News of Note
Agences Kyoto – Court of Quebcc finds that a written contract or resolutions were unnecessary for the deductibility of inter-company management fees
Email this ContentRegarding the denial by the ARQ of the deduction of management fees paid by the taxpayer (AK) to its wholly-owning parent (GAK), Richard JCQ stated:
Despite the absence of a written contract, resolution or other documentation, [an AK/GAK director] convinced the Court that numerous acts of management were performed by GAK for the benefit of AK, notably in the negotiation of financing, acquisition opportunities, the determination of rents and the payment of life insurance policies for its directors, of which GAK is the beneficiary.
Neal Armstrong. Summary of Agences Kyoto ltée v. Agence du revenu du Québec, 2023 QCCQ 2921 under s. 18(1)(a) – income -producing purpose.
Larouche – Court of Quebec determines the relative business use represented by a home office using the home’s gross rather than net area
In deducting his home office expenses, the taxpayer determined the portion of his home that was used in his business of providing electrical engineering services, which he calculated by dividing the square-foot area of the three rooms that he used in that business by the net square footage of his home, which was the area of the two floors as measured by the exterior dimensions, minus the areas taken up by the walls and minus the area of common areas (stairwells and hallways). In instead accepting the ARQ method, which divided the area of the three rooms by the gross floor area, Brunelle JCQ stated (at para. 35, TaxInterpretations translation):
[A] person's home is first and foremost the individual’s dwelling and "the privileged place of his or her private life". Admittedly, a person may choose to work at home and reserve a certain amount of space for this purpose, but the fact remains that corridors, stairwells and other indoor areas for locomotion are essential to the personal use of the premises.
Neal Armstrong. Summary of Larouche v. Agence du revenu du Québec, 2023 QCCQ 3350 under s. 18(12).
Morin – Court of Quebec finds that management fees paid to a related company that performed its functions through the agency of the fee payer were non-deductible
A pharmacist (“Morin”), who previously had operated six pharmacies as proprietorships, agreed with her management company (“377”) that she would incur various of the expenses of the pharmacies as they related to services provided by technicians and support staff, as contrasted to professional staff, as agent for 377 and that the gross profits from the pharmacies would be split on a 30/70 basis between 377 and her. 377 sent quarterly invoices to Morin and issued credit notes for its computed share of the expenses.
Tremblay JCQ confirmed the ARQ position that the $2.5 million in management fees charged by 377 to Morin for the years at issue under the above arrangement were completely non-deductible as they were not incurred for an income-producing purpose. Morin was performing exactly the same functions as before, and the sole effect of the arrangement was to reduce her income by the fee amounts. Tremblay JCQ stated):
… Ms. Morin had no expectation of receiving any income from the management fees she paid to 377. …
It seems obvious that a reasonable businesswoman, considering only her commercial interests, would not have committed herself to such an expense.
However, the ARQ reassessments to deny her deductions, which were made beyond the normal reassessment period, were statute-barred, given that the general plan had been proposed by Morin’s tax advisors and she “could reasonably expect that the structure proposed to her could produce the legal and tax effects envisaged by her professionals.”
Neal Armstrong. Summaries of Morin v. Agence du revenu du Québec, 2023 QCCQ 2406 under ITA s. 18(1)(a) – income-producing purpose, and s. 152(4)(a)(i).
CRA finds that a company which negotiated agreements between credit card companies and merchants was supplying a GST/HST-exempt service
“Acquirers,” who used funds from the customer’s credit card issuer to provide funds to pay merchants for their customers’ purchases, retained the Company to find merchants and negotiate agreements with them to receive such services of the Acquirer, in consideration for a fee based on the number of merchant transactions processed by the Acquirer. After indicating that the service of the Acquirer was an exempt financial service under para. (a) or (i) of the definition, and after ruling that the supply of the Company to the Acquirer was a single supply that was exempted under para. (l), CRA stated:
[T]he purpose of the Company’s supply is to act as an intermediary to bring together the Acquirer and prospective merchant customers of the Acquirer with the view to causing supplies by the Acquirer of its Acquirer Service to occur. The Company is involved in the entire negotiation process for the supply of Acquirer Services by the Acquirer to merchants. In that process, it appears that in each case the Company is relied upon heavily by the merchant and the Acquirer. The Company delivers to the Acquirer a fully negotiated Merchant Agreement to which the merchant will be bound, subject to the Acquirer’s approval.
