News of Note
DAC – Tax Court of Canada finds no abuse in avoiding CCPC status by continuing to BVI
Email this ContentWith a view to its imminent disposition of the shares of a subsidiary, the taxpayer continued to the British Virgin Islands, with the result that it ceased to be a Canadian-controlled private corporation (CCPC) and became a private corporation that was not a CCPC (its central management and control remained in Canada). CRA assessed on the basis that the resulting non-application of s. 123.3 (imposing refundable tax) and s. 123.4 (denying the general rate reduction on aggregate investment income) was an abuse of those provisions and of s. 250(5.1).
In finding no abuse of s. 123.3, D’Arcy stated:
Parliament has chosen, for policy reasons, to have different sets of rules for different corporations. …
Prior to being continued in the British Virgin Islands, the Appellant was on one side of the dividing line [a CCPC] and, after it was continued, it was on the other side of the dividing line [a non-CCPC]. …
[T]he Appellant’s choice to be taxed as a non-CCPC did not abuse section 123.3 since Parliament only intended it to apply to a corporation’s investment income that is taxed under the regime for CCPCs.
After indicating that the absence of a rate reduction under s. 123.4 for aggregate investment income reflected that it was subject to a low rate of tax once distributed as dividends, D’Arcy J noted that there was no abuse regarding the s. 123.4 rate reduction, since the rate reduction it enjoyed for its taxable capital gain reflected the unavailability of a dividend refund.
Finally, the application of s. 250(5.1) accorded with its rationale, which was “to equate the place of continuance of a corporation with its place of incorporation”.
Neal Armstrong. Summaries of DAC Investment Holdings Inc. v. The King, 2024 TCC 63 under s. 245(4), s. 123.3, s. 123.4(1) – full rate taxable income – (b)(iii) and s. 250(5.1).
CRA applies s. 13(7)(e)(ii) to the purchase of a depreciable property from a non-arm’s length non-resident corporation with no tax nexus to Canada
A non-resident corporation (“US Corp”) sold trademarks at a sales price in excess of their adjusted cost base to a non-arm’s length Canadian resident corporation (Canco). Canco took the position that, as US Corp was a non-resident corporation which was not liable for tax in Canada, it was not a “taxpayer” under the Act in light of Oceanspan, so that it could not be considered to have a “capital property” (whose definition references a taxpayer), as required for the application of s. 13(7)(e)(ii). Accordingly, s. 13(7)(e)(ii) did not apply to reduce the step-up in the capital cost of the trademarks (which were Class 14.1 property) to it.
The Directorate rejected this position and found that s. 13(7)(e)(ii) was also applicable where the non-arm’s length transferor was a non-resident. In distinguishing Oceanspan (which entailed the purported generation of non-capital losses by a non-resident corporation while it was not subject to Canadian tax), it stated:
In the current situation, the object and purpose of subparagraph 13(7)(e)(ii) is to establish the resident purchaser’s capital cost of depreciable property acquired from a non-arm’s length transferor for CCA purposes. The purpose is not to determine the tax liability of the non-resident transferor corporation.
Neal Armstrong. Summary of 4 March 2023 Internal T.I. 2023-0994501I7 under s. 13(7)(e)(ii).
Income Tax Severed Letters 8 May 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that it is prepared to ignore reasonable absences for injury, illness, or birth in applying the actively-engaged TOSI test
Regarding the requirement in s. 120.4(1) – “excluded business” – that a specified individual be actively engaged on a regular, continuous, and substantial basis in the activities of the business in either the taxation year, or any five taxation years of the specified individual, s. 120.4(1.1)(a) deems an individual to be so engaged in a taxation year if the individual works in the business at least an average of 20 hours per week during the portion of the year in which the business operates. When asked regarding the impact on this test if the employment is interrupted by injury, illness or the birth or adoption of a child, CRA stated:
[T]he period of time during which a specified individual was on leave will not, in and of itself, preclude the individual from meeting the requirements of an excluded business. For example, if a specified individual was on a medical leave beginning in March of 2022 and returned in September of 2022, the CRA would be prepared to disregard the 6 month temporary absence in determining if the individual was (or was deemed to be) actively engaged on a regular, continuous and substantial basis in the activities of the business. The CRA would be prepared to take this approach only in cases where the leave in question is reasonable and in line with leave taken in an arm’s length situation for similar reasons (e.g. when an individual is unable to work due to injury, illness, or the birth/adoption of a child), and where the specified individual can reasonably be expected and has demonstrated an intent to return to work on the expiration of the leave period.
