News of Note
CRA finds that the deposit of crypto into a pooling vehicle for receipt tokens, and a subsequent exchange of the receipt tokens for underlying tokens, are dispositions
Email this ContentA resident individual deposited two types of crypto-assets (the “Deposited Tokens”) into liquidity pools in a crypto pooling vehicle (the “Platform”), in exchange for “Receipt Tokens”, which evidenced such deposit and could themselves be transferred, or used to claim corresponding underlying deposited assets.
The individual subsequently redeemed the Receipt Tokens for crypto-assets of the same type as the Deposited Tokens, at a time that they had appreciated in value. In the meantime, the individual received a return from the Platform (the “Rewards”) in the form of “Nativetoken,” which also could be realized upon by exchanging them through decentralized exchanges for other crypto assets. The Rewards accrued to the individual daily based on his proportion of the “underlying” tokens staked in each of the two pools.
CRA found that:
- The individual’s deposit of the Deposited Tokens into a liquidity pool on the Platform and redemption of Receipt Tokens for crypto-assets of the same type as the Deposited Tokens were “dispositions” for capital gains purposes, if those tokens had been held on capital account;
- If the tokens instead were held in a business on income account, such exchanges would be barter exchanges described in IT-490, giving rise to income on each exchange; and
- The Rewards would be included in computing the taxpayer’s income under s. 9.
Neal Armstrong. Summaries of 20 March 2024 Internal T.I. 2023-0973071I7 under s. 248(1) – disposition and s. 9 – computation of profit.
Income Tax Severed Letters 28 August 2024
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Gorgis – Tax Court of Canada finds that the new housing rebate was available for an individual who split his time between 3 locations
The appellant (Gorgis) acquired a new house in Caledon East, Ontario in January 2019 at about the same time he was establishing a Toronto body shop (“Green Apple”), stayed there two to four nights a week and stayed most of the balance of the nights in a bed at Green Apple, or on a couch or a brother’s bed at his siblings’ house in Toronto. He did not move in a lot of belongings – but he did not have a lot. In August 2020, he leased out the balance of the house to tenants, but continued to live in the basement thereafter.
Cook J found that this use pattern was sufficient for Gorgis to have satisfied the new housing rebate requirement in s. 254(2)(g)(i), which relevantly required Gorgis to have been the first occupant of the house “as a place of residence.”
Cook J also found that there was sufficient corroboration of Gorgis’ testimony that his intention was to acquire the house as his “primary place of residence,” as required by s. 254(2)(b). Gorgis was entitled to the new housing rebate.
Neal Armstrong. Summary of Gorgis v. The King, 2024 TCC 109 under s. 254(2)(g)(i).
CRA rules on a triangular loss consolidation involving circling a daylight loan 4 times, a non-recourse interest-bearing note and a 1 b.p. spread for the preferred dividends
CRA ruled on a triangular loss-shifting transaction between Lossco and its subsidiary, Profitco, under which Lossco used a daylight loan to make an interest-bearing loan (pursuant to the “IB Note”) to Profitco, who subscribed for preferred shares of its sister, “Numberco,” who made a non-interest-bearing loan to Lossco. There was to be one daylight loan whose proceeds would be circled four times as described above, before it was repaid. The Numberco preferred shares were to bear a cumulative dividend at a rate 1 b.p. above the rate of simple interest on the IB Note. Recourse under the IB Note was to be limited to the Numberco preferred shares.
These transactions would be unwound on a cashless basis, and Numberco would then be wound-up into Lossco.
Neal Armstrong. Summary of 2023 Ruling 2023-0973911R3 under s. 111(1)(a).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in September of 2001. Their descriptors and links appear below.
These are additions to our set of 2,928 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 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Characterization issues arise for tax purposes when a non-resident uses a Canadian professional employer organization
A professional employer organization (PEO) is an unrelated entity that is used to outsource a foreign entity’s human resource (HR) function. The contract between the foreign entity and the PEO might provide that: the PEO acts as the employer of the individuals in Canada for the purposes of servicing the foreign entity’s needs in Canada, and is responsible for all payroll compliance and reporting provided that it is first paid in full by the foreign entity and receives related indemnities; and the PEO is an independent contractor, and not an agent of the foreign entity.
Canadian tax considerations include:
- Leaving aside the PEO relationship, the foreign entity will often in fact be carrying on business in Canada, under Canadian common-law principles or under ITA s. 253 (which includes reference to orders solicited or anything offered for sale through an agent or servant).
- Although many non-resident companies claim that they have no employees in Canada because their arrangement with the PEO is instead a contract for services, this position may be less tenable where stock options and other equity consideration are provided as part of the compensation package.
- Even if the relationship is a contract for services, the dependent agent provisions of the applicable treaty should be analyzed to determine if the foreign entity is thereby carrying on business through a Canadian permanent establishment.
