News of Note
CRA finds that members of a corporate co-op likely were the beneficial owners of the co-op cattle inventory notwithstanding the documentation’s contrary label
As an economic matter, members of a feeder cattle finance cooperative established under the Co-operative Corporations Act used money borrowed on their behalf by the co-op to purchase cattle, and then maintain and feed them until sale and slaughter, so that, for example, they were responsible for all the costs of raising the cattle and maintaining their health. However, to secure such borrowing by the co-op and to provide better insulation from the effects of any member bankruptcy, the documentation of such transactions for the most part treated the co-op as retaining at all times, up to such sale, “all legal, equitable and beneficial ownership in the cattle.”
After indicating that “the definition of inventory in the Act is consistent with the ordinary meaning of the word and that in order to hold inventory for sale a taxpayer must own the inventory,” and that “the primary attributes of beneficial ownership are possession, use, risk and control,” CRA went on to state:
While the determination of who beneficially owns the cattle is a mixed question of law and fact that can only be determined after a complete review of all the terms and conditions of the contracts and agreements between the parties, it is our view that based on the information submitted that the beneficial ownership of the cattle is likely with the Members. The Members would treat the cattle as inventory for income tax purposes.
This is a good example of CRA’s willingness to make its own assessment of the legal substance of arrangements rather than being bound by the parties’ labels.
Neal Armstrong. Summary of 18 July 2022 External T.I. 2021-0887121E5 under s. 248(1) – inventory.
CRA described ETA s. 213.2 as establishing an import certificate regime allowing registered importers to obtain a CRA certificate permitting them to import - free of GST/HST otherwise imposed at the border – goods owned by a non-resident person for the purpose of providing a storage or distribution service, or performing certain manufacturing or processing services, in respect of those goods prior to their export (with the provision also extending to the importation of goods or raw materials, other than fuels, lubricants and plant equipment, for consumption or absorption directly in the processing of other goods for export.)
CRA confirmed that a Canadian manufacturer could not obtain such a certificate respecting its importation of goods from a registered US supplier given that it was not necessarily receiving the goods for their export or for the purpose of providing a service in respect of them to the non-resident supplier. Thus, the importer was subject both to GST at the border (under Division III) and to the GST charges of the non-resident supplier (under Division II).
Neal Armstrong. Summary of 1 September 2020 GST/HST Interpretation 180336 under ETA s. 213.2(1).
CRA finds that health professionals’ helping employers assess whether employees met health standards was not GST/HST exempted, whereas travel health advice was
ETA Sched. V, Pt. II, s. 1.2 deems any supply to not be eligible for any health care exemption if it is not a “qualifying health care supply,” whose definition refers to a supply that is made for various listed care purposes, e.g., maintaining health, preventing disease or treatment of injury or illness.
CRA found that services provided by a corporation to employers to assist them in assessing whether individuals met health requirements for employment through pre-employment medical evaluations and periodic medical evaluations were made for that purpose rather than the listed care purposes, so that such services were not exempted supplies. However, the supply by the corporation of travel health consultations performed by either a medical physician or a registered nurse (e.g., assessing vaccinations or prescriptions that should be obtained before travelling to certain countries) met the purpose test “as long as it is the client’s choice to seek such a consultation for travel motives without being obliged to do so in order to meet any pre-imposed travel conditions” so that, subject to that caveat, these latter types of services were exempted.
Neal Armstrong. Summary of 24 February 2022 GST/HST Ruling 231316 under Sched. V, Pt. II, s. 1.2.
We have published 8 translations of CRA interpretations released in March of 2004. Their descriptors and links appear below.
These are additions to our set of 2,216 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 18 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Comments on the revised stock-option rules include:
- S. 110(1.1) has been amended to replace the reference to “rights” by “right” - so that a qualifying person’s election can be in respect of less than all of the rights under a specific option agreement.
- In the common situation where the Canadian subsidiary is the employer and the issuer is its parent whose human resources function is the one involved in the option administration, it may be most expedient for such global plan administrator to provide the required notice under s. 110(1.9) (that the optioned shares are non-qualified securities) within the required 30 days of the agreement as agent for the Canadian employer.
- In order for a s. 110(1)(e) deduction to be available to the employer where there is a s. 7(1) benefit to the employee respecting a non-qualified security, an employment relationship must have existed at the time of grant, so that where a non-resident employee of a qualifying person that is non-arm’s length to the taxpayer is transferred to Canada after grant, no such deduction is available, even though the original grant made by the related foreign employer would be subject to s. 7(1).
- There is no requirement under s. 110(1)(e) that the employer have incurred any expense and, in fact, there would be no such expense where the grantor was another non-arm’s length qualifying person and there was no recharge agreement.
