News of Note

Al-Rubaiy – Tax Court of Canada finds that the common law rule of discoverability does not apply to GST/HST rebate claim deadlines

The taxpayer was charged HST on his purchase of a dental practice and, after changing accountants, applied for a rebate of the HST (presumably on the basis that the purchase was exempt under inter alia ETA ss. 141.1(1)(b), 200(3) and 167.1).) Although his rebate application was made well after the two-year limitation in s. 261(3), he unsuccessfully argued that under the common law principle of discoverability, the two-year period did not start running until he discovered his overpayment on his change in accountants. Wong J added, obiter:

No evidence was introduced to show that the joint election was made with respect to subsection 167(1) for the tax-free supply of the Vendor’s business assets. Therefore, since no election appears to have been made, this transaction was subject to GST/HST and the tax in issue was likely not paid in error.

Neal Armstrong. Summary of Al-Rubaiy v. The Queen, 2020 TCC 34 under ETA s. 261(3).

Dilalla – Federal Court of Appeal articulates the purpose of the fresh start rule

Rennie JA confirmed the decision below that the “fresh start” rule (Rule 8) precluded the taxpayer from bringing a motion to strike the Crown’s Reply more than two years after all pre-trial proceedings had been completed, stating:

The fresh step rule is designed to ensure the orderly movement of litigation through to trial. The rule is based on the view that if a party pleads over to a pleading, it implies a waiver of any irregularity that might have been attacked. Here, the judge’s discretion was exercised consistent with the objective of this rule … .

Neal Armstrong. Summary of Dilalla v. Canada, 2020 FCA 39 under Rule 8.

Our translations of CRA interpretations go back 9 years

We have published a further 5 translations of CRA interpretations released in February, 2011. Their descriptors and links appear below.

These are additions to our set of 1,094 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for March.

Bundle Date Translated severed letter Summaries under Summary descriptor
2011-02-25 8 October 2010 Roundtable, 2010-0373161C6 F - Paragraphs 256(3) and 256(6) ITA Income Tax Act - Section 256 - Subsection 256(6) application could prevent acquisition of control or preclude loss of CCPC status
8 October 2010 Roundtable, 2010-0373191C6 F - Computation of safe income Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) where interest in partnership holding Subco with safe income is rolled into Holdco for prefs, dividends from Subco do not change consolidated SIOH of prefs – or increase commons’ SIOH
2011-02-18 8 October 2010 Roundtable, 2010-0373131C6 F - Présomption d'action concertée Income Tax Act - Section 251.2 - Subsection 251.2(2) - Paragraph 251.2(2)(a) Q of fact re whether 3 or more CCPC shareholders form a group
9 December 2010 Internal T.I. 2010-0371741I7 F - Automobiles mises à la disposition des employés Income Tax Act - Section 248 - Subsection 248(1) - Automobile qualification as automobiles turns on design, not use
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(e) employer-provided automobile to attend occasional off-site meetings did not generate a benefit
24 January 2011 Internal T.I. 2010-0389251I7 F - Farm-out agreement and warrants Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (j) CEE to be incurred under simple farmout reduced by an allocation to warrants issued by farmee
Income Tax Act - Section 15 - Subsection 15(1) valuation of “free” warrants issued as part of a simple farmout agreement determined based on what would be a s. 15(1) benefit
General Concepts - Fair Market Value - Options amount allocated out of consideration to “free” warrants based on the greater of their trading and in-the-money value
Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (f) application of farmout policy to situation where free warrants issued along with incurring of CEE

Burlington Resources – Crown abandons its position that s. 247(2)(c) applied to reduce guarantee fees paid by a ULC to its non-resident parent

Burlington, a Nova Scotia ULC, borrowed approximately U.S.$3 billion in 2001 and 2002 by issuing notes that were guaranteed by its non-resident parent (“BRI”). The Minister reassessed Burlington’s 2002 to 2005 taxation years to deny, under ss. 247(2)(a) and (c), deductions for the “guarantee fees” paid by Burlington to BRI. The October 2012 Reply to Burlington’s Notice of Appeal relied on s. 247, and also asserted that the fees were not incurred for the purpose of earning or producing income under s. 20(1)(e.1) (they were “redundant” due to Burlington’s status as a ULC).

D’Auray J has now granted a Crown motion to file an amended Reply in which it has abandoned its position that the transfer pricing rules in s. 247 applied to the quantum of the fees, and takes the position that the deductions instead should be denied on the grounds that they were not “guarantee fees” within the meaning of s. 20(1)(e.1) and, in the alternative, they were not incurred by Burlington for the purpose of borrowing money, within the meaning of s. 20(1)(e.1).

