News of Note
CRA finds that charges to a company for a negotiated municipal sewage plant expansion were for a taxable supply
Email this ContentIn order to be permitted to expand its processing facility, a company had to negotiate an agreement with the municipality to cover 70% of the costs of an expansion to the municipal sewage treatment plant. CRA found that such charges were consideration for a taxable supply of wastewater treatment services made by the municipality, and that such supply was not an exempted supply of municipal services under ETA s. V-VI-21 as the company failed to satisfy one of the stipulated conditions, namely, that the municipal “service is … one which the owner or occupant has no option but to receive” (presumably meaning that the company always had the “choice” of not proceeding with its expansion or somehow otherwise avoiding the additional sewage discharge).
Neal Armstrong. Summary of 3 July 2024 GST/HST Ruling 242566r under ETA s. V-VI-21.
CRA confirms that an individual can claim unclaimed donations made by her spouse before marriage (going 5 years’ back), including maybe for statute-barred years
CRA confirmed that an individual could claim (in years in which she was married, within the 5-year carryforward period from the year of the donation) the portions of a charitable donation that her husband had made before they had married, but which he had not claimed (perhaps, because of his limited income).
Regarding whether she could open up statute-barred taxation years to make such claims, CRA noted that s. 152(4.2) accorded it the discretionary authority to make a reassessment beyond the normal reassessment period in respect of a taxation year, when requested by an individual in order to determine a refund - and that “[g]enerally, an individual can make a written request in respect of a tax year, within [the stipulated] 10-year time limit, if the individual was not aware of, or missed claiming a deduction or a credit that was available for that year.” It did not make any explicit comment that, deciding after the expiry of the carryforward period to have the spouse claim the unclaimed remnant, amounted to impermissible retroactive tax planning.
Neal Armstrong. Summaries of 5 September 2024 External T.I. 2024-1022711E5 under s. 118.1(1) – total charitable gifts - (c)(i)(A) and s. 152(4.2).
CRA indicates that a direction letter to change how title is conveyed at closing gives rise to a real estate supply for GST/HST purposes
An individual agreed to purchase a pre-construction condominium unit for personal purposes, and a related individual agreed to purchase a second such unit for rental as a residence. Now, before the closing of the purchases, the two individuals would like to jointly own both units for rental as places of residence for individuals. This would be done by entering into agreements to assign rights and obligations respecting their purchase agreements, or issuing a letter of direction for title to be transferred on this basis.
CRA indicated that:
- a direction of title change is considered to be a supply of real property or an interest in real property and that, generally, there are no exemptions that apply for newly constructed real property;
- the assignment by the purchaser of the agreement is normally considered to be a sale of that first purchaser's interest in the new unit which, pursuant to s. 192.1, would be deemed to be a taxable supply; and
- pursuant to s. 155, there would be deemed FMV consideration for such taxable supplies if the recipient in each case was not a registrant who acquired the property for consumption, use or supply exclusively in the course of commercial activities.
CRA did not discuss what this meant. For instance, it might mean that an amount equal to ½ the value of any embedded deposit plus ½ of any appreciation in the underlying property at the time of the direction or assignment would in each case be subject to GST/HST that would not be creditable to the recipient.
Neal Armstrong. Summaries of 2 May 2024 GST/HST Interpretation 246050 under ETA s. 123(1) – supply and s. 256.2(3).
The concept of de facto control should not have an expansive meaning in the context of the s. 84.1(2.3) rules
The immediate intergenerational transfer rules in s. 84.1(2.31) require the parents to give up de facto control of the business immediately after the disposition time, while allowing them to retain “management” of the business for up to three years after the disposition time.
The enactment of s. 256(5.11) (effectively overruling McGillivray) could be regarded as effectively reinstating the broad concept of de facto control in IT-64R4, so that previously defunct factors, such as “day-to-day management and operation of the business” now carry weight in determining de facto control.
