News of Note
Income Tax Severed Letters 30 December 2015
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that a federally incorporated charity is resident for HST rebate purposes where its office is
ETA s. 132.1(3) and s. 2(2) of the New Harmonized Value-added Tax System Regulations, No. 2 provide that a charity is deemed to have a permanent establishment in a province if a place in that province would be a permanent establishment for income tax purposes if the charity were a corporation and its activities were a business for income tax purposes. Although this test could give rise to metaphysical difficulties, CRA had no difficulty in ruling that a federally-incorporated charity which managed its activities out of a single office in “Province 1” was resident for HST rebate purposes in Province 1.
Neal Armstrong. Summary of 23 June 2015 Interpretation 144489 under ETA s. 132.1(3).
CRA considers discounts on purchases by members of a public sector body to be “insignificant” for GST exemption purposes if less than 30% of membership fees
Membership fees in a public sector body can be GST-exempt even where the member receives discounts on purchases made from the body provided that their total value is “insignificant” relative to the membership fee, which CRA interprets as being less than 30%.
Neal Armstrong. Summary of 2 June 2015 Ruling 169081 under ETA Sched. V, Pt. VI, s. 17(e).
CRA acknowledges that what is “nominal property” for purposes of the ETA s. 156 election can be determined on a relative basis
The test of who is a “qualifying member” eligible to make an ETA s. 156 election for intra-group supplies to occur at deemed nil consideration references whether substantially all the registrant’s property (other than financial instruments and “property having a nominal value”) has been acquired for consumption, use or supply exclusively in the course of its commercial activities (para. (c)(i)) or, if it has no such property, instead references the services it supplies (para. (c)(ii)) or its reasonably expected prospective supplies and purchases (para. (c)(iii)).
CRA stated that generally this test “will be made with reference to the value of the property and its significance, relative to the commercial activity in question,” so that (to use the extreme example cagily provided by CRA) a $300 computer would be nominal relative to a business with a prospective $1 billion in assets.
Neal Armstrong. Summary of 24 April 2015 Interpretation 166609 under ETA s. 156(1) – qualifying member.
CRA indicates that a licence has an indefinite life if “in the circumstances” it is “reasonably” certain it can be renewed
Class 14 properties can include a “concession or licence for a limited period.” In IT-477 (Archived), CRA stated:
Where… renewals or extensions are automatic or within the control of the taxpayer, that is they do not require any further negotiation with or the concurrence or consent of the grantor, the life of the property includes such additional periods. … Where the taxpayer has an option to renew or extend the term only if certain conditions are met, for instance meeting certain performance or sales criteria, the circumstances of the particular case must be examined to determine whether or not, when he acquired the property, it was reasonably certain that these conditions would be met. If so, the additional periods are included in the life of the property.
Post-Shell, the last sentence is dubious and, as discussed below, even the first sentence could be questioned.
In a recent technical, CRA referred to the above passage before finding that a government licence which could be renewed each year on the payment of a fee was an eligible capital property rather than a Class 14 property, i.e., the taxpayer had the right to renew on tendering the fee, so that presumably the first sentence in the above passage applied. Is this consistent with the proposition that a lessee with a bargain purchase option is not the property owner (see 2008-0303651E5)?
Neal Armstrong. Summary of 30 July 2015 T.I. 2014-0552041E5 F under Sched. II – Class 14.
CRA is proposing to assess taxpayers who have overcontributed to TFSAs after only one warning letter
CRA is proposing to streamline its procedures so that any taxpayer who, having failed to remove an excess contribution from his or her TFSA following a warning letter from CRA, will be subject to an automatic assessment of tax on the excess contribution without further warning. CRA considers that “subsection 152(7) permits the Minister to make an assessment of tax under Part XI.01 without first contacting the taxpayer,” so that such assessments are authorized.
Neal Armstrong. Summary of 11 September 2015 Memorandum 2015-0599851I7 under s. 152(7).
CRA finds that a payment to a lender based on equity value of the borrower was not eligible for the s. 20(1)(e) deduction
No s. 20(1)(e) deductions are available for amounts “computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion.” An amount payable to a lender on specified events such as an IPO and computed as X% of a modified computation of NAV was found by CRA (after referring to its positions on the predecessor of the similarly worded participating interest definition) to be caught as being computed by reference to a similar criterion, i.e., the equity value of the enterprise was a function of profitability and cash flow. A factual finding of Audit that this amount “was used as a substitute for a direct equity investment that the Lender originally wanted but could not acquire” was also germane. Finally, it did not make any difference that the borrower resisted paying the amount, so that what it ended up paying was pursuant to a negotiated settlement of what it owed under the formula.
Neal Armstrong. Summary of 2014-0547431I7 under s. 20(1)(e).
CRA affirms that the thin cap rules have always applied to the computation of income in s. 216 returns
Following 2013 amendments, the thin cap rules have made specific mention of their application to non-resident corporations which file returns under s. 216 as if they were Canadian residents. CRA has rejected the suggestion that this implies that such corporations were not caught by the thin cap rules before the 2013 amendments.
Neal Armstrong. Summary of 2015-0599161I7 under s. 18(4).
University of Calgary – Tax Court of Canada finds that indirect costs which could not be traced to revenues from taxable supplies were eligible for pro rata ITCs
Before finding that it was fair and reasonable for the University of Calgary to allocate (for input tax credit purposes) its GST costs for its grounds using the same split between taxable and exempt use as was applicable to the floor space of its buildings which was directly used for one (third-party rentals) or the other (e.g., classroom) use, D’Arcy J stated:
The purpose of [a registrant’s] business is to earn revenue, i.e., to make supplies. Therefore, the result of subsection 141.01 (2) is that all costs incurred by a person in the course of the person’s business must be traced to a specific supply or multiple supplies in respect of which the costs were incurred. [emphasis added]
This confirms that, notwithstanding the enactment of s. 141.01(2), the GST costs for property or services whose acquisition cannot be traced to the making of taxable supplies nonetheless may qualify for ITCs (see also BJ Services).
Neal Armstrong. Summaries of University of Calgary v. The Queen, 2015 TCC 321 under ETA s. 141.01(2) and s. 141.01(5).
CRA will accommodate brief screw-ups resulting in a technical breach of the prohibition against TFSA or RRSP borrowings
Various types of glitches can cause a TFSA, RRSP etc. to go into overdraft (so that technically the brokerage is lending money to the plan in breach of the prohibition against borrowing) until the problem is remedied a day or so later. CRA states that it will not act on “an overdraft in a TFSA [etc.] if it:
- is temporary in nature and covered without undue delay;
- arises as a result of (i) a mismatch of cash flow due to differences in standard settlement cycles for securities, (ii) a reasonable error, or (iii) an unintended infrequent event; and
- does not have the character of leveraged investing.”
However, CRA will not accommodate a breach which results from a cashless exercise procedure in which the broker advances funds to the plan to exercise warrants and repays itself out of the sale proceeds of the acquired shares.
De-registration of an individual’s TFSA for breach of the borrowing requirement would cause a permanent loss of TFSA savings room for the individual.
Neal Armstrong. Summaries of 22 October 2015 Memo 2013-0486491I7 under s. 146.2(2)(f) and s. 207.10(1) – unused TFSA contribution room.