Zomaron and 207227 are similar.
Neal Armstrong. Summary of 9 March 2023 GST/HST Ruling 244638 under ETA s. 123(1) – financial service – (l).
CRA rules that a variable return at note maturity linked to a non-resident company’s stock was not participating debt interest
A Canadian public corporation (ACO) will issue unsecured and unsubordinated notes to non-residents with whom it deals at arm’s length. The issue price for each Note will equal its principal and correspond to the value of a ‘Reference Stock” on the date issued. The Reference Stock will be proposed by the noteholder but must be a listed stock of a non-resident issuer dealing at arm’s length with ACO and must have a correlation to ACO’s common shares that is lower than that of the S&P 500 index to ACO’s common shares. The Notes will bear interest at a stipulated rate expressed as a percentage of the Principal Amount.
At maturity, ACO will pay an amount equal to the closing price of the Reference Stock if it does not exceed the “Cap Price,” and otherwise will pay the Cap Price. ACO may elect to repay the Note at maturity with Reference Stock.
CRA ruled that the exclusion for participating debt interest did not apply. Its summary indicated:
[C]onsistent with the policy of the provision, the payments are not tied to the profitability of the issuer. In other words, the payments do not represent a disguised payment of profits out of Canada.
Neal Armstrong. Summary of 2021 Ruling 2020-0865991R3 under s. 212(3) – participating debt interest.
GST/HST Severed Letters March/April 2023
This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their March and April 2023 release) is now available for your viewing.
Income Tax Severed Letters 12 July 2023
This morning's release of eight letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that s. 110.6(1.3)(a) can still be satisfied long after the farmer’s death
Mr. A owned farmland and farmed it for his chief source of income. Under his will, the farmland was devised to his daughter who did not farm it and sold it more than 24 months after his death. CRA found that this timing of her sale would not preclude the conditions in ss. 110.6(1.3)(a)(i) and 110.6(1.3)(a)(ii)(A) from being satisfied,
Regarding s. 110.6(1.3)(a)(i), it required that the farmland have been owned for the period of at least 24 months immediately preceding the determination time (the daughter’s disposition) by one or more of the specified persons or partnerships such as her, her father and his estate. Here, since the farm was owned continuously by Mr. A, his estate and his daughter for a period of at least 24 months immediately preceding the daughter’s disposition, this test was satisfied.
S. 110.6(1.3)(a)(ii)(A) was satisfied because Mr. A had met the active farming and gross revenue tests for a period of at least two years. It did not matter that he was not the person who owned the property at the determination time, nor during the prior 24 months.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.15 under s. 110.6(1.3)(a).
CRA discusses the procedure for requesting an extension of the 36-month vesting period under s. 70(6)
The rollover under s. 70(6) requires that the capital property of the deceased vest indefeasibly in e.g., the surviving spouse or testamentary spousal trust within 36 months of the death or such longer period as is granted by CRA. CRA indicated in this latter regard that:
- a letter should be submitted within the 36-month period
- it should include particulars including details that will provide the TSO with a clear picture of the reason for the extension request and
- CRA will consider the overall reasonableness of the extension request, and whether the duration of the extension is reasonable, based on the barriers faced by the legal representative in having the property vested indefeasibly in spouse, common law partner, or trust.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.14 under s. 70(6).
CRA indicates that an s. 104(21) designation can be made re distributing the taxable half of a trust capital gain to a corporate beneficiary – who receives no CDA addition
An inter vivos Canadian resident trust pays an amount equal to its net taxable capital gains for the year to a Canadian private corporation that is a beneficiary and designates that amount pursuant to s. 104(21). CRA indicated that a valid s. 104(21) designation would result in that amount being deemed to be a taxable capital gain realized by the corporation even though the non-taxable half of the gains was distributed instead to other beneficiaries. However, by virtue of the wording of s. (a)(i.1) of the capital dividend account definition, there would be no addition to the corporation’s CDA – whereas there would be such an addition if both portions of the capital gains were distributed to the corporate beneficiary.
The addition to the corporation’s CDA would be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation, given that the s. 104(21) designation cannot be made before the end of the trust’s taxation year.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.12 under s. 89(1) – CDA – (a.1).