News of Note
CRA indicates that post-closing adjustments to a real estate sale price are generally not subject to an obligation to charge GST/HST
Email this ContentOn a real estate sale, the parties normally prepare a statement of adjustments whereby, at closing, adjustments are made for expenses pre-paid by the vendor (e.g., lawn mowing or snow removal fees, property taxes, amenities fees) and for revenues of the vendor, e.g., unearned prepaid rents that should be credited to the purchaser. Regarding whether such adjustments should be regarded as being to the purchase price for the real estate, so that normally no GST/HST should be charged on such adjustments (based on the ETA ss. 221(2) and 228(4) self-assessment rule or a residential real estate exemption), CRA treated this as essentially a question relating to an application of the single-supply doctrine, so that “if an obligation is inextricably tied to the real property itself, then it is likely not a separate supply from the sale of the real property and the adjustment likely increases or decreases the value of consideration” for the real estate, whereas “if it is determined that an obligation giving rise to the adjustment is a separate supply from the sale of the real property that is not incidental to the sale of the real property, then the application of the GST/HST to the adjustment depends on the nature of the separate supply itself.”
Other than adjustments for real property taxes, which it accepted were adjustments to the real estate purchase price, it did not pass on which of the typical adjustments satisfied this test.
However, it went on to indicate that it did not make much difference to the application of this distinction whether the adjustments were made at closing or as a post-closing item.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.29 under ETA s. 221(2).
CRA states that a badly-drafted HST Reg. that could deem all ILPs to be SLFIs should be broadly interpreted
Under s. 9(a) of the SLFI Regulations, an investment limited partnership ("ILP") whose partners are all resident in a single HST province, such as Ontario, will also be a selected listed financial institution (“SLFI”) if it has a permanent establishment in a non-HST province. As per s. 3(e)(i) of the SLFI Regulations, it will be deemed to have a PE in such a province where it “is qualified, under the laws of Canada or a province, to sell or distribute units of the [ILP] in the particular province.”
If the quoted phrase were interpreted broadly, then all ILPs would be regarded as being permitted under the securities laws of each provinces to distribute their securities on a private-placement basis - so that all ILPs would be regarded as qualified to distribute securities in each province. However, such an interpretation would render s. 3(e)(i) redundant, i.e., all ILPs would be SLFIs. What likely would come within s. 3(e)(i) is something like a conventional mutual fund which has already gone through the hoops so as to be qualified to be in continuous distribution – as contrasted, at the other extreme, to a conventional ILP which if it, for example, has no intention of preparing a current offering memorandum, is not yet qualified to distribute securities, even on a private placement basis.
When asked about s. 3(e)(i), CRA gave the following opaque answer:
It is CRA’s understanding that the policy intent is that the words of subparagraph 3(e)(i) of the SLFI Regulations are intended to be broadly interpreted. Similar to other distributed investment plans, the ILP would be required to determine if it is qualified under the laws of Canada or a province, to sell or distribute its units in a particular province in order to determine whether the ILP is deemed to have a permanent establishment in a particular province.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.26 under SLFI Regs. s. 3(e)(i).
CRA implies that hair stylists’ chair rents might qualify as rent for CERS purposes
Regarding a query as to whether an amount paid by a barber or hairdresser (“Stylist”) as “chair rent” to the owner of a salon may be claimed as a “qualifying rent expense” for Canada emergency rent subsidy (“CERS”), CRA first indicated that the term “chair rent” may “refer to an amount paid for the use of, or right to use, a portion of the Salon,” and then stated:
Where an amount paid by a Stylist (who is an eligible entity) as “chair rent” is rent for the use of, or right to use, an area within the Salon that is real or immovable property such that it is capable of being a qualifying property, it may be a qualifying rent expense for the Stylist, provided all of the conditions in the definition of qualifying rent expense are met.
It is highly likely that the stylist would be a non-exclusive licensee of the salon space rather than a tenant, given the absence of a right of exclusive possession. Accordingly, these comments may imply that amounts paid by a licensee of space or a portion thereof could qualify as “rent.”
Neal Armstrong. Summary of 11 May 2021 Internal T.I. 2020-0869981I7 under s. 125.7(1) – qualifying rent expense.
