News of Note
CRA rules that a registered charity running an Ontario school was eligible for PSB rebates at the enhanced “school authority” rates
Email this ContentA registered charity that that operated an Ontario elementary or secondary school was ruled to be entitled to the 68% federal rebate and 93% Ontario rebate regarding non-creditable HST paid by it on its acquisitions of property or services for consumption, use, or supply in the activities engaged in by it in the course of operating the school given inter alia that the definition of “selected public service body” includes a school authority that is established and operated otherwise than for profit. The non-creditable HST on its other purchases generated rebates at the federal 50% and provincial 82% rate.
Neal Armstrong. Summary of 25 May 2020 GST/HST Ruling 125678r under ETA s. 259(3).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretation released in June 2009. Their descriptors and links appear below.
These are additions to our set of 1,363 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2009-06-19 | 12 June 2009 Internal T.I. 2009-0324511I7 F - Déductibilité des primes payées | Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit | substantial commissions generated to broker on policies where he paid the premiums were taxable given their substantial amount |
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) | premiums paid by broker on policies on which the insureds were family members were non-deductible notwithstanding that the related commissions earned by him were taxable | ||
| 4 May 2009 External T.I. 2008-0299841E5 F - Garantie pour l'impôt de départ | Income Tax Act - Section 220 - Subsection 220(4.5) | posting of security for departure tax can generate refund of instalments paid in excess of regular tax | |
| Income Tax Act - Section 164 - Subsection 164(7) | refund of instalments paid in excess of Part I tax for year ignoring s. 128.1(4) departure tax permitted where s. 220(4.5) security posted for such departure tax | ||
| 8 June 2009 External T.I. 2009-0314301E5 F - Société d'État provinciale, production T2 | Income Tax Act - Section 150 - Subsection 150(1) - Paragraph 150(1)(a) | provincial Crown corporations not required to file T2 returns and forms | |
| 2009-06-12 | 27 May 2009 External T.I. 2008-0303971E5 F - Transfer of a life insurance policy | Income Tax Act - Section 148 - Subsection 148(7) | gain under s. 148(7) on drop down of policy (with CSV exceeding its ACB) by individual to his corp. |
| 3 June 2009 External T.I. 2009-0310231E5 F - Exonération des gains en capital | Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(d) | 24-month test in para. (b) of QSBCS definition met where during part of 24-month period, mooted QSBCS were held through a general partnership |
Various pitfalls can attend inbound and outbound acquisitions
The foreign affiliate dumping (FAD) rules were intended to target two types of transactions:
- debt dumping (for example, Canadian Opco borrows to acquire preferred shares of a non-resident Opco subsidiary of its non-resident parent and receives (s. 113(1)(a)) exempt dividends on those shares)
- surplus stripping (for example, Canadian Opco, with distributable cash but whose shares have low paid-up capital (PUC), purchases (or subscribes for) such preferred shares)
However, their scope is wider. For example, they apply where the Canadian subsidiary (CRIC) uses cash on hand to invest in common shares of a wholly owned non-resident Opco for use in its foreign active business – even though there is no debt dumping or surplus stripping involved.
Similarly, it is unclear why it is necessary to meet all of the requirements of the s. 212.3(16) “closely connected business exception” where there is no debt dumping or surplus stripping. For example, where a Canadian public corporation with no operations in Canada becomes a CRIC on being acquired for cash by a foreign multinational, it cannot satisfy that exception because it does not carry on business itself - even if its executives have sole decision-making authority respecting the foreign Opcos. If a “bump and run” transaction could not be structured, this has caused potential foreign acquirors to abandon Canadian acquisitions.
The structure resulting where a Canadian public corporation, that has no operations in Canada, is acquired by a Canadian Acquisitionco as described in s. 212.3(10)(f), is undesirable since the PUC of the shares of Canadian Acquisitionco is reduced to nil pursuant to ss. 212.3(2) and (7), so that any investment (other than by way of PLOI) made in a foreign Opco by the Canadian public corporation or Canadian Acquisitionco would result in a cross-border deemed dividend. Accordingly, the FAD rules encourage a bump-and-run transaction, which provides no benefit to Canada.
Where a non-resident acquisition target is a holding company that has numerous operating subsidiaries that have made substantial upstream loans to it, an element of circularity can arise in determining whether the shares of such operating subsidiaries and, thus, the shares of the holding company, are excluded property.
