News of Note
CRA rules that using employees to provide on-line health services to non-resident patients from home offices in Canada does not create a PE in Canada
Email this ContentThree corporate taxpayers, which are resident in three countries with which Canada has treaties, use employees residing in those respective countries to provide online (e.g., by phone or video) services to patients in the same time zone. The taxpayers have now started providing the same services to patients in the same time zone as a Canadian province (“western patients”) but will not provide services to any patients located in Canada.
In order to accommodate employees who do not wish to work on night shifts in providing services to western patients, the taxpayers will permit (and financially assist) them to rent short-term accommodation (they will stay no more than 183 days) in such province, so that they can use their home office there to provide the services to western patients using computers provided by their employer. The taxpayers will continue to maintain their servers outside Canada and will have no access rights to such home offices.
CRA ruled that the taxpayers will be considered to be carrying on business in Canada while such employees are providing such services, but that they will not be considered to be carrying on business in Canada through a permanent establishment, as defined in Article 5 or V of the applicable treaty, solely as a consequence of such services being so provided.
Neal Armstrong. Summary of 2024 Ruling 2023-0984281R3 under Treaties – Income Tax Conventions – Art. 5.
Income Tax Severed Letters 10 July 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a PAC cannot be held by a trust not listed in Reg. 304(1)(c)(iii)(A)
A prescribed annuity contract (PAC) generally provides a more beneficial tax treatment to the annuitant than other types of annuities, which are subject to the accrual rules in s. 12.2(1). One of the requirements to be a PAC under Reg. 304(1)(c) is the requirement in Reg. 304(1)(c)(iii)(A) that the “holder” of the annuity contract be an individual (other than a trust) or a listed type of trust, i.e., an alter ego trust, joint spousal or common-law partner trust, post-1971 spousal or common-law partner trust, or qualified disability trust.
CRA rejected a suggestion that a PAC could be held in a non-listed trust in reliance on Reg. 304(3)(a), which deems the annuitant under an annuity contract to be the holder of the contract where the contract is held by another person in trust for the annuitant (defined in Reg. 304(4) as a person who is entitled to receive annuity payments under the contract) – so that (it was suggested) the holding of the mooted PAC by a non-listed trust could be deemed to be its holding by an individual beneficiary of the trust.
CRA indicated that Reg. 304(3)(a) could, for instance, permit a parent to hold an annuity contract for the parent’s child until the attainment of a specific age, so that Reg. 304(3)(a) would deem the child to be the holder of the contract, such that there thus would be an individual holder who satisfied Reg. 304(1)(c)(iii)(A). CRA concluded that “the expression ‘in trust’ in paragraph 304(3)(a) … is more akin to a nominee [arrangement]” and is not meant to accommodate non-listed trusts.
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 7, 2024-1005821C6 under Reg. 304(1)(c)(iii)(A).
CRA illustrates the application of ss. 248(35) and (36) to gifts of life insurance policies
Pursuant to s. 248(35), the FMV of a gift to a registered charity of a life insurance policy is reduced (leaving aside other more adverse refinements) to its adjusted cost basis immediately before the gift if the policy had been acquired less than three years before the date of the gift (or less than 10 years before, if one of the main reasons for the donor’s acquisition of the policy was to gift it to a qualified done). S. 248(36) may further reduce the FMV if the FMV of the interest in the gifted policy was reduced under s. 248(35) because the donor acquired that policy within the 3-year or 10-year periods described in that provision, and the policy was, at anytime within the 3-year or 10-year periods, as applicable, acquired by a person not dealing at arm’s length with the donor.
CRA illustrated the two provisions’ application. S. 248(5) would apply where:
- Within 2 years of the s. 98(5) wind-up of a partnership that had held a policy on the life of the sole proprietor (A) for over 10 years, A donated the policy to a registered charity (a “donation”) (CRA indicated that the period of holding by the partnership would not count for s. 248(25) purposes);
- An individual transfers a newly-acquired policy for nil consideration to a wholly-owned corporation and, 35 months later, the corporation gifts the policy to a registered charity;
- A parent purchased a policy on the life of the parent’s 8-year old child and then gifted it to the child on attaining 21, with the child then making a donation within 3 years (s. 248(36) did not apply since the policy had been held by the parent for over 10 years); and
- A transfers a policy on A’s life that A had held for 15 years to A’s spouse (B) on a s. 146(8.1) rollover basis, and B makes the donation within 3 years thereafter (again s. 248(36) would not apply, and B’s gain under s. 148(7) would be attributed to A).
The last scenario above is varied by A holding the policy for only 2 years before gifting it to B, who makes the donation within the next year. Here, s. 248(36) would apply given that the policy was acquired by A within the 3 year period before the time of the gift by B, so that s. 248(36) in conjunction with s. 248(35) would restrict the FMV of the interest in the gifted policy to the least of its FMV otherwise determined, its ACB to B immediately before the gift and its ACB to A immediately before the gift to B (again, B’s gain under s. 148(7) would be attributed to A.)
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 5, 2024-1007081C6 under s. 248(35).
We have translated 7 more CRA interpretations
We have translated an interpretation released last week and a further 6 CRA interpretations released in October of 2001. Their descriptors and links appear below.
