News of Note
Grands Palais – Court of Quebec finds that consideration for parking spots was part of the consideration for (condo) residential complexes for new housing rebate purposes
Email this ContentThe Quebec new housing rebate is essentially the same as the ETA equivalent, except that entitlement to it is lost at a lower dollar level of total consideration for the “residential complex” that is purchased. Croteau, J.C.Q. found that the consideration paid by purchasers for new condo units in a complex also included the $25,000 they paid for an underground parking spot. In particular, she found that the parking spot was “attributable to the [condo] unit and … reasonably necessary for the use and enjoyment of the unit,” stating:
The location of the various high-rise residential buildings and the advantages that indoor parking spaces can provide led 99.44% of purchasers to express their intention to acquire at least one parking space at the same time as their residential unit.
[A]lthough they constitute different cadastral lots … the interdependence and interconnection of the parking spaces to the residential units are such that they could not be considered, for the purposes of establishing the amount of the Rebate to which the purchasers were entitled, as separate components.
Accordingly, for 93 of the purchases, the total consideration exceeded the dollar threshold, after taking the extra $25,000 into account.
Like ETA s. 254(6), the builder under the QSTA is not liable for the denied rebate (which has almost invariably been assigned to the builder in larger projects) except where it “knows or ought to know” that the individual purchaser is not eligible for the rebate. In finding that the builder could not escape liability on this ground, Croteau, J.C.Q. found that although the rebate form itself did not explain the point at all well, the builder should have been able to ascertain the CRA/ARQ position on the rebate in various published Bulletins.
Neal Armstrong. Summary of Grands Palais du nouveau Saint-Laurent Inc. v. Agence du revenu du Québec, 2020 QCCQ 281 under ETA s. 123(1) – residential complex – (b).
CRA indicates that a discretionary family trust is required to make a pro rata allocation of safe income respecting a dividend distributed to its beneficiaries
CRA indicated that when a discretionary family trust distributes a dividend received from Opco to a corporate and an individual beneficiary (with a s. 104(19) designation being made), “the safe income on hand associated with the dividend would be allocated on a pro rata basis amongst the portions of the dividend received by the corporate and individual beneficiaries,” rather than the trustees being permitted to allocate all of safe income to the dividend received by the corporate beneficiary.
Neal Armstrong. Summary of 27 January 2020 External T.I. under s. 55(2.1)(c).
Income Tax Severed Letters 26 February 2020
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on a self-cancelling circular transaction to convert net capital losses into stepped-up UCC
Aco, and its subsidiary Bco, have available capital losses that they wish to use in stepping up the undepreciated capital cost of trademarks (Class 14.1 properties, presumably having a nominal or modest capital cost) which Bco uses in the course of carrying on its business. In broad terms, this is accomplished by Bco using up its losses in spinning the trademarks off to Aco on a partial rollover basis, and by Aco dropping the trademarks down to Bco to also use up its losses. More specifically:
- Aco establishes a new sister to Bco (Newco) to which Aco does an s. 85(1) drop-down of preferred shares of Bco having a fair market value equaling that of the trademarks;
- Bco spins-off the trademarks to Newco on a partial rollover basis in consideration for prefs of Newco, thereby using Bco’s net capital losses to effect a ½ step-up of the UCC of the trademarks under s. 13(7)(e)(ii) – and with Newco licensing the trademarks back to Bco for royalties;
- The prefs in 1 and 2 above are cross-redeemed (with reliance on the s. 55(3)(a) exception to s. 55(2));
- Newco is wound-up under s. 88(1);
- Aco does an s. 85(1) drop-down of the trademarks back to Bco, but choosing an elected amount so as to uses up its net capital losses and to effect a further ½ step-up of the trademarks' UCC under s. 13(7)(e)(ii).
The CRA summary of this transaction emphasizes that Reg. 1102(14) deems the trademarks to have the same (Class 14.1) class to Newco, Aco and Bco in succession. It is unclear whether this reflects someone’s sensitivity to a Mara Properties issue (property retaining its character as it is bounced around in the group) or a Hickman Motors/Reg 1102(1)(c) issue (transitory income-producing purpose).