CRA confirms that a property can be bifurcated into a qualifying property and a residence for CERS purposes
The definition of “qualifying property” for Canada emergency rent subsidy (“CERS”) purposes excludes a self-contained domestic establishment (“SCDE”) that is used by the eligible entity or a person with whom it does not deal at arm’s length. CRA indicated that the fact that a particular property included a portion that was subject to the SCDE exclusion would not necessarily “preclude the remaining part of the property from being a qualifying property.” For example, if part of a building was used as a personal residence, the remainder of the building that was used as a store could potentially generate qualifying rent expense. (A particular example provided by CRA to this effect confusingly refers to the eligible entity as being the owner rather than the tenant of the property.)
Neal Armstrong. Summary of 17 May 2021 Internal T.I. 2020-0870041I7 under s. 125.7(1) – qualifying property.
Income Tax Severed Letters 19 May 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Leonard – Tax Court of Canada finds that on a foreclosure, the taxpayer disposed of his mortgage, even though the debt it secured remained outstanding
The taxpayer acquired mortgage debt owing by an insolvent developer from the bank at a discount, and then, two years later, purchased the related real estate lot at a judicial auction held pursuant to foreclosure proceedings for a purchase price substantially less than the amount owing under the debt. He was unable to sell the lot.
After finding that the taxpayer had acquired the mortgage debt as part of an adventure in the nature of trade, Sommerfeldt J turned to the question of whether a loss had been realized on the foreclosure process in 2011, given that, as part of those proceedings, the taxpayer received a deficiency judgment for the unpaid amount of the debt (the “Post-Auction Debt”). In concluding that there had been no disposition of the debt, he found that of the “four fundamental terms of a debt obligation, i.e., the identity of the debtor, the principal amount, the amount of interest and the maturity date” identified in General Electric Capital, “the only term that was significantly different in respect of the Post-Auction Debt … was the amount of interest.”
However, Sommerfeldt J nonetheless concluded that the above finding had virtually no impact on his concurrent finding that most of the dollars truly at issue had been realized as a loss as a result of the foreclosure. The key passage appears to be the following:
[S]ubparagraph (b)(i) of the [s. 248(1)] definition of “disposition” … states that “‘disposition’ of any property … includes … any transaction or event by which, … where the property is a … mortgage, … the property is in whole or in part redeemed, acquired or cancelled….” … Thus, by reason of the foreclosure and the judicial sale, the Mortgage was cancelled. By reason of the cancellation of the Mortgage, Mr. Leonard was deemed to have disposed of the Mortgage in 2011.
Accordingly, he appeared to consider that the definition of disposition had the effect of deeming the mortgage security to be a separate property from the debt that it secured.
Sommerfeldt J found, in light of the insolvency of the developer, that it was reasonable to allocate 99.9% and 0.1% of the purchase consideration to the mortgage and the debt, respectively and that “to achieve symmetry” the proceeds should also be allocated in those proportions. Accordingly, the taxpayer sustained a significant loss on his disposition of the mortgage as a result of the foreclosure proceedings, notwithstanding that there was no disposition of the underlying debt.
Summaries of Leonard v. The Queen 2021 TCC 33 under s. 18(1)(b) – capital loss v. loss – debt, s. 248(1) – disposition, s. 171(1), s. 9 – timing, and General Concepts – Evidence.
We have published 10 more CRA translations
We have published a further 10 translations of CRA interpretation released in April and March, 2008. Their descriptors and links appear below.
These are additions to our set of 1,536 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 13 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA discusses the implications of TFSAs, RESPs and RDSPs or their controlling individuals receiving damages
It is CRA’s policy to consider that a settlement payment made to an RRSP or RRIF respecting an actionable loss suffered by it will not be treated as a contribution to the plan, nor as such a contribution or a taxable benefit to the annuitant if the damages are paid to the annuitant but are paid over to the plan by the later of the year end and six months after receipt.
When so asked, CRA confirmed that this position applied with modification to TFSAs, RESPs and RDSPs. First, there will be no adverse tax consequences where a settlement payment is made to a TFSA, RESP or RDSP either directly, or indirectly by the holder, subscriber or beneficiary returning the payment to the plan within the timeframe applicable to the RRSP policy. As for the treatment if the settlement payment was instead retained by the holder etc.:
- In the case of a TFSA, the settlement payment would not be taxable as TFSA distributions are not taxable.
- If the payment is received by a holder of an RDSP who is not the beneficiary, the payment would not be a disability assistance payment (DAP) and therefore would not be included in income under s. 146.4(6), but would give rise to an advantage (as discussed below) – whereas if the payment is received by the beneficiary of the plan, the payment would be a DAP and would be included in the beneficiary’s income under s. 146.4(6).