These are additions to our set of 2,886 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 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA confirms its policy in IT-244R3 regarding gifts of a life insurance policy to a charity, but does not articulate any extension of this policy to split dollar arrangements
IT-244R3 indicated that a gift by an individual of a life insurance policy to a registered charity is considered to be a gift for purposes of s. 118.1 provided that the policy has been absolutely assigned to the donee, who becomes the registered beneficiary. CRA stated that “split-dollar” or other shared ownership arrangements are beyond the scope of its position in IT-244R3. 2003-0004315 indicated that there may be arrangements that could result in a charitable gift for purposes of s.118.1 within the spirit of the split-receipting rules but such a determination can only be made on a case-by-case basis.
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 4, 2024-1007061C6 under s. 118.1(1) – total charitable gifts.
CRA confirms that it only applies its position, that there can be only be only one child life insured under a policy at the time of a mooted s. 148(8) rollover transfer, at the transfer time
2004-0065441C6 indicated that the s. 148(8) rollover would not apply to a transfer of a life insurance policy under which more than one person is insured even where all the lives insured meet the definition of child; and 2005-0116681C6 indicated that the rollover is available where there is a joint-last-to-die policy on the life of a parent and child, and the policy is transferred to the child by virtue of the child being the named contingent owner of the policy within the meaning of s. 199(1) of the Insurance Act (Ontario) on the parent’s death, where the child is the only life insured under the policy at the time of the transfer. Further to these positions, CRA commented on the situation where a parent acquires and is the sole policyholder of a joint-last-to-die life insurance policy on the life of a child and the child’s spouse, and the child then dies so that the spouse is the sole life insured.
CRA confirmed that the parent could then gift the policy on a s. 148(8) rollover basis given that there now was only one life insured under the policy who was the “child” (under the extended definition of that term) of the policyholder, or of the transferee.
If, subsequent to the child death, the parent instead named the child’s surviving spouse as the contingent owner of the policy upon death, within the meaning of s. 199(1) of the Insurance Act (Ontario) then, again, the spouse would be the only life insured under the policy at the time of the transfer to the spouse, so that such transfer could occur on a s. 148(8) rollover basis.
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 3, 2024-1007101C6 under s. 148(8).
CRA finds that a Burkina Faso S.A.R.L. is a corporation rather than partnership
Before finding that a Burkina Faso limited liability company (S.A.R.L.) should be classified as a corporation for ITA purposes, CRA stated that, like a Canadian corporation, the SARL “has legal personality separate from that of its members; it owns its own property; it has its own obligations; and the liability of its members is limited since they are liable for the SARL’s corporate debts only up to the amount of their contributions.” It also has partnership features, e.g., a provision in the governing Act providing that a SARL “is created by (one or more) persons that agree, through an agreement, to contribute, to an activity, cash, or in-kind or services assets for the purpose of sharing profits or enjoying revenues that may derive therefrom” – but, overall, its attributes were closer to those of a Canadian corporation than of a partnership.
Neal Armstrong. Summary of 21 December 2022 Internal T.I. 2019-0826411I7 under s. 248(1) – corporation.
B.C. v. Peakhill Capital - B.C. Court of Appeal finds that structuring a receiver’s sale of B.C. real property as a share sale to avoid LTT was not an avoidance transaction
B.C. appealed from an order pronounced in a receivership under the Bankruptcy and Insolvency Act (Canada) approving a reverse vesting order (“RVO”), under which the shares of the insolvent debtor were sold to a purchaser after removal of unwanted assets and liabilities. This share sale avoided the imposition of property transfer tax (“PTT”) under the Property Transfer Tax Act (B.C.) thereby enhancing the value of the estate to be distributed to the secured creditors – and the judge below had found that this was the purpose for structuring the transaction as a share sale.
The Province argued inter alia that the judge’s order effectively deprived it of the ability pursuant to s. 2.001(3) of the PTTA (the “Recapture Provisions”) to deny the tax benefit from the transaction on the basis that it was an “avoidance transaction.” This term referred inter alia to a transaction that “is not one that may reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than for the purpose of obtaining the tax benefit.” In rejecting this submission, Harris JA stated:
[S]tructuring a transaction to avoid the transfer of title and thereby PTT is a legitimate commercial practice outside the insolvency context. … I can see no reason why that which is legitimate and proper outside the insolvency context should be viewed differently within it.
In any event, I can find no air of reality to the suggestion that the Recapture Provisions could apply to this transaction. The Province fastens on to the suggestion that the sole purpose of the transaction is to avoid PTT, but that is not entirely accurate. As the judge found, the purpose of the transaction was to maximize recovery for the creditors and it did so by avoiding PTT. The goal of maximizing recovery for creditors is a bona fide purpose intended to further the objectives of the BIA. Avoiding PTT was simply the means by which that benefit was conferred. To use the language of the provisions, the RVO is a transaction that may reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than for the purpose of obtaining the tax benefit.
Harris JA did not discuss the point that the tax benefit was that of the purchaser, not the receiver-vendor. Leaving that aside, the above analysis seems to be similar to that in Spruce Credit Union, which essentially found that a transaction with a primary non-tax purpose is not an avoidance transaction even though it was adopted in preference to an alternative transaction that was less tax effective. In other words, if a reasonable commercial alternative to selling an asset for $97 is selling the shares for $100, the latter transaction can be viewed as undertaken primarily to generate the $97, so that the $3 increment (related to the purchaser’s tax benefit) is incidental.
Neal Armstrong. Summaries of British Columbia v. Peakhill Capital Inc., 2024 BCCA 246 under s. 245(3) and BIA, s. 243.
Excise Tax Severed Letters January 2024
This afternoon's release of 25 Excise severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their January 2024 release) is now available for your viewing.
(On June 27th, the Directorate also released a bundle of six GST/HST severed letters dated January 2024, for 33 letters in total.)