Neal Armstrong. Summary of 2019 Ruling 2018-0772921R3 under s. 13(7)(e)(ii).
Clément – Tax Court of Canada finds that s. 8(1)(b) did not cover legal costs of an action to extend the period of employment
The taxpayer worked as a provisional judge for the Montreal Municipal Court up until 2005, and then served as a full-time judge up until 2012, at which time he was forced to resign as he had attained the age of 70 – which meant that he was 23 months short of the requisite years of full-time service required to generate a full pension.
Lafleur J found that the legal expenses he incurred in an unsuccessful court action to obtain redress were not deductible under s. 8(1)(b). Respecting the first ground of his action - seeking a declaration that he was entitled to continue to exercise his office as a judge of the Montreal Municipal Court after the age of 70, thereby accumulating credits for obtaining a full pension - Lafleur J essentially noted that this did not represent attempted recovery of amounts he earned for working up to 70, but instead related to an attempted extension of his employment. Respecting his alternative ground - seeking a declaration that the three years during which he acted as a provisional judge be taken into account in the calculating his pension – she noted inter alia that s. 8(1)(b) did not extend to amounts that would have been included in his income under s. 56 rather than s. 5.
Neal Armstrong. Summary of Clément v. The Queen, 2020 CCI 33 under s. 8(1)(b).
Al-Rubaiy – Tax Court of Canada finds that the common law rule of discoverability does not apply to GST/HST rebate claim deadlines
The taxpayer was charged HST on his purchase of a dental practice and, after changing accountants, applied for a rebate of the HST (presumably on the basis that the purchase was exempt under inter alia ETA ss. 141.1(1)(b), 200(3) and 167.1).) Although his rebate application was made well after the two-year limitation in s. 261(3), he unsuccessfully argued that under the common law principle of discoverability, the two-year period did not start running until he discovered his overpayment on his change in accountants. Wong J added, obiter:
No evidence was introduced to show that the joint election was made with respect to subsection 167(1) for the tax-free supply of the Vendor’s business assets. Therefore, since no election appears to have been made, this transaction was subject to GST/HST and the tax in issue was likely not paid in error.
Neal Armstrong. Summary of Al-Rubaiy v. The Queen, 2020 TCC 34 under ETA s. 261(3).
Dilalla – Federal Court of Appeal articulates the purpose of the fresh start rule
Rennie JA confirmed the decision below that the “fresh start” rule (Rule 8) precluded the taxpayer from bringing a motion to strike the Crown’s Reply more than two years after all pre-trial proceedings had been completed, stating:
The fresh step rule is designed to ensure the orderly movement of litigation through to trial. The rule is based on the view that if a party pleads over to a pleading, it implies a waiver of any irregularity that might have been attacked. Here, the judge’s discretion was exercised consistent with the objective of this rule … .
Neal Armstrong. Summary of Dilalla v. Canada, 2020 FCA 39 under Rule 8.
Our translations of CRA interpretations go back 9 years
We have published a further 5 translations of CRA interpretations released in February, 2011. Their descriptors and links appear below.