Burlington argued that the Court should not grant leave for the making of the amendments since they constituted purported withdrawals of admissions that the fees had been paid as guarantee fees. D’Auray J found that, in the broader context, such admissions had not been made, and that even if they had been, they could now be withdrawn given inter alia that “there is a triable issue which ought to be tried in the interests of justice.”

The requested amendments were granted in light inter alia of the request having been made well in advance of the trial, and the position on s. 20(1)(e.1) having been made known on discoveries of the Crown in 2014.

Neal Armstrong. Summary of Burlington Resources Finance Company v. The Queen, 2020 TCC 32 under Rule 132.

After the PPT, Luxcos or other group Holdcos preferably should have significant substance

It is common for multinationals or international private equity funds to use a subsidiary holding company in a jurisdiction with a favourable Treaty network, such as Luxembourg, to hold many of the group subsidiaries or investments. However, the principal purpose test (PPT) in Art. 7 of the Multilateral Instrument (MLI) now makes this practice more fraught. Regarding the Examples in Art. 29 of the OECD Commentary, it is suggested that:

Examples G and H appear to be consistent with the existence of a potential safe harbour for multinational groups in consolidating certain activities in an entity not resident in the parent company's jurisdiction. There are a number of jurisdictions with well-developed management services and financing capabilities, from both a workforce and a service provider perspective, that make it practical for multinationals to set up substantial group services and financing operations in those locations. At the same time, many of those jurisdictions have extensive treaty networks. Examples G and H recognize that it is not necessarily the residence of the parent company within a group that establishes a baseline for treaty-shopping analysis.

Furthermore, Example K:

suggests that it is acceptable to use a holding company that is resident in a third jurisdiction to manage a group of regional investments, so long as that holding company has sufficient substance in the jurisdiction in which it is resident. … Arguably, the threshold in, for example, Prévost Car, and Alta Energy may be insufficient.

More generally:

[T]here will be less risk of challenge under the PPT if there are demonstrable reasons for having a presence in a particular jurisdiction (such as key decision makers located in the jurisdiction, commercial or other regulatory reasons, proximity to jurisdictions into which investments are made, etc.) … .

Neal Armstrong. Summary of Nelson Whitmore and Owen Strychun, “Canadian Inbound Investment After the MLI,” Canadian Tax Journal, (2019) 67:3, 831-80 under Treaties – MLI – Art. 7(1).

CRA indicates that the “primarily operated” test for GST/HST-exempt supplies of ESL or FSL instruction will be tested on an annual-revenues basis

ETA Sched. V, Pt. III, s. 11 exempts:

a supply of a service of instructing individuals in, or administering examinations in respect of, language courses that form part of a program of second-language instruction in either English or French, if the supply is made by a school authority, a vocational school, a public college or a university or in the course of a business established and operated primarily to provide instruction in languages.

In the case of the four listed types of schools, this exemption overlaps with s. 7, which may exempt for-credit courses that they offer.

In its new GST/HST Memorandum on s. 11, CRA states that the “program” exception generally requires that there be “a series of courses” and provides an example of this requirement being satisfied where a continuing education program of a public college provides course in four languages including French, and provides for three levels of French language instruction.

Respecting the requirement, for the final type of listed organization, that it make the supplies “in the course of a business established and operated primarily to provide instruction in languages,” CRA states that it:

will consider a business to be operated primarily to provide instruction in languages if more than 50% of its total annual revenues are derived from fees/tuition for, or can be attributed to instruction in, language courses

and conversely that:

if the portion of the business’s total annual revenues that is derived from language course fees/tuition or that can be attributed to instruction in these courses falls to 50% or less during the following fiscal year, the business would no longer be considered to be operated primarily to provide instruction in languages in the next fiscal year.

Neal Armstrong. Summaries of GST/HST Memorandum 20-7 “Second-language Instruction” December 2019 under ETA Sched. V, Pt. III, s. 11 and Equivalent Courses (GST/HST) Regulations, s. 2.

CRA publishes a new GST/HST Memorandum on private instruction and tutoring

ETA Sched. V, Pt. III, s. 9 exempts:

a supply of a service of tutoring or instructing an individual in

  1. a course that is approved for credit by, or that follows a curriculum designated by, a school authority;
  2. a course that is a prescribed equivalent of a course described in paragraph (a); or
  3. a course the successful completion of which is mandatory for admittance into a particular course described in paragraph (a) or (b) and not for admittance into any other course that is a prerequisite to the particular course”.

