News of Note
Income Tax Severed Letters 24 November 2021
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Newave – Federal Court states that allegations of procedural fairness at the audit stage can be addressed at the objection or appeal stage
After a lengthy audit, CRA concluded that the “business” of the applicant (Newave) consisted of generating fraudulent input tax credit claims. CRA proposed to deny those claims and gave Newave 30 days to respond (subsequently extended to 60 days).
Counsel demanded that all documents reviewed or relied upon by CRA be disclosed in order that it could make “fulsome” representations before any reassessments were made. CRA refused after the 60-day period, and shortly thereafter reassessed. A few days before the reassessments, Newave applied for judicial review, challenging CRA’s previous decision not to provide disclosure and additional time for submissions and, a day after the reassessments, made a further application challenging CRA’s decision to issue the reassessments. Newave also sought a stay of any collection action by CRA and of deregistration of Newave, both pending the disposition of the applications for judicial review.
After dismissing the stay applications, Little J went on to grant the Crown’s application to strike out the applications. Regarding the first application, he stated:
[T]he real goals of the applicant’s first Notice of Application were not to remedy alleged procedural fairness concerns, but instead were to halt and attempt to control CRA’s reassessment process. … In substance, the content of the pleading is an attempt to interfere with the Minister’s statutory duty to assess. …
[A]ny allegations about procedural fairness at the audit stage can be remedied at the objection or appeal stage… .
Before also allowing the motion to strike the second application, he stated:
[T]he second Notice of Application is an improper challenge to the Reassessments in the guise of a judicial review application. Any such attack on the merits of the Reassessments, or the facts and law on which they are based, must be done under the processes in the Excise Tax Act… .
Neal Armstrong. Summary of Newave Consulting Inc. v. Canada (National Revenue), 2021 FC 1203 under Federal Courts Act. s. 18.5.
Wang – Tax Court of Canada finds that a quick sale of a residential property following its occupation was not made by a “builder” for ETA purposes
The sale of a residential unit by its “builder” is generally subject to GST/HST. That term generally includes an individual who acquired the property as an adventure or concern in the nature of trade.
The taxpayer sold a newly-constructed townhouse a few months after she acquired possession. Bocock J gave “determinative weight” to such sale being a result of a change in personal circumstances: she was single when she had signed the agreement for the construction of the townhouse a number of years previously; and the sale was prompted by her plan to move to the US to join her then fiancé.
Neal Armstrong. Summary of Wang v. The Queen, 2021 TCC 86 under ETA s. 123(1) – builder.
CRA finds that an unoccupied property was not a qualifying property for CEWS purposes
An eligible entity signed a pre-construction lease for new office space several years ago and then, after moving in, was unsuccessful in subleasing its previous space due to the COVID-19 pandemic. For Canada Emergency Rent Subsidy (“CERS”) purposes, was the unoccupied property a “qualifying property,” whose definition generally requires the real property to be used by the eligible entity in the course of its ordinary activities?
CRA noted that:
- Ensite found that property was used in a business if it was employed and risked in the business such that the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations.
- Glaxo Wellcome found that the word “use” connotes actual utilization for some purpose, not holding for future use.
CRA concluded:
[G]iven that the office space was unoccupied since the eligible entity moved to a new office … the old office space would likely not be considered to be used in the ordinary activities of the eligible entity. This is because it does not appear to be employed and risked in the ordinary activities of the eligible entity, and is merely waiting to be subleased.
Neal Armstrong. Summary of 20 September 2021 Internal T.I. 2021-0883531I7 under s. 125.7(1) – qualifying property.
CRA indicates that licences of real estate by a municipality are GST/HST-taxable
A registrant (Aco) provides various municipalities with a program of installing something (“X”), whose description is redacted, in their public spaces, pursuant to agreements that confer on it the right to so use those lands, and require it to make payments to each such municipality, which it funds out of a portion of the sponsorship payments it receives from local businesses.
Before concluding that the amounts paid to each municipality were consideration for a taxable supply, CRA noted that:
- ETA s. 146(e) deems the supply by a municipality of a right to enter or access municipal property to be made in the course of a commercial activity unless the supply is specifically exempted.
- S. 20(l) of Sched. V, Pt. VI excludes the supply of such rights from the licence exemption in s. 20(c).
- The exemption in Sched. V, Pt. VI, s. 25 for supplies of real property made by various public service bodies does not extend to such supplies by a municipality.
Neal Armstrong. Summary of 25 May 2021 GST/HST Ruling 204710 under s. 146(e).
We have published 11 more translations of CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 10 translations of CRA interpretation released in June and May, 2006. Their descriptors and links appear below.
These are additions to our set of 1,817 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 15 ½ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA applies Zomaron to an ISO earning participation commissions for signing up merchants for payment processing
The Taxpayer, an independent sales organization, agrees to solicit merchants on behalf of an “acquirer” in order that the acquirer may make exempt supplies to the merchant (under a separate agreement) for the processing of credit and debit card payments for the merchant’s customers within a payments networks. In finding that the fees generated to the Taxpayer (mostly computed as a percentage of the total credit card sales volume generated) very well may be GST/HST exempt “arranging for” financial services, CRA stated:
There is indication that the Taxpayer has direct involvement and effort in the provision of the acquirer’s supplies of financial services made to merchants under the merchant agreement. The Taxpayer has some autonomy within [the Agreement …] to recommend fees and rates to the acquirer with respect to the merchant agreements. There appears to be a significant degree of reliance by both the acquirer and the merchant on the Taxpayer in concluding the merchant agreement and the information substantiates the Taxpayer’s intention of effecting a supply of a financial service.
