not zero-rated since they were partly performed in Canada
Email this ContentMELP was found to be performing its services to Canadian patients who underwent bariatric surgery at the surgical unit in Mexico of a Mexican company (“LIMARP”) as agent for LIMARP given that their conduct implied an agency arrangement. Accordingly, MELP was not subject to GST/HST on the ½ portion of the patient fees that it collected as agent for LIMARP.
However, its own fees (collected by deduction from the fees collected by it from the patients before remittance to LIMARP) were not zero-rated under s. VI-V-5 given that that the services which MELP performed on behalf of LIMARP (including a wide range of various pre-operation and post-operation services) were in significant part performed in Canada. Thus, services performed by LIMARP through its agent were performed in part in Canada, so that their place of supply was deemed under s. 142(1)(g) to be in Canada, contrary to the requirements of s. VI-V-5(b) that the zero-rated agency services be in respect of supplies made outside Canada (and, for similar reasons, neither s. 142(2)(g) or 143 deemed their place of supply to be outside Canada.)
Neal Armstrong. Summaries of MELP Enterprises Ltd. v. The King, 2024 TCC 130 under ETA s. 306, s. VI-V-5(b), V-II-1 – “institutional health care service and s. 143(1).
CRA finds that a non-resident cruise ship stopping at Canadian ports was carrying on business in Canada
A non-resident cruise line company sells cruises (including cruises with stops at Canadian ports) to customers around the world, including sales in Canada through independent third-party Canadian sales agents, and does not have a presence in Canada otherwise than through its ships (e.g., its only employees in Canada are crew members). CRA found that the company was carrying on business in Canada. CRA provided an example of a ship with 3,000 customers accompanied by 1,275 employees, with such employees working a total of 10 days in Canada. It stated that, in this light, the activities carried on in Canada were significant and related to the company’s main business line. Furthermore, there was the extensive marketing in Canada.
Neal Armstrong. Summary of 10 August 2023 GST/HST Interpretation 183417 under ETA s. 240(1).
CRA indicates that if an agreement for the supply by a resident of IPP (e.g., copyright) has no stated restrictions on where the IPP may be used, the supply is wholly in Canada
A Canadian resident agrees with a non-resident (ACo) that, in consideration for royalty payments, the resident will upload books and designs created by him or her to the ACo platform, which ACo customers can then choose to receive in electronic form or print off or (in the case of the designs) have them printed on products acquired by them from ACo.
CRA found that the place of supply of all such supplies by the resident (being supplies of intangible personal property) was in Canada, indicating that, for purposes of ETA s. 142(1)(c) (generally indicating that a supply of IPP is made in Canada if it may be used in whole “or in part” in Canada), if there were no restrictions on where the IPP could be used in the written agreement (as was the case here), “the supply will be deemed to be made in Canada regardless of if it is actually used in Canada.”
However, CRA noted the potential availability of zero-rating under Sched. VI, Pt. V, s. 10 or 10.1.
Neal Armstrong. Summary of 3 November 2023 GST/HST Ruling 245549 under ETA s. 142(1)(c).
GST/HST Severed Letters 9 October 2024
Income Tax Severed Letters 9 October 2024
This morning's release of four severed letters from the income Tax Rulings Directorate is now available for your viewing.
CRA comments on directed gifts to a municipality
Regarding a situation where a municipality issued a press release in which it solicited donations that were redistributed to a specific fund for individuals following an unfortunate event, CRA stated:
[D]onations can be receipted by a municipality in Canada on behalf of a program or entity which operates under the authority of the municipality (e.g., a committee established by a municipal bylaw) provided the municipality retains discretion as to how the donated funds are to be spent. If a municipality is merely collecting funds from donors that will simply be redistributed to a person or organization that is not a qualified donee and the latter is legally or otherwise entitled to the property so transferred, the municipality is not in receipt of a gift and cannot issue a donation receipt.
Neal Armstrong. Summary of 2 April 2024 External T.I. 2024-1005231E5 under s. 118.1(1) – total charitable gifts.
CRA declines to provide guidance on a Pt. IV tax circularity issue
2022-0957491R3 F, discussed in yesterday’s post, contemplated initial distributions by an estate and trust, followed by a split-up butterfly reorganization. The Rulings Directorate granted an extension for the implementation of the proposed transactions given that clearance certificates had not yet been received from CRA and the ARQ respecting the various distributions.
As ruled on, after the redemption of preferred shares issued by the two transferee corporations (TCs), and before the winding-up of the distributing corporation (DC) into the TCs, the TCs would establish their first taxation year ends, thereby avoiding circularity issues under s. 186(1)(b). Due to the implementation delay, this was no longer possible.
The Directorate noted this circularity issue, but declined to provide any guidance on it.
