News of Note
We have translated 5 more CRA Interpretations
Email this ContentWe have published a further 5 translations of CRA interpretations released in February, 2010. Their descriptors and links appear below.
These are additions to our set of 1,267 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA rules on pipeline transaction where the subject company funds the payment of the terminal taxes
In a pipeline transaction involving a portfolio company whose shares had been stepped up to fair market value in the hands of the estate on the death of the deceased (A), it is proposed that the corporation lend the necessary funds to the estate to pay the terminal taxes of A. When the estate sells its shares of the portfolio company to a Newco for two promissory notes, the estate then assigns the first of these two notes to the portfolio company in repayment of the terminal-taxes loan. This first note then is extinguished by operation of law when the portfolio company is wound-up into Newco a year later – with payments of the second note by Newco to the estate commencing thereafter.
Neal Armstrong. Summary of 2020 Ruling 2019-0819191R3 F under s. 84(2).
Ray-Mont – Federal Court of Appeal confirms applying 4-part Wiebe test to find employment notwithstanding intent of Quebec parties not to be employer-employee
Notwithstanding that a logistics company and workers performing loading work for it had intended their relationship to be one of independent contractors rather than of employment, the Tax Court went on to apply the four objective tests in Wiebe as to the presence of an employment relationship to find that there was one. Although the definition of employment in the Civil Code “places emphasis on the essential characteristic of direction or control,” Boivin JA found that even for Quebec workers “’a court does not err in taking into consideration as indicators of supervision the other criteria used under the common law [Wiebe tests of] the ownership of the tools, the chance of profit, the risk of loss, and integration into the business.’”
This is a different articulation of the tests than by Graham J in Insurance Institute - that under “Connor Homes … a different test must be applied [than in Wiebe] when the worker and the payor share a common intention.”
Neal Armstrong. Summaries of Ray-Mont Logistiques Montréal Inc. v. Canada (National Revenue), 2020 FCA 113 under s. 5(1) and General Concepts – Judicial Comity.
National R&D – Tax Court finds that programming costs were not SR&ED and not deductible
Lafleur J confirmed the denial of SR&ED treatment for a project of a consulting company to develop a computer program to automate aspects of filing SR&ED claims through a “web-based, cross-platform and cross-browser framework to track claimable SR&ED projects.” Among other things, there was a failure to “carry out systematic investigation to remove technological uncertainties” and there was no “contemporaneous documentation that details any of the tests and the results of those tests.” The result was to deny deductions for the expenditures in addition to denying investment tax credit claims.
The taxpayer did not argue that the expenditures were deductible under s. 9, notwithstanding that it is common for businesses to deduct their programming expenses without challenge.
Neal Armstrong. Summary of National R&D Inc. v. The Queen, 2020 TCC 47 under s. 248(1) - SR&ED.
CRA rules on pipeline involving creation of high PUC common shares
CRA ruled on post-mortem pipeline transactions with somewhat unusual mechanics, i.e., the Newco will not issue notes or preferred shares to the company whose shares were stepped up on death (Holdco), and Newco and Holdco might amalgamate only after some of the earnings of Holdco have been stripped.
In particular:
- S. 51 is used to convert the estate’s stepped-up shares of Holdco into high ACB (and low PUC?) preferred shares, with the estate then subscribing a (presumably nominal) amount for voting common shares of Holdco.
- A portion of the Holdco shares are redeemed in order to distribute the capital dividend account of Holdco and generate a capital loss for effective carryback under s. 164(6).
- The estate transfers its high ACB/lower PUC prefs of Holdco to Newco under s. 85(1) in consideration for high ACB/high PUC shares of Newco.
- After a stipulated period (perhaps a year), Newco effects a PUC distribution on its Class A shares by distributing 8 non-interest bearing promissory notes to the estate with staggered maturity dates, with the first one occurring the next day (and the last one 2 years later?)
- After a specified passage of time, Newco and Holdco will amalgamate.
- At an appropriate juncture (which apparently could occur before the amalgamation), the estate will distribute to its beneficiaries the above promissory notes which had not yet been repaid, as well as the common shares of Newco or Amalco.
Neal Armstrong. Summary of 2019 Ruling 2019-0835131R3 F under s. 84(2).
