News of Note

The COVID-related relief set out by CRA in International income tax issues: CRA and COVID-19 mostly was stated to expire on October 1, 2020. CRA has now added a supplement to that webpage, which provides inter alia that:

• The relief for the initial period (until September 30, 2020) regarding physical presence of individuals in Canada due to COVID travel restriction being ignored under the common-law factual test of residency and for purposes of the s. 250(1)(a) sojourning rule is extended until the earlier of the date of the lifting of the travel restrictions and December 31, 2021 (this extension does not apply to corporate residency.)
• Although there is no extension of the relief regarding whether a non-resident employer has a fixed place of business in Canada, CRA considers that for there to be such a permanent establishment, the site must have “a semblance of permanence” and it must be at the “disposal” of the employer – so that an individual’s working remotely (in Canada) from home due to the travel restrictions “will generally not be sufficient to meet the thresholds of a permanent establishment.”
• Similarly, regarding an “agency” PE, the individual would not satisfy the requirement of “habitually” exercising a right to conclude contracts on behalf of the non-resident enterprise where the individual “is doing so from Canada solely because of the travel restrictions.”
• Regarding the services PE in Art. IV(9) of the Canada-U.S. Treaty, most such employees would not meet either of the thresholds in Art. IV(9) “if they are not working on projects for Canadian customers.”
• Relief during the initial relief period respecting the 183-day test in Art. XV, 2(b) of the Canada-US Treaty is extended to December 31, 2020 so that physical presence in Canada due to COVID travel reasons will not count towards the 183 days (whereas such days after December 21, 2021 must be included under the 183-day test, with associated withholding and remittance obligations of the employer).
• As an administrative matter, where such relief conditions are met, a non-resident employer will not be required to submit a T4 slip for the 2020 taxation year.
• Where as a result of the travel restrictions, Canadian-resident individuals have been forced to perform their duties for a U.S. employer from their Canadian home and their employer received a CRA letter of authority (to reduce the Canadian source deductions at source to reflect the available foreign tax credit), as an administrative concession, CRA will treat the employment income from the U.S. employer for 2020 that was subject to U.S. withholding as having a U.S. source – so that those individuals can file their tax returns as in prior years and claim a foreign tax credit for the U.S. taxes.
• Alternatively, such individuals may choose to file their 2020 Canadian income tax return in accordance with the income sourcing rules in the Treaty, i.e., reporting their employment income as sourced from Canada since they performed their duties there.

Regarding this alternative:

• Where contributions are made in 2020 under the U.S. Federal Insurance Contributions Act (FICA), administratively the entire amount of the individual’s employment income on which the contributions were based may be included in the individual’s 2020 foreign non-business income for foreign tax credit purposes.
• If the individual has made contributions to a U.S. retirement plan in 2020, the amount deductible on form RC268 may be determined as if the individual had continued to exercise employment duties in the U.S. throughout all of 2020.
• If the individual paid state income tax in 2020, where the state refused to relinquish its right to tax the individual, administratively the individual may claim a foreign tax credit respecting those taxes despite the income being earned in Canada.
• Where such individuals temporarily find it difficult to pay the full amount owing, until after the payment due date when they receive a refund of their withholdings from the U.S., CRA will cancel all or part of the interest or late-payment penalties that arise as a result until a reasonable time after the receipt of the U.S. refund.

Neal Armstrong. Summaries of CRA webpage: International income tax issues: CRA and COVID-19, including VII. Supplemental guidance (to 31 March 2021) under s. 2(1), Treaties Art. 5 and Art. 15.

An individual makes a donation (being an excepted gift described in s. 118.1(19) ) of 10% of his shares (being preferred shares with a nominal PUC and ACB) of a corporation with a NERDTOH balance to an arm’s length registered charity and public foundation. The donated shares are then promptly redeemed, thereby generating a deemed dividend (with no s. 89(14) designation being made.) This generates a dividend refund to the corporation.

