News of Note
Jungen – Tax Court of Canada finds that the disability tax credit could be claimed for a child with ADHD and conduct disorder
Email this ContentThe taxpayer’s son had extreme behaviour issues, being unable to maintain good relationships with anyone due to his unpredictable and aggressive behavior, and was diagnosed as having attention deficit hyperactivity disorder (ADHD), and subsequently additionally diagnosed with unspecified disruptive, impulse-control and conduct disorder. In allowing the taxpayer’s claim for the disability tax credit, Russell J focused on the aspect of s. 118.4(1) referring to a marked restriction in a basic activity of daily living including mental functioning necessary for everyday life (s. 118.4(1)(c)(i)) such as “adaptive functioning” (s. 118.4(1)(c.1)(iii)), and emphasized inter alia that the child was “seriously lacking in ability to engage in social interactions … substantially all of the time.”
Neal Armstrong. Summary of Jungen v. The Queen, 2021 TCC 16 under s. 118.4(1)(c.1)(iii).
CRA publishes a new GST/HST Memorandum on determining whether a financial institution is a qualifying institution for ITC purposes
CRA has published a new Memorandum on determining whether a financial institution is a qualifying institution. Financial institutions are subject by virtue of ETA s. 141.02 to more detailed and onerous rules for claiming input tax credits than “regular” registrants. Qualifying institutions are singled out for specially onerous rules in this regard.
Very generally, qualifying institution are banks, insurers or securities dealers which otherwise would be entitled in their two preceding fiscal years to ITCs for residual (i.e., non-exclusive) inputs at above specified thresholds expressed in terms of dollars and as a percentage of the total tax payable on such inputs.
In its Memorandum, CRA inter alia:
- Notes that the definition of an insurer does not extend to a person, such as a foreign bank, that is authorized to carry on an insurance business in its home jurisdiction but does not carry on an insurance business in Canada.
- Provides a mortgage broker as an example of a financial institution that is not an insurer or other prescribed-class person.
- Notes that for the residual ITC threshold computation purposes referred to above, selected listed financial institutions generally take into account only the federal tax paid by them and their federal tax ITCs, and ignore provincial HST.
- Provides an example illustrating that the election made under s. 141.02(9) - by a non-qualifying institution that is a bank, insurer or securities dealer to have its ITCs for residual inputs limited in the same manner as if it were a qualifying institution - can be revoked before the return due date for the year for which the election was made.
- Provides numerous examples of the operation of the continuity rules in ss. s. 141.02(4) and (5) for amalgamations and wind-ups.
Neal Armstrong. Summaries of GST/HST Memorandum 17-11 [17.11] Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02 23 July 2021 under s. 141.02(1) – qualifying institution, residual input tax amount, tax credit amount, s. 141.02(4), s. 141.02(9), s. 141.02(24), Input Tax Credit Allocation Methods (GST/HST) Regulations, s. 1 – bank, insurer.
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in May and April, 2007. Their descriptors and links appear below.
These are additions to our set of 1,672 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 14 1/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Deans Knight suggests that CRA may attack Bill C-208 surplus-stripping transactions on the basis that the stripper retains “actual” control of the small business corporation
The requirement in s. 84.1(2)(e) that the children or grandchildren merely have legal control of the purchasing corporation suggests a surplus-stripping transaction in which Mr. A, who owns all the shares (having nominal tax basis and paid-up capital) of a private company carrying on an active business, forms Newco, in which his children invest $100 in preferred shares giving them voting control, with Mr. A then selling his shares to Newco for $1 million in cash and common shares issued by Newco, and claiming the capital gains exemption.
Deans Knight decided that the object, spirit and purpose of s. 111(5) is to restrict the tax losses of a corporation if a person acquires “actual control over the corporation’s actions, whether by way of de jure control or otherwise.”
[I]n light of Deans Knight, the CRA could take the position that, under GAAR, the relevant question is: whose business is it? Do the children have “actual control” over the actions of the family business, or do the parents?
Neal Armstrong. Summary of Allan Lanthier, "The general anti-avoidance rule and family surplus strips", Canadian Accountant, 12 August 2021 under s. 84.1(2)(e).
CRA discusses the consequences of a sabbatical leave plan being offside the SDA rules
After finding that a sabbatical leave plan did not satisfy the requirements of Reg. 6801(a) as a deferred salary leave plan (for multiple reasons including the length and timing of the sabbatical leave and provision for notional employer contributions to match the salary amounts that the participating employees elected to defer), CRA went on to discuss the consequences of the leave plan being a salary deferral arrangement:
- The amount of salary that an employee deferred in a particular taxation year together with the amount of any matching notional employer contribution, would constitute a “deferred amount,” to be included in computing the employee’s income for that year pursuant to ss. 6(11) and 6(1)(a).
- The employer receives a s. 20(1)(oo) deduction for the same year as the s. 6(1)(a) inclusion.
- Amounts received by an employee during the sabbatical leave that were previously included in income as deferred amounts are (per s. 6(1)(i)) excluded from the employee’s income on such receipt.
