News of Note
CRA considers that the new international shipping rules have not significantly curtailed the exemption
Email this ContentCRA considers that the amendments (for taxation years beginning after July 12, 2013) to the exemption in s. 81(1)(c) for international shipping income did not effect any substantial narrowing in its scope. CRA still considers that the non-resident taxpayer’s income can be exempted, even where it is not responsible for the crew, where it has “commercial management” of the ship, i.e., “the ship owner is operating the ship under the Taxpayer’s direction.” In addition, the new “international shipping” definition, which “introduced what may be considered to be a new requirement that the ships must be ‘owned or leased’ by the relevant taxpayer,” can be satisfied by the taxpayer being the charterer under a time charter (provided it has commercial management of the ship).
Neal Armstrong. Summary of 24 December 2015 Memo 2014-0560831I7 under s. 81(1)(c).
CRA finds that the fix in s. 87(8.2)(f) for absorptive mergers (where no shares are issued) also indirectly extends to the s. 87(4) basis adjustment rules
In the case of an absorptive merger of FA2 into FA1 (as the survivor) where FA2 ceases to exist and its shares are cancelled, s. 87(8.2)(f) deems the cancelled shares to have been exchanged by the Canadian shareholder (Canco) for purposes of the foreign merger definition in s. 87(8.1), so that the requirement in s. 87(8.1)(c) of that definition - that there be such a share exchange - is satisfied. However, s. 87(8.2)(f) does not explicitly deem there to be such a share exchange for purposes of s. 87(4), which deems shares of Amalco acquired in exchange for shares of a predecessor to have been acquired at a cost equal to the exchanged shares’ ACB. However, also note that s. 87(8) provides that the s. 87(4) rules apply to a foreign merger (so that this effect quite arguably is one of the purposes of the foreign merger definition).
Not surprisingly, CRA has concluded that the deemed exchange rule in s. 87(8.2)(f) also applies for purposes of the application of s. 87(4) to a foreign merger so that, for example, the ACB of the cancelled shares of FA2 is deemed to be added to the cost to Canco of its shares of the survivor (FA1).
Neal Armstrong. Summary of 8 July 2015 T.I. 2014-0550641E5 under s. 87(4).
Income Tax Severed Letters 17 February 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Using agency structures can save GST
Utilizing an agency relationship may save GST or HST. For example:
- Given that, with the exception of accident and sickness insurance, the supply of insurance is considered a financial service for GST purposes only in situations where the insurance is provided by an insurer, it generally will be preferable for a company to secure insurance for other group members as their agent - rather than acting as principal in acquiring the insurance and resupplying the benefits of the insurance coverage to the group companies.
- A s. 150 election generally exempts intragroup leases or servicing agreements, which may result in loss of input tax credits. For example, if in this situation a bank is subleasing premises to subsidiary asset manager, it will be denied ITCs on its corresponding headlease payments to a 3rd party landlord. However, if it instead headleases the premises as agent for the asset manager, the asset manager could generate ITCs for the GST on such rent.
- In order to avoid GST on intercompany management fees, a group company may employ individuals as agent for multiple group companies, while using one payroll account.
- If a mutual fund manager earned redemption fees directly from the mutual fund trust, such fees would be taxable. Instead, the redemption fee is structured as an obligation of the redeeming unitholder to the manager – but with the trust paying the redemption fee directly to the manager on behalf of the unitholder.
- If a person providing out-sourced government services is doing so as agent for a public sector body, then an exemption is more likely to apply.
In addition, having the operator of a real estate joint venture appoint the bare trustee as its agent to enter into contracts to procure property and services at its direction (in order to avoid disclosing the identity of any of the participants including the operator) “has become fairly common.”
Neal Armstrong. Summary of Brent Murray, "Cost-Sharing, Agency & Resupply Agreements: the When and the Why", Canadian GST/HST Monitor (Wolters Kluwer), No. 329, February 2016, p.1 under General Concepts – Agency.
M. Tech India – Delhi High Court finds that the mere right to customize software purchased for resale does not render the consideration a royalty
The Indian case law on the distinction between a software royalty (subject to withholding) and the purchase of software as a product apparently is well developed. The purchase price of specialized software acquired by an Indian company from a non-resident for resale to Indian end users was found not to be a royalty in the face of a Revenue argument that the right of the purchaser to customize the software established that it could use the software and, therefore, the payment, in fact, was a royalty. Bakhru J. stated:
In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright.
Neal Armstrong. Summary of Principal Commissioner of Income Tax-6 v. M.Tech India P. Ltd., ITA 890/2015, under s. 212(1)(d).