However, if the day-to-day management and operation of the business by an employee is tantamount to de facto control, parents would be required to give up day-to-day work in the business immediately after the share sale, which would contradict the legislative accommodation of their retention of management for three years. This inference that de facto control excludes day-to-day management and operational control of the business is consistent with Plomberie J.C. Langlois, which found that a 50% shareholder who had “an operational role, not a decision-making role” was not part of the de facto control of the corporation, whereas the other shareholder, who “[a]s the sole director … had the power that ensured him a dominant influence in the direction of the [corporation]” had de facto control.
In IT-64R4, CRA cited other factors which would appear to contradict the design of s. 84.1(2.3) if they established de facto control, e.g., the ownership of retractable preferred shares and the percentage of voting shares (whereas s. 84.1(2.3) rules establish their own code for determining what percentage of voting shares and retractable preferred shares parents are permitted to own) and “influence [of] a family member” (whereas in the context of s. 84.1 intergenerational transfers, the influence of family members will be a priori ubiquitous).
Neal Armstrong. Summary of Marissa Halil, David Carolin and Manu Kakka, “Are Section 84.1 Intergenerational Transfers (Mission) Impossible? The Meaning of “De Facto Control” in the Context of Subsection 84.1(2.31),” Tax for the Owner-Manager, Vol. 25, No. 1, January 2025, p. 1 under s. 84.1(2.31)(c).
Income Tax Severed Letters 8 January 2025
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CIBC – Tax Court of Canada finds that CIBC’s interchange fees from a non-resident credit-card processor were not zero-rated as relating to the loans effectively made to its Cdn. cardholders
CIBC had outsourced part of its Visa-card operation to an arm’s length non-resident (“GPDI”) so that, in a typical transaction in which a Canadian cardholder presented their CIBC Visa card to a Canadian merchant, GPDI would process the point-of-sale information received from the merchant and transmit it to CIBC for credit authorization, transmit the authorization (assuming no “decline”) back to the merchant and send this and the other day’s transactions to VISA for clearing, following which there was a process involving CIBC, GPDI and VISA by which the settlement funds were paid to the merchant. GPDI would charge the merchant a merchant discount fee of, say, 2%, and pay CIBC an interchange fee of, say, 1.5% in consideration for CIBC’s authorization and payment services.
Before concluding that the interchange fees were not zero-rated on the basis of the exclusion in ETA VI‑IX‑1(a)(ii) for a service that “relates to (a) a debt that arises from … (ii) the lending of money that is primarily for use in Canada”, Sommerfeldt J found that:
- regarding the “relates to” test, “there only needs to be ‘some connection’ between the interchange services and the debt described in the carve‑out;
- in this context the verb “lend” should have “a broad meaning (recognizing that a loan arises when the lender, at the request of the borrower, pays money to a third party in satisfaction of an obligation owed by the borrower to the third party)”, so that “when a Cardholder used a CIBC Visa Card in respect of a transaction, CIBC loaned to the Cardholder, and the Cardholder borrowed from CIBC, the monetary amount of the transaction” (even though the funds went to the merchant);
- “in a tax context, the word primarily generally means (among other things) principally, mainly, most importantly, or more than 50%”; and
- “the loaned money was used to pay merchants located in Canada” so that “the money paid by CIBC indirectly to the merchants (i.e., through the Visa Payment System), in satisfaction of the Cardholders’ obligations to the merchants, was loaned money that was primarily for use in Canada”.
However, CIBC established a due diligence defence to reverse the penalties imposed under former ss. 280(1)(a) and 280(2)(a) given inter alia that “CIBC’s filing position was not unreasonable” and had been prepared by qualified tax-group employees.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. The King, 2024 TCC 160 under ETA s. VI‑IX‑1(a)(ii) and s. 280(1)(a).
CRA confirms that it is the bare trustee rather than the beneficial owner who has any UHT filing obligations
Regarding the situation where a Canadian corporation held title to a residential property as bare trustee for an individual, CRA indicated that such corporation was the “owner” of the property for UHTA purposes, whereas the individual was not, i.e., the individual was not a person that “could reasonably be considered to be an owner in respect of the residential property based on [the land registry] system” under the definition of owner. Accordingly, the individual had no UHT filing obligations, whereas the corporation did (assuming that it was not an “excluded owner”).
