News of Note

CRA indicates that eligible dividend designations can be made before the dividend payment time and by email

S. 89(14) in its entirety provides:

A corporation designates a portion of a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom the dividend is paid that the portion of the dividend is an eligible dividend.

In this regard, CRA has now stated:

[T]he sending of an e-mail, with an acknowledgment of receipt, would meet the criteria for the designation of a dividend as an eligible dividend pursuant to subsection 89(14).

As to when the written notice must be sent and dated, the CRA accepts that notification in writing should be given to shareholders between the time the dividend is declared and the date the dividend is paid.

Neal Armstrong. Summary of 18 December 2017 External T.I. 2017-0720731E5 F under s. 89(14).

North Shore – Federal Court of Appeal finds that previously-collected HST is not “credited” by the supplier to the purchaser under ETA s. 232 unless the sum is put at the purchaser's disposal

A supplier (Menova) received substantial down payments respecting its sale of solar array projects, and then became insolvent before earning more than a fraction of the down payments. Menova then issued credit memos to the business customer (North Shore) for the value of the unperformed work, and was petitioned into bankruptcy before refunding any amount shown on the credit memos. CRA considered that because the applicable portion of the previously-charged and collected HST thus had been credited through the adjustment shown on the credit memos, such HST was required to be added back to North Shore’s current HST return under ETA s. 232, thus effectively reversing the input tax credit previously claimed by North Shore.

Woods JA stated:

[T]he term “credit” in section 232 [means]: an operation by which a sum is put at the disposal of someone else. I do not suggest that money must actually be set aside, but it is not sufficient if there is no sum at the disposal of the purchaser.

[As] Menova did not put funds at the disposal of North Shore when it issued the credit memos … section 232 does not apply to the transactions at issue as HST was not credited to North Shore.

Neal Armstrong. Summary of North Shore Power Group Inc. v. Canada, 2018 FCA 9 under ETA s. 232(2) and 231(1).

CRA finds that a trust is related for purposes of Art. XXIX-A (3) of the Canada-U.S. Treaty to a corporation that is controlled by its corporate trustee

Under Art. XXIX-A (3) of the Canada-U.S. Treaty, a non-qualifying person that is resident in the U.S. may benefit from the provisions of the Treaty to the extent that, amongst other conditions, it or “a person related thereto,” is engaged in the active conduct of a trade or business in the U.S. CRA found that in the situation where a U.S. parent was the trustee of a U.S. trust whose beneficiary was a U.S. Opco that was engaged in a U.S. business, that U.S. Opco qualified as a related person for these purposes. CRA reasoned that, under Art. III(2) of the Treaty, the Canadian domestic rules on a related person governed this test of relatedness under Art. XXIX-A (3), and that under those rules and having regard to the deeming by s. 104(2) of a reference to a trust as being a reference to the trustee, the Trust controlled US Opco by virtue of its trustee (US parent) controlling US Opco – so that the Trust and US Opco were related.

This meant that the Trust potentially could access Treaty benefits in relation to its income derived directly or indirectly from Canada in connection with or incidental to US Opco’s (substantial) business. The particular income in question was interest on a loan that the Trust made to a Canadian-group company, but CRA did not comment on this aspect of the Art. XXIX-A (3) tests.

Neal Armstrong. Summary of 8 September 2017 External T.I. 2014-0549771E5 under Treaties – Articles – Art. 29A.

Income Tax Severed Letters 17 January 2018

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

6305521 Canada – Court of Quebec finds that an incorporated repairman reporting to a foreman was not carrying on a personal services business

An individual was the sole shareholder and employee of a corporation. His corporation did work for various employment agencies (7 over the course of 9 years) which, in turn, provided his services and of others in repairing aircraft under the supervision of an agency foreman. Lareau JCQ found that the corporation was not carrying on a personal services business (under the Quebec version of those rules).

The fact that the work to be performed was precisely described and performed in a secured environment reflected the highly technical character of the required tasks rather than indicating that he was under the superintendence and control of the agencies so as to be the equivalent of an incorporated employee. In addition, he was required to provide his own tools, his corporation offered his services to various agencies at a time, he could work for more than one agency during a period, and his hours were variable depending on the exigencies of the work.

Neal Armstrong. Summary of 6305521 Canada Inc. v. ARQ, 2017 QCCQ 14869 under s. 125(7) – personal services business.

SAE – Court of Appeal of England and Wales broadly defines “college”

The ETA definition of a “university” includes a “college affiliated with” a qualifying university. Patten LJ defined the word “college” broadly as “a group of people organised as an institution usually (but not necessarily) in the field of education,” before going on to find that a corporation providing training in audio and digital media technologies and whose students in courses validated by Middlesex University were considered by MU to be members of MU nonetheless did not qualify as a college “of” MU, as required by the UK VAT legislation.

Neal Armstrong. Summary of SAE Education Ltd v. Revenue and Customs Commissioners, [2017] EWCA Civ 1116 under ETA s. 123(1) – university.

