News of Note
CRA finds that the HST/GST status of a supply was to be determined at the time the agreement was entered into
Email this ContentETA s. 133 provides that a supply means the entering into of the agreement to make the supply and that the actual provision of the related service or property is deemed to be part of that supply. This potentially means, among many other things, that the character of the supply generally is determined by what is agreed rather than what occurs.
Sched. V, Part III, s. 13 exempts the supply, under a meal plan that is for at least one month, by universities to their students of the right to receive at least 10 meals weekly throughout the meal plan period for a single consideration. CRA considers that these requirements are not breached if there are "top-ups," i.e., the addition of funds to the plan, and that:
The tax status of a supply… is to be determined at the time the student initially enters into the agreement with the supplier and will not be affected if, at the end of the plan period, unused funds are refunded or carried over for use in the future…[or] the plan is cancelled… and unused funds are refunded.
Neal Armstrong. Summary of Excise and GST/HST News – No. 96 under "University and public college meal plans" under ETA, Sched. V, Part III, s. 13.
CRA finds that s. 108(7) does not apply to qualify a usufruct trust as a personal trust where the usufruct was created for valuable consideration
S. 108(7)(b) provides that where all the beneficial interests in an inter vivos trust, which were acquired by way of transfer of property to it, were acquired by one person (s. 108(7)(a)) or by related persons (s. 108(7)(b)), their beneficial interests are deemed to have been acquired for no consideration (so that inter alia the trust can qualify as a personal trust). Where father transfers the bare ownership of land to his son for consideration, so that father becomes a usufructuary, ss. 248(3)(a) and (d) deem father to have settled a trust of which he and his son are the beneficiaries.
CRA considers that in this situation "as the bare owner did not transfer, assign or dispose of any property to the deemed trust… paragraph 108(7)(b) cannot apply to deem the beneficial interest of the bare owner to have been acquired for nil consideration." By referring to s. 108(7)(b), CRA is indicating that it considers that both son and father acquired their interests in the deemed trust as a result of the transfer of property by father to this deemed trust. On its face, s. 108(7)(b) only seems to require that both of these beneficial interests have been acquired by related persons (as is clearly the case for a father and son) and does not require that son have transferred any property to the deemed trust. Accordingly, this reasoning is difficult to follow.
Given the above finding that the trust is not a personal trust, the deemed wind-up of the deemed trust that would occur when son subsequently acquires father’s interest as usufructuary will (in CRA’s view) occur on a non-rollover basis under s. 107(2.1) (rather than under s. 107(2)).
Neal Armstrong. Summaries of 11 June 2015 T.I. 2014-0522641E5 F under s. 108(7), s. 73(3) and s. 110.6(1) – qualified farm or fishing property.
CRA indicates that the trustee fees of a lawyer who was appointed for personal reasons are subject to employee source deductions
In response to a question as to whether trustee fees earned from an estate by a lawyer, who normally didn’t do that sort of work but was appointed because the deceased trusted him, were income from an office (subject to source deductions and an estate T4 reporting obligation) or from a business (subject to a T4A reporting obligation and to HST), CRA stated that the fees could be considered income from an office, if "the lawyer was appointed on personal grounds; for example, because he or she was a friend of the deceased."
Neal Armstrong. Summary of 16 March 2015 T.I. 2014-0521791E5 under s. 248(1) – office.
CRA rules that the Amalco resulting from the amalgamation of a public target and the Canadian bidco can elect to cease to be a public corporation when the shares of the target are delisted following the amalgamation
Under a Plan of Arrangement, the Canadian public target ("Pubco") was to be amalgamated with Bidco. The applicable rules did not permit the shares of Pubco to be delisted until three days after the effective date of the Plan of Arrangement. Although not mentioned in the ruling letter, s. 87(2)(ii) deemed Amalco to be a public corporation because a predecessor (Pubco) was a public corporation.