- If the foreign entity provides stock options to a person hired by the PEO, a resulting provision of “remuneration” to the individual may force the foreign entity to register for Canadian payroll purposes, which would create uncertainty regarding whether the s. 110(1)(d) deduction (which requires an agreement of the individuals concerned with their employer or another qualifying person) would be available.
Neal Armstrong. Summary of Hetal Kotecha, “Canadian Tax Concerns Arising from the Use of Professional Employer Organizations,” International Tax Highlights (IFA), Vol. 3, No. 3, August 2024, p. 9 under Treaties – Income Tax Conventions – Art. 5.
PC Bank – Federal Court of Appeal finds that loyalty point redemption payments made in the course of a financial business could generate ITCs if also in the course of a commercial activity
PC Bank, a corporation in the Loblaw group, issued loyalty points to its cardholders based on their expenditures, which could then be applied by the cardholders towards purchases at Loblaw-branded stores, with PC Bank then paying the cash value of those points (the redemption payments) to Loblaws, but also receiving payments of two types from Loblaws that reduced its loss on paying the redemptions amounts.
Goyette JA found that that the Tax Court erred in finding that PC Bank’s payments of the redemption amounts did not entitle it to notional input tax credits (“NITCs”) pursuant to s. 181(5) (based on the tax fraction thereof) because such amounts did not satisfy the s. 181(5) requirement of being paid “in the course of a commercial activity” of PC Bank. In particular, the Tax Court had not recognized that it did not matter that the redemption amounts were paid in the course of PC Bank’s exempt financial services business given that they were also paid in the course of its commercial activity of “driving customers to Loblaws” – and it also did not matter that PC Bank was incurring a loss on this commercial activity because a commercial activity of a corporation was not required to have a reasonable expectation of profit.
She noted that the redemption amount was not required by s. 181(5) to be paid “exclusively” or “primarily” in the course of a commercial activity, and stated:
Unlike the words exclusively and primarily, the phrase “in the course of” has a broad meaning; it means “incidental to” or “connected to” directly or indirectly … .
She further stated (at para. 36):
In drafting subsection 181(5), Parliament did not include explicit language that the credit be allocated only “to the extent” that the person made the payment in the course of a commercial activity. The absence of this allocative language indicates that Parliament intended to grant an NITC on the entire amount of a coupon redemption payment from the moment the payment was made in the course of a commercial activity.
Accordingly, PC Bank was entitled to its claimed NITCs.
In the course of his extended dissenting reasons, Webb JA stated:
Just as the scheme of the ETA does not contemplate that 100% of a particular property or service that is acquired can be considered to be used in both a commercial activity and a business of making exempt supplies, Parliament did not intend that 100% of a single payment that is made could be considered to be made in both the course of a commercial activity and in the making of exempt supplies.
Neal Armstrong. Summary of President's Choice Bank v. Canada, 2024 FCA 135 under ETA s. 181(5).
CRA rules on a loss-consolidation transaction which avoided loans to the regulated Profitcos through the use of a partnership
CRA ruled on loss consolidation transactions involving a parent with losses and three indirect “Profitco” subsidiaries. The transactions did not entail direct interest-bearing loans to the Proficos, which were regulated entities. Instead, the Profitcos would become limited partners of a newly-formed LP (with a parent newly-formed subsidiary as the GP), which would receive an interest-bearing loan from the parent and subscribe for dividend-bearing preferred shares of a Newco subsidiary of the parent, with the preferred dividends being funded with annual cash contributions to Newco by the parent. Although the LP would in fact generate a thin profit, the Profitcos would take s. 112(1) deductions for their share of the LP’s dividend income.
Neal Armstrong. Summary of 2022 Ruling 2021-0910431R3 under s. 111(1)(a).
Income Tax Severed Letters 21 August 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that renting common areas out to third parties would disqualify a residential housing co-operative continue to qualify as an NPO under s.149(1)(l)
Would a residential housing co-operative (Co-op) continue to qualify as an NPO under s.149(1)(l) if it earned profits from renting its common areas to third-parties (e.g., film companies)? CRA noted its position that “a tax-exempt NPO can earn a profit, as long as the profit is incidental,” i.e., “not significant and arises from activities directly connected to the organization’s not-for-profit objectives.” For example it was acceptable that the Co-op earned “modest revenues from providing laundry machines for use by residents of the Co-op.”
In contrast, here the anticipated profits from renting out the Co-op’s common areas were expected “to be considerable enough to assist the Co-op in paying for major repairs, ongoing maintenance of the building, maintaining a reserve fund, and lowering monthly maintenance fees for the residents.” Accordingly, that activity would disqualify it under s. 149(1)(l).
Neal Armstrong. Summary of 13 May 2024 External T.I. 2022-0944461E5 under s. 149(1)(l).
Neal H. Armstrong editor and contributor