ING –Court of Appeal of England and Wales finds that the provision of non-peripheral services by a bank to its depositors transformed it into a financial supplier

Under the European VAT jurisprudence, a mere borrowing or share issuance by a company is not considered to be a supply by it, so that VAT on inputs relating to the borrowing or issuance are not denied on that ground as being in relation to the supply of a financial serviced (see BLP and Kretztechnik).

An ING company unsuccessfully argued that its activity of taking deposits from its customers should benefit from this jurisprudence. Arden LJ accepted the finding below that the services provided by ING to its depositors (including 24-hour access to their deposits through internet banking) were more than merely “peripheral” to the borrowing represented by the deposits. As it was engaged in an exempt banking business, its related inputs did not generate VAT deductions.

Although the BLP proposition, that a borrowing does not constitute a supply by the borrower to the lender, might seem obvious, this proposition does not appear to be accepted by CRA. The confusion stems in part from the inclusion in the financial services definition (which likely only becomes relevant once there is first a determination that there is a supply) of “borrowing” and the “issue … of a financial instrument.” (The VAT provisions are broadly similar. See also ETA s. 185(1).) The ING case may illustrate that, even if the narrow view of supply under the VAT jurisprudence were accepted in Canada, there are circumstances where a borrower nonetheless can be making a supply of a financial services to the lender if it provides related non-“peripheral” services that are in the financial services world.

Neal Armstrong. Summaries of ING Intermediate Holdings Ltd v HMRC, [2017] EWCA Civ 2111 under ETA s. 123(1) – supply, s. 153(1) and General Concepts – Substance.

Six further full-text translations of CRA technical interpretations are available

The table below provides descriptors and links for the French technical interpretation released last week and five technical interpretations released in January and February of 2014, as fully translated by us.

These (and the other full-text translations covering the last 47 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2018-01-10 6 December 2017 External T.I. 2016-0667361E5 F - Taxable Capital Gains Designation Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Annual Gains Limit annual gains limit of upper-tier trust does not include QSBC gains distributed and designated by lower-tier trust
Income Tax Act - 101-110 - Section 104 - Subsection 104(21.2) eligibility of a gain for the capital gains deduction is lost when it is distributed by a lower-tier to upper-tier trust
2014-02-05 23 January 2014 External T.I. 2013-0500711E5 F - Paragraph 75(2) Income Tax Act - Section 75 - Subsection 75(2) s. 75(2) does not apply by virtue of the executor also being a beneficiary of inter vivos trust legatees
20 January 2014 External T.I. 2013-0503871E5 F - Vente d'une érablière Income Tax Act - Section 248 - Subsection 248(1) - Property maple syrup production quota is property if it is property under civil law
25 October 2013 External T.I. 2013-0484321E5 F - Donation entre vifs / inter vivos gift Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) meaning of "gift" inter vivos determined by private law
25 October 2013 External T.I. 2013-0491141E5 F - Sens d'« agriculture » - Meaning of « farming » Income Tax Act - Section 248 - Subsection 248(1) - Farming assistance of consultant not included in farming
2014-01-29 14 January 2014 External T.I. 2012-0453871E5 F - Pension Real Estate Corporation Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(o.2) - Subparagraph 149(1)(o.2)(ii) ancillary non-real estate investments by an (o.2)(ii) corporation are permitted

CRA indicates that the eligibility of a gain for the capital gains deduction is lost when it is distributed by a lower-tier to upper-tier trust

S. 104(21), which indicates that, in specified circumstances, taxable income distributed by a trust can be designated as being a taxable capital gain of the recipient beneficiary from a disposition, states that it does not apply for purposes of s. 110.6.

CRA considers that this means that where Trust 1 has realized a capital gain from the disposition of qualified small business corporation shares, and distributes that capital gain to a second beneficiary trust (Trust 2), and makes a s. 104(21) designation, the resulting deemed capital gain of Trust 2 is not also deemed to be a capital gain from the disposition of QSBC for capital gains exemption purposes. This, in turn, means that Trust 2 cannot make a s. 104(21.2) designation respecting that capital gain where it is distributed by it, in turn, to its individual beneficiaries, so that they cannot benefit from the capital gains deduction.

Neal Armstrong. Summary of 6 December 2017 External T.I. 2016-0667361E5 F under s. 104(21.2).

CRA clarifies the operation of the transitional rule for the narrowing of the principal residence exemption for trusts

An estate that qualified as a graduated rate estate with a fiscal period of July 1, 2016 to June 30, 2017, sold the principal residence of the deceased in the first half of 2017. The adult son lived in the home during 2017 before the sale and was a specified beneficiary of the estate as described in the principal residence definition.

CRA confirmed that under the s. 40(6.1) transitional rule, any portion of the gain that accrued after December 31, 2016 would not be eligible for sheltering by the principal residence exemption and would be taxable.

Neal Armstrong. Summary of 16 June 2017 External T.I. 2017-0698181E5 under s. 40(6.1).