News of Note
Grenon – Tax Court of Canada finds that the purported establishment of “alter ego” MFTs through which an RRSP invested in operating businesses was a GAAR abuse
In order that the taxpayer’s RRSP could indirectly invest in operating businesses in which he had a management role, he instigated the formation of various unit trusts (the “Income Funds”) which were intended to be mutual fund trusts on the basis that 171 individuals (the “Investors”) - immediate and extended family members, friends, employees, business associates and others - each subscribed approximately $750 for units of each Income Fund. The taxpayer’s RRSP then invested a large sum (e.g., over $150 million for one of the Income Funds) in subscribing for additional units. The Income Funds invested in underlying LPs carrying on businesses through an intermediate sub trust and master limited partnership.
Smith J found that there had been a failure to satisfy the requirement in Reg. 4801(a)(i)(A) that there had been a “lawful distribution” of the units to the Investors in accordance with the offering memorandum exemption from a prospectus-filing requirement, given that a substantial number of the Investors were adults who did not pay for their own units, or minors. As the Income Fund units thus did not qualify as MFT units, the RRSP was subject to tax and penalty tax on the basis of not holding qualified investments.
In the alternative, Smith J considered whether GAAR should apply even if the units in the Income Funds were qualified investments. After finding that there was a tax benefit and avoidance transactions (being the establishment of the Income Funds through which the RRSP could invest in the businesses), Smith J also found that there was an abuse under s. 245(4), stating:
[T]he object, spirit and purpose of subsection 146(4) is to prevent an annuitant from making tax deductible contributions … and then using those funds for business purposes and thus take advantage of the tax-exempt status of the plan. …
[T]he acquisition by the RRSP Trust of 99% of the units of the Income Funds defeated the object, spirit and purpose of the provision and was contrary to the Parliament intention that a mutual fund trust was to be widely held. It was certainly not within the contemplation of Parliament that a mutual fund trust that was a qualified investment for RRSP purposes would effectively become one investor’s alter ego. …
[T]he Appellant sought to abuse the RRSP regime and the provisions of the Act by establishing the Income Funds … .
After finding that the Minister’s assessment of the taxpayer himself respecting the RRSP income pursuant to s. 56(2) was unsupported by the wording of that provision, Smith J went on to indicate that he would have upheld the reassessments of the taxpayer in those amounts on the basis of the GAAR, but for this resulting “in a duplication of the tax which the Minister has also sought to impose on the RRSP Trust pursuant to subsection 146(10.1)” – which could not “be considered ‘reasonable in the circumstances’ as contemplated in subsection 245(5).” Accordingly, only the assessments of the RRSP under s. 56(2) and not of the taxpayer under s. 56(2), were sustained.
At 1984 CTF Roundtable, Q.60, the Department suggested that where swap payments are not made contemporaneously, for example, payments under the swap agreement are made by Canco to a non-arm’s length non-resident corporation (NRco) annually, whereas NRco makes its payments to Canco quarterly, withholding tax may apply to a portion of the outbound payments that represents an interest element.
CRA indicated that this position was contrary to Shell Canada, which found that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected – so that withholding tax would not apply in such a situation absent a finding of sham or the application of a specific provision, e.g., s. 245 or 247. CRA gave a similar response at 5 September 2020 IFA Roundtable, Q.2
CRA also stated that “CRA considers that all amounts payable or receivable under the terms of a swap agreement are on account of income and are to be included or deducted under section 9.” This is an over-simplification – for example, CRA would recognize that on a cross-currency swap hedging an FX borrowing, the hedge of the principal component generally would be on capital account.
CRA indicates that s. 74.4(2) could apply to a s. 51 estate freeze-style reorganization by two spouses in favour of two discretionary trusts for them and their spouse
Mr. X and Mrs. X, each owning 50% of the common shares of corporation that is not a small business corporation, effect a s. 51 exchange of their respective shareholdings for the issuance of freeze preferred shares, with a discretionary trust created for each spouse (but with discretion to pay income or capital thereof to the other spouse) subscribing nominal and equal amounts for new common shares of the corporation.
