News of Note

Canada North – Supreme Court of Canada finds that a CCAA court can order a super-charge that has priority over a s. 227(4.1) deemed trust

The Crown challenged an order of the Alberta judge in CCAA proceedings regarding the Canada North group of companies that “priming charges” pursuant to s. 11 of the CCAA for counsel fees, costs of the monitor and financing charges of an interim lender would rank in priority to all other security interests and charges, arguing that this priority was contrary to s. 227(4.1). The Crown argued that (1) s. 227(4.1) created a proprietary interest in the debtors’ assets and a court could not attach a super-priority charge to assets that were not the debtors’ property, and (2) in any event, s. 227(4.1) created a security interest that had statutory priority over all other security interests, including super-priority charges.

Before rejecting both arguments in detail, Côté J, writing for herself and two other Justices, stated:

In all cases where a supervising court is faced with a deemed trust, the court must assess the nature of the interest established by the empowering enactment, and not simply rely on the title of deemed trust. In this case, when the relevant provisions of the ITA are examined in their entirety, it is clear that the ITA does not establish a proprietary interest because Her Majesty’s claim does not attach to any specific asset. Further, there is no conflict between the CCAA order and the ITA, as the deemed trust created by the ITA has priority only over a defined set of security interests. A super-priority charge ordered under s. 11 of the CCAA does not fall within that definition.

In elaborating on her first ground, she noted that, in addition to the “indeterminacy” of which specific assets were covered by the deemed trust, “the fact that assets subject to the deemed trust are indeterminate makes the trustee’s role effectively impossible to play”, so that there was no trust under Quebec Civil Law concepts. Similar considerations indicated that s. 227(4.2) did not create a trust that accorded with common law concepts.

In rejecting the second ground, she indicated that there was an implication from the relatively narrow breadth of the definition of security interest in s. 224(1.3) (referenced in s. 227(4.1),) and also from the fact that s, 227(4.2) provided that “a security interest does not include a prescribed security interest” (which showed that in fact Parliament did not contemplate that the deemed trust had much life beyond what was included in the definition of security interest), that the s. 227(4.1) deemed trust was subject to the priority of the priming charges.

She also stated:

[C]ourts should still recognize the distinct nature of Her Majesty’s interest and ensure that they grant a charge with priority over the deemed trust only when necessary. …

In the concurring reasons of Karakatsanis J (writing for herself and another Justice), she agreed that s. 227(4.1) does not satisfy the requirements for a trust, and seemed to emphasize the importance of giving breadth to the discretion of a CCAA judge under s. 11 of the CCAA in order to “further the remedial objectives of the CCAA” and given that at the end of the day the final CCAA order should provide for payment of the source deduction amounts.

Neal Armstrong. Summaries of Canada v. Canada North Group Inc., 2021 SCC 30 under s. 224(4.1), General Concepts – Ownership, Statutory Interpretation – Interpretive/Definition Provisions and Interpretation Act, s. 8.1.

Ménard – Court of Quebec applies the kiddie tax to a trust’s distribution of a capital gain, realized on a crystallization transaction, to a minor beneficiary

In 2012, a discretionary family trust engaged in a capital gains crystallization transaction in which it disposed of shares, having a modest ACB, of a small business corporation wholly-owned by the trust in consideration for shares of a new class of the same corporation, and then allocated and distributed the capital gain to its beneficiaries, one of whom was a minor. The ARQ applied the equivalent of ITA s. 120.4(5) to include twice the amount of the taxable capital gain in the minor’s income as a dividend, subject to a high rate of tax.

The statutory language relevantly required that an “amount can reasonably be considered to be attributable to a taxable capital gain … of a trust from a disposition of shares … that are transferred, either directly or indirectly … to a person with whom the specified individual does not deal at arm's length… .”

Taxpayer’s counsel argued that this language required that there be two distinct transactions – first, a disposition, and second, a transfer – whereas here the disposition and the transfer instead were one and the same transaction. In rejecting this argument and dismissing the appeal, Bourgeois. J.C.Q. stated that “a disposition transaction necessarily includes the notion of transfer.”

He also noted that comments in Gwartz indicated that had the similar transactions in that case occurred after the implementation of s. 120.4(5), they would have been caught, and that the Finance Explanatory Notes were “also eloquent” that the purpose was “to restrict income splitting opportunities in respect of capital gains realized (through a trust) for the benefit of a minor.”

Neal Armstrong. Summary of Ménard v. Agence du revenu du Québec, 2021 QCCQ 3891 under s. 120.4(5).

Income Tax Severed Letters 28 July 2021

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

CRA rules on the conversion of a defined benefit to a defined contribution SERP

CRA ruled on the conversion of two supplementary executive retirement plans (being unfunded plans) for the Company’s CEO and for its VPs, from defined benefit plans to defined contribution plans.

The revised terms contemplate that In respect of each month of service for which the member is making the maximum contributions under the Company registered pension plan (RPP), the Company will make notional contributions to the member’s account in an amount equaling the excess of 10% of the member’s targetcd compensation for such month (including 1/12 of the targeted year-end bonus) over the amount of the Company contributions made for such month to the member’s RPP, except that if such amounts for the year prove to exceed 18% of the actual compensation of the member for the year over the RPP limit of the member for that year, the employer will pay, as soon as possible, the excess in a lump sum to the member (or, if the member has died, to the member’s spouse).

