News of Note
Entertainment Software Association v. SOCAN - Supreme Court decision casts doubt on withholding tax exemption for artistic production royalties
Email this ContentThe copyright holders of musical works represented by the Society of Composers, Authors and Music Publishers of Canada ("SOCAN"), who generally would have already licensed the copyright in their musical works to games publishers, were found to not have any right to further royalties when the games were downloaded by online purchasers. At issue was whether these downloads represented a "communicat[ion of] a work to the public by telecommunication," which was protected under s. 3(1)(f) of the Copyright Act. The Supreme Court of Canada found that the core of Canadian copyright is the pair of rights set out in the introductory paragraph of s. 3(1), which are the exclusive right to produce or reproduce, and the exclusive right to perform, a work. Historically, s. 3(1)(f) is a specific example of the latter right only. As the downloading of the games by their online purchasers was protected by the production or reproduction branch of copyright protection, rather than the performance branch (including the s. 3(1)(f) telecommunication right), the SOCAN members were not entitled to collect a second set of royalties.
This distinction drawn between reproduction and performance rights suggests that copyright royalties paid to a non-resident for the right to mount a theatrical or musical production may not be exempted from Part XIII tax by s. 212(1)(d)(vi) (which applies only to royalties for "production or reproduction" of a work; see 13 June 2003 T.I. 2003-0018975 and 29 May 1998 Memorandum 973007). Additional issues arise under similarly-worded exemptions in various Income Tax Conventions to which Canada is a party (but which should also give effect to the intent of the other Treaty partner), given that (as noted in the dissenting reasons of Rothstein J.) the copyright law of foreign jurisdictions such as the U.S. may be structured quite differently than the Canadian Copyright Act.
Scott Armstrong. Summary of Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada, 2012 SCC 34 under s. 212(1)(d)(vi) and Statutory Interpretation - Legislative History.
CRA provides further confirmation of the inefficiency under the at-risk rules of a two-tier LP structure
CRA has an established administrative policy that in a two-tier LP structure (or a GP on LP structure), limited partnership losses of the bottom LP (i.e., its losses allocated to the top LP in excess of the relevant at-risk amount) effectively get vaporized: (1) even if the bottom LP subsequently earns income, the top LP will not be able to use its limited partnership loss because it is not a taxpayer for loss-utilization purposes; and (2) the partners of the top LP do not have a limited partnership loss in respect of the bottom LP because their indirect share of that LP's loss did not qualify as a limited partnership loss in their hands. See, for example, 14 May 2004 T.I. 2004-0062801E5 and 2 May 1994 T.I. 5-940777.
CRA has now indicated that this problem is not resolved if the ultimate partners were direct partners of the bottom LP when the losses were incurred; and they subsequently rolled their interests into the top LP with the the bottom LP then becoming profitable. In this situation they still cannot utilize their limited partnership losses as a deduction from the bottom-tier income that is allocated to them because they have no "at-risk amount" in respect of the bottom LP (whose definition requires that they be a direct limited partner of that partnership.)
Neal Armstrong. Summary of 31 May 2012 T.I. 2012-0436521E5 under s. 111(1)(e).
Pope - UK Upper Tribunal finds that next of kin are not taxable on interest they receive in respect of an unadministered estate
The son of the taxpayers, who was the beneficiary of his own life insurance policy, was abducted by Angolan rebels in 1998 and later presumed dead. The taxpayers received the insurance proceeds plus interest in 2002, which was three years before his estate went into administration. The Upper Tribunal found that the interest was not income to the taxpayers because at the time of receipt all beneficial interests in the unadministered estate were held in suspense - and, in fact, until the administration was completed, they did not have any proprietary interest in any particular asset of the unadministered estate.
The UK provision in issue specified that tax "shall be charged on and paid by the persons receiving or entitled to the income." The Upper Tribunal found that the taxpayers were not "entitled to" the interest, but did not explicitly state that they did not "receive" the interest. An implicit finding appears to be that, because the interest was potential income of the unadministered estate, the taxpayers should not also be regarded as the "persons receiving or entitled to" that income.
Similar reasoning might apply in Canada. Ss. 104(13) and (24) provide that an amount of estate (or other trust) income is not included in a beneficiary's income until the beneficiary is entitled to enforce its payment, or it is paid, by the estate.
Scott Armstrong. Summaries of Pope & Ors v. R & C Commrs., [2012] UKUT 206 (Tax and Chancery Chamber) under s. 104(13) and s. 12(1)(c).
CRA implicitly finds that the extinguishing of property in a non-arm's length transaction does not result in deemed fair market value proceeds
CRA has found that where a partnership which was wound-up under s. 98(5) was leasing property from the the partner which received the partnership business, s. 98(5) rollover treatment will not apply to the leasehold interest of the partnership, assuming that the leasehold interest was extinguished by merger into the freehold interest of the lessor partner on the winding-up rather than being received by that partner. Instead, the partnership would be able to claim a terminal loss with respect to the leasehold interest, on the basis that it was disposed of for nil proceeds of disposition.
