News of Note
CRA states that wage-reimbursement payments received by employers were s. 9 income
Email this ContentA BC government program required employers to pay wages in specified circumstances of employees who stayed home for COVID-related reasons – but then reimbursed the employer for all or a portion of this wage cost.
CRA indicated that these reimbursement payments were included in the employers' income under s. 9 (no need to resort to s. 12(1)(x)) and that the payments to the employees were includible in their income under s. 5(1).
Neal Armstrong. Summaries of 2 December 2021 External T.I. 2021-0898441E5 under s. 9 – expense reimbursement and s. 5(1).
CRA indicates that the broadest level of consolidation should be used for CEWS purposes
Can a group of eligible entities who prepare consolidated financial statements in accordance with their normal accounting practices choose to use the consolidated revenue from those statements to determine their qualifying revenue, even if there is a higher level consolidation? CRA responded:
[W]hen there are multiple levels of consolidated financial statements prepared in accordance with the normal accounting practices of the group, it is our view that when determining qualifying revenue, the broadest level of consolidated financial statements (i.e., the broadest group of eligible entities that normally prepares consolidated financial statements) should be used for determining the qualifying revenue for each member of the group of eligible entities.
Neal Armstrong. Summary of 14 February 2022 External T.I. 2020-0851361E5 under s. 125.7(4)(a).
CRA defines “company,” “publicly traded company,” and “subsidiary” in s. 125.7(2.01)
S. 125.7(2.01) provides a prohibition against the CEWS (wage subsidy) being paid “to a qualifying entity that is a publicly traded company or a subsidiary of such a company if, in the qualifying period, it paid taxable dividends to an individual who is a holder of common shares of the company or of the subsidiary of the company.” CRA indicated:
- “Taxable dividends” include taxable dividends that are deemed dividends.
- “Common share” has its somewhat technical meaning in s. 248(1) rather than its ordinary meaning.
- A “publicly traded company” is “a company the shares … of which are listed or traded on a stock exchange or other public market” and “would include [such] a non-resident company.”
- Although the term “company” is “potentially more inclusive than the term corporation,” it is considered to refer to a corporation (and would not include a partnership or trust), given inter alia the references in s. 125.7(2.01) to “taxable dividends” and “common shares.”
- CRA “would consider a subsidiary of a publicly traded company to be a corporation over which the publicly traded corporation exercises de jure control either directly or indirectly.”
Neal Armstrong. Summary of 22 February 2022 External T.I. 2022-0922921E5 under s. 125.7(2.01).
Income Tax Severed Letters 9 March 2022
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Cominar REIT announces the closing of its acquisition in a hybrid transaction
After the purchase of a portion of the assets of the Cominar REIT (a closed-end unit trust and mutual fund trust holding mostly Quebec real estate directly and through subsidiaries (mostly LPs)) by Group Mach and Blackstone purchasers, the REIT declared a special in-kind distribution to push out all the gains (which was expected to not include more than $43M of net recapture income) resulting from such sales and a s. 111(4)(e) designation, with such special distribution paid by way of issuing units (followed immediately by a unit consolidation). The Purchaser (a limited partnership) then subscribed for REIT units in consideration for cash and “Subscription Notes” issued by it to the REIT. The cash was then used to redeem the units of the public unitholders.
The other unitholders (being entities associated with the consortium owning the Purchaser) had their REIT units redeemed for notes which were set-off against notes that they owed for their subscription for units of the Purchaser once such subscription notes were assigned by the Purchaser to the REIT in repayment of Subscription Notes owing, in turn, by it to the REIT.
Neal Armstrong. Summary of Circular of Cominar Real Estate Investment Trust regarding its acquisition by Iris Acquisition II LP (the “Purchaser”) under Mergers & Acquisitions - REIT/Income Fund/LP Acquisitions - LP Acquisitions of Trusts.
Foley – Tax Court of Canada finds that the non-inclusion of surrogate parent expenses under s. 118.01 did not violate s. 15 equality rights
The taxpayer unsuccessfully claimed that the exclusion from the scope of the adoption tax credit (“AETC”) under s. 118.01 of various expenses he incurred in connection with having a surrogate mother bearing a child, derived from an embryo from him and his wife, infringed his equality rights under s. 15 of the Charter. Hogan J stated inter alia that “limiting the AETC to adoption-related expenses does not perpetuate or exacerbate any preexisting disadvantage or prejudice within the meaning of section 15.”
Neal Armstrong. Summary of Foley v. The Queen, 2021 TCC 92 under Charter – s. 15.
