News of Note
Income Tax Severed Letters 21 August 2024
Email this ContentThis 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).
CRA rules on a post-mortem pipeline with a 24-month implementation timeline, and an earlier note repayment to fund terminal return taxes
CRA ruled on a straightforward post-mortem pipeline concerning the estate of the deceased - who had died holding high-ACB preferred shares of Opco and common shares and preferred shares of the Holdco holding the Opco common shares – providing for:
- Opco redeeming preferred shares held by the estate, giving rise to a deemed dividend and a capital loss, which the estate carried back under s. 164(6).
- The estate transferring its Holdco shares under s. 85(1) to Newco (newly formed by it) in exchange for a Note of Newco whose principal was limited in accordance with s. 84.1(2)(a.1) to reflect that the estate had claimed the capital gains deduction, and Newco common shares for the balance.
- Newco using proceeds of interest-bearing loan (made on a back-to-back basis by Opco to Holdco, and by Holdco to Newco) to repay a portion of the Note so as to fund the payment by the estate of income taxes arising in the deceased’s terminal return.
- At least one year following 2, Newco and Holdco amalgamating.
- Over the following year (or more), the Note being gradually repaid.
Neal Armstrong. Summary of 2024 Ruling 2023-0993651R3 under s. 84(2).
CRA rules that emission allowances issued under the Quebec cap and trade regime constitute “emission allowances” for GST/HST purposes
ETA s, 221(2.1) indicates that a supplier of an “emission allowance” is not required to collect GST/HST on the supply. The Finance Explanatory Notes indicate that the recipient is required to account for the tax on the supply, but in most cases would not have any amount to remit because of an offsetting input tax credit.
The Environment Quality Act (Quebec) provides for the issuance (pursuant to a cap and trade system) by the Quebec Minister of “offset credits” representing greenhouse gas (GHG) emission removals and reductions (measured in metric tonnes of CO2 equivalents) generated from verified projects, as well as other “emission allowances,” which may be used by a GHG emitter to “cover” its GHG emissions, or traded to another emitter or another “participant” (e.g., an exchange) for use to cover purchasers' emissions.
CRA ruled that the emission allowances issued by the Minister satisfied the “emission allowance” definition in s. 123(1), so that subsequent supplies constituted supplies of emission allowances for GST/HST purposes.
Neal Armstrong. Summary of 31 January 2024 GST/HST Ruling 245426 under ETA s. 123(1) - emission allowance.
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 2,922 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).
The joint acquisition by Intact and Tryg of a UK multinational target entailed unwinding a sandwich structure using s. 212.1(4) and a Danish demerger transaction
An article by Carrie Smit and Tommy Friedlich and the public documents referenced by them illuminate the transactions on which CRA ruled in 2020-0875391R3.
Intact, a Canadian public company insurer, and Tryg, a Danish public company insurer dealing at arm’s length with Intact, engaged in co-ordinated transactions to acquire a U.K. target (RSA, a U.K. public company multinational) so that: Intact retained RSA’s Canadian business and certain other international businesses; Tryg acquired the RSA Scandinavian businesses; and Intact and Tryg initially jointly owned RSA’s Danish business and subsequently sold it to an arm’s length party (Alm Group). An indirect U.K. subsidiary of RSA held a Canadian subsidiary (RSA Canada), i.e., there was a sandwich structure.
RSA was acquired by a UK Bidco owned exclusively “beneath” Intact notwithstanding that over half of the funding was provided by Tryg. The Tryg portion of the funding was paid to the direct shareholder of the UK Bidco on account of the purchase price payable by Tryg for the Scandinavian companies that were transferred to it postclosing.
CRA ruled that s. 212.1(4) would not apply to the transfer of RSA Canada by its UK shareholder to Intact such that s. 212.1(1.1)(a) would not deem a dividend to be paid by RSA Canada to that shareholder. CRA accepted that, notwithstanding the funding by Tryg of more than 50% of the acquisition, Tryg did not control RSA and its subsidiaries (including the UK shareholder of RSA Canada) and dealt at arm’s length with Intact.
At the acquisition time, RSA indirectly held a “Danish Opco,” which indirectly held both “keeper” and “non-keeper” businesses, CRA gave detailed and favourable rulings on the application of the s. 15(1.5) demerger rules to a division of Danish Opco between a Demergerco 2 and Demergerco 1 (which was to be sold to Alm Group).
Neal Armstrong. Summary of Intact Financial Corporation (“Intact”) Business Acquisition Report 51-102F4, Form 51-102F3 Material Change Report, Material Document, Co-operation Agreement dated 18 November 2020, Carrie Smit and Tommy Friedlich, “Conquer and Divide: The CRA Rules on a Foreign Acquisition, Reorganization, and Demerger Transaction,” International Tax Highlights (IFA), Vol, 3, No. 2, May 2024, p. 16 and 2021 Ruling 2020-0875391R3 under Public Transactions - Mergers & Acquisitions - Cross-Border Acquisitions - Outbound – Other.
CRA publishes a revised webpage on the mandatory disclosure rules
CRA has expanded its Webpage on the mandatory disclosure rules:
- The fee is paid by an insurance professional to a client’s advisor for a referral regarding a proposed policy to fund taxes arising on death, or the fee is paid by the advisor to the insurance professional for the referral of the estate freeze work, generally will not come within the contingent fee arrangements hallmark.