Most of the discussion in CRA’s new GST/HST Memorandum is on (a) above. CRA states:

The service of tutoring or instructing an individual need not be limited to material contained in a course approved for credit by, or that follows a curriculum designated by, a school authority [and] … could also include general concepts dealing with the relevant subject matter … in order to assist the individual in understanding the material contained in a course approved for credit by, or that follows a curriculum designated by, a school authority. … In order for the exemption to apply, it must be evident that there is some direct connection between the supply of the service of tutoring or instructing in question and the course approved for credit by, or the curriculum designated by, a school authority.

CRA then provided examples of general reading proficiency instruction qualifying, but general study skills course not qualifying. CRA also provided an example of a private corporation (“Corporation A”) providing a course that involved children working through a progression of non-customized math workbooks at their own pace as not qualifying given that there was little assistance from the instructor and there was “no evidence of a relationship between the supply being made by Corporation A and a course approved for credit by, or that follows a curriculum designated by, a school authority.”

Note that s. 9(a) only requires that the course be a credit course of the school authority and not that the course actually be taught by the school authority. CRA provided examples of a private driving school providing exempt driving courses to students for high school credit, and a similar example respecting a high school authorizing jazz dance classes at a private dance academy.

The prescribed equivalent in s. 9(b) is music lessons, which CRA defines somewhat as one would expect.

CRA illustrates the somewhat convoluted language of s. 9(c) by indicating that where there is a three-level ballet course, with only the third level recognized by a private school for a physical education credit, level 2 would qualify because it is a prerequisite to entering level 3, but level 1 would not qualify because it is merely a prerequisite to entering a prerequisite course (level 2).

Neal Armstrong. Summaries of GST/HST Memorandum 20-6 “Tutoring and Equivalent Services” December 2019 under ETA Sched. V, Pt. III, s. 9 and Equivalent Courses (GST/HST) Regulations, s. 2.

CRA, following Alexander College, now recognizes that a college granting provincially-recognized two-year degrees can qualify as a “university”

The ETA states that a "’university’ means a recognized degree-granting institution or an organization that operates a college affiliated with … such an institution." Alexander College found that a private for-profit B.C. college with a two-year arts program providing "associate degrees," which were recognized as degrees under the Degree Authorization Act (B.C.), qualified as a university under the bolded language above, so that its fees were GST-exempt.

CRA has acknowledged that it will follow Alexander College:

[A] “recognized degree-granting institution” will now include a college or similar organization that is authorized by a province under provincial legislation or a governmental body in a foreign entity’s home jurisdiction to grant a degree where degree is defined in the applicable legislation to include an academic achievement at the associate level or higher. Therefore … the CRA no longer requires the degree to be at the baccalaureate level or higher.

Neal Armstrong. Summary of Excise and GST/HST News - No. 107 February 2020 under ETA Sched. V, Pt. III, s. 7.

The GST/HST place of supply may be affected by revised Incoterms

The place of supply of goods for GST/HST purposes generally is the place of legal delivery, which is commonly specified by using an Incoterm. A revised set of Incoterms came into effect on January 1, 2020, including modifying the FCA, DAP, DPU, and DDP terms to reflect the reality that some buyers and sellers will often bypass third-party carriers in favour of transporting the goods using their own means of transport, and redefining DAT (Delivered at Terminal) as DPU (Delivered at Place Unloaded) to reflect the fact that delivery could be at any place rather than just at a terminal.

Neal Armstrong. Summary of Rob Kreklewetz & Stuart Clark, “Incoterms® 2020 Changes Incoming!” Millar Kreklewetz Tax & Trade Bog, 21 November 2019 under ETA s. 142(1)(a).

The PPT concept of “arrangement or transaction” may be restricted to the scope of a common-law series

Although not expressly stated in the language of the principal purpose test itself in the Multilateral Instrument, the expression “arrangement or transaction” probably implicitly includes the common law notion of “series of transactions”, which references sequenced transactions that are pre-ordained to produce a given result, with no practical likelihood that the pre-planned events would not take place in that order. This suggests, for example, that if the holding structure for a Canadian oil and gas company, such as in Alta Energy “is migrated to Luxembourg at a time when there is neither an agreement nor a specific genuine intention to sell the shares of the Canadian company, no series should exist for the purposes of the application of the PPT.”

As the PPT uses a “one of the principal purposes” test to determine the presence of an avoidance transaction, rather than the GAAR principal purpose test, it is broader than GAAR in this regard.

(As also discussed by Duff) on the face of the MLI, it appears that where it applies to deny a Treaty benefit, all of that benefit is denied rather than only the incremental benefit attributable to the tax avoidance.

Neal Armstrong. Summary of Michael Kandev and John Lennard, "The OECD Multilateral Instrument: A Canadian Perspective on the Principal Purpose Test", Bulletin for International Taxation, January 2020, p. 54 under Treaties - MLI – Art. 7(1).