Airzone – Tax Court of Canada indicates a presumption that a taxpayer satisfying the “how” SR&ED tests will also satisfy the “why” test
The taxpayer (“Airzone”) provided comprehensive air quality monitoring services to government agencies, international organizations, and businesses. In connection with allowing most of Airzone’s projects, largely in connection with expanding its techniques for testing for airborne compounds, as qualifying as SR&ED, Hogan J made a number of pithy general observations, including:
- The taxpayer is required to demonstrate satisfaction both of “how factors,” namely “that the work was carried out by way of systematic investigation or search through experiment and analysis of a hypothesis … [and the] results of the work must also be preserved” and also a “why factor,” namely “that the work was carried out to resolve technical uncertainties that could not be solved through standard procedures and methods.”
- “[T]he concept of ‘experimental development’ includes activities undertaken to achieve incremental improvements to existing methods or procedures” e.g., in this context “improving methods, procedures and processes to carry out air quality detection in unique environments.”
- “[I]t is unlikely that a taxpayer would conduct experiments in a manner that respects the “how factors”, all at additional expense, if the purpose of the work was not to achieve technological advancement.”
- Technical uncertainty can be considered to be present where “the claimant may be fairly confident that the goals can be achieved, but it is uncertain which of several alternatives will work.”
- “[T]he ‘why factor’ cannot be so strictly applied that only large corporations that employ dedicated research staff can qualify for the SR&ED incentives … [as m]oving the goal post so far afield … would be contrary to the intention of Parliament.”
Interestingly, the taxpayer called the CRA research and technology advisor, who had carried out the audit of the challenged projects, as a witness in order to cross-examine him to demonstrate that his sources “were not of particular relevance” and that “his knowledge of Airzone’s specialized field of activity [was] understandably quite limited.”
Neal Armstrong. Summaries of Airzone One Ltd. v. The Queen, 2022 TCC 29 under s. 248(1) - SR&ED and General Concepts - Evidence.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in May, 2005. Their descriptors and links appear below.
These are additions to our set of 1,950 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 16 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Glenogle Energy – Federal Court decision effectively penalizes a taxpayer for filing s. 97(2) elections on a timely basis rather than late
In January 2015, the taxpayer transferred resource properties to a limited partnership that was wholly-owned by it, directly and indirectly. The s. 97(2) elections that were filed approximately 18 months later (in July 2016) designated nominal agreed amounts. In November 2016, the taxpayer applied to amend the elections so as to increase the agreed amounts by approximately $32 million. Despite CRA requests, no detailed explanation was provided to CRA as to the reasons for the requested amendments, and ultimately, in May 2021, the Minister’s delegate denied the request on the basis inter alia that it involved retroactive tax planning (indicating that the amended elections circumvented the successor rule in s. 66.7) and that the taxpayer’s submission did not support that the requested amendments were “just and equitable” as required by s. 96(5.1).
In dismissing the taxpayer’s application for judicial review, Aylen J stated:
I am satisfied that the Applicant’s “explanation” was so devoid of particulars that it did not amount to an explanation at all. …
The Applicant … failed to explain in any meaningful way why it would be just and equitable for the Minister [to grant the request].
… I am not satisfied that the Applicant has demonstrated any error by the Minister’s delegate in his finding that the amendment requests constituted an attempt to circumvent the successor rule stipulated in section 66.7 … .
Doubtless it has occurred to the taxpayer that it would have been better off to have filed the s. 97(2) elections four months later and paid the additional penalty under s. 96(6) of $100 per month.
Neal Armstrong. Summary of Glenogle Energy Inc., 2022 FC 198 under s. 96(5.1).
Daville Transport – Tax Court of Canada finds that a settlement offer not made on a principled basis should be ignored for cost award purposes
The taxpayer submitted that it was entitled to “substantial indemnity costs” from the Crown per Rule 147(3.1) (i.e., perhaps 80% of its actual legal costs, as adjusted) on the basis that it had achieved greater success in its tax appeal than reflected in a settlement offer it had made. However, Russell J characterized that offer as an “arbitrary settlement offer,” i.e., as “a ‘let’s split it down the middle’ settlement offer” that thus violated the principle “that the Minister … can only assess tax consistent with his/her view of the underlying facts and law.” Accordingly, “this settlement offer was not within the scope of Rule 147(3.1).”
However, although the taxpayer thus was only entitled to party and party costs, Russell J increased the Tariff items by a factor of 1.6 to reflect that the Tariff had not been updated for some time.
Neal Armstrong. Summary of Daville Transport Inc. v. The Queen, 2022 TCC 5 under Rule 147(3.1).