The above reasoning is reminiscent of the analysis in Excise and GST/HST News - No. 109, June 28, 2021, which concluded with the statement:
The CRA will only apply the Zomaron decision to supplies made by an ISO/MSP if the same fact situation exists.
“Same” includes “similar.”
Neal Armstrong. Summary of 15 June 2021 GST/HST Interpretation 196187 under ETA s. 123(1) – financial service – para. (l).
CRA indicates that donations received by a registered charity generally are qualifying revenue for CEWS purposes
CRA indicated that gifts received by a registered charity generally are qualifying revenue for CEWS (wage subsidy) purposes, stating that the “fact that they are unsolicited or received to carry on a new charitable activity is not sufficient to conclude that they are extraordinary items.”
Neal Armstrong. Summary of 7 July 2021 External T.I. 2020-0848251E5 F under s. 125.7(1) – qualifying revenue – (c).
CRA considers that there is a strong presumption that any flip of a condo purchase agreement is a taxable supply
A non-resident individual entered into an agreement to purchase a condo to be constructed in Canada for occupancy by the individual’s daughter while the latter attended a post-secondary institution, which had granted a conditional acceptance. However, the exam results of the daughter at the secondary school she was attending did not meet the standards of the post-secondary institution, and it revoked its conditional acceptance. This resulted in the individual assigning her purchase agreement to another purchaser at a gain.
The Directorate ruled that this assignment was a taxable supply for GST/HST purposes on the basis that the individual had acquired her real estate interest “in the course of a business or an adventure or concern in the nature of trade” (under para. (f) of the definition of “builder”).
The Directorate found that in order to satisfy this test, she was required to inter alia “prove” that her stated primary intention of acquiring the condo for use as a residence for her daughter “was a firm, fixed and settled intention that was not likely to change.” Instead, it viewed the stated purpose as “a tentative, provisional or exploratory contemplation that was conditional or dependent on future events occurring (that is, the … daughter being accepted and attending [the post-secondary institution]).” It also applied the following position:
Generally, if an individual acquires an interest in a residential complex (that is, acquires the interest in the complex before it has been occupied by an individual as a place of residence or lodging) and sells the interest before or while the complex is under construction, then the action of selling the interest is viewed strongly as evidence that the individual acquired the interest in the complex for the primary purpose of selling the interest in the course of a business or an adventure or concern in the nature of trade.
The above comments are at least somewhat at odds with the income tax jurisprudence on what is a real estate adventure in the nature of trade, including the findings under the Racine line of cases that the prospect of resale at a gain if Plan A falls through must be "an operating motivation" in the acquisition in order for the secondary intention doctrine to apply, and did not refer to any of this jurisprudence or even the IT Bulletin on the subject.
Neal Armstrong. Summary of 1 June 2021 GST/HST Ruling 192033r2 under ETA s. 123(1) – builder – (f).
Lauria – Tax Court of Canada accepts that shares transferred 3 weeks prior to filing the IPO preliminary should be valued at a 40% “marketability” discount to the IPO value
On April 1, 2006, the taxpayers, who were executives of Gluskin Sheff+Associates Inc. (“GS+A”) (but with less clout than the founders), sold a portion of their shares to newly established family trusts at a price that was approximately 4.8% of that at which those shares were sold under an initial public offering that closed on May 26, 2006, following the filing of the preliminary prospectus on April 18, 2006. The pricing for the sale to the trusts applied a formula that had been used in agreements under which they (and other executives) had purchased their shares from the founders a few years previously, namely, 1.0 times the weighted average base management fee revenues of GS+A for the three preceding years. Such purchase agreements gave the right to the Board to require them at any time to sell their shares back to other executives at an amount determined under the same formula.
The taxpayers did not provide a valuation expert. Pizzitelli J accepted the opinion of the Crown’s expert, who estimated the maintainable earnings of GS+A (including performance fees) and capitalized those earnings to arrive at an en bloc enterprise value for GS+A (which, perhaps not coincidentally, largely coincided with the IPO valuation), and then applied a 40% “marketability” discount (to effectively the IPO price) to reflect “the risks that the IPO may not take place or the market for the shares does not materialize, or there would be a failure to agree on price, or the worsening of market conditions or a change of heart by the Founders.” Pizzitelli J considered this discount to be eminently fair to the taxpayers given his finding that, on the valuation date (April 1, 2006), the prospects for a successful IPO were high (and of the founders requiring the taxpayers to sell their shares back at the formula price, quite fanciful). Accordingly, the gains realized on the taxpayers’ sales to the trusts were substantially increased pursuant to s. 69(1)(b).
The taxpayers were reassessed well beyond the normal reassessment period. In finding that this was justified based on carelessness or neglect, Pizzitelli J stated:
[T]he Appellants did not seek an independent valuation and cannot be said to have thoughtfully, deliberately and carefully considered whether the proposed IPO would affect the share price. In fact, the Appellants just seemed to ignore it, when in my opinion, having regard to their skills in and knowledge of the securities industry from working as executives for a wealth management firm and the multiple other circumstances or red flags that went up … they were clearly aware of the impact of the IPO’s value on their holdings.
Neal Armstrong. Summaries of Lauria v. The Queen, 2021 TCC 66 under General Concepts – FMV – shares and s. 152(4)(a)(i).