News of Note
CRA finds that an unoccupied property was not a qualifying property for CEWS purposes
Email this ContentAn 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).
GST/HST Severed Letters June/July 2021
Income Tax Severed Letters 17 November 2021
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
McNeeley – Federal Court of Appeal applies the principle that the Act must prevail over an overlapping Regulation
A distribution to an employee under an employee benefit trust (EBP) is taxable under s. 6(1)(g) rather than being subject to the usual trust distribution rules in s. 107. On the other hand, various s. 107 rules are stated to apply to a prescribed trust described in Reg. 4800.1. A trust for employees, which held shares in a family-controlled company, made distributions to employees including family members. Their tax reporting relied on the trust being a prescribed trust, so that a capital gain was treated as being realized on the distribution pursuant to s. 107(2.1) (as a result of an s. 107(2.001) election), with that capital gain being allocated to the beneficiaries.
Webb JA and the Tax Court below treated that distribution as instead having been made by an EBP, so that the full value of the distribution was includible in the beneficiaries’ income under s. 6(1)(g). Webb JA noted that the trust satisfied the terms both of the EBP definition and the description of a prescribed trust. In finding that it was an EBP, he cited Oldman for the proposition that “[o]rdinarily … an Act of Parliament must prevail over inconsistent or conflicting subordinate legislation,” and then stated:
[S]ince the definition of a prescribed trust is set out in the Regulations, the paramountcy of the definition of an employee benefit plan in the Act must govern. Otherwise, the Act would be amended by the Regulations if an arrangement, such as the one in this appeal, is not an employee benefit plan as defined in the Act because it is also a prescribed trust as defined in the Regulations.
Neal Armstrong. Summaries of McNeeley v. Canada, 2021 FCA 218 under s. 248(1) – EBP and Statutory Interpretation – Regulations/Statutory Interpretation.