News of Note
CRA acknowledges that a residential exemption certificate generally protects a purchaser from GST even where the vendor is non-resident
Email this ContentETA s. 194 provides that where a vendor erroneously states or certifies in writing that it is making an exempt supply of residential real estate then, unless the purchaser knows or ought to have known that the supply is not exempt supply, the purchase price is deemed to be inclusive of HST or GST, so that the purchaser cannot be assessed for that tax. CRA has acknowledged that this provision applies even were the vendor is a non-resident, so that its only recourse is to go after the non-resident for the tax.
Neal Armstrong. Summary of CBAO 2014 Roundtable, Q. 25 under ETA s. 194.
CRA finds that the two-out-of-three telecommunications GST place-of-supply rule overrides the general rules
ETA, s. 142(1)(g) deems a supply by a registrant of a service which is partly performed in Canada to be made in Canada. However, s. 142.1 provides a "two out of three" rule for deeming a telecommunication service to be made in Canada - for example, in the case of a telephone call, if two of the following are in Canada: place where the call is emitted; where it is received; and the billing location. CRA considers a telecommunication service, that is not deemed to be made in Canada under this rule, to be made outside Canada, even if that service is partly performed in Canada.
Neal Armstrong. Summary of CBAO 2014 Roundtable, Q. 27, under ETA s. 142.1(2)(b).
Devon – Federal Court of Appeal implies that large corporations may have the right to raise new issues within one year of their Objection deadline (and finds that they can appeal new issues which were considered and rejected by CRA Appeals)
Although s. 169(2.1) prohibits a large corporation from appealing to the Tax Court an issue which it did not raise in its Notice of Objection, Webb JA found that where an appeals officer considers and communicates rejection of subsequently-raised issues, this has the effect of amending the Notice of Obection, so that the new issues can also be raised in a Notice of Appeal. He also stated:
[S]ince the Minister accepted these submissions, it is a moot point whether the Minister could have refused to accept them on the basis that they were made well after the time permitted…for seeking an extension of time to file a notice of objection, had expired.
This suggests that it may not work for CRA to respond to this decision by instructing appeals officers to refuse to consider new issues if such issues are raised in submissions made within the s. 166(7)(a) one-year extension period.
Neal Armstrong. Summary of Devon Canada Corp. v. The Queen, 2015 FCA 214, under s. 169(2.1).
6051944 Canada Inc. – Tax Court of Canada rejects CRA GST position that a management fee was a profits distribution
A private company with a new home construction business with revenues in the $12M to $16M range had a good 2009 fiscal year and when the 2009 accounts were prepared, accrued and paid management fees to its two shareholder-management companies of $1.8M rather than the fees in the $1M to $1.2M range, as had been accrued and paid for nearby years. A GST auditor was offended, claiming that the enhanced fee was "merely a profit distribution mechanism," and denied input tax credits on the portion of the fees in excess of $1M under ETA s. 170(2) (an analogue of ITA s. 67, although Favreau J perceived significant wording differences).
In allowing the appeal, Favreau J referred to the value of the services provided and the resulting profitability of the business. He did not seem troubled by the fact that the fees varied significantly from year to year notwithstanding that essentially the same services were provided each year. He also noted that for income tax purposes, what was deductible to the company was includible in the income of the management companies at the same federal rate of income taxation.
Neal Armstrong. Summary of 6051944 Canada Inc. The Queen, 2015 CCI 180 under ETA, s. 170(2).
High-Crest - Tax Court of Canada finds that government funding only of operating costs of a nursing home addition did not detract from its purpose of increasing beds
Although assisted–living facilities (or additions thereto) normally are subject to HST on their fair market value when substantially completed, ETA s. 191.1(2) effectively deems the HST to be payable on the greater of most costs and the fair market value where the builder received government funding "for the purpose of making residential units in the complex available to [seniors]."
Owen J found that although the form of government assistance for an addition to a Nova Scotia nursing home was its agreement to subsidize operating costs relating to the additional residents and not the construction costs:
[T]his does not alter the fact that the dominant purpose of the Department in…agreeing to make these payments was to secure additional long‑term care beds for seniors in Nova Scotia. The immediate result of the payments may have been the provision of the Services but that was not the purpose behind the payments.
