News of Note
CRA indicates that the Treaty does not fetter the right of the US to impose GILTI tax with reference to Canadian subs’ income
The new rules on tax on “global low-taxed intangible income” or “GILTI” in s. 951A of the Code may result in a U.S. corporation being subject to tax on a current basis on active business income earned by a controlled Canadian subsidiary, even if that subsidiary does not have a permanent establishment in the U.S. CRA does not consider that this is contrary to Art. 29 of the Canada-U.S. Treaty, which confirms the rights of the US to impose tax on its own residents, subject to limited exceptions which are inapplicable here.
CRA finds that a headlease structure for a student residence avoided triggering the GST/HST self-supply rule
Shortly before the occupancy of a newly constructed apartment complex (expected to be predominantly occupied by students), LP#1 purchases the building from the developer. As this taxable sale occurs before any unit is occupied, and LP#1 acquired the building for the purpose of leasing it to another partnership (LP#2) rather than an individual, LP#1 will qualify as a builder for GST/HST purposes. That “headlease” will not be exempt because more that 10% of the units will be occupied for short-term stays (under one month) during the regular academic year, and with over 90% short-term occupancy in the summer months.
On the other hand, the “self supply” rule (usually triggering GST/HST on the first occupancy of a newly-constructed apartment complex on the complex’s fair market value) will not apply to LP#1 and, indeed, it likely will obtain full input tax credits for the GST/HST paid by it on its purchase of the building from LP#1. This GST/HST on the FMV is effectively deferred until LP#1 sells the building, perhaps decades down the road.
The central paymaster rules in Reg. 402.1 of the Regulations allocate the salaries and wages paid by an employer for services provided to a non-arm’s-length benefiting corporation. Given that Reg. 402.1(5) deems a partnership to be a corporation for the purposes of these rules, the paymaster rules will apply such that the salary or wages earned by an employee of a partnership for the performance of services in a particular province for a benefiting corporation are deemed to be salary or wages paid by non-arm’s length benefiting corporation to an employee of its permanent establishment(s) (if it has them) in the province.
Given that Reg. 402.1(3) provides that the salaries and wages paid by a partnership that are thus deemed to be paid by the benefiting corporation, are deducted from the partnership employer’s salaries and wages paid in the taxation year, such salaries and wages are not included in the salaries and wages that are allocated under Reg. 402(6) to the members of the partnership for their own allocation purposes .
Neal Armstrong. Summary of 2 February 2018 Internal T.I. 2017-0728331I7 under Reg. 402.1(5).
Filion – Court of Quebec finds that a director is not liable for unremitted source deductions if he had no reason to suspect financial difficulty
The taxpayer, who was a titular director (but not the sole director) and a shareholder, was duped by those managing the company into believing it was in good financial shape. Accordingly, he established a due diligence defence under the Quebec equivalent of S. 227.1(3). After discussion the federal and Quebec jurisprudence, Massol JCQ concluded:
[T]he liability of a director is not engaged until the time that the corporation commences, to the knowledge of the director, a period of financial difficulty such that the corporation cannot meet its obligations or, worse, begins to favour some creditors to the detriment of the fisc.
Neal Armstrong. Summary of Filion v. Agence du revenu du Québec, 2018 QCCQ 2759 under s. 227.1(3).
Pay Audio – Federal Court considers that the denial of remission of tax overpaid due to an honest mistake was not unreasonable
An agent of a partnership (Pay Audio) incorrectly told an ARQ auditor that the place of supply for digital music services supplied by Pay Audio to Telus was in Ontario rather than Alberta, and the ARQ assessed Pay Audio accordingly for uncollected Ontario HST. Pay Audio did not realize that, in fact, the place of such supplies (based on the relevant Telus servers being in Alberta) was in Alberta until about a year later when it had unsuccessfully sought to recover such tax from Telus, at which point the time had expired for objecting from the assessments or applying for refunds under ETA s. 261.
In confirming that the decision of the Remission Committee to deny Pay Audio’s application for a remission of the tax was within the range of what was reasonable, Lafrenière J stated:
"Equity aids the vigilant, not those who sleep on their rights" and the lack of attention and undue delay by Pay Audio in rectifying the error undermines its arguments for equitable relief.
Since Pay Audio had no identified reason for doubting the accuracy of the relevant employee’s misinformation about the location of the Telus servers, the quoted lack of diligence might be referencing the slow response from Telus (although it is hard to find fault here too, given that Pay Audio fully expected Telus to pay).
