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CRA states that it usually will provide administrative relief where a registrant fails to self-assess tax on the purchase of commercial real estate

A GST-registered person purchases commercial real estate and, when it files its return for that month, neglects to report the tax payable under s. 228(4) on the purchase (which is required to be reported on a separate line in the return) and to claim the offsetting input tax credit. If this is discovered by CRA on audit, it generally will assess the purchaser for its s. 228(4) tax, allow the off-setting ITC and not assess any interest. However, it states that it will not provide this “administrative relief” “where the purchaser was previously assessed under similar circumstances.”

Although ETA s. 296(2) requires CRA on audit to deduct any unclaimed ITCs from an assessment of net tax, CRA considers its usual approach described above to be “administrative relief” because, as a technical matter, “the tax payable [under s. 228(4)] is not part of the registrant’s net tax calculation” – so that in CRA’s view it is in its discretion as to whether, in addition to assessing the purchaser’s s. 228(4) tax, it also assesses the purchaser’s negative net tax resulting from recognizing the unclaimed ITC.

Neal Armstrong. Summaries of 25 February 2016 CBA Roundtable, Q.11 under ETA s. 228(4) and 296(2).

CRA permits professionals who are sharing payroll expenses to jointly open up a single payroll account without being considered to be a partnership

A group of dentists, who are not in partnership, wish to share the costs of staff such as receptionists and bookkeepers and also are shared employers of the staff, so that all of the staff remuneration paid by each dentist is exempted from GST/HST as a result of being paid qua employer. CRA indicated that it can accept such an arrangement as being valid notwithstanding that all of the source deductions are handled on the payroll account of only one of the dentists, who does the remittances, and source deduction and T4 reporting, as agent for the other dentists as well as on her own behalf – and also pays the staff remuneration as agent and is reimbursed on a pro rata basis by the other dentists.

CRA also indicated that even though this arrangement is not a partnership either in Quebec or the Rest of Canada (because “both common law and civil law’s approach to partnership require an element that relates to profit sharing”), the group of dentists viewed as a “non-commercial partnership, or a partnership of employment or occupation” could alternatively jointly “open a Business Number (BN) payroll account for payroll purposes and remit and report under that BN.”

Neal Armstrong. Summaries of 25 February 2016 CBA Roundtable, Q. 7 under ITA s. 96 and s. 153(1)(a), ETA s. 123(1) – service.

An HST/GST rebate claim will show on collections officers’ screens as a remittance deficiency if it is not timely-processed

Although s. 228(6) permits a registrant to net its rebate claim against its net tax remittance obligation, that amount will show in the system as a remittance deficiency if the rebate application is not processed by CRA within a particular time frame. However, where this occurs, collections officers are being instructed not to pursue collection of the rebate claim until it has been affirmed or denied.

Neal Armstrong. Summary of 25 February 2016 CBA Roundtable, Q. 5 under ETA s. 228(6).

CRA states that it may not abide by provincial garnishment limitations except in Quebec

When a trade receivable of $100 plus $13 of HST owing to a tax debtor is garnished by CRA to satisfy part of the $200 tax debt of the tax debtor to CRA, this very well may mean that the tax debtor will not have the funds to satisfy its obligation to remit the $13 with its monthly HST return. CRA noted that this may not have an adverse arrears interest effect on the tax debtor because, although it will be accruing more interest on its current unpaid remittance, the old tax debt has been reduced.

CRA indicated that it no longer respects provincial garnishment limitations (apparently for ITA purposes as well as GST/HST purposes) except that it abides by the Quebec limitations respecting GST collections in Quebec to stay coordinated with the ARQ, which is legally bound by the Quebec limitations. Examples of where CRA may exceed the provincial limits in the Rest of Canada include situations

where there were other sources of income and only one income source was to be subjected to garnishment action, assets that could be readily available to the debtor to generate funds to satisfy the tax debt in full or a substantial portion and the debtor was not cooperating, or situations where the provincial exemption amount would be insufficient to address the amount of arrears.

Neal Armstrong. Summary of 25 February 2016 CBA Roundtable, Q. 4 under ETA s.317.

CRA indicates that damages can be eligible for a s. 216 election

Consistently with the surrogatum principle (or the broad meaning of "in lieu of" per Transocean), CRA found that annual compensation paid pursuant to a court order by a Canadian utility to a non-resident lessor, to compensate the lessor for lost rental income resulting from the utility’s construction of power lines on the rented lands, should be treated for Part XIII purposes as rent (subject to 25% withholding). However, CRA indicted that, by the same token, the compensation amounts also would be eligible for the s. 216 election (to effectively subject the amounts to Part I tax instead) provided that the usual tests (e.g., the lost rental income was property income) were satisfied.

Neal Armstrong. Summaries of 13 February 2017 External T.I. 2015-0570011E5 under s. 212(1)(d) and s. 216(1).

CRA notes that a s. 94(3) trust can cause a trust of which it is beneficiary to be subject to Part XII.2 tax

A non-resident trust, which is deemed to be resident for various purposes under s. 94(3)(a), is nonetheless considered to be a “non-resident person” for purposes of the application of Part XII.2 tax to a resident trust of which it is a beneficiary. It seems quite anomalous that a resident trust would be subject to Part XII.2 tax on the basis of the non-resident status of a beneficiary which is itself subject to full Part I tax under under s. 94(3).

Neal Armstrong. Summary of 9 February 2017 External T.I. 2016-0657531E5 under s. 210 – designated beneficiary – para. (a).