Neal Armstrong. Summary of 21 February 2023 CPAC Roundtable Q. 12, 2022-0947201C6 under s. 120.4(1.1)(a).
Litman – Tax Court of Canada finds that a laneway house built atop an unsevered garage qualified as a new residential complex for HST rebate purposes
Mr. Litman built a laneway house on top of a detached garage on his property in Ottawa, without severing it, and claimed the new housing rebate. In finding that this qualified under ETA s. 256(2)(a) as the construction of a residential complex which was a single unit residential complex for use as the primary place of residence of a relation (his mother), St-Hilaire J stated that:
The laneway house is detached from the main house and it forms a new residential complex where, prior to its construction, there was none. In addition, I see nothing in the definition of residential complex that requires that the laneway house be held under separate title to meet the requirements of that definition.
Neal Armstrong. Summary of Litman v. The King, 2024 TCC 58 under ETA s. 256(2).
TD – Tax Court of Canada finds that Aeroplan Miles are not gift certificates for GST/HST purposes because their attributes are not similar to money
An affinity program agreement with Aeroplan allowed TD to add Aeroplan Miles rewards to its credit cards. Graham J found that Aeroplan was making a single supply under the agreement of the Aeroplan Miles rather than, as contended by the Crown, marketing services, given inter alia that “there would have been no commercial efficacy to the Agreement if TD could not provide Aeroplan Miles to its cardholders” and the monthly purchase price was based on the number of Aeroplan Miles purchased.
In finding that the Aeroplan Miles purchased by TD were not gift certificates, but were coupons, so that their purchase was subject to HST, Graham J stated:
[F]or a device to be a gift certificate, it must have the following key characteristics:
(a) The device must have a stated monetary value that either appears on the device’s face or is retrievable electronically.
(b) It must be possible to transfer the device to a third party without additional payment to the issuer.
(c) The bearer must be entitled to apply some or all of the balance of the stored monetary value to the purchase price of goods or services purchased from either the issuer of the device or any other person who can lawfully accept the device as payment.
(d) The device may have some conditions, but any such conditions must not detract from the essential attribute of a gift certificate that it must have attributes similar to those of money.
An Aeroplan Mile had none of these characteristics. It did not have a stated monetary value and thus that value could not be applied towards a purchase. It was not transferrable without paying a fee to Aeroplan. Finally, the need to accumulate more Aeroplan Miles in order to use a single Aeroplan Mile was a significant condition on the device’s use.
Neal Armstrong. Summaries of The Toronto-Dominion Bank v. The King, 2024 TCC 50 under ETA s. 123(1) – supply, s. 181.2 and s. 306.1(1).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in January of 2002. Their descriptors and links appear below.
These are additions to our set of 2,825 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 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2002-01-04 | 9 January 2002 External T.I. 2001-0089655 F - AVANTAGE AUTOMOBILE | Income Tax Act - Section 248 - Subsection 248(1) - Automobile - Paragraph (e) - Subparagraph (e)(i) | 6-seat pickup not excluded from 90% test |
| Income Tax Act - Section 6 - Subsection 6(2) | being on-call at home does not diminish the personal benefit from use | ||
| 10 January 2002 External T.I. 2001-0090325 F - UTILISATION DES VEHICULES | Income Tax Act - Section 6 - Subsection 6(2) | commuting in connection with employer requirement to keep vehicle overnight at home was personal use – but not emergency use | |
| 18 January 2002 External T.I. 2001-0092665 F - AUTOMOBILE-VEHICULE PUBLICITAIRE | Income Tax Act - Section 248 - Subsection 248(1) - Automobile | automobile status turns on design, not use (here, only for advertising) | |
| Income Tax Act - Section 248 - Subsection 248(1) - Automobile - Paragraph (e) - Subparagraph (e)(i) | vehicle cosmetically altered for advertising purposes is not thereby used to transport goods or equipment | ||
| 8 January 2002 External T.I. 2001-0094485 F - EMPLOI SUR UN CHANTIER PARTICULIER | Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(a) | s. 6(6) applicable to a non-citizen | |
| 21 January 2002 External T.I. 2001-0078735 F - Droit de recevoir une somme | Income Tax Act - Section 54 - Proceeds of Disposition | FMV of contingent right to deferred cash sales proceeds was included in proceeds, with subsequent gain or loss when the contingency was resolved | |
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) | s. 12(1)(g) inapplicable to contingent right to receive deferred cash sales proceeds to the extent the share consideration declined in value | ||
| Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(f) | s. 85(1)(f) applicable to contingent right to receive deferred cash sales proceeds to the extent the share consideration received under s. 85(1) declined in value | ||
| 21 January 2002 External T.I. 2001-0080325 F - FRAIS DE VOYAGE-BIENS LOCATIFS | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) | notwithstanding s. 18(1)(h) jurisprudence, CCRA allows travel expenses incurred for collecting rent, supervising repair work or managing the multiple rental properties |
The Joint Committee comments on design issues for the shift to the 2/3 capital gains inclusion rate
Comments of the Joint Committee on the design issues for implementing the increase in the capital gains inclusion fraction to 2/3 include:
In order to avoid costs, difficulties, uncertainties, or impediments in actually realizing capital gains before June 25, 2024, taxpayers should be permitted to file an election (see s. 110.6(19)) to be deemed to have realized all or a portion of their accrued capital gains before that date.