- On the forfeiture of all notional employer contributions on the early termination of participation in the Plan, the amount of the employer contributions (previously included in the employees income) would be deductible by the employee pursuant to s. 8(1)(o). The employer, who would have previously taken a s. 20(1)(oo) deduction, would now have a s. 12(1)(n.2) inclusion. However, the lump-sum received by the employee on early termination would be excluded on receipt under s. 6(1)(i) given the previous inclusion under ss. 6(11) and 6(1)(a).
Neal Armstrong. Summaries of 23 April 2021 External T.I. 2020-0872371E5 under Reg. 6801(a) and s. 6(11).
Pavages Vaudreuil – Court of Quebec finds that an operation of washing, sorting and crushing aggregate was separate from a road construction operation
In addition to being involved in construction (maintenance of roads, streets and bridges), the taxpayer owned several natural gravel quarries and sand pits and processed sand, river gravel, crushed stone and earth for sale to third parties and for use in its construction operations. It purchased three pieces of equipment for use exclusively for the handling of materials already gathered by a cable shovel in connection with the washing, sorting and crushing of the various products.
In order for the purchases to have generated an investment tax credit for Quebec purposes, they were required inter alia to qualify as Class 29 property, i.e., they were required to have been acquired for use primarily in the manufacturing or processing of goods for sale. Under the Quebec equivalent of Reg. 1104(9)(c), “manufacturing or processing” was deemed to exclude “construction."
In finding that this exclusion did not apply because the taxpayer’s construction and processing operations were distinct, Bourgeois JCQ noted that the operations’ respective customers differed, the processing occurred at sites distinct from the situs of the construction projects, only 27% of the processed product was used in the construction operation, the two operations could have been operated independently of each other, and there was separate accounting. The appeal was allowed.
Neal Armstrong. Summaries of Pavages Vaudreuil Ltée v. Agence du revenu du Québec, 2021 QCCQ 3890 under Reg. 1104(9)(c) and Reg. 1104(9)(e).
Vocan – Tax Court of Canada finds that supplies to insurers of injury assessment reports were not GST/HST exempted
Vocan supplied assessment reports to insurance companies or law firms regarding individuals injured in motor vehicle accidents. The reports were prepared by independent-contractors assessors, who examined and tested the injured individuals at the Vocan facility.
Vocan submitted that its facility was a health care facility, being “a facility … operated for the purpose of providing medical … care,” so that its supply of the reports was exempted under Sched. V, Pt. II, s. 2 as a supply of an “institutional health care service” rendered to patients of the facility. In finding that the Vocan facility was not a health care facility, Lyons J stated that “'medical care’ is to be interpreted as being connected to the practice of medicine,” whereas the assessments activities were not medical care. Furthermore, she found that any care relationship was between the assessor and the individual, not Vocan and the individual, so that “individuals were not patients of Vocan’s facility.”
Accordingly, the supplies of the reports were not exempted.
Neal Armstrong. Summary of Vocan Health Assessors Inc. v. The Queen 2021 TCC 49 under ETA Sched. V, Pt. II, s. 2.
Income Tax Severed Letters 11 August 2021
This morning's release of four severed letters from the Income Tax Ruliings Directorate is now available for your viewing.
CRA rules on a hybrid pipeline transaction involving an interim loan to fund terminal return taxes, and PUC distributions rather than note repayments out of the Amalco
CRA ruled on what it called a “hybrid” pipeline transaction involving a corporation that held only marketable securities under which:
- The estate exchanges the common shares of the Corporation on a s. 85(1) rollover basis for new Class A common shares and redeemable retractable preferred shares of the Corporation.
- The Corporation’s CDA is accessed by electing under s. 83(2) on an increase in the stated capital of the preferred shares.
- The Corporation redeems the preferred shares in consideration for a note, designates a portion (based on its GRIP account) of the resulting deemed dividend as an eligible dividend and reports a resulting capital loss, which is carried back under s. 164(6).
- The Estate then transfers the Class A Common Shares to a “Newco” formed by it in consideration for Newco common shares.
- The Corporation makes a loan to Newco, which makes a stated capital distribution on its common shares to fund income taxes owing under the deceased’s terminal return.
- At least 12 months later, the Corporation and Newco amalgamate and, thereafter, Amalco makes stated capital distributions at a rate not exceeding 25% per quarter of the initial aggregate paid-up capital of the Amalco common shares.
Neal Armstrong. Summary of 2021 Ruling 2020-0874851R3 under s. 84(2).
CRA position accommodating extracting cash on an amalgamation may facilitate surplus stripping
2018-0785921E5 and 2017-0696821E5 indicate that where there is a distribution of cash and shares to shareholders of predecessor corporations pursuant to an amalgamation, the conditions of s. 87(1)(c) will be met, while the receipt of the non-share consideration will preclude s. 87(4) from applying, so that such shareholders will realize a capital gain or loss based on the value of the shares and cash received from Amalco.
This suggests that surplus of a corporation can be extracted on its amalgamation as cash or other non-share consideration. S. 84(2) risk can be minimized by continuing to operate the businesses of the predecessors and taking the non-share consideration as a note that is drawn down over time.
Neal Armstrong. Summary of Kenneth Keung and Balaji Katlai, “CRA Essentially Approves Surplus Stripping by Amalgamation,” Canadian Tax Focus, Vol. 11, No. 3, August 2021, p. 1 under s. 84(2).