The notional contributions in respect of a member will be credited with notional investment returns on a pooled investment fund available to the RPP.

If a SERP member ceases service for any reason other than death, the employer will pay the SERP benefit in 10 annual instalments, unless the member has elected for a fewer number of instalments or to have the balance in the member’s account paid as one lump sum.

If the member dies before benefit payments have commenced, the balance in the member’s account will be paid to the surviving spouse, or to a designated beneficiary.

Rulings included that these would not be salary deferral arrangements and that s. 5(1), 6(1)(a) or 12(4) would not apply to the member.

Neal Armstrong. Summary of 2021 Ruling 2020-0858321R3 under s. 248(1) – SDA.

CRA reaffirms that significant additional services transform rental income into income from services

Would the owner of a qualifying property that operates a hotel, or other similar business such as a motel or a bed and breakfast, be considered to use the property primarily to earn rental income as described in para. (b) of the definition of “qualifying rent expense” in s. 125.7(1), such that it would be prevented from claiming the Canada emergency rent subsidy (“CERS”)? CRA stated:

Generally, any income earned from the use or occupation of a property or a right to use or occupy property is considered to be rental income. However, where, in addition to basic services that are customarily supplied with rental of real or immovable property, an entity also provides significant additional services that are integral to the success of its ordinary activities, it is the CRA’s longstanding position that the entity would be earning income from the services provided instead of earning rental income from the use or occupation of the property.

CRA went on to indicate that the application of these tests was a question of fact, and did not repeat its vintage statement in IT-73R6 that a “corporation that operates a hotel is generally considered to be in the business of providing services and not in the business of renting real property.” Nonetheless, it appears that CRA would continue to view a full-service hotel as not generating rental income.

Neal Armstrong. Summary of 16 July 2021 Internal T.I. 2020-0872521I7 under s. 125.7(1) - “qualifying rent expense” – para. (b).

Our translations of CRA Interpretations go back over 14 years

We have published a further 10 translations of CRA interpretation released in July, 2007. Their descriptors and links appear below.

These are additions to our set of 1,642 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 14 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for August.

Bundle Date Translated severed letter Summaries under Summary descriptor
2007-07-20 11 July 2007 External T.I. 2006-0206391E5 F - Choix du paragraphe 70(6.2) - société de personnes Income Tax Act - Section 248 - Subsection 248(1) - Property each share, unlike a partnership unit, is a distinct property
Income Tax Act - Section 70 - Subsection 70(6.2) s. 70(6.2) election not available for part of a partnership interest, whereas it is made for particular shares
12 July 2007 Internal T.I. 2007-0240681I7 F - Indiens - Cotisations à un RPA Income Tax Act - Section 147.2 - Subsection 147.2(4) - Paragraph 147.2(4)(a) s. 8(1)(m) deduction prorated based on percentage of work performed on the reserve
10 July 2007 External T.I. 2006-0177881E5 F - Allégement transitoire Income Tax Act - Section 112 - Subsection 112(3) transitional relief not lost on s. 85(1) exchange
11 July 2007 External T.I. 2006-0192101E5 F - Disposition d'actions par un non-résident Income Tax Act - Section 212.1 - Subsection 212.1(1) relief under the 1998 federal budget was not implemented – deemed dividend where NR individual effects pipeline transaction
2007-07-13 9 July 2007 External T.I. 2006-0200791E5 F - Actions sous entiercement Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation shares of public-company franchisor could be used in the franchisee’s business if required to be held by it
4 July 2007 Internal T.I. 2007-0237631I7 F - Frais de repas - Secteur du taxi Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) ss. 18(1)(h) and (a) less restrictive than s. 8(4) but does not permit deduction of self-employed tax driver’s lunch expenses
4 July 2007 Internal T.I. 2007-0238391I7 F - Crédit pour stage en milieu de travail Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) Quebec job tax credit included under s. 12(1)(x) if not a wage expense reduction
Income Tax Act - Section 12 - Subsection 12(2.1) inclusion under s. 12(2.1) where Quebec job credit received by partnership members
2007-07-06 14 June 2007 Internal T.I. 2007-0229311I7 F - Capital Dividend Account Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (b) recording of dividend payable and dividend receivable between sub and parent was insufficient to constitute the payment of a capital dividend, so that there was no CDA addition
General Concepts - Payment & Receipt making accounting entries does not constitute payment of a dividend
Income Tax Act - Section 184 - Subsection 184(3) invalid payment of capital dividend (because no payment) was subject to Pt. III tax (given valid s. 83(2) election) for which no s. 184(3) election could be made as no payment
General Concepts - Effective Date a declared dividend cannot be revoked
3 July 2007 External T.I. 2007-0236551E5 F - Crédit d'impôt pour études Income Tax Act - Section 118.6 - Subsection 118.6(1) - Qualifying Student post-doctoral fellow is not a student
30 May 2007 External T.I. 2006-0183851E5 F - Paragraphs 83(2) and 84.1(1) Income Tax Act - Section 83 - Subsection 83(2) s. 83(2) election can be made on a s. 84.1 deemed dividend
Income Tax Act - Section 84.1 - Subsection 84.1(1) - Paragraph 84.1(1)(b) s. 84.1(1) dividend is payable per s. 84(7) so that s. 83(2) election available

