News of Note
5 more translated CRA interpretations are available
Email this ContentWe have published a further 5 translations of CRA interpretations, which were released in October 2010. Their descriptors and links appear below.
These are additions to our set of 1,152 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
San Domenico Vetraria – ECJ finds that a secondment was a taxable supply for VAT purposes
Although the European VAT Directive provided that supplies of services (or goods) for consideration were taxable for VAT purposes, Italian VAT legislation provided that the secondment of staff where only the payroll costs were reimbursed was to be ignored for VAT purposes. In finding that this Italian legislation was contrary to the VAT Directive, so that VAT was applicable to the payments made by an Italian subsidiary (San Domenico Vetraria) to its Italian parent (Avir) to reimburse the latter for the payroll costs of a staff member who had been seconded to San Domenico Vetraria, the 7th Chamber of the European Court of Justice stated:
[A] supply of services is effected ‘for consideration’ … if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient. … .
[T]he secondment was carried out on the basis of a legal relationship of a contractual nature between Avir and San Domenico Vetraria … [and] there was reciprocal performance, namely the secondment of a director from Avir to San Domenico Vetraria, on the one hand, and the payment by San Domenico Vetraria to Avir of the amounts invoiced to it, on the other.
This is consistent with the CRA position that the payroll reimbursement payments (in the absence of a s. 150 or 156 election) would generally be taxable unless the remuneration was paid by the one company as agent for the other company (see 15 May 2012 Ruling 142436 and 25 February 2016 CBA Roundtable, Q. 7).
Neal Armstrong. Summary of San Domenico Vetraria SpA v. Agenzia delle Entrate, Case C-94/19 (ECLI:EU:C:2020:193) (7th Chamber) under ETA, s. 123(1) – supply.
CRA finds that a credit generated by a business under the Ontario Net Metering Program is only income when applied, and is offset by a deduction for the electricity consumed
Under the Net Metering Program administered by the Ontario Power Authority, a participant who generates electricity primarily for its own use from a renewable energy source is billed only for the excess of the value of the electricity consumed by it over the value of the electricity supplied to grid. Where the value of the participant’s electricity consumption is less than the value of the electricity supplied, it generates credit, which is available for use against its future electricity consumption in the next billing period – but to the extent that the accumulated credit cannot be used within a given 12-month period, it will then be forfeited.
CRA stated:
[W]here a participant in the Net Metering Program generates electricity that is consumed in the course of carrying on a business or earning income from another property (such as a rental building), the value of such a credit would be included in the participant’s income from such business or property. This income inclusion will be realized in the taxation year in which the credit is applied against the participant’s electricity consumption costs and it will be equal to the value of the credit applied. However at that time, the participant would typically be entitled to an offsetting deduction for the cost of the electricity consumed by the participant, being an expenditure incurred for the purpose of earning income from the business or property.
Neal Armstrong. Summaries of 17 January 2020 External T.I. 2017-0685341E5 under s. 9 – computation of profit, s. 3 – business source, Sched. II – Class 43.1 and Reg. 1100(25).
Duque - Federal Court of Appeal finds that a director was able to establish that CRA had incorrectly included holdbacks in the corporate assessment
Webb JA confirmed that a director who was assessed under ETA s. 323 for failure of the corporation to remit GST can challenge the correctness of the assessment of the corporation for the unpaid GST, even where it had failed to do so. Here, the director was able to establish that the corporate taxable billings assessed by CRA had incorrectly included construction lien holdback amounts, even though ETA s. 168(7) deemed there to be no GST payable on the holdback amounts until they became payable.
Neal Armstrong. Summaries of Duque v. Canada, 2020 FCA 73 under ETA s. 323(1) and s. 168(7).
CRA rules that lump sums in settlement of future wage loss payments were exempt, but that residual payments out of the disability trust were s. 6 income
A CCAA (or similar) plan for a corporation provided that:
- the trustees of a health and welfare trust that had been set up for disabled employees of the corporation would pay them lump sums in lieu of continued wage loss replacement plan benefits, with such sums equalling the actuarially computed net present value of those benefits;
- if there were any remaining assets in the trust after this, the Trustees would equitably allocate them to the remaining beneficiaries as of a specified date; and
- the trust would then be wound up.
CRA ruled that the lump sum payments under 1 above would not be income to the recipients, but that any payments under 2 above would be income of the recipients under ss. 5 and 6.
The first ruling is consistent with Tsiaprailis and 2005-0159331E5, and the second might be supported by s. 6(3)(b).
Neal Armstrong. Summaries of 2019 Ruling 2018-0757561R3 under s. 6(1)(f) and s. 6(3)(b).
Income Tax Severed Letters 15 April 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Post-mortem tax planning should address the narrow scope of the comfort letter on s. 212.1(6)
A pipeline typically entails the estate selling its shares of Canco (whose ACB was stepped up on death) to a new Holdco for a Holdco note which, on its subsequent repayment, effectively extracts the corporate surplus of Canco. Although the new look-through rule in s. 212.1(6)(b) would otherwise generally generate a deemed dividend to the non-resident beneficiaries of the estate based on their proportionate share of the excess of the note over the paid-up capital of the transferred Canco shares, Finance has provided a comfort letter in which it disclosed a recommendation that the Act be amended to exclude, from the application of s. 212.1(6)(b), dispositions of shares by a Canadian resident graduated rate estate of an individual who was resident in Canada immediately before the individual's death, provided that those shares were acquired by the estate on and as a consequence of the individual's death.