Due to an upward cascading effect in a multi-tier structure of FAs, a non-resident target with non-excluded property of only 3% on a consolidated basis nonetheless might not have its shares qualify as excluded property. It may be possible to engage in purification transactions to achieve excluded property status.
In this regard, it would be more appropriate for the drafting of s. 17(8) to not require excluded property status “always and forever” and to instead provide for its application during the period in which the shares being financed are excluded property.
Reg. 5907(2.01) to some extent accommodates “pack and sale” transactions (respecting a drop down of a business unit to a foreign Newco followed by an arm’s length sale of the Newco) by rendering Reg. 5907(5.1) inoperative to transactions occurring on a rollover basis under the foreign tax law (so that exempt surplus may be generated) if certain conditions are met, one of which is that the only consideration received in respect of the particular drop-down disposition is shares of the capital stock of another FA of the taxpayer. Thus, the assumption of liabilities on the drop-down transaction would exclude access to Reg. 5907(2.01). See 2014-0550451E5.
Neal Armstrong. Summaries of Raj Juneja and Pierre Bourgeois, “International Tax Issues that Get in the Way of Doing Business", 2019 Conference Report (Canadian Tax Foundation), 36:1 – 42 under s. 212.3(1), s. 212.3(16), s. 212.3(10)(f), s. 251(5)(b), s. 18(5) – specified right, Reg. 105(1), s. 95(2)(a)(ii), s. 95(1) – excluded property – (b) and Reg. 5907(2.01).
CRA will not provide relief where there are COVID-related delays in meeting the deadline of realizing a loss for s. 164(6) carryback within an estate’s first taxation year
In order for the s. 164(6) carryback of a capital loss by an estate to the terminal year to be available, the executors must dispose of the capital property in question within the first taxation year of the estate. Could CRA allow more time for the disposition given that there may be COVID-related or other delays in the probate process? CRA responded that the extensions accorded under the COVID-19 Time Limits Act did not apply here, and stated:
[W]hile we understand that delays in the probate process may delay the timing of the disposition of the properties of an estate, the CRA is unable to extend the time limit for the dispositions in subsection 164(6) … beyond the first taxation year of the graduated rate estate.
Neal Armstrong. Summary of 16 October 2020 External T.I. 2020-0865071E5 under s. 164(6).
CRA indicates that taxpayers can delay flow-through share reporting under the look-back rule in reliance on the COVID-related proposed amendments
COVID-related proposed amendments (principally ss. 66(12.6001), 66(12.731) and 211.91(2.1)) released on December 16, 2020 generally related to a one-year extension of the timelines to spend flow-through share proceeds and make related filings. Should taxpayers file their returns based on such “Proposed Amendments”? For example, where flow-through shares were issued in 2019 under the look-back rule , can the Form T101C (reporting any Part XII.6 taxes payable) be filed before March 2022 rather than March 2021?
CRA first noted its previously-stated position:
It is the CRA’s longstanding practice to ask taxpayers to file on the basis of proposed legislation. … However, where proposed legislation results in an increase in benefits … the CRA’s past practice has generally been to wait until the measure has been enacted. …
Generally speaking, the CRA will not reassess if the initial assessment was correct in law. As a result, a taxpayer’s request to amend their tax records to reflect proposed legislation will be denied.
It then stated:
Based on the foregoing, taxpayers may file their tax returns, including any Form T101C, based on the Proposed Amendments.
Neal Armstrong. Summary of 23 December 2020 External T.I. 2020-0874621E5 under s. 211.91(2.1).
Pomeroy – Federal Court of Appeal allows the Crown to adduce fresh evidence after a TCC motion even with something of a failure to have introduced this before the TCC
The Tax Court dismissed the Crown’s motion to amend its reply to the taxpayer’s notice of appeal to add an allegation that a loan in issue was a sham, on the grounds that such addition would be unfair as the taxpayer’s principal (Mr Pomeroy) had now died. The Crown now moved under Rule 351 for leave to present fresh evidence, namely, the entirety of the transcript of Mr. Pomeroy’s 2018 discovery, on the basis that it would demonstrate that Mr. Pomeroy had little knowledge of the transactions in question, and therefore he could not