CRA publishes a new memorandum on acceptable ITC methods for use by financial institutions

The quite detailed rules in ETA s. 141.02 for calculating input tax credits (ITCs) of financial institutions (FIs) are under the pall of the requirement to use a “specified method”, namely, a method acceptable to CRA. CRA has published a new memorandum on this topic, and cancelled Bulletin B-106 (which had a number of vacuous or trite examples). Some of the CRA comments include:

  • An FI generally has very few non-attributable inputs. An example of a direct input (i.e., contributing to making both taxable and exempt supplies) is services received by an FI for the maintenance of a website providing information about its involvement in the community activities (e.g., sponsorship of children’s sports teams), as well as information about the various services it provides. Such acquired services can “be attributed to the making of particular supplies (both taxable supplies for consideration and exempt supplies).” (This appears to imply acceptance that such indirect promotional activity is for the purpose of making the taxable and exempt supplies of the FI, i.e., ETA s. 141.01(2) may be no more restrictive that ITA s. 18(1)(a).)
  • Office space, heating costs, electricity, equipment repair and office supplies of an FI making both exempt and taxable supplies were also given as examples of direct inputs.
  • Furthermore, CRA considers that a substantial portion of an FI’s direct inputs can be allocated through (direct) tracking of the use of the inputs or through “causal allocation” (generally using an allocation base such as square footage or number of employees) so that “as a result, few, if any, direct inputs will be allocated using either an input-based allocation [based on the relative use of other business inputs] or an output-based allocation [e.g., using relative taxable and exempt revenues].”
  • CRA provides an example of an acceptable method for allocating a non-attributable input (employees anonymously using a third-party counselling service for mental health or other issues), namely, the FI properly allocated 8.5% of all its exclusive and direct inputs to taxable supplies (using tracking and causal methodologies) and, accordingly, claiming an ITC of 8.5% of the GST on this supplier’s invoice.

Neal Armstrong. Summaries of GST/HST Memorandum 17-12 “Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02” July 23, 2021 under ETA s. 141.01(2), s. 141.01(3), s. 141.02(1) – exclusive input, direct input, non-attributable input, specified method, s. 206(3), s. 141.02(17) and s. 141.02(9).

Tomorrow's Champions – Federal Court of Appeal finds that a Canadian amateur athletic association could focus on funding costs of facilities and equipment

This case was substantially similar to the A4A case and the reasons in that case were stated to be largely applicable to the similarly successful appeal by the appellant (“TCF”) in this case. The chief difference was that while A4A indicated that it would be providing funding directly to athletes, TCF indicated it would be assisting teams and clubs by paying for facilities, equipment, and services.

Webb JA substantially reiterated the reasons from his A4A decision, but also stated:

The condition in paragraph (a) of the definition of CAAA is that the association “was created under any law in force in Canada”. Therefore, there is no requirement that a CAAA must be formed under a federal law. An organization incorporated under the former Society Act of British Columbia will satisfy this requirement.

Neal Armstrong. Summary of Tomorrow's Champions Foundation v. Canada, 2021 FCA 146 under s. 149.1(1) – CAAA - (a).

Athletes 4 Athletes – Federal Court of Appeal finds that the required nationwide objective for a Canadian amateur athletic association could be met out of a local office funding athletes directly

The Minister rejected the application of the appellant (“A4A”) for registration as a registered Canadian amateur athletic association (CAAA) on the basis that (1) A4A was not intending to promote amateur athletics in Canada directly, but instead was intending to financially support athletes who could not otherwise afford to train and pay for their daily living expenses, and (2) A4A was intending to have, at least initially, a presence only in Vancouver and lacked the budget to operate programs on a national level, so that it would not satisfy the test (in para. (d) of CAAA definition) of promoting amateur athletics in Canada on a “nationwide basis”.

In rejecting the first ground and before remitting the matter back to the Minister for redetermination in accordance with his reasons, Webb JA stated:

So long as the only purpose and the only function of an organization is the promotion of amateur athletics in Canada on a nationwide basis, it should not matter whether a particular function directly or indirectly does so.

In rejecting the second ground, he stated:

So long as the organization is promoting amateur athletics in Canada on a nationwide basis, even if it only has an office in one province, it would satisfy the requirement.

He also cited Stemijon in noting that the “guidance as previously drafted by the CRA cannot bind the Minister nor can it alter the provisions of the statutory definition of a CAAA”.

Neal Armstrong. Summaries of Athletes 4 Athletes Foundation v. Canada (National Revenue) 2021 FCA 145 under s. 149.1(1) – CAAA - (d) and s. 149.1(22).

GST/HST Severed Letters March 2021

This afternoon's release of three severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their March 2021 release) is now available for your viewing.