News of Note

A Canadian corporation (“Sulpetro”), which had rights to direct the exploitation of, and to receive the proceeds from, a licence its U.K. subsidiary (“Sulpeto UK”) held in an offshore U.K. oil and gas field, sold its rights (and shares of the subsidiary) to a U.K. purchaser (BP) for consideration that included a royalty that became payable, based on production from the field, when the market price of oil exceeded US$20 per barrel. The taxpayer (RBC) received an assignment of this royalty following default by Sulpetro on a loan from RBC.

The principal issue was whether HMRC was permitted by Art. 6 of the Canada-U.K. Treaty to impose tax on the royalty payments received by RBC and, in particular, whether they fell within the portion of the definition of “immovable property” in Art. 6(2) (the “fifth limb”) that referred to "rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources".

Lady Rose first stated her agreement with the conclusion of the Court of Appeal (per Falk LJ) that the right to work the field was held by Sulpeto UK and not by Sulpeto, stating in this regard:

There is a legal difference between someone having a right to work natural resources and someone having a right to require another person to work those natural resources. Sulpetro has the latter but not the former. …

Lady Rose went on to find that even If the rights of the royalty payer (now, BP) had amounted to a right to work the field, nonetheless RBC's right to royalty payments from BP did not amount to a right to "consideration for" such right to work. In particular:

• It was inherent in the reference in the fifth limb to payments being "consideration for" the right to work that the royalty recipient (RBC) be a person who could confer on the royalty payer the right to work the oil field, whereas RBC never had such right because it never had an interest in the land in which the natural resources were found.
• Furthermore, it was only payments made in return for the first grant of the rights by the landowner that fall within the definition of "consideration for" the right to work, so that payments made for the assignment or transfer of rights conferred on someone by the owner of the rights were not "consideration for" the right to work.

Accordingly, HMRC did not have the right to tax the royalty payments.

Neal Armstrong. Summaries of Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs [2025] UKSC 2 under Treaties – Income Tax Conventions – Art. 6, Art. 12, General Concepts – Separate Existence, and ETA s. 217 – imported taxable supply - (c).

The Canadian entrepreneurs’ incentive (CEI) in draft s.110.63 reduces to 1/3 the inclusion rate for capital gains realized on the disposition of, for example, qualified small business corporation shares, where specified conditions are satisfied. It is apparently still contemplated that it will apply to up to $400,000 of capital gains in 2025, which will increase by $400,000 each year until a lifetime maximum of $2 million is reached in 2029.

Access to the CEI can be enhanced through use of the capital gains reserve.

For example, in 2025 an entrepreneur sells shares, qualifying for the CEI and having an ACB of $100, for $2,000,100. $400,020 is payable immediately, and the balance of $1,600,080 is to be paid equally as to $400,020 in each of the next four years. The entrepreneur will be able to claim a reserve each year, allowing the inclusion of a capital gain of $400,000 per year until 2029, thereby benefiting from the increase in the limit and enabling CEI claims for the years 2026 to 2029.

Neal Armstrong. Summary of Julien Théberge, “Benefiting from the Annual Increase in the CEI Limit by Using a Capital Gain Reserve,” Canadian Tax Focus, Vol. 15, No, 1, February 2025, p. 2 under s. 110.63(2).

Regarding the supply by a dentist’s professional corporation of an artificial tooth (e.g., a denture, crown or bridge) to a patient, CRA applied the 2022 Tax Court (Informal Procedure) decision in Axelrod to find that “the predominant element of a supply made by a dentist to their patient, through a dental corporation, is their professional dental services and not the artificial tooth per se” so “that when a dentist provides artificial teeth in the course of rendering a dental treatment to an individual, the dentist is making a single supply of a dental treatment, which is a health care service.” Accordingly, no portion of such supply was zero-rated under ETA s. VI-II-11, which applies to “a supply of artificial teeth.”

CRA did not discuss the 2023 FCA decision in Kevin Davis Dentistry (which found, regarding the similar zero-rating under s. VI-II-11.1, for “a supply of an orthodontic appliance,” that “a supply of an orthodontic appliance is intended to be zero-rated even when accompanied by orthodontic services.”)

Neal Armstrong. Summary of 21 August 2024 GST/HST Ruling 174773 under ETA s. VI-II-11.

We have translated a further 6 CRA interpretations released in February of 2001. Their descriptors and links appear below.

These are additions to our set of 3,103 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 24 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5^th of each month).