Neal Armstrong. Summary of 4 June 2024 Underused Housing Tax (HST) Ruling 246073 under UHTA, s. 2 – owner.
CRA finds that the merchant rather than the consumer was the recipient of delivery services for goods sold through a platform
Consumers purchased goods from merchants through a platform which acted as facilitator, and as collection agent on behalf of the merchant and delivery drivers.
CRA found on construction of the platform webpage that the delivery driver was making a supply of its delivery service to the merchant, which the merchant used as an input into the supply that it made to the consumer.
Neal Armstrong. Summary of 17 July 2024 GST/HST Ruling 219794 under ETA s. 123(1) – recipient.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in March of 2001. Their descriptors and links appear below.
These are additions to our set of 3,053 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 23 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Various oddities in the EIFEL rules are discussed
Comments on the EIFEL rules (respecting limitations on leverage) include:
- The inclusion in eligible group entities of resident corporations or trusts that are related to the taxpayer in the application of the “excluded entity” exemption has the effect of requiring corporate groups controlled by respective siblings to be aware of each other’s affairs.
- For example, a corporation group controlled by one sibling relying (under para. (b) of the excluded entity definition) on its annual interest and financing expenses being under $1 million would also need to take into account the IFE of the resident corporations in a group controlled by a second sibling.
- Similarly, if the first sibling group was relying on the para. (c) exclusion, it would be offside if there was relevant participation in the structure of the second sibling’s group by a family trust one of whose related beneficiaries had ceased to be a resident.
- S. 95(2)(f.11)(ii)(D) provides, respecting s. 95(2)(f)(ii) (but not (i)) amounts included in the relevant affiliate IFE (RAIFE) of a controlled foreign affiliate (CFA) of a Canadian taxpayer for a taxation year, for a denial of such RAIFE amounts otherwise deductible in computing foreign accrual property income (FAPI) in proportion to the of overall denial (if any) computed under s. 18.2(2) – so that deduction of the RAIFE of the CFA is potentially subject to the same proportionate denial as for its Canadian parent in respect of the parent’s IFE.
- However, the rules do not seem to explicitly provide for situations where a foreign affiliate is a CFA of two or more Canadian taxpayers, each with a different potential denial proportion under s.18.2(2) so that it might be necessary to perform separate FAPI calculations for different Canadian taxpayers with a participating percentage in the same CFA.
- The election under s. 95(2)(f.11)(ii)(E) - to forego foreign accrual property losss (FAPL) amounts (derived from RAIFE) otherwise realized in a taxation year of a CFA of a Canadian taxpayer in exchange for non-inclusion of an equivalent amount in its RAIFE - can be beneficial where the FAPL for the year has more value in reducing the current year’s RAIFE (and thus IFE of the Canadian parent) than it would in a future or prior year as a FAPL carryforward or carryback.
- As the election is limited to the lesser of the CFA’s FAPL and RAIFE for the year, there appears to be no ability to elect to forego only a portion of FAPL for the year (i.e., the election is potentially an all or nothing proposition if the FAPL amount is the lesser amount in s. 95(2)(f.11)(ii)(E)(II)).
- The proposed definition of “exempt interest and financing expenses” (not subject to the EIFEL limitations) references inter alia the expenses that are reasonably attributable to the portion of the borrowing used by the taxpayer for the purpose of acquiring, building or converting a purpose-built residential rental.
- Since a “purpose-built residential rental” can refer to a part of a mixed-use building, there could be significant uncertainties associated with allocating a financing to such portion of the project.
Neal Armstrong. Summaries of Larry Nevsky, Brian Kearl and Aaron Chai, “Unexpected EIFEL Issues and Uncertainties,” Draft 2024 CTF Annual Conference paper under s. 18.2(1) – excluded entity, ATI – B (h), RAIFE, exempt interest and financing expenses, s. 95(2)(f.11)(ii)(D), s. 95(2)(f.11)(ii)(E) and s. 18.21(2).
Neal H. Armstrong editor and contributor