News of Note
Elim Housing Society – Tax Court of Canada finds that a nursing home for those with dementia qualified for the enhanced public service body HST rebate
Email this ContentWoods J found that a B.C. long-term care facility, whose residents mostly had dementia, severely impaired mobility, complex medical issues and a life expectancy of between three months and three years, was making "facility supplies," so that it was eligible for the enhanced 83% public service body HST rebate. This likely overrules 3 July 2012 Ruling 109082 (re a nursing home).
Although there were a number of significant and novel interpretive issues to resolve, the "gist of the dispute… [was] whether the services provided by care aides…, such as toileting and bathing, [were] therapeutic health care services." Woods J found that it was sufficient that these care aide services were provided at the direction of the on-site nurses "to address particular medical concerns."
Neal Armstrong. Summary of Elim Housing Society v. The Queen, 2015 TCC 282 under ETA s. 259(1) – facility operator.
Canada Life – Ontario Superior Court grants requested detailed rectification of an LP wind-up so as to avoid a s. 98(5) rollover
A Canada Life subsidiary (CLICC) clearly intended to realize an accrued loss on its LP interest in a subsidiary partnership by winding it up. CRA reassessed to deny the loss on the basis that the s. 98(5) rollover applied.
Pattillo J granted the requested order that the transactions be deemed to occur as requested by CLICC so that the rollover did not apply, notwithstanding a Crown complaint that the number of proposed rectification transactions was two more than had originally occurred. He noted that arguments that rectification was restricted to correcting mistakes in the instruments used to implement a definite and ascertainable tax plan had been rejected in Fairmont.
Neal Armstrong. Summary of Canada Life Insurance Co. of Canada v. A.G of Canada, 2015 ONSC 281, under General Concepts – Rectification.
CRA rules that legal fees incurred for the purpose of receiving compensation for lost business profits give rise to non-creditable GST
CRA has ruled that legal services provided to a business in successfully suing for lost business profits did not qualify as giving rise to an input tax credit for the HST on the resulting legal fees. CRA reasoned that the resulting settlement was merely "compensatory," so that the legal services were not received for the purpose of making taxable supplies for consideration, as required by ETA s. 141.01(2).
This may illustrate that (at least in CRA’s view) ETA s. 141.01(2), in this respect, is narrower than ITA s. 18(1)(a). Under the surrogatum principle, compensation for lost business profits itself has the character of business income, so that legal fees incurred to generate such compensation should be deductible under ss. 18(1)(a) and 9.
Neal Armstrong. Summary of 1 May 2015 Ruling 164658 under ETA s. 141.01(2).
CRA finds that the connection test in XXIX-A(3) of U.S. Treaty can be satisfied by funding interest to a non-qualifying U.S. parent, on a loan whose use had nothing to do with a connected Canadian business, out of the cash flows generated by that business
Para. XXIX-A(3) of the Canada-U.S. Treaty lets a U.S. resident which is not a qualifying person access Treaty benefits (e.g., no withholding on non-arm’s length interest) if it satisfies a three-prong active trade or business test. One of these tests (the "Connected Test") is that the item of income, for which the Treaty benefit is sought, is derived from the source state (Canada) in connection with or incidental to the (U.S.) actively-conducted trade or business of the U.S. person - including any such income derived directly or indirectly by that U.S. person through a person that is resident in Canada.
A U.S. person who was not a qualifying person (US-Holdco1) lent money to a direct or indirect Canadian subsidiary (Canco, carrying on a connected business) to help fund the purchase by Canco (through an intermediate structure) of a non-North American target. CRA considered that the Connected Test could be satisfied so as to permit the interest on the loan to enjoy the Treaty exemption, even though the lent money was not used in Canco's business, if the interest payments were funded out of the cash flow from that business. Conversely, if the interest payments to US-Holdco1 were partially funded from foreign affiliate dividends, no relief would be available under para. XXIX-A(3).
Neal Armstrong. Summary of 5 November 2015 Memo 2013-0496401I7 under Treaties - Art. 29A.
Income Tax Severed Letters 18 November 2015
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Finance releases pre-comfort letter on largely overriding s. 104(13.4)(b) and permitting limited backdating of post-mortem donations
The new s.104(13.4)(b) rule dealing with spousal trusts (and similar trusts such as alter ego trusts) deems the trust’s income for the year ending with the lifetime beneficiary’s death (including from deemed proceeds at death) to have been distributed to the lifetime beneficiary rather than to be retained as trust income. This can result in the associated income tax liability being borne by the wrong beneficiaries, and in the stranding of donation credits for post-mortem donations made by the trust (which no longer has any income to use the credits).