CRA ruled that Amalco will cease to be a public corporation when it files an election, following the delisting, to cease to be a public corporation. The particular technical difficulty addressed by CRA is that, at the time of the election, insiders of the electing corporation are required to hold more than 90% of the shares which previously had been listed. CRA stated:
Since as a matter of tax policy, a corporation in this situation should not be precluded from electing not to be a public corporation, the condition in Regulation 4800(2)(a) can be read as applying where previously listed shares no longer exist.
Neal Armstrong. Summary of 2015 Ruling 2015-0577141R3 under s. 89(1) – public corporation.
Income Tax Severed Letters 15 July 2015
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
1455257 Ontario – Tax Court of Canada finds that a dissolved corporation must be revived before pursuing an appeal
242(1)(b) of the OBCA provides that an action may be brought against a dissolved corporation "as if the corporation had not been dissolved." It arguably is implicit that the dissolved corporation also has the right to defend itself – and, in fact, the Federal Court in 460354 and the Federal Court of Appeal in 495187 (a.k.a. Sarraf) found that a dissolved corporation can appeal to the Tax Court.
Lyons J disagreed, and preferred to follow Webb J (as he then was) in GMC in finding that, in order for a dissolved corporation to appeal an assessment, it must be revived. She gave the dissolved corporation, which was (so to speak) before her after filing an appeal, 60 days to revive itself.
Neal Armstrong. Summary of 1455257 Ontario Inc. v. The Queen under Business Corporations Act (Ontario), s. 242.
The requirement to repay an upstream loan, and the effect of a blocking deficit in a top-tier FA, can result in anomalous income inclusions
The only permanent way of eliminating an upstream loan made by FA, the non-resident subsidiary of Canco, is repaying it. Other situations in which it would be appropriate to offset the income inclusion to Canco under s. 90(6) are not addressed, for example:
- Canco sells FA, which has made a loan to Canco’s non-resident parent, to that parent (so that the loan proceeds effectively have been repatriated to Canco on a taxable basis);
- FA sells the loan (without novation) to a Canadian subsidiary of Canco; and
- Canco acquires all the shares of its non-resident sister to which FA had made the loan, so that the loan is now owing between two controlled foreign affiliates of Canco.
The notional deduction for pre-acquisition surplus dividends under s. 90(9)(a)(i)(D) is limited to the adjusted cost base of Canco’s shares in FA, so that there is no ability to create a negative ACB gain under s. 40(3) that can then be eliminated through a s. 93(1) election so as to access exempt surplus of a non-resident subsidiary of FA. Accordingly, a small exempt deficit in FA, the top-tier foreign affiliate, may result in an income inclusion under the upstream loan rules even in situations where a series of dividends could have been paid free of Canadian tax due to large exempt surplus balances lower in the chain. Furthermore, the deficit can have the same blocking effect on multiple upstream loans.
Neal Armstrong. Summaries of Ian Bradley, Marianne Thompson, and Ken J. Buttenham, "Recommended Amendments to the Upstream Loan Rules", Canadian Tax Journal, (2015) 63:1, 245-67 under s. 90(14) and s. 90(9).
CRA substantially revises and expands its Bulletin on deductibility of fines and penalties
New (or differently expressed) points (as compared to IT-104R3) in CRA’s Folio on the deductibility of fines and penalties include:
- CRA generally will follow the characterization of amounts required to be paid under another statute, so that if they are not treated there as a fine or penalty, e.g., the purchase price of carbon offset credits, their deductibility will not be denied under s. 67.6.
- "[A] fine or penalty incurred in relation to a transaction that is outside the scope of a taxpayer’s normal business activities should not be included in the computation of profit from that business for purposes of subsection 9(1)."
- Following CIBC, the morality of a taxpayer’s conduct is not irrelevant to the deductibility of its expenses.
- In addition, it also is irrelevant if the fine or penalty was deliberately incurred, it was incurred as a result of egregious or repulsive conduct or its deduction would be contrary to public policy.
