News of Note
CRA confirms that the “cost” of eligible capital property for thin cap purposes means its original cost rather than cost amount
Email this ContentUnder the expanded thin cap rules, Canadian branches of non-resident corporations or trusts are limited to debt of 60% of the "cost" of assets used or held in the Canadian activities. CRA has confirmed that the "cost" of eligible capital property means its "original acquisition cost" rather than (amortized) "cost amount." It made essentially the same finding in 2013-0513761E5 respecting depreciable property.
A similar point arises under the gross REIT revenue definition, which provides for the deduction of the cost rather than cost amount of property which has been disposed of.
Neal Armstrong. Summary of 22 July 2014 T.I. 2014-0526631E5 under s. 18(5) – equity amount.
Income Tax Severed Letters 6 August 2014
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Individual taxpayers can destroy all written copies of their records
It is acceptable to CRA for you or other taxpayers to destroy all your receipts or other records provided that you take readable electronic copies and make appropriate backup copies.
Neal Armstrong. Summary of 17 July 2014 T.I. 2014-0526121E5 under s. 230(4.1).
CRA confirms that a group Finco is a listed financial institution for GST/HST purposes
CRA has revised and expanded its Memorandum on what is a listed financial institution for GST/HST purposes. New points include:
- The "insurer" branch of LFI also includes non-provincially licensed insurers such as accident and sickness insurers.
- The "money-lender" branch includes in-house Fincos (so that, for example, a group with a Finco could make s. 150 elections to eliminate HST/GST on intercompany lease or services charges).
- A person who is deemed by s. 149(3) to be an FI by virtue of an acquisition from an FI of what will be continued as its principal business is not thereby also deemed to be an LFI (unless it satisfies the specific criteria).
Neal Armstrong. Summaries of Memorandum 17-6 "Definition of ‘Listed Financial Institution’" July 2014 under ETA s. 149(1)(a) and s. 149(3).
CRA provides checklist on determining SLFI status for HST purposes
CRA has published a memorandum on the meaning for HST purposes of a "selected listed financial institution" – e.g., a mutual fund which is required to pay HST based on the provincial distribution of its unitholders rather than on the HST which is charged to it by suppliers.
Although mostly a paraphrase of the relevant provisions, the memo has an Appendix setting out a "series of tips" i.e., a checklist, to assist in determining SLFI status.
Neal Armstrong. Summary of Memorandum 17.6.1 "Definition of ‘Selected Listed Financial Institution’" July 2014 under ETA s. 225.2(1) – selected listed financial institution.
Beaudet and Saucier – Tax Court of Canada finds that the FMV of a newly-constructed apartment building is its direct and indirect cost
An apartment building which is constructed for rental by the builder generally is subject to GST on its fair market value when the first tenant moves in. Since this GST cost is non-creditable (subject to a new accommodation rebate), there is an additional GST cost to the extent that such FMV is higher than the costs of the new apartment property. Lamarre J found that because there was no evidence of some specific market anomaly such as a zoning restriction which would cause the FMV of the new apartment properties to be higher than their cost, their FMV was equal to the determined costs. Such costs included an estimated financing cost and imputed management fee of 1.5% and 5% of total costs, as well as advertising expenses, and excluded some cost overruns, e.g., because of substandard ground conditions.
Neal Armstrong. Summary of Beaudet and Saucier v. The Queen, 2014 TCC 52 under General Concepts – fair market value – real estate.
CRA finds that active business assets distributed on a non-QLAD liquidation of FA do not generate FAPI
On the liquidation of a foreign affiliate which is not a qualifying liquidation and dissolution, there is a deemed disposition on the liquidating distribution (i) under s. 88(3)(a) of shares which are excluded property for their relevant cost base and (ii) under s. 88(3)(b) of other property for its fair market value. Can the second category include property which is excluded property by virtue of being used in an active business given that such use arguably has ceased at the very moment of its distribution?
Yes. CRA indicated that it can qualify as excluded property if it was used in the active business immediately before its distribution, in which case gains from its deemed disposition at fair market value will not give rise to foreign accrual property income.
Neal Armstrong. Summary of 17 July 2014 T.I. 2014-0536331E5 under s. 88(3).
CRA confirms that negative ACB gains of non-residents from Canadian real estate or resource LP interests are exempt from tax
S. 40(3.1) deems the holder of an LP interest to realize a capital gain when the ACB calculation is otherwise about to go negative, but only goes on to deem there to be an associated disposition of property at that time for purposes of the capital gains deduction. CRA has confirmed that this means that a negative ACB gain of a non-resident from holding an LP interest which is taxable Canadian property is exempt from capital gains tax – but has drawn Finance’s attention to this anomaly.
Although not mentioned by CRA, the same result arguably occurs when the non-resident realizes a negative ACB gain on shares which are taxable Canadian property. S. 40(3) deems the non-resident to realize a gain from a disposition of the shares – but only deems the non-resident to have disposed of the shares in the year for limited purposes not including s. 2(3)(c).
Summaries of 18 June 2014 T.I. 2011-0417491E5 and 18 June 2014 T.I. 2011-0421481E5 under s. 40(3.1).
Income Tax Severed Letters 30 July 2014
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A registrant which has been charged GST on a commercial real estate purchase should promptly apply for a rebate
Where a registrant pays GST on a commercial real estate purchase, CRA considers that the correct approach is for the registrant to apply under s. 261 for a rebate for GST paid in error, rather than to purport to offset that tax by claiming an input tax credit. Such ITC instead is an offset to its self-assessment obligation for the GST under s. 228(4).
Requiring the registrant to apply for a rebate is potentially problematic as the time limit for the rebate claim is two years after payment of the GST.
Neal Armstrong. Summary of 25 February 2014 Memo 155876 under ETA s. 221(2).