Alternatively or in addition, and consistent with the change in the inclusion fractions on January 1, 1988 and January 1, 1990, the effective date should be moved to January 1, 2024.
The increased inclusion fraction should not apply to dispositions of property occurring pursuant to legally binding obligations entered into by the taxpayer in writing before April 16, 2024, subject to some limitations.
With a view to avoiding retroactive effects of the increased inclusion fraction:
- Capital gains reserves from pre-June 25, 2024 dispositions should be brought into income at the ½ rate;
- The ½ deduction should be maintained for distributions from hybrid surplus generated from pre-June 25, 2024 dispositions (which might entail drafting for a second category of hybrid surplus).
- Amendments to s. 110(1)(d.1) should include a continuation of the 50% deduction rate for CCPC options exercised prior to June 25, 2024;
- Capital gains realized by a trust or partnership prior to June 25, 2024 should maintain that time stamp when allocated to beneficiaries or members.
Canadian individuals should be able to share their $250,000 safe harbour with private corporations of which they are direct or indirect shareholders.
Examples of trusts negatively impacted by the $250,000 safe harbour not being accorded to them include graduated rate estates, qualified disability and Henson trusts, and alter ego or joint spousal/partner trusts.
Canadians should be permitted to carry forward unused portions of their $250,000 safe harbour room.
Neal Armstrong. Summary of Joint Committee, “Subject: Federal Budget 2024 – Capital Gains Inclusion Rate,” 1 May 2024 Joint Committee Submission under s. 38(a).
CRA indicates that it will follow Gardner (re deducting a sales person’s expenses of occasional travel between her home office and her employer) only on similar facts
Regarding the deductibility of automobile expense incurred by an employee, with a fully remote work arrangement, in connection with an occasional visit to the employer’s office from the home office, CRA stated:
[T]raveling between an employee’s home, including a home office, and a regular place of employment (RPE) is generally considered personal travel … .
… In this case, “regular” means there is some degree of frequency or repetition in the employee’s reporting to that particular location in a given pay period, month, or year. … For example, a work location may be considered to be a RPE of an employee even though the employee may only report to work at that particular location on a periodic basis (e.g., once or twice a month) during the year.
CRA noted that Gardner “held that motor vehicle expenses related to an employee’s travel between their home office and the employer’s principal place of business were deductible employment expenses under paragraph 8(1)(h.1)” but indicated that it had not changed its position except “where it can be established that an employee’s circumstances are factually similar to Gardner and all of the requirements in paragraph 8(1)(h.1) and subsection 8(10) … are met.”
Neal Armstrong. Summary of 29 August 2023 CPAC Roundtable Q. 8, 2023-0983051C6 - Automobile Expenses under s. 8(1)(h.1).
CRA confirms that the simplified method of computing home office expenses cannot be used for 2023 and subsequent taxation years
Regarding the status of the simplified method of calculating home office expenses, CRA stated:
In response to the COVID-19 pandemic, a temporary flat rate method was introduced to provide eligible employees with a simpler way to deduct home office expenses (work-space-in-the-home expenses and office supply and phone expenses). The temporary flat rate method can only be used for the 2020, 2021 and 2022 tax years.
Neal Armstrong. Summary of 29 August 2023 CPAC Roundtable Q. 7, 2023-0983041C6 - Home Office Expenses under s. 8(13).
Neal H. Armstrong editor and contributor