Since s. 98(5) windings-up generally occur as non-arm's length transactions, this interpretation appears to implicitly accept that s. 69(1)(b) , which deems the receipt of fair market value proceeds on the disposition of "anything to a person with whom the taxpayer is not dealing at arm's length," does not apply to an extinguishing of a property by operation of law.
Neal Armstrong. Summary of 31 May 2012 T.I. 2011-0426091E5 under s. 98(5).
Fiducie Famille Gauthier - Federal Court of Appeal finds that the fair market value of shares should not exclude recently-incurred reorganization expenses
If you purchase a company for $2.6 million, and then immediately incur $200,000 in professional fees to reorganize the company, followed by a transfer of the securities of the company in an internal reorganization, is it appropriate to consider that the securities have a fair market value of $2.8 million on the internal transfer? The Fiducie Gauthier case - which dealt with the reverse situation where approximately $200,000 of reorganization expenses are incurred before transferring securities in a non-arm's length transfer, and then selling them in an arm's length sale for $2.8 million - arguably provides some support for the proposition that the fair market value of shares may reflect recently-incurred reorganization expenses.
Neal Armstrong. Summaries of Fiducie Famille Gauthier v. The Queen, 2012 FCA 76, aff'g 2011 TCC 318 under s. 84.1(1) and General Concepts - Fair Market Value - Shares.
CRA gets granular on how close grassroots exploration can be to an existing mine
In order for expenses of exploring a potential mineral resource to qualify as Canadian exploration expense under para. (f) of the definition of that term, they must not relate to a mine in the the mineral resource or to a potential expansion of the mine. CRA has apparently ruled that a proposed exploration program would qualify provided (among other conditions) that the activities are not undertaken within 1.2 kilometers of the mine shaft for a former mine on care and maintenance.
Neal Armstrong. Summary of 2012 Ruling 2011-0422761R3 under s. 66.1(6) - CEE, para. (f).
CRA corrects error in GST/HST Policy Statement re discounted gift certificates
In the version of Policy P-202 which was outstanding up until April of this year, CRA stated that one of the characteristics of a gift certificate (which is treated for GST and HST purposes similarly to money) is that the consideration for its purchase "is given in the amount of the stated value." This previous requirement that the gift certificate not be purchased at a discount from its face amount has now been corrected by CRA.
In particular, CRA has acknowledged that vouchers purchased on-line from a "Groupon" type of vendor still qualify as gift certificates even though they are purchased at a discount from their face amount and the participating merchants have agreed to honour the vouchers at their face amount. This position now is also reflected in the revised version of P-202.
Neal Armstrong. Summary of 19 July 2011 HQ Letter 127619 under ETA s. 181.2.
CRA rules that magnetic membership cards qualify as gift certificates for HST/GST purposes
CRA has ruled that membership cards for access to a social networking website which are sold through retail stores and then activated at the stores by scanning a magnetic strip and entering a scratch-away PIN number, qualify as gift certificates for GST and HST purposes. This position that a gift "certificate" can include a magnetic card is now reflected in the revised version of Policy Statement P-202, which was released in April 2012.
Scott Armstrong. Summary of 11 August 2011 Headquarters Letter 127020 at ETA s. 181.2.
CRA considers that nursing homes do not qualify for the 83% GST rebate
CRA considers that a public institution operating a nursing home (in this case, one focusing on Alzeimer's residents) did not qualify for the higher 83% GST rebate available to qualifying operators of "qualifying facilities" (as opposed to a 50% rate) given that the level of "active" physician involvement in the care services was significantly short of that traditionally provided in hospitals. Examples of qualifying facilities included "those that offer a high level of therapeutic care, cancer clinics, day surgery clinics and community health centres that render primary care services."
Neal Armstrong. Summary of 20 May 2011 HQ Letter 115028 under s. 259(1) - "facility supply".
HST/GST: CRA finds mortgage broker services to be exempt notwithstanding associated credit assessment and processing services - but warns that trailer fees may not be exempt
CRA has indicated that the fees earned by a mortgage broker from mortgage lenders (and, in some instances, from the borrowers) were exempt financial services for HST and GST purposes. The services of the mortgage broker included credit monitoring and administrative/processing services, which were sufficient to cause the similar services provided by a web-based loan broker described in the post below to be taxable supplies (see also 19 July 2011 HQ Letter Case 125864). However CRA noted that the mortgage broker had a high degree of responsibility and involvement in making the loans occur.
Although it was not asked to comment on trailer commissions, it went out of its way to warn that "a renewal commission payable in future years may not be [exempt]."
Neal Armstrong. Summary of 27 May 2011 HQ Letter 129882 and 14 July 2011 HQ Letter 132388 under s. 123(1) - financial service.