News of Note
CRA provides guidance on a GST/HST exemption for respite care services
Email this ContentETA Sched V, Pt. IV, s. 3 exempts
A supply of a service of providing care and supervision to an individual with limited physical or mental capacity for self-supervision and self-care due to an infirmity or disability, if the service is rendered principally at an establishment of the supplier.
Points made by CRA include:
- Such an exempt service can include the provision of lodging.
- The single supply doctrine can assimilate the provision of lunch, snacks, art supplies, and transportation to and from different activities in the exempt supply of the care.
- The fact that an individual requires assistance with meal preparation and basic activities of daily living alone is not indicative of the individual having limited physical or mental capacity for self-supervision and self-care.
- The factors taken into account in determining whether the care is provided at facilities of the supplier include:
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who has authority over making operational decisions in the establishment
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who has control of day-to-day operations of the establishment
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who has presence in the establishment
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the types of activities and routine carried on in the establishment
Neal Armstrong. Summary of GST/HST Memorandum 21-3 "Respite Care Services" January 2019 under ETA Sched V, Pt. IV, s. 3.
CRA confirms that a subsequent capital loss did not render a capital dividend excessive
CRA took only three weeks to respond to a technical interpretation request by confirming that where a corporation has paid a capital dividend in Year 1 based on a capital gain realized by it in that year, a capital loss realized by it in Year 2 only affects the calculation of its capital dividend account going forward so that no Part III tax on the capital dividend is engaged.
Neal Armstrong. Summary of 22 January 2019 External T.I. 2019-0791631E5 under s. 89(1) – capital dividend account – para. (a).
CRA discusses how to measure compliance by a PHSP with the 90% METC-eligible expense test
Under CRA’s revised policy on insured private health services plans (PHSPs), all or substantially all of the premiums paid under the plan must relate to medical expenses that are eligible for the medical expense tax credit (METC). CRA confirmed that this means a test of whether 90% or more of the annual premiums paid under the plan relate to METC-eligible expenses, and it would be irrelevant if, for example, only 88% of the benefits paid in the year were METC-eligible. However, in the case of a self-insured plan, the test is one of whether all or substantially all of the benefits paid to all employees in the calendar year are for METC-eligible expenses.
Where a health care spending account (HCSA) sets a ceiling on the amounts that can be claimed under the plan, the employees’ allocation of the ceiling amount to the various expense categories is not considered, so that if the portion of the benefits paid in the year for METC-eligible benefits was, say, 92%, it would not matter that the total ceiling amounts allocated to METC-eligible expenses was only 80%. In the rare case where there was determined to be a separate HCSA plan for each employee, this same test would be applied to each such separate plan.
CRA provides helpful tabular numerical examples.
Neal Armstrong. Summary of 24 January 2019 External T.I. 2016-0651291E5 under s. 248(1) – private health services plan.
Income Tax Severed Letters 27 February 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that BEPS has not substantially affected its transfer-pricing practices
CRA comments relating to the mooted BEPS impact on CRA transfer-pricing practices included:
- BEPS Actions 8 to 10 did not effect substantial changes, i.e., the underlying principles are the same.
- CRA hopes to have final guidance out (re BEPS changes) by November 2019 including clarifying the concepts of risk-free return and risk-adjusted return.
- Canada has not adopted the simplification measure concerning low-value-added intragroup services – so that, rather than accepting a flat markup on intragroup service-charges because of the OECD guidance, CRA will continue to rely on IC87-2R to govern intragroup pricing until adoption of a new measure.
- Penalties are usually imposed for failure to have accurate and complete contemporaneous documentation respecting the ss. 247(4)(a)(iv) to (vi) matters (regarding the underlying analysis).
- CRA will audit the “story” in the underlying documentation, e.g., if the taxpayer represent that one of the parties is a low-risk distributor and CRA’s review demonstrates that it is a full-fledged distributor, penalties will probably be imposed (provided the $5 million threshold is exceeded).
Neal Armstrong. Summaries of 26 February 2019 Toronto CRA & Tax Professionals Seminar under s. 247(2) and s. 247(4)(a).
The OECD Commentaries on the PPT are helpful re treaty-benefit situations that have economic substance
Comments on Art. 7 of the MLI (containing the principal purpose test) include:
- The OECD Commentary (whose examples are based in large part on the facts of treaty abuse cases in various jurisdictions, whose results the Commentary may consider to be inapplicable under the PPT test) suggest that the PPT may apply mostly in situations where there is very little real economic substance to the transactions.
- Because the PPT states that a benefit under a covered tax treaty (“CTA”) "shall not be granted” where the provision applies, the application of this provision could make taxpayers worse off than under a reasonable alternative transaction, e.g., a taxpayer who has sought to lower the dividend withholding tax rate from 10% to 5% could be subject to a 25% withholding rate under this complete-denial approach.
- In interpreting a similar one-of-the-principal purposes test, UK courts have held that a principal purpose "has a connotation of importance” (Travel Document Services) and that a principal purpose of a transaction may be to obtain a tax advantage even if the transaction had a commercial objective at least as important as the tax advantage (Lloyds TSB Equipment Leasing). [See also the Groupe Honco line of cases.] Accordingly, the threshold for the PPT may be lower than in most domestic general anti-avoidance rules.