- If the settlement payment was made to the subscriber of an RESP, the payment would be an accumulated income payment (AIP) and would be included in the subscriber’s income under s. 146.1(7.1). As an AIP, it might also be subject to additional tax under Part X.5.
Regarding the advantage rules under ss. 207.01(1) and 207.05:
- Provided that the settlement payment is made on arm’s length terms to compensate for the actual damages suffered by the registered plan, the payment would not give rise to an advantage.
- There would be no advantage where a settlement payment is made to the controlling individual of a registered plan and not returned to the plan – except that if the settlement payment is made to an RDSP holder who is not the beneficiary, the payment would be a registered plan strip (as defined in s. 207.01(1)) and therefore an advantage under para. (d) of the advantage definition (because the exclusion from the registered plan strip definition for TFSAs and for amounts included in income would be inapplicable).
Neal Armstrong. Summaries of 25 February 2021 Internal T.I. 2020-0865641I7 under s. 146(8), s. 207.01(1) – unused TFSA contribution room – (b) – D, s. 207.01(1) – registered plan strip, and s. 146.1(7.1).
CRA would include the full FMV of a RRIF in the annuitant’s income on death given no payment thereunder to the spousal beneficiary before that survivor’s death
The last annuitant of a trusteed registered retirement income fund (“RRIF”) died in 2018, and that annuitant’s spouse, who was the sole designated beneficiary under the RRIF, died before the distribution of RRIF proceeds, which was made to the spouse’s estate in 2020.
Because no amounts were paid to the designated beneficiary, there was no designated benefit, so that pursuant to s. 146.3(6), the full FMV of all the RRIF property held at the time of the annuitant’s death was included in the income of the annuitant in the year of death, rather than being included in the income of the surviving spouse.
Given that the RRIF continued to be exempt from tax until the end of the year following the death (i.e., until the end of 2019), and the trust could take a deduction in 2020 for gain and income distributed by it, appreciation in the RRIF property between the date of the annuitant’s death and the distribution date was to be included in the income of the spouse’s estate for 2020.
Neal Armstrong. Summaries of 12 March 2021 External T.I. 2020-0867001E5 under s. 146.3(1) – designated benefit and s. 146.3(3.1).
CRA finds that the new ETA s. 179(9) drop shipment rule does not affect whether a non-resident lessor is carrying on business in Canada
Example 1 in Policy Statement P-051R2 indicates that a non-resident lessor (with a leasing business outside Canada) is considered to be carrying on business in Canada by virtue of a sale-leaseback transaction under which it purchases a conveyance from a resident registrant, with delivery under the sale agreement and under the lease-back to the resident (who will use the conveyance partly in Canada) occurring in Canada, notwithstanding no other significant connecting factors to Canada.
ETA s. 179(9), which took effect in 2017, appears to deem this transaction to be subject to the drop-shipment rules, so that the resident is deemed to have sold the conveyance to the non-resident outside Canada, if the non-resident is not registered (so that such supply is not subject to GST/HST), and is deemed to have provided a drop-shipment certificate to the non-resident (so that the resident is subject to tax if it does not use the conveyance in commercial activity). When asked about the impact of s. 179(9), CRA stated that it “reviewed the leasing examples in P-051R2 and has determined that the introduction of new subsection 179(9) … does not impact the rationale or carrying on business conclusions in those examples.”
Although CRA did not discuss this response, there seems to be an element of circularity involved. If CRA indeed considers that the non-resident was carrying on business in Canada, it should have been registered (and, if not, CRA would register it retroactively.) Since the s. 179(9) drop shipment rule only applies where the non-resident is not registered, therefore, it does not apply. If CRA instead started with the proposition that s. 179(9) deemed the non-resident to no longer have any significant transactional connection with Canada, then it could have reached the opposite conclusion.
When also asked about a variation on this example where the equipment is purchased by the non-resident from a third party (rather than the Canadian company) and is leased by the non-resident to the Canadian company, which exports the conveyance immediately after taking possession under the lease in Canada, CRA stated that this also did not change its conclusion that the non-resident is carrying on business in Canada.
Neal Armstrong. Summaries of 27 February 2020 CBA Roundtable, Q.24 under ETA s. 240(1) and s. 179(9).