These are additions to our set of 1,094 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for March.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2011-02-25 | 8 October 2010 Roundtable, 2010-0373161C6 F - Paragraphs 256(3) and 256(6) ITA | Income Tax Act - Section 256 - Subsection 256(6) | application could prevent acquisition of control or preclude loss of CCPC status |
| 8 October 2010 Roundtable, 2010-0373191C6 F - Computation of safe income | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | where interest in partnership holding Subco with safe income is rolled into Holdco for prefs, dividends from Subco do not change consolidated SIOH of prefs – or increase commons’ SIOH | |
| 2011-02-18 | 8 October 2010 Roundtable, 2010-0373131C6 F - Présomption d'action concertée | Income Tax Act - Section 251.2 - Subsection 251.2(2) - Paragraph 251.2(2)(a) | Q of fact re whether 3 or more CCPC shareholders form a group |
| 9 December 2010 Internal T.I. 2010-0371741I7 F - Automobiles mises à la disposition des employés | Income Tax Act - Section 248 - Subsection 248(1) - Automobile | qualification as automobiles turns on design, not use | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(e) | employer-provided automobile to attend occasional off-site meetings did not generate a benefit | ||
| 24 January 2011 Internal T.I. 2010-0389251I7 F - Farm-out agreement and warrants | Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (j) | CEE to be incurred under simple farmout reduced by an allocation to warrants issued by farmee | |
| Income Tax Act - Section 15 - Subsection 15(1) | valuation of “free” warrants issued as part of a simple farmout agreement determined based on what would be a s. 15(1) benefit | ||
| General Concepts - Fair Market Value - Options | amount allocated out of consideration to “free” warrants based on the greater of their trading and in-the-money value | ||
| Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (f) | application of farmout policy to situation where free warrants issued along with incurring of CEE |
Burlington Resources – Crown abandons its position that s. 247(2)(c) applied to reduce guarantee fees paid by a ULC to its non-resident parent
Burlington, a Nova Scotia ULC, borrowed approximately U.S.$3 billion in 2001 and 2002 by issuing notes that were guaranteed by its non-resident parent (“BRI”). The Minister reassessed Burlington’s 2002 to 2005 taxation years to deny, under ss. 247(2)(a) and (c), deductions for the “guarantee fees” paid by Burlington to BRI. The October 2012 Reply to Burlington’s Notice of Appeal relied on s. 247, and also asserted that the fees were not incurred for the purpose of earning or producing income under s. 20(1)(e.1) (they were “redundant” due to Burlington’s status as a ULC).
D’Auray J has now granted a Crown motion to file an amended Reply in which it has abandoned its position that the transfer pricing rules in s. 247 applied to the quantum of the fees, and takes the position that the deductions instead should be denied on the grounds that they were not “guarantee fees” within the meaning of s. 20(1)(e.1) and, in the alternative, they were not incurred by Burlington for the purpose of borrowing money, within the meaning of s. 20(1)(e.1).
Burlington argued that the Court should not grant leave for the making of the amendments since they constituted purported withdrawals of admissions that the fees had been paid as guarantee fees. D’Auray J found that, in the broader context, such admissions had not been made, and that even if they had been, they could now be withdrawn given inter alia that “there is a triable issue which ought to be tried in the interests of justice.”
The requested amendments were granted in light inter alia of the request having been made well in advance of the trial, and the position on s. 20(1)(e.1) having been made known on discoveries of the Crown in 2014.
Neal Armstrong. Summary of Burlington Resources Finance Company v. The Queen, 2020 TCC 32 under Rule 132.
After the PPT, Luxcos or other group Holdcos preferably should have significant substance
It is common for multinationals or international private equity funds to use a subsidiary holding company in a jurisdiction with a favourable Treaty network, such as Luxembourg, to hold many of the group subsidiaries or investments. However, the principal purpose test (PPT) in Art. 7 of the Multilateral Instrument (MLI) now makes this practice more fraught. Regarding the Examples in Art. 29 of the OECD Commentary, it is suggested that:
Examples G and H appear to be consistent with the existence of a potential safe harbour for multinational groups in consolidating certain activities in an entity not resident in the parent company's jurisdiction. There are a number of jurisdictions with well-developed management services and financing capabilities, from both a workforce and a service provider perspective, that make it practical for multinationals to set up substantial group services and financing operations in those locations. At the same time, many of those jurisdictions have extensive treaty networks. Examples G and H recognize that it is not necessarily the residence of the parent company within a group that establishes a baseline for treaty-shopping analysis.
Furthermore, Example K:
suggests that it is acceptable to use a holding company that is resident in a third jurisdiction to manage a group of regional investments, so long as that holding company has sufficient substance in the jurisdiction in which it is resident. … Arguably, the threshold in, for example, Prévost Car, and Alta Energy may be insufficient.
More generally:
[T]here will be less risk of challenge under the PPT if there are demonstrable reasons for having a presence in a particular jurisdiction (such as key decision makers located in the jurisdiction, commercial or other regulatory reasons, proximity to jurisdictions into which investments are made, etc.) … .
Neal Armstrong. Summary of Nelson Whitmore and Owen Strychun, “Canadian Inbound Investment After the MLI,” Canadian Tax Journal, (2019) 67:3, 831-80 under Treaties – MLI – Art. 7(1).