- The apparent requirement for the entirety of the s. 7(1) benefit to be included in the employee’s income, would deny the s. 110(1)(e) deduction where the benefit is partially sourced to another jurisdiction.
- The 2021 Explanatory Notes indicate that corporate partners may claim the s. 110(1)(e) deduction in some circumstances involving employees of partnerships, which appear to be those referred to in 2001-0115933, where CRA noted that there were no agreements in place which limited any of the employees’ employment relationship to any of the partners and that "[c]onsequently, each of the employees of the partnership are considered to be employees of each of the partners of the partnership for the purposes of section 7" - so that it should be possible to allocate the deduction among the corporate partners who are treated as employers under such policy.
- An exchange of an option agreement under s. 7(1.4) would appear to give rise to a new option agreement, so that s. 110(1.3) likely would require the re-application of the annual vesting limit.
Although in 2020-0864831I7, CRA seemed to indicate that RSUs granted to an employee early in a year would generally be regarded as representing compensation for services rendered in a prior year (so that the 3-year bonus exception period would start running one earlier) “unless all the facts and circumstances established that the grant was wholly unrelated to past services,” it would appear reasonable to consider this exception to be satisfied where a signing bonus or a retention bonus is paid by way of the grant of RSUs.
Neal Armstrong. Summaries of Paul Carenza and Chirs D’Iorio, “Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments,” draft 2021 Conference Report paper (Canadian Tax Foundation) under s. 110(0.1) – specified person, s. 110(1.42), s. 110(1.44), s. 110(1.1), s. 110(1.9), s. 110(1)(e), s. 110(1.3) and s. 248(1) - SDA – (k).
In another ruling dealing with an Ontario conservation authority, that was a deemed municipality, providing services (here the provision of environmental permits) to a member municipality, CRA ruled that funding provided by the municipality in consideration for getting a dedicated staff at the authority to provide prompter permit service, was consideration for a taxable supply for HST purposes.
This result seems quite form driven. If the municipality had agreed to pay higher permit fees for the faster service, those fees presumably would have been exempted under Sched. V, Pt. VI, s. 20(c)(i).
Neal Armstrong. Summary of 29 September 2020 GST/HST Ruling 175147 under ETA Sched. V, Pt. VI, s. 20(c)(i).
CRA found that water level and flow information provided by an Ontario conservation authority (which had been designated as a municipality for HST purposes) to a municipality for the latter’s planning purposes was a taxable supply (because this type of service supplied by a municipality was not specifically enumerated in Sched. V, Pt. VI), so that the fees were subject to HST.
Regarding the documentary requirements for the recipient municipality to claim a rebate, CRA then stated:
A supplier may issue an amended invoice or an additional invoice to account for the uncollected tax and to meet the disclosure requirements in the ETA. Where there are no contractual or common law restrictions to prevent the issuance of amended or additional invoices, the … CRA … will accept that the disclosure of an amount of tax payable may be met after the fact.
CRA requires proof that a Barbados remittance-based resident has borne tax on Canadian dividend income before providing the Treaty rate reduction
Dividends sourced from a Canadian corporation and received by a beneficiary of a resident trust (“NR-Beneficiary”) that was resident, but not domiciled, in Barbados and which was deemed to have received the dividends pursuant to a s. 104(19), was considered by CRA to qualify as a Treaty resident (i.e., under the Crown Forest test, it was “subject to the most comprehensive form of taxation” existing in Barbados) even though it was subject to tax on its income from non-Barbados sources only to the extent that such income was remitted to Barbados. CRA stated:
[E]ven if … the taxation of the Trust Income may be deferred until a benefit is obtained in the form of a remittance of money or an importation of property in Barbados, it is our understanding that the NR-Beneficiary remains, nonetheless, “liable to tax” in Barbados in respect of its worldwide income.
Although the dividends thus would otherwise be eligible for a Treaty-reduced rate of 15%, CRA noted that Art. XXX(5) generally permitted the application of the provisions of the Treaty to income received by a remittance basis Barbados taxpayer only if that income was taxed by Barbados in its hands. The Directorate then stated:
If a person who is subject to remittance basis taxation in Barbados files a return of income in Barbados contrary to the application of the law in force in Barbados, it is our view that the income reported on that return (the “Income”) would not be considered “taxed” in Barbados for the purposes of Article XXX(5) such that the benefits of the Treaty would not apply to the Income. Such would be the case if, for example, the Income is erroneously or mistakenly taxed or if taxes are gratuitously paid in respect of the Income in Barbados, without legal basis.
Accordingly, to receive the Treaty-rate reduction on the dividend income, NR-Beneficiary would be required to establish that such income was taxed in Barbados in conformity with Barbados tax law.