CRA indicated that the s. 74.4(2) could apply following this transaction, given that “one of the spouses could potentially be entitled to more than 50% of the income of the Corporation because of his or her beneficial interest in both trusts,” so that there could be a resulting transfer of income from one spouse to the other.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 15, 2020-0852271C6 F under s. 74.4(2).
CRA comments on when utilities can be added to rent for CERS purposes and notes CERS/CEWS similarity for computing revenue reduction
The definition of “qualifying rent expense” for purposes of the CERS (rent subsidy) refers to “rent … including … regular instalments of operating expenses, such as insurance, utilities and common area maintenance expenses, customarily charged to the lessee under a net lease.” In clarifying (so to speak) what this means, CRA stated:
[I]f a net lease requires an amount to be paid to a third party as a regular instalment of operating expenses customarily charged to the tenant under a net lease, this payment may be a qualifying rent expense. Examples of third parties might include property managers or utility service providers.
CRA also confirmed that an eligible entity must compute its qualifying revenue using the same approaches and elections for both the CEWS (wage subsidy) and the CERS for a particular qualifying period.
For example, if Corporations A and B have jointly elected that the qualifying revenue of the affiliated group is to be determined on a consolidated basis under s. 125.7(4)(b) for qualifying period 9 for CEWS purposes (i.e., period 2 for CERS purposes) then, even if Corporation B did not apply for the CEWS for that period, it must determine qualifying revenue on a consolidated basis for that qualifying period in determining its revenue reduction for CERS purposes.
In addition, CRA provided a useful table showing all the upcoming application deadlines for periods 8 to 13 for the CEWS, along with the corresponding periods for the CERS (periods 2 to 6).
Neal Armstrong. Summaries of 23 March 2021 TEI Roundtable, 2021-0879631C6 under s. 125.7(1) – qualifying rent expense – (a)(i)(C)(II), rent subsidy percentage and s. 125.7(2.1).
CRA confirms that auditors must submit unclaimed GST/HST rebates for processing effective the return due date for the audited reporting period
In confirming that ETA s. 296(2.1) requires CRA auditors to allow GST/HST unclaimed rebates as a deduction from assessments of net tax, CRA stated:
Current audit procedures require the auditor to verify the validity of the unclaimed rebate and, if the rebate claim is valid, to send the rebate claim to be keyed into our system and processed with an effective date that is the same as the due date of the registrant's return for the reporting period under audit.
CRA finds that an Indian who is now working at a home office on the reserve for COVID reasons has become exempt from the resulting employment earnings
CRA’s Guideline 3 exempts from tax all income earned by a status Indian from employment if more than 50% of the duties of the employment are performed on a reserve and the employer or employee lives on a reserve.
Applying this Guideline, CRA found that the employment income of an employee, who previously worked at a location of the employer that was not on a reserve, but is now working from home on a reserve due to the COVID-19 pandemic, has now become tax exempt.
Neal Armstrong. Summary of 4 February 2021 External T.I. 2020-0875231E5 F under Indian Act, s. 87.
CRA indicates that Quebec supplementary maternity benefits subsidized childcare centres are taxable, but may not be subject to EI deductions
CRA indicated that supplementary maternity benefits paid under a plan for Quebec's subsidized childcare centres were taxable income subject to source deductions and T4 reporting, and also were subject to EI deductions unless:
- The total amount of the combined supplement and weekly EI benefits did not exceed the employee's gross regular weekly earnings; and.
- The supplement did not reduce the employee's accrued credits such as for a retiring allowance, unused sick leave or vacation leave.
Neal Armstrong. Summary of 27 August 2020 Internal T.I. 2016-0675801I7 F under s. 6(1)(a).
We have published translations of 3 interpretations released by CRA last week, and a further 9 translations of CRA interpretation released in June and July, 2008. Their descriptors and links appear below.
These are additions to our set of 1,483 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
We have published translations of the 14 questions from the October 7, 2020 (regular) APFF Roundtable that were released last week. Although most of them have been covered in various News of Note posts, for your convenience, they are also summarized and linked in the table below.