As this proposal only applies to shares acquired on death:
If the Opco shares are exchanged (for example, for fixed-value preferred shares) after death and before the pipeline, relief may be lost.
More fundamentally, the comfort letter does not apply to life interest trusts (LITs)—such as alter ego, spousal, and joint partner trusts— even though LITs are in a materially identical position to GREs, so that the proposal does not address the same double taxation issue faced by them.
A suggestion:
Assume that the LIT transfers its shares of Opco for Holdco shares alone (that is, without receiving any non-share consideration). Paragraph 212.1(1.1)(b) suppresses the PUC of the Holdco shares, but no deemed dividend arises. On a subsequent repurchase or redemption of those shares, the LIT will realize a deemed dividend under subsection 84(2) or (3), but, critically, its POD will be reduced (see paragraph (j) of the POD definition in section 54). The result is a capital loss. Subject to the applicability of any stop-loss rules and the general three-year loss carryback period, the LIT can use that loss to offset its capital gain on death. Thus, only one layer of tax subsists.
Neal Armstrong. Summary of Kyle B. Lamothe and Alexander Demner, “Section 212.1 Post Mortem Pipeline Comfort Letter” Tax for the Owner-Manager, Vol. 20, No. 2, April 2020, p. 8 under s. 2261.
Lee – Court of Quebec finds deductible interest on a note that could be settled with property worth less than the amount owed and that the tax shelter definition is applied on a property-by-property basis
The ARQ did not lose heart with the victory by a representative investor in a tax shelter in Drouin (where CRA unsuccessfully argued that no business was carried on) and, for the same tax shelter and for the same year (as well as other years) was successful before the Court of Quebec in having most of the claimed deductions denied. For two of the years, there was a prescribed benefit in the form of limited recourse debt, which resulted in all the deductions being denied under the Quebec equivalent of ITA s. 231.7(6), as no tax shelter registration had been made. For two subsequent years, such registration had been made, but there nonetheless were tax shelter investments under Quebec equivalent of s. 143.2, so that the limited recourse nature of the debt again resulted in CCA denials under that provision and the equivalent of Reg. 1100(20.1). However, interest deductions on the limited recourse debt was allowed for those years, notwithstanding that the taxpayers could extinguish their obligations under the notes by surrendering their franchises (which in fact occurred, once the targeted deductions were claimed).
For some further taxation years, the promoters once again failed to file tax shelter registrations. The taxpayers argued that the franchises for those years did not satisfy the numerical tax shelter test because the cost of their acquisition of the property (being a single franchise property for these purposes comprised of the software licence and the membership right) included all the interest they had covenanted to pay. Fournier JCQ rejected this interpretation of “cost”, stating:
The term "cost" must therefore be assimilated to the price that the taxpayer agreed to pay to acquire the property, excluding other expenses incurred in respect of the property, including interest payable on money borrowed by the taxpayer to acquire the property.
He also rejected the single property argument, stating that the tax shelter definition “militates in favour of an individual analysis of the property in question in order to determine whether or not it qualifies as a tax shelter.” Accordingly, the Class 12 CCA claims for those latter years respecting the cost of the software were also denied, whereas the eligible capital amounts claimed for the membership right were deductible.
Neal Armstrong. Summaries of Lee v. Agence du revenu du Québec, 2020 QCCQ 780 under s. 20(1)(c)(ii) and s. 237.1(1) - tax shelter.
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in November and October 2010. Their descriptors and links appear below.
These are additions to our set of 1,147 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA confirms that the “cost” of call options closed out by their writer is nil, and that the “cost” of a short sale is the FMV of the borrowed shares
Box 20 of Form T5008 Statement of Securities Transactions that is prepared by investment dealers respecting the transactions conducted by them on behalf of their clients reports (in Box 20) the cost of such securities. CRA indicated that the cost of a call option that is sold by its writer on an exchange is nil, and that where the writer then terminates its obligations under that option by purchasing a matching option on the exchange, that purchase is treated as a separate transaction for T5008 reporting purposes.
In the case of a short sale transaction, the cost of the shares sold short is the fair market value of the shares at the time they are borrowed for the purpose of being sold short – so that the cost of the sales sold short is not the cost of the shares subsequently purchased to cover the short.
S 49(1) deems the writing of a call option on capital account to be a disposition, with the implication that the call premium received by the writer is deemed to be proceeds of disposition. CRA confirmed its position “that expenses incurred in connection with the granting of an option may be deducted from the proceeds of disposition when calculating a taxpayer's gain.”
Neal Armstrong. Summaries of 22 January 2020 External T.I. 2014-0559281E5 F under Reg. 230(2), ITA s. 40(1)(a)(i) and s. 49(1).