In response to these concerns, Finance has indicated that it is generally amenable to providing that s. 104(13.4)(b) no longer applies except, in limited circumstances, where the spousal (or other) trust, and the lifetime beneficiary’s estate, jointly elect into s. 104(13.4)(b) applying. To deal with the donation credit "stranding" issue, Finance is amenable to allowing the trust to backdate donations made by it in the calendar year of the death to the trust taxation year that was deemed by s. 104(13.4)(a) to end with the death.
However, Finance will think about "whether additional amendments may be necessary to give effect to the…policy objectives" of avoiding "unintended tax benefits."
Neal Armstrong. Summary of 16 November 2015 Letter of Brian Ernewein to Joint Committee, CALU and STEP Canada respecting s. 104(13.4) under s. 104(13.4)(b).
CRA will continue its favourable policy for allocation of charitable gifts between spouses after 2015
Notwithstanding some amendments to the charitable gift rules, CRA is continuing its administrative practice for spouses (or common law spouses) to allocate their charitable gifts between them in whatever manner they consider to be most advantageous.
Neal Armstrong. Summary of 30 September 2015 T.I. 2015-0590501E5 F under s. 118.1(1) – total charitable gifts.
CRA confirms that a graduated rate estate can have up to four taxation years
If the executors of an estate adopt a year end that results in an initial short taxation year (say, September 30, 2016, being six months after the death), then the estate generally would be deemed by s. 249(4.1) to have a further short taxation year, namely, its 4th taxation commencing on November 1, 2018 and ending on March 31, 2019, being 36 months after the death. Thereafter, the estate would not enjoy graduated rates and would be required to use a December 31 year end.
Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q. 1, 2015-0572131C6 under s. 249(4.1).
CRA indicates that a graduated rate estate can include a testamentary trust
In its oral presentation at the 19 June 2015 STEP Roundtable, CRA indicated that a deceased has only one estate for income tax purposes including under the rules applicable to graduated rate estates, even if there are multiple wills with different executors or worldwide assets. In its published version, CRA now has added a statement that:
The composition of the graduated rate estate for tax purposes will often depend on how the decedent wanted his/her assets to be administered as dictated by will. Where, for example, a will deals immediately with separating property to be held in a distinct testamentary trust apart from other assets of the estate, there can still only be one graduated rate estate allowed for tax purposes for the 36 month period (or earlier if administration is complete) following death.
…Question 8 of the 2012 STEP Roundtable [stated]:
...[T]he estate of the deceased and other trusts funded out of the residue of the estate will generally be testamentary trusts. Traditionally, the CRA has not attributed any tax consequences to the transition from estate administration to trust administration and generally has viewed the trusts created out of the residue as arising on death.
Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q. 2, 2015-0572091C6 under s. 248(1) – graduated rate estate.
Cartier House Care Centre – Tax Court of Canada finds that the GST incidental supply rule did not apply where the allocation of consideration among the components was apparent
Paris J rejected CRA arguments that an independent contractor, who provided personal care services to a B.C. for-profit residential care home, including assistance with bathing, dressing, grooming, feeding, and incontinence management, was not thereby providing a (GST-exempt) "homemaker service," which was defined to mean "a household or personal service, such as cleaning, laundering, meal preparation and child care, that is rendered to an individual who, due to age, infirmity or disability, requires assistance." He applied the principle in National Bank of Greece v. Katsikonouris, [1990] 2 SCR 1029 that "the use of specific examples after a general term in legislation [here, "personal service"] does not restrict the meaning of the general term to cases similar to the specific examples."
In addition to the services (described above) of its "care aides," the contractor also provided "activity aides" (who focused on social activities for the residents, and whose time represented 5.4% of the total), and invoiced for the services of both aide types on the same invoice (showing the hours for each) and at the same hourly rate. In rejecting a submission that the incidental supply rule in ETA s. 138 effectively assimilated the otherwise-taxable activity aide services to the single supply of personal care "homemaker" services, Paris J stated that, as the hours for each service were evident on the invoice, "the consideration for each category of worker would be determinable and separate amounts" (so that there was no "single consideration") and that:
…[T]he activity aide services were not incidental to the care aide services. …[E]ach kind of service was independent of the other and had value as a separate supply.
This reasoning suggests that the incidental supply rule does not apply on an asset sale transaction where the purchase price is allocated between the component realty and personalty.
Neal Armstrong. Summaries of Cartier House Care Centre Ltd. v. The Queen, 2015 TCC 278, under Sched. V, Pt. II, s. 1 – home care service, Sched. V, Pt. II, s. 13, s. 138, Public Service Body Rebate (GST/HST) Regulations, s. 2 – government funding, Statutory Interpretation – Interpretation/Definition Provisions and Statutory Interpretation – Noscitur a Sociis.