Neal Armstrong. Summary of 2023 Ruling 2023-0998411R3 F under s. 186(1)(b).
We have translated 6 more CRA interpretations
We have translated a ruling letter and supplemental ruling letter released last week and a further 6 CRA interpretations released in July of 2001. Their descriptors and links appear below.
These are additions to our set of 2,966 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 23 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA rules on a butterfly split-up that is integrated with a prior pipeline transaction
Following the death of the Parent, the estate of Parent, whose two beneficiaries were testamentary trusts for the two children of Parent, implemented a pipeline transaction respecting the preferred shares of an investments holding company (Holdco) that had been held by Parent. As a result of that pipeline transaction, the estate ended up holding both preferred shares and a note of the corporation (the distributing corporation or DC) resulting from the amalgamation of the Newco used in connection with the pipeline transaction and Holdco. A portion of that note was then repaid and distributed by the estate to the two testamentary trusts, from them in equal shares to the two children, and by each child to their respective new wholly-owned holding companies (TC1 and TC2). The common shares of DC, which were held in an inter vivos trust (the Trust) principally for the two children, were unaffected by the pipeline transaction.
Preliminarily to a proposed butterfly split-up of DC between TC1 and TC2, the note owing to the estate, and the DC preferred shares, would be distributed on a 50-50 basis under s. 107(2) to the two testamentary trusts, from them on a s. 107(2) rollover basis to the two respective children, and by each of them to her or his TC on a s. 85(1) rollover basis – and similarly, the DC common shares would be distributed on a s. 107(2) rollover basis by the Trust to the two children, and by them on a s. 85(1) rollover basis to their respective TCs. These transactions were to be followed by the butterfly split-up of DC between the two TCs, which would include the assumption by each TC of half of the note owing by DC, so that such pipeline note would be extinguished by operation of law (implied set-off). In order to avoid circularity issues, the preferred shares of the TCs would be redeemed before their first taxation year ends, and DC would be wound up into the TCs under s. 88(2) after those year ends.
Neal Armstrong. Summary of 2023 Ruling 2022-0957491R3 F under s. 55(1) – distribution.
RBC – Tax Court of Canada finds that foreign interchange fees earned by RBC were zero-rated – entitling it to ITCs on a portion of its interchange expenses, but not on loyalty point costs
When cardholders of RBC credit cards used their cards for purchases from a foreign merchant, RBC would earn an “interchange fee” from the foreign bank of the foreign merchant for accepting the charge. Upon such acceptance, the cardholder discharged their purchase obligation to the merchant, RBC advanced the amount charged (less its interchange fee) to the foreign bank for crediting to the merchant’s account, and RBC would then request payment of the balance from the cardholder at the end of the applicable billing cycle.
Smith J rejected the Crown position that such interchange financial services supplied by RBC to the non-resident merchant acquirer to be the recipient) were not zero-rated under Sched. VI, Pt. IX, s. 1 by virtue of the exclusion in para. 1(a) thereof for a “service [that] relates to (a) a debt that arises from … (ii) the lending of money that is primarily for use in Canada”. He noted that, in contrast to para. (g) of the financial service definition, which referred to “the making of any advance, the granting of any credit or the lending of money”, the carve-out in subpara. 1(a)(ii) referred only to the “lending of money”. He found that, on a proper legal analysis, RBC was not lending money to the foreign bank but, rather, advancing credit: there was a three-party arrangement under which the cardholder became indebted to RBC and RBC became liable to the foreign merchant (but not pursuant to a loan of money). According, RBC was entitled input tax credits (ITCs) based on the proportion of its expenses incurred in providing interchange services that it apportioned to its zero-rated interchange fees.
However, RBC unsuccessfully submitted that it offered loyalty reward points to its cardholders to entice them to use their cards and increase the volume of interchange fee revenues, so that the costs to it of honouring loyalty points when redeemed were a direct input to generating the interchange fee revenues , including the zero-rated charges, In rejecting this position, so that RBC had no ITCs for its GST/HST incurred in honouring points redemptions, Smith J stated:
[E]xpenses incurred by RBC in the redemption of loyalty reward points were inextricably linked and an integral component of the Appellant’s agreement to extend credit pursuant to the Cardholder Agreement.
It followed from this finding of the loyalty points being related to an exempt supply of credit that RBC could also not rely on the “free supply” rule in s. 141.01(4).
Neal Armstrong. Summaries of Royal Bank of Canada v. The King, 2024 TCC 125 under ETA s. 301(1.2)(a), s. 141.02(21), s. 141.02(31)(f), s. 141.02(1) – direct input, s. 123(1) – recipient, Sched. VI, Pt. IX, s. 1(a), and Statutory Interpretation - Exclusionary provisions.
Neal H. Armstrong editor and contributor