Would the owner of a qualifying property that operates a hotel, or other similar business such as a motel or a bed and breakfast, be considered to use the property primarily to earn rental income as described in para. (b) of the definition of “qualifying rent expense” in s. 125.7(1), such that it would be prevented from claiming the Canada emergency rent subsidy (“CERS”)? CRA stated:

Generally, any income earned from the use or occupation of a property or a right to use or occupy property is considered to be rental income. However, where, in addition to basic services that are customarily supplied with rental of real or immovable property, an entity also provides significant additional services that are integral to the success of its ordinary activities, it is the CRA’s longstanding position that the entity would be earning income from the services provided instead of earning rental income from the use or occupation of the property.

CRA went on to indicate that the application of these tests was a question of fact, and did not repeat its vintage statement in IT-73R6 that a “corporation that operates a hotel is generally considered to be in the business of providing services and not in the business of renting real property.” Nonetheless, it appears that CRA would continue to view a full-service hotel as not generating rental income.

Neal Armstrong. Summary of 16 July 2021 Internal T.I. 2020-0872521I7 under s. 125.7(1) - “qualifying rent expense” – para. (b).

The quite detailed rules in ETA s. 141.02 for calculating input tax credits (ITCs) of financial institutions (FIs) are under the pall of the requirement to use a “specified method”, namely, a method acceptable to CRA. CRA has published a new memorandum on this topic, and cancelled Bulletin B-106 (which had a number of vacuous or trite examples). Some of the CRA comments include:

• An FI generally has very few non-attributable inputs. An example of a direct input (i.e., contributing to making both taxable and exempt supplies) is services received by an FI for the maintenance of a website providing information about its involvement in the community activities (e.g., sponsorship of children’s sports teams), as well as information about the various services it provides. Such acquired services can “be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).” (This appears to imply acceptance that such indirect promotional activity is for the purpose of making the taxable and exempt supplies of the FI, i.e., ETA s. 141.01(2) may be no more restrictive that ITA s. 18(1)(a).)
• Office space, heating costs, electricity, equipment repair and office supplies of an FI making both exempt and taxable supplies were also given as examples of direct inputs.
• Furthermore, CRA considers that a substantial portion of an FI’s direct inputs can be allocated through (direct) tracking of the use of the inputs or through “causal allocation” (generally using an allocation base such as square footage or number of employees) so that “as a result, few, if any, direct inputs will be allocated using either an input-based allocation [based on the relative use of other business inputs] or an output-based allocation [e.g., using relative taxable and exempt revenues].”
• CRA provides an example of an acceptable method for allocating a non-attributable input (employees anonymously using a third-party counselling service for mental health or other issues), namely, the FI properly allocated 8.5% of all its exclusive and direct inputs to taxable supplies (using tracking and causal methodologies) and, accordingly, claiming an ITC of 8.5% of the GST on this supplier’s invoice.

Neal Armstrong. Summaries of GST/HST Memorandum 17-12 “Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02” July 23, 2021 under ETA s. 141.01(2), s. 141.01(3), s. 141.02(1) – exclusive input, direct input, non-attributable input, specified method, s. 206(3), s. 141.02(17) and s. 141.02(9).

The Minister rejected the application of the appellant (“A4A”) for registration as a registered Canadian amateur athletic association (CAAA) on the basis that (1) A4A was not intending to promote amateur athletics in Canada directly, but instead was intending to financially support athletes who could not otherwise afford to train and pay for their daily living expenses, and (2) A4A was intending to have, at least initially, a presence only in Vancouver and lacked the budget to operate programs on a national level, so that it would not satisfy the test (in para. (d) of CAAA definition) of promoting amateur athletics in Canada on a “nationwide basis”.

In rejecting the first ground and before remitting the matter back to the Minister for redetermination in accordance with his reasons, Webb JA stated:

So long as the only purpose and the only function of an organization is the promotion of amateur athletics in Canada on a nationwide basis, it should not matter whether a particular function directly or indirectly does so.

In rejecting the second ground, he stated:

So long as the organization is promoting amateur athletics in Canada on a nationwide basis, even if it only has an office in one province, it would satisfy the requirement.

He also cited Stemijon in noting that the “guidance as previously drafted by the CRA cannot bind the Minister nor can it alter the provisions of the statutory definition of a CAAA”.

Neal Armstrong. Summaries of Athletes 4 Athletes Foundation v. Canada (National Revenue) 2021 FCA 145 under s. 149.1(1) – CAAA - (d) and s. 149.1(22).

S. 110.6(14)(c) may assist in satisfying the test, in the qualified small business corporation (QSBC) definition in s. 110.6(1), that the mooted QSBC shares have been held by the disposing taxpayer or a related person or partnership for at least 24 months.

Suppose, for example, that on January 31, 2021, Mr. X settled a family trust for himself and related family members, and thereupon transferred his shares of Opco (which he had incorporated in 2015 and which otherwise met the QSBC definition) to the trust, with the trust selling the shares to a third party on June 30, 2021.

In this situation, resort may be had to s. 110.6(14)(c)(ii), which indicates that a trust is deemed to be related to a person from whom it acquired the shares, provided that all beneficiaries are related to the person at the time that the shares are sold to the third party. Here, because the trust acquired the shares from Mr. X and there are no non-related beneficiaries, (c)(ii) deems the trust to be related to Mr. X, so that the 24-month test is met, i.e., the shares were owned by the vendor (the trust) or by Mr. X (deemed by (c)(ii) to be related to the trust) for the 24-month period.

The beneficiaries of a trust may include a second trust – which will be deemed by s. 110.6(14)(c)(i) to be related to the first trust during the period that the second trust is a beneficiary thereof. For s. 110.6(14)(c)(ii) to apply, in addition to being related to all beneficiaries, the person from whom the first trust acquired the shares must also be a beneficiary of the second trust, and thus deemed by s. 110.6(14)(c)(i) to be related to the second trust at the time that the first trust disposes of the shares.

Where there is a corporate beneficiary, s. 110.6(14)(c)(i) deems that corporation to be related to the trust while it was a beneficiary thereof. For s. 110.6(14)(c)(ii) to apply, the person from whom the trust acquired the shares must also be related to the corporate beneficiary at the time that the trust disposes of the shares.

Note that to access s. 110.6(14)(c)(i), all beneficiaries of the trust must be related to the person selling the shares. Thus, no aunts, uncles, or cousins can be beneficiaries. Furthermore, if in-laws are included as beneficiaries, a divorce may result in an in-law no longer being related to the original owner of the shares at the time of the third-party sale.

Neal Armstrong. Summary of David Carolin, Manu Kakkar and Stan Shadrin, “Capital Gains Exemption Planning, Trusts, and the 24-Month Holding Period Rule,” Tax for the Owner-Manager, Vol. 21, No. 3, July 2021, pp. 2-3 under s. 110.6(14)(c).