- Since the PPT applies where it is "reasonable to conclude" that one of the principal purposes of an arrangement or transaction was to obtain a benefit under the CTA, it also imposes a relatively low burden on the tax authority, effectively requiring taxpayers to argue that it would be unreasonable to conclude that obtaining the benefit was a principal purpose of the arrangement or transaction.
- The remedial benefits rule in Art. 7(4) has only been adopted by 28 jurisdictions (not including Canada) and is poorly drafted.
Neal Armstrong. Summaries of David G. Duff, “Tax Treaty Abuse and the Principal Purpose Test – Part 2,” Canadian Tax Journal, (2018) 66:4, 947-1011 under Treaties - MLI – Art. 7(1) and Art. 7(4).
Escape Trailer – Federal Court of Canada suggests that imposing HST on goods earmarked for immediate export fails to apply s. 142 purposively
When a B.C.-based company (the “applicant”) sold an RV to a U.S. customer, it could have avoided the requirement to charge HST on the sale price by delivering the RV to the customer in the U.S. (so that under ETA s. 142 the place of supply would have been outside Canada) or by shipping the RV to the customer in the U.S. on a common carrier (thereby engaging zero-rating). Both options were cumbersome or inconvenient, and what it did instead was to deliver the RV to the customer in a parking lot just north of the border, with the customer then driving the RV across the border as the importer of record. When CRA assessed the applicant for failure to charge HST on the sales (on the basis that they were taxable under s. 142), the applicant paid the tax but then requested that CRA recommend a remission order under s. 23(2) of the Financial Administration Act. The requested grounds were three of the criteria set out in the CRA Remission Guide, namely, financial setback coupled with extenuating factors, incorrect CRA advice and “unintended results of the legislation.”
After finding that CRA had reasonably rejected the first two grounds, Manson J went on to find that CRA had not been unreasonable in choosing “to follow the express language of section 142 over the broader purpose of the ETA to tax the consumption of goods or services in Canada,” noting that this was “consistent with past jurisprudence of this Court which has preferred the strict language of the ETA over its broader purpose.” However, he went on to state, obiter:
[I]f I had [instead] applied the correctness standard to this issue, I may have come to the opposite conclusion.
…The Officer’s literal interpretation tends to frustrate both a purposive construction of section 142 and the intent of the ETA to tax consumption of goods in Canada … [and] appears to lead to a result which is at odds with the equitable underpinnings of subsection 23(2) of the FAA.
Neal Armstrong. Summaries of Escape Trailer Industries Ltd v. Canada (Attorney General), 2019 FC 31 under Financial Administration Act, s. 23(2), ETA s. 142(1)(a) and Statutory Interpretation – Ordinary meaning.
6 further full-text translations of CRA interpretations are available
We have published a further 6 translations of interpretations released in July and June 2012. Their descriptors and links appear below.
These are additions to our set of 789 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for March.
Fono – Court of Quebec finds that a taxpayer gradually shifting his ties to Ottawa continued to reside in Quebec while he had secondary and personal ties there
A Quebec taxpayer, who got a job in Ottawa in 2007 along with an apartment there, was found to have continued to be resident in Quebec for his 2009 and 2010 years given that he maintained significant ties with Quebec including a significant other who stayed in Quebec and gave birth there to a child in 2010 and with the taxpayer visiting Quebec on a weekly basis. Furthermore, the taxpayer maintained various secondary Quebec ties such as bank accounts, car registration, Quebec rental properties and membership in the Quebec CPA order. Somewhat curiously, Pokomàndy JCQ found that the taxpayer did not become resident in Ontario until 2011 at the very earliest notwithstanding that the taxpayer and his significant other purchased a permanent home in Ottawa which the taxpayer, at the least, moved into in November 2010. (The provincial residency tests are based on status on December 31 of each year.)
Neal Armstrong. Summary of Fono v. Agence du revenu du Québec, 2018 QCCQ 10534 under s. 2(1).
CRA rules that a foreign collective investment vehicle is fiscally transparent rather than a unit trust
Investors subscribe for units of a “Fund”, both situated in and governed by the laws of a redacted non-resident jurisdiction. The units are described as representing proportionate interests in the property of a particular Subfund (holding a particular managed portfolio) but with an entitlement to exchange their co-ownership interest in that Subfund’s property for that in another Subfund.
Investors with different tax profiles are required to invest in separate Classes of units so that there is no pooling of withholding tax rates applicable to the securities in a Subfund’s portfolio.
The non-resident Depositary deals at arm’s length with the non-resident manager, and the Canadian securities are held by a Canadian-resident custodial subsidiary of the Depositary.
CRA ruled that the funds were fiscally transparent, so that non-resident investors holding units in a Subfund that, in turn, held Canadian equities, would be treated for Canadian withholding tax purposes and s. 116 purposes in the same manner as if they received a pro rata distribution on or proceeds of the Canadian securities.
This arrangement is somewhat similar to that in a 2014 ruling on an Irish contractual fund (2013-0496831R3 – see also 2015-0606141R3, 2009-0345011R3 and 2006-0199741R3), whose descriptions also looked somewhat similar to a unit trust, and was ruled upon to be a co-ownership arrangement. It is also is more dissimilar with (but still broadly similar to) that in a recent ruling on a Luxembourg investment mutual fund (2015-0605161R3).
Neal Armstrong. Summary of 2018 Ruling 2017-0738041R3 under s. 104(1).