- In the context of its safe harbour from the contractual protection hallmark for traditional representations and warranties insurance policies, that are generally obtained in the ordinary commercial context of mergers and acquisitions transactions to protect a purchaser from pre-sale liabilities (including tax liabilities), it has added the comment:
For greater clarity, the contractual protection hallmark would not arise solely where the insurance or indemnity is based on the actions or inactions of a person to achieve a tax result.
- A standard indemnity clause in the trust terms protecting a trustee also will not generally come within this hallmark, provided that when the clause was created it was not reasonable to conclude that an aggressive tax avoidance transaction was contemplated.
- CRA has essentially finalized its position at the 2024 IFA Roundtable, Q.3 regarding the application of NT-2023-05 (re back-to-back arrangements) to cash pooling arrangements. It states:
In the context of a cross-border [physical or notional] cash pooling arrangement involving a Canadian taxpayer, non-arm’s length non-residents, and an arm’s length intermediary, assuming that the Canadian taxpayer is a debtor and at least one non-resident member of the pool resides in a jurisdiction with a higher interest withholding tax rate than the rate applicable to the intermediary, the arrangement would be a notifiable transaction [described in NT-2023-05] and results in a filing requirement where:
- the taxpayer files or anticipates filing its income tax returns on the basis that the debt or other obligation owing by it, and the interest paid thereon, is not subject to the thin capitalization rules, or
- the taxpayer reports or is expected to report that the interest it pays in respect of the arrangement is subject to the lower rate of withholding tax applicable to the intermediary.
A filing generally is not required where the Canadian taxpayer participating in the cash pooling arrangement is solely a creditor … .
[T]he filing of Form RC312 by a person in respect of the earliest transaction in the series of transactions forming the cash pooling arrangement will satisfy that person’s reporting obligation in respect of each transaction that is part of the series.
Neal Armstrong. Summaries of “Mandatory disclosure rules – Guidance,” 15 August 2024 CRA Webpage under s. 237.3(1) – reportable transaction – (a), contractual protection and s. 237.4(3).
CRA publishes 3 new Memoranda on the ETA place-of-supply rules
CRA has published three GST/HST Memoranda on the provincial place-of-supply rules, partially supplanting parts of Technical Information Bulletin B-103 (draft).
CRA provides some helpful illustrations of its view of the operation (or non-operation) of ETA Sched. IX, Pt. II, s. 3(a), which departs from the usual rule of the place of supply being that of legal delivery where the vendor (say, in PEI) delivers the goods onto a common carrier which it has retained on behalf of the purchaser (say, in Manitoba), so that the place of supply is the location of the ultimate delivery in Manitoba rather than of the legal delivery of the goods to the carrier in PEI. A CRA example indicates that where the common carrier was retained by the Manitoba purchaser, this rule will not apply so that the place of supply is the place of legal delivery (to the purchaser’s common carrier) in PEI, even if the purchaser instructed the vendor to directly contact the carrier when the goods were ready to be picked up.
A second example illustrates the CRA view that a consignment sale entails two supplies. Where the Manitoba supplier personally delivers goods to the consignee in Ontario, who sells the goods to a Quebec purchaser and sends the goods by courier to Quebec, there are two supplies: in Ontario (the place of delivery to the consignee); and Quebec (by virtue of the courier rule in Sched. IX, Pt. II, s. 3(b).)
CRA illustrates the “reasonably attributable” apportionment rule in ETA s. 136.2 with an example of the proration of single option to buy two real estate properties in two different provinces based on the properties’ relative values.
Neal Armstrong. Summaries of GST/HST Memorandum 3-3-2, Place of Supply in a Province – Overview, August 2024 under New Harmonized Value-added Tax System Regulations. s. 8, GST/HST Memorandum 3-3-4, Place of Supply in a Province – Real Property, August 2024 under ETA, s. 136.2 and s. 136.1(1) and GST/HST Memorandum 3-3-3, Place of Supply in a Province – Tangible Personal Property, August 2024, ETA Sched. IX, Pt. II, s.1 and s. 3.
CRA accepts a wide meaning of “wood waste”
The definition of “wood waste” in Reg. 1104(13) feeds the definition of “specified waste materials” which, in turn, was added consequentially to amendments to expand eligibility for Classes 43.1 and 43.2 to equipment used to convert specified waste materials into liquid and solid biofuels. The “wood waste” definition states that that term includes:
scrap wood, sawdust, wood chips, bark, limbs, saw-ends and hog fuel, but does not include spent pulping liquor and any waste that no longer has the physical or chemical properties of wood.
CRA confirmed that “wood waste” includes waste generated from (i) forestry operations, including slash piles, (ii) provincially/territorially regulated forest management activities that support improving the health of forest stands and forest fire resiliency (e.g., residues from stand thinning, salvaged wood from fire/pest affected stands, residues from fire smarting), and (iii) construction and demolition activities.
In this regard, it stated that “there is no inherent limitation to the activity or process from which the waste is generated” and that:
[I]t appears as though “wood waste” would generally mean an unwanted material or by-product that would otherwise be discarded and that consists of the substance that is found in parts of trees, shrubs, etc. …
Neal Armstrong. Summary of 2023-1000061E5 under Reg. 1104(13) - “wood waste.”
Income Tax Severed Letters 13 August 2024
This evening's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Neal H. Armstrong editor and contributor