- CRA has carried forward the statements in IT-104R3 that fines or penalties incurred to acquire inventory, depreciable property or eligible capital property can be treated as expenditures on those items, without qualifying these statements by reference to the subsequently-enacted s. 67.6. The implication may be that fines or penalties whose deduction otherwise would be prohibited by s. 67.6 may be indirectly deducted by this route.
- Ss. 18(1)(t) and 67.6 do not prohibit the deduction of interest charges imposed under commodity tax statutes. However, provincial and foreign income taxes are non-deductible under general principles (unless allowed under ss. 20(11) to (12.1).)
- A deduction for a prepayment penalty under s. 18(9.1) for a taxation year ending after the prepayment is limited to the amount of the prepayment that reasonably relates to the value of the interest that otherwise would have been payable in that year as measured at the time of the prepayment. This amount may be determined using a straight line or present value method. (I don’t know whether the lack of a numerical example reflects embarrassment about the oddness of using a straight line method, diffidence about discussing what discount rate to use or sloth.)
Neal Armstrong. Summaries of S4-F2-C1: "Deductibility of Fines and Penalties" under s. 67.6, s. 18(1)(a) – income-producing purpose, s. 18(9.1), s. 13(21) – undepreciated capital cost – A, s. 10(1), s. 14(5) – eligible capital property, s. 18(1)(t).
Hill Fai Investments – Tax Court of Canada decision indicates that the record retention period for tax basis information does not start running until the last claim for that basis is made
Subject to other more specific rules, s. 230(4) requires a taxpayer to keep books and records until the expiration of six years from the end of the last taxation year to which they "relate." The six-year period starts running from the end of the year in which the relevant claim was made rather than from when the relevant cost arose so that, for example, if the taxpayer (as in this case) had claimed a bad debt deduction under s. 50, the six-year period starts running from the end of the year for which the claim is made rather than the year the advance in question was made.
This of course means that documentation supporting tax basis may have to be retained for decades.
Neal Armstrong. Summary of Hill Fai Investments Ltd. v. The Queen, 2015 TCC 167 under s. 230(4).
Pendragon - UK Supreme Court finds that a scheme, which exploited a VAT rule intended to avoid double-taxation so as to avoid a single level of tax, was abusive
The Pendragon Group used a scheme, which KPMG had designed to exploit a special VAT "margin" rule applicable to sales of second-hand goods, so that VAT was only applicable to its profit margin over the cars’ cost when it resold demonstrator cars, rather than on the full sale price.
Halifax plc v CEC, [2006] EUECJ C-255/02 had established that under the VAT abuse-of-law doctrine, an abuse can be found if "the transactions concerned, notwithstanding formal application of the [detailed provisions]…result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions," and it is "apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage."
After noting that the VAT "broad principle is that tax on the ultimate value of the product is levied only once," Lord Sumption found that "the effect of the KPMG scheme was to enable the Pendragon Group to sell demonstrator cars second-hand under the margin scheme in circumstances where VAT had not only been previously charged but fully recovered…[so that a] system designed to prevent double taxation on the consideration for goods has been exploited so as to prevent any taxation on the consideration at all." The scheme failed.
Given the significance accorded in both Halifax, and across the ocean in Canada Trust, Lipson and Copthorne, to the purpose of the legislative provisions which have allegedly been abused, and the potential persuasiveness of an argument that the scheme of the GST legislation, like that of the VAT, is to impose a single level of tax from lumberjack to bed frame sale, Pendragon potentially may provide support for considering that transactions of Canadian registrants, which are crafted to result in net GST being imposed (at whatever stage) on less than all of the commercially-added value respecting a good or service which ultimately is consumed, are abusive under GAAR.
Neal Armstrong. Summary of HMRC v Pendragon plc, [2015] UKSC 37 under ETA, s. 274(4).