CRA recognizes that an individual and their registered plans can constitute multiple beneficiaries under the 150 MFT beneficiary test
Reg. 4801(b) requires a mutual fund trust to have at least 150 beneficiaries each holding one block of units with an aggregate fair market value of at least $500. CRA indicated that where an individual, her TFSA, her RRSP and her spouse’s RRSP (to which she had contributed) each held a block of units, they would be considered to be four beneficiaries for these purposes. It stated:
There is no requirement to look through the registered plan trust.
It also noted:
Notwithstanding our general view described above, we note that the CRA has previously applied … GAAR … in situations where mutual fund trust status was artificially achieved to facilitate abusive tax avoidance.
Neal Armstrong. Summary of 8 June 2020 External T.I. 2019-0822901E5 under Reg. 4801(b).
Income Tax Severed Letters 9 September 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that landlords should apply ETA 232 to CECRA rent reductions
After describing the CECRA (COVID rent assistance) program, CRA noted:
- The forgivable loan made by CMHC is an exempt supply – no GST/HST is payable to the CMHC.
- The landlord should issue a credit note for the rent reduction in conformity with s. 232 so that, inter alia, it will not be required to remit GST/HST on the pre-reduction amounts.
Further points made by CRA (unrelated to CECRA):
- services of osteopathic manual practitioner (other than an osteopathic physician) are not exempted from GST/HST
- the new 20% B.C. sales tax on certain vapour products is not a “prescribed provincial levy,” so that GST is levied not only on the sale price but also on that sales tax
- after noting that it prevailed in Patterson Dental, CRA stated:
The CRA’s existing policy regarding the application of the GST/HST to drugs that are mixed substances or solutions is consistent with the decisions of the Courts.
Neal Armstrong. Summaries of Excise and GST/HST News - No. 108 September 2020 under ETA s. 123(1) – financial service - (c), s. 232(3)(a), Sched. V. Pt. II, s. 1 – practitioner, s. 154(2)(b), and Sched. VI, Pt. I, s. 2(e).
Valovic – Tax Court of Canada finds that shareholders’ services were not consideration for dividends received by them for s. 160 purposes
An electrician and his spouse provided their services as electrician and administrator to their equally-owned corporation, and received dividends and salary. In rejecting their submission that, for s. 160 purposes, the annual dividends were paid for equivalent consideration, being a portion of their services, Monaghan J noted that decisions of the FCA/TCC “accepted and endorsed the view expressed in Neuman that dividends relate to shareholding and rejected the argument that there was consideration for the dividends.”
Neal Armstrong. Summary of Valovic v. The Queen, 2020 TCC 101 under s. 160(1)(e)(i).
Reference re S. 6 of the Time Limits and Other Periods Act – Federal Court of Appeal finds that s. 6 did not trench on orders made under the Federal Courts Rules
In a letter dated September 1, 2020 addressed to the Federal Court, the Attorney General stated his position that s. 6 of the Time Limits and Other Periods Act (COVID-19), which suspended retroactively all “time limits…established by or under an Act of Parliament” during the March 13-September 13 period, ousted all “orders and directives issued” by the Courts concerning time limits or setting deadlines. The reaction of Noël C.J. was instantaneous. On September 3, he issued the following direction pursuant to Rule 54:
The Court directs that the Attorney General’s position concerning the interpretation and effect of section 6, in so far as it extends to the time limits under the Rules and orders made thereunder, is incorrect in law and should not be followed. The Federal Courts Rules, S.O.R./98-106 and this Court’s Practice Directions, judgments, orders and directions remain in full force and effect.
He explained:
Were it otherwise, confusion and potential harm—surely not desired by Parliament—would result. For example, orders requiring a proceeding to be prosecuted urgently on shortened time limits to further the public interest and to avert some harm or prejudice would be invalidated with retroactive effect. …
Beyond this, construing section 6 as allowing Parliament to unilaterally interfere with the management and governance of ongoing proceedings would invade a core judicial function … . Where possible—and it is possible here—section 6 should be given a meaning that is respectful of judicial independence and obeys constitutional imperatives.
Presumably, the Tax Court will take a similar view that s. 6 does not prevent it from controlling its own proceedings.
Respecting the scope of s. 6, Noël C.J. noted that it did extend the time periods for starting proceedings in the Federal Court, for example s. 27(2) of the Federal Courts Act (the time limit for bringing appeals) and ss. 18.1(2) and 28 thereof (the time limit for bringing an application for judicial review).
Neal Armstrong. Summary of Reference re Section 6 of the Time Limits and Other Periods Act (COVID-19) (CA), 2020 FCA 137 under Time Limits and Other Periods Act (COVID-19), s. 6.