CRA was asked whether s. 129(1.2) could be applied to deny the dividend refund notwithstanding that the corporation had liquid assets that would have been more than sufficient to have paid a taxable dividend to the individual so as to generate the dividend refund. CRA responded that s. 129(1.2) could apply in that the series of transactions could satisfy the purpose test in s. 129(1.2). It added:

[T]he CRA took a similar approach in … 2016-0628181R3 by adding an opinion that any dividend … paid … on the shares of … the private corporation (Holdco) to the foundation (Foundation), which had previously acquired the shares as a result of the transfer of the shares by the testamentary spousal trust for the spouse of the deceased following the death of the spouse, would be considered not to be a taxable dividend, with the result that subsection 129(1. 2) would apply … .

Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 3, 2020-0851991C6 F under s. 129(1.2).

In CIBC World Markets, the Federal Court of Appeal found that a non-resident permanent establishment of CIBC had deemed separate person status sufficient to enjoy zero-rating on services supplied to it by CIBC World Markets, notwithstanding an ETA s. 150 election between the two Canadian affiliates. When asked as to whether it considered this decision to be portable to the situation where a non-resident person with a branch in Canada wishes that branch to be treated as resident in Canada for purposes of the ETA s. 156 election (presumably to be made with a Canadian corporate affiliate), CRA responded that it was considering the decision’s “impact on section 132,” but that:

Subsection 132(2) deems a non-resident person with a permanent establishment in Canada to be resident in Canada “in respect of, but only in respect of activities of the person carried on through that establishment”. Based on the clear legislative wording, it has been the CRA’s position that subsection 132(2) does not deem a non-resident person as a whole to be resident in Canada for purposes of the Part IX of the ETA. It has therefore been the CRA’s view that the non-resident person in your scenario would not be eligible to make the section 156 election.

Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.5 under s. 132(2).

A professional corporation’s orthodontics practice claimed input tax credits on the basis of an administrative arrangement of CRA with the Canadian Dental Association under which orthodontists filed their GST returns using 35% of the patient’s total treatment cost as an estimate of the consideration for the supply of the orthodontic appliance (which was zero-rated), with only the balance treated as exempt - and with a requirement, when the annual results became available at year end, to reconcile their 35% ITC estimate with their actual taxable supplies. However, in the view of CRA, the corporation did not comply with the requirement under this policy to “identify the consideration for the zero-rated supply of the appliance separately from the consideration for the exempt supply of services” (the agreement with the patient stated that “[o]ur orthodontic fee includes a portion, up to 35%, relating to the value of orthodontic appliances,” but the invoices contained no allocation between the services and device. Accordingly, CRA disallowed the corporation’s input tax credit claims – effectively on the basis that there was a single supply of exempt orthodontic services.

In allowing the corporation’s appeal, Wong J stated (at para. 41):

The statute makes it clear (and Parliamentary intent confirms) that a conventional orthodontic practice consists of exempt supplies of services and zero-rated supplies of appliances. It is unnecessary to use the common law test for determining single versus multiple supplies or to consider whether the supply of an appliance is incidental to the supply of orthodontic treatment because the statute has directly addressed the tax status of both.

Accordingly, she confirmed the corporation’s position that it made both exempt and zero-rated supplies to its patients on a 65/35 basis, so that the zero-rated supplies generated ITCs. She did not discuss Brian Hurd, where Campbell J found that an incorporated orthodontic practice was making a single supply of exempt orthodontic health services rather than (as argued by it) two supplies comprised of a zero-rated supply of medical equipment (the orthodontic appliance) and of exempt orthodontic services (e.g., adjustment and maintenance services).

CRA also justified its ITC disallowance on the basis that the invoices rendered to the patients did not comply with the Input Tax Credit Information (GST/HST) Regulations. (This position was odd, because these Regulations apply to invoices received from a supplier (i.e., to input invoices), and are not directly relevant to the ITC position of a supplier rendering invoices (i.e., output invoices)). In any event, Wong J found that the corporation’s invoices complied with these Regulations. In particular:

• they showed the tax on the taxable supplies included because they showed nil (overall) tax (s. 3(c)), and they therefore also included the (nil) amount of tax for each supply (s. 3(b)); and
• they included the total amount paid for the supplies (s. 3(a)).

Neal Armstrong. Summary of Dr. Kevin L. Davis Dentistry Professional Corporation v. The Queen, 2021 TCC 25 under Sched. VI, Pt. II, s. 11.1, s. 169(5) and Input Tax Credit Information (GST/HST) Regulations, s. 3(b).