Neal Armstrong. Summaries of High-Crest Enterprises Ltd. v. The Queen, 2015 TCC 230 under ETA, s. 191.1(1) – government funding and General Concepts – Intention.
A Liechtenstein Foundation with a Canadian-resident beneficiary may not be subject to the NRT rules
After affirming its position that a Liechtenstein Foundation "generally will be considered to be a trust for purposes of the Act," CRA accepted that a Liechtenstein Foundation whose sole "beneficiary" was a resident Canadian individual was not subject to the NRT rules in s. 94(3) because the Foundation had no "resident beneficiary," whose definition requires the existence of a "connected contributor." There was none, as no Canadian resident had ever made a "contribution" (as broadly defined) to the Foundation.
Neal Armstrong. Summary of 20 August 2015 T.I. 2015-0581681E5 F under s. 94(1) - connected contributor.
CRA finds that a depreciable property continues as such on a s. 88(1) winding-up irrespective of the parent’s purpose
Reg. 1102(1)(c) provides that depreciable property does not include a property which is not acquired for an income-producing purpose. CRA dealt with the situation where a parent received depreciable property of its subsidiary on a s. 88(1) winding-up with no intention of using the property for an income–producing purpose (it was kept idle) - and a number of years later, sold the property at a loss.
In light of Reg. 1102(14), which deemed the property to belong to the same prescribed class as when it was held in the subsidiary, and the somewhat conflicting reasons in Hickman which nonetheless pointed in the same general direction, CRA concluded that the property retained its character as depreciable property in the hands of the parent. Furthermore, keeping the property idle did not constitute a change of use under s. 13(7)(a), so that the terminal loss was not realized until the year of the sale.
Although it was depreciable property, the parent nonetheless was precluded from claiming CCA, in light of the income-producing purpose test in the preamble to s. 20(1) that was emphasized in Hickman.
Neal Armstrong. Summaries of 22 June 2015 Memo 2014-0553731I7 under Reg. 1102(14), s. 13(7)(a) and s. 20(1).
Income Tax Severed Letters 7 October 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Large construction projects engage a litany of tax considerations
Tax considerations arising under a major construction project include:
- Significant deferral benefits can arise from the choice of the Project LP’s year end given that the stub period accrual rules do not bite if the previous year was not yet profitable.
- CRA has accommodated (e.g., in 2006-0218781R3) treating the Project LP’s construction costs as consideration for a right to access the construction site, so that such costs can be amortized as a Class 14 asset.
- For long-term projects, faster CCA write-offs may be available with a s. 13(29) election (or, alternatively, reliance might be placed on the rolling-start rule in s. 13(7)(b).)
- The interest capitalization rule in s. 21 also extends to s. 20(1)(e) financing costs.
- Investment in the project by a public corporation may engage consideration of the SIFT partnership rules – and sale of an interest in a project may engage the tax shelter rules if too much is stated about the projected results.
- PST considerations in B.C. engage the distinction between fixtures and tangible personal property.
Neal Armstrong. Summaries of Shane Onufrechuk and Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35 under s. 34.2(1) - Adjusted Stub Period Accrual Income, s. 12(1)(l.1), s. 18(6)(d), Class 14, s. 13(27)(b), s. 13(29), s. 21(1), s. 20(1)(e.1), s. 122.1(1) – investment, s. 237.1(1) – tax shelter, Provincial Sales Tax Act (B.C.), s. 1 – taxable service.
1057513 Ontario Inc. – Federal Court of Appeal states that RDTOH is not reduced by unclaimed dividend refunds
The taxpayer was ineligible for dividend refunds for various years because it did not file the returns claiming the dividend refunds within three years of the taxation year ends in question.
However, Webb JA stated obiter that the unclaimed refunds did not reduce the taxpayer's refundable dividend tax on hand. This comment is consistent with Tawa, MSH and Ottawa Ritz (the latter also a decision of Webb) in the Tax Court and is inconsistent with the CRA position (see 2012-0436181E5).
Neal Armstrong. Summaries of 1057513 Ontario Inc. v. The Queen, 2015 FCA 207 under s. 129(1) and s. 129(3).