Neal Armstrong. Summary of Pay Audio Services Limited Partnership v. The Queen, 2018 FC 494 under Financial Administration Act, s. 23(2).
CRA rules on exiting a post-acquisition sandwich structure through using the s. 88(1)(d) bump and a continuance outside Canada
A non-resident partnership and its non-resident co-investors wished to acquire a Canadian public-company target (Target), whose only significant assets were non-resident subsidiaries (Subcos 1 and 2), and then eliminate this sandwich structure through the distribution of the Subcos to them.
Accordingly, they capitalized a Canadian Buyco (Parent), which acquired the shares of Target under a Plan of Arrangement for cash (or, interestingly, in the case of the only shareholder of Target who was a specified shareholder, for a combination of cash and shares of Parent). Parent then amalgamated with Target and the Subco shares were bumped under s. 88(1)(d) – but with the bump amount being reduced by any Subco surpluses described in Reg. 5905(5.4).
So far, this is essentially following the script for a buy, bump and run transaction. However, distributing the bumped Subco shares out of Amalco to the non-residents would have attracted a FIRPTA-style tax in the local tax jurisdictions for the Subcos. This local tax was avoided by continuing Amalco to a jurisdiction of convenience for the non-residents (perhaps, Delaware). The bump minimized the s. 128.1(4) tax on emigration. CRA ruled that the Parent/Amalco paid-up capital, which had been ground under s. 212.3(7)(c), was reinstated under s. 219.1(4) for purposes of computing the s. 219.1 emigration tax.
A further wrinkle in response to the local tax regime was that the amalgamation of Parent and Target was not a conventional amalgamation but one which was specified under the Plan of Arrangement to entail the continued existence of Target. The s. 88(1)(d) bump ruling effectively treated this as a good s. 87(11) amalgamation.
The table below provides descriptors and links for the Technical Interpretation released last week, a further Technical Interpretation also provided by us last week (which has not yet been released under the severed letter program, hence the absence of a bundle date) and four Technical Interpretations released in October 2013, all as fully translated by us.
The above translated interpretations (and the other full-text translations covering the last 4 1/2 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA confirms that a subsequently admitted partner benefits from a s. 34 WIP election made for a professional partnership’s 2017 year
Although the benefit of the election under s. 34 to exclude professional work-in-progress from income is being phased out over a five-year period, that election (in the case of calendar-year practices) cannot be made after 2017. CRA confirmed that since the election is made at the partnership level, where an election was made for the 2017 year of a professional partnership by an authorized partner in accordance with s. 96(3), a partner who is subsequently admitted to the partnership (in the posited example, a personal corporation to which an individual’s partnership interest was assigned) will benefit from the election as to its share of the partnership income.
Neal Armstrong. Summary of 26 March 2018 External T.I. 2017-0734381E5 F under s. 34.
CRA finds that making the ETA nil consideration election can have punitive results respecting GST/HST on related employee benefits
Although ETA s. 173(1) often imputes a taxable supply by an employer based on the amount of taxable benefits conferred by it under ITA s. 6(1)(a), s. 173(1)(d)(i) provides that this rule does not apply where the employer was denied an input tax credit under s. 170 on its acquisition of the property or service that, in turn, was provided to the employee. S. 170(1)(b) generally denies the ITC where such property was acquired for the exclusive personal consumption of an employee so as to engage s. 6(1)(a).
CRA found that this s. 173(1)(d)(i) exclusion did not apply where the property in question (an automobile) was acquired by a closely-related corporation and then leased to the employer with the benefit of the s. 156 nil-consideration election, with the automobile being provided for the exclusive personal benefit of an employee. CRA reasoned that as there was no GST/HST payable by the employer on its lease payments, it should not be said that it was being denied ITCs under the s. 170 rule. CRA implicitly accepted that the automobile was being acquired by the employer exclusively for commercial use notwithstanding the personal use of the automobile by its employee.
The above result appears to be anomalous. If the s. 156 election had not been made, the employer would have claimed ITCs on the lease payments made by it to its affiliate, so that the net additional amount required to be remitted by it under s. 173 might be small or minimal. As a result of making the election, it must still compute the same imputed GST/HST s. 173 benefit amount, but without getting a somewhat offsetting ITC.
Neal Armstrong. Summary of 21 December 2017 Interpretation 164739 under ETA s. 173(1)(d)(i).