CRA still generally accepts backdated GST JV (s. 273) elections
In P-187 dated October 16, 1997 respecting the GST joint venture election, CRA states that “as a result of the requirement that an effective date be specified, the participants in the joint venture may complete the election form after the fact.” CRA has dealt with this point in more detail, in the context of a co-ownership arrangement that qualifies as a joint venture, stating:
Where in a particular fact situation, there is a valid operator, it can be clearly established that a joint venture exists for purposes of the section 273 election, and the parties were acting as if the election were in place, a back-dated election can be made that dates back to the date of the written co-ownership arrangement.
Neal Armstrong. Summaries of 26 February 2015 CBA Roundtable, Q. 15 under ETA s. 273(4), s. 156(4).
Notwithstanding 6051944, CRA will not revisit its policy on potentially limiting the deductibility of management fees paid by an opco to a management holdco
In the 6051944 Canada Inc. case, Favreau J found that a fee paid by a private company (engaged in a new home construction business) to its two shareholder-management companies, which was significantly higher than for other years when operating profits had been lower, was reasonable for ETA purposes (rather than being "merely a profit distribution mechanism," as alleged by the Crown). In response to a query on whether CRA would revisit its position on the reasonableness of management fees paid by an operating company to a holding company that is owned by an individual who is the ultimate operator/manager, CRA indicated that this was a (GST/HST) informal procedure case that “therefore” had limited precedential value, there were no plans for such a review and the reasonableness of an expense under ITA s. 67 was a question of fact.
There does not appear to a lot of difference in the judicial weight given to informal procedure cases which have been properly argued by counsel, and regular cases. It is difficult to extract any broad principles from the 6051944 case (other than, perhaps, that there is nothing particularly wrong with a management fee that varies with the success of the business), so that CRA instead should have used its other stock response, that the case was decided on its facts.
Neal Armstrong. Summary of 5 January 2016 T.I. 2015-0622991E5 under ITA s. 67.
CRA states that whether the GST registration of an initially unregistered purchaser of a commercial rental property can be backdated is “a question of fact”
If a commercial rental real estate property is transferred to a single-purpose Newco (Company C) which inadvertently is not registered at the time of the transfer, would Company C be entitled to register for GST/HST purposes retroactively back to the transfer date given that it is making supplies by way of lease of commercial property and that it is not a small supplier? CRA stated:
[As] Company C was making taxable supplies in Canada of real property by way of lease, then it would have been required to be register under subsection 240(1)… at the time it first made a taxable supply in Canada otherwise than as a small supplier. It will be a question of fact whether…Company C was required to be registered at the time of the transfer of the real property.
This is better than simply saying “no.”
CRA also noted that if the property was subject to a valid s. 273 joint venture election (whose validity would not depend on Company C being registered), then Company C would be deemed not to be making any taxable supply of the real property - so that it could not be registered. CRA did not comment on the quandary as to whether a company which is purchasing commercial real estate with a view to it being supplied under the s. 273 venture election (so that it will not be making any taxable supplies) is thereby precluding from registering - so that it would be required to be charged non-creditable GST on the purchase.
Neal Armstrong. Summaries of 26 February 2015 CBA Roundtable, Q. 16 under ETA s. 240(1) and s. 171(1).
CRA considers that a joint venture agreement and management agreement can qualify as “an agreement” for GST joint venture election purposes
In order for a registrant to qualify as the “operator” under a GST joint venture election it must inter alia be a participant in the joint venture “under an agreement, evidenced in writing, with” a co-venturer. CRA “may consider…two agreements to constitute a single joint venture agreement” for this purpose. For example, where a joint venture starts off comprising two co-owners, and then in a subsequent year they enter into an agreement with a property manager or other “operator” which deals only with the property management subject matter rather than also repeating all the rights and obligations under the original co-ownership agreement, joint venture elections potentially could be made in the second year with the manager qua operator.
CRA also accepts that an agreement styled as a “co-ownership agreement” can be regarded as a joint venture agreement (i.e., the mere label used is not a touchstone).
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 13 under ETA s. 273(1) and Interpretation Act, s. 33(2).
CRA may challenge the eligibility of a joint venture manager (e.g., property manager) to be a GST operator if its only personnel are officers jointly appointed to an affiliated co-owner
CRA accepts that a corporation can qualify as a “participant” in a joint venture (so that that it is eligible for making a GST joint venture election) even if its only role is as the joint venture’s manager (i.e., having “managerial or operational control” of the joint venture) rather than having any ownership interest in the joint venture. When asked whether the corporation can still so qualify if it has delegated the performance of all its management responsibilities, CRA stated:
Where an operator has no staff and contracts out all of its responsibilities to other parties, the officers of the operator are often the same persons as the officers of the other [co-owner] participants… . This would make it doubtful whether the operator actually has managerial or operational control of the joint venture… .
This suggests that CRA could view the overlapping officers as performing their management functions for the affiliated co-owner(s) rather than for the purported manager, so that the purported manager would not be regarded as being an eligible operator.
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 12 under ETA s. 273(1).