Mont-Bruno – Tax Court of Canada strikes out the Minister’s Reply as not containing sufficiently cogent factual allegations to justify assessing a statute-barred return

A non-profit organization operating a golf course was assessed well beyond the normal reassessment period on the basis that a gain realized by it on selling some wooded land adjacent to its golf course (but on the other side of the road and with a different zoning) was not exempted under s. 149(5)(e)(ii) as being used directly and exclusively in the course of providing its sporting facilities. After striking two allegations of mixed fact and law in the Minister’s Reply, including one that merely paraphrased the s. 149(5)(e)(ii) test rather than containing only factual allegations, Paris J found that the remaining factual allegations in the Reply, if proven, would have been insufficient to establish that there had been a misrepresentation attributable to neglect etc. Accordingly, the Minister’s Reply was struck as disclosing no reasonable cause of action.

However, as it was possible that the Minister would be able to draft an amended Reply to support the late assessment, the Minister was given 60 days to file an amended Reply.

This case suggests that there is a significant burden on the Minister to establish misrepresentation attributable to neglect etc.

Neal Armstrong. Summary of Mont-Bruno C.C. Inc. v. The Queen, 2016-1152(IT)G, 21 March 2017 under s. 152(4)(a)(i).

CRA states that s. 95(2)(a)(ii) (if applicable) can recharacterize a profit transfer payment that is not deemed a dividend under s. 90(2)

Under an “Organschaft,” a German parent (“Parentco”) and its German subsidiary (“Subco”) can enter into a profit transfer agreement (PTA) which Subco agrees to annually transfer its entire profit determined in accordance with German (statutory) GAAP to Parentco. In 26 May 2016 IFA Roundtable Q. 6, 2016-0642081C6, CRA confirmed that, at least in the simple case where Parentco wholly-owns Subco through ownership of a single class of shares, the annual profit transfers will be deemed to be dividends under s. 90(2) and, thus, not foreign accrual property income to the direct or indirect Canadian parent of Parentco – and then indicated that this supplanted an earlier position (e.g., (e.g., 2001-0093903) that a profit transfer payment made by Subco to Parentco could be re-characterized as income from an active business of Parentco under s. 95(2)(a)(ii) to the extent that Subco had earnings from an active business before taking into account the profit transfer payment – so that this previous position will only apply to profit transfer payments made before 2017.

A questioner pointed out that there are PTA mechanisms in other jurisdictions as well, and that there are still situations where s. 90(2) does not apply, e.g., where a profitable operating subsidiary in Finland or Sweden makes PTA payments to a grand-parent). CRA stated:

[T]he proposal to limit the application of the [s. 95(2)(a)(ii)] General Approach to PTA payments made before 2017 was only meant to apply to situations where the PTA payment is deemed under subsection 90(2) to be a dividend. For any other PTA situations…the CRA will continue to apply the General Approach.

Neal Armstrong. Summary of 2 March 2017 External T.I. 2017-0682291E5 under s. 95(2)(a)(ii).

Income Tax Severed Letters 22 March 2017

This morning's release of nine severed letteres from the Income Tax Rulings Directorate is now available for your viewing.

Full-text translations of the 2017 Quebec CPA Roundtable items are available

Full-text translations of all the eight of 2017 Quebec CPA Roundtable questions and answers that were released last Wednesday (including those referred to in previous posts) are now available, and are listed and briefly described in the table below.

These (and the other translations covering the last 21 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2017-03-15 2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.1, 2016-0674221C6 F - General deduction from tax - 123.4 Income Tax Act - Section 123.4 - Subsection 123.4(1) - Full Rate Taxable Income income on which the SBD was not claimed nonetheless is not eligible for the general rate deduction
2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.2, 2017-0682711C6 F - Dedicated Telephone Service for Income Tax Service Income Tax Act - Section 152 - Subsection 152(1) telephone service for those with complex technical tax issues will initially be limited to Ontario and Quebec CPAs
2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.3, 2016-0674821C6 F - Individuals separated living under the same roof Income Tax Act - Section 122.6 - Cohabiting Spouse or Common-Law Partner couple under the same roof can be living separate and apart
Income Tax Act - Section 248 - Subsection 248(1) - Common-Law Partner meaning of living "separate and apart"
2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.4, 2016-0674831C6 F - Changement d'usage - duplex Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c) substantially renovating the personal-use portion of a rental property (without changing floor areas) generally would not engage the change-of-use rules
Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) apportionment of operating expenses of duplex used both personally and for rental income
Income Tax Act - Section 248 - Subsection 248(1) - Property duplex is single property
2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.5, 2016-0674801C6 F - Allocation et frais d'une automobile Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(k) - Subparagraph 6(1)(k)(v) electric vehicles treated the same
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(vii.1) general reasonability of a car allowance rate of $0.54/$0.48 per kilometre including for electric vehicles
2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.6, 2016-0674861C6 F - Wholly dependent person tax credit Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(b) - Subparagraph 118(1)(b)(ii) meaning of support/legal custody not required/ITA is silent on number of days child must spend with parent
2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.7, 2016-0674811C6 F - Allocations automobiles & dépenses afférentes Income Tax Regulations - Regulation 200 - Subsection 200(3) correction of T4s
Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(h.1) if vehicle allowance is too low, employee can include the allowance and deduct the vehicle expenses/T2200 production expected
2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.8, 2016-0674851C6 F - HBTC - Acquisition by way of gift Income Tax Act - Section 118.05 - Subsection 118.05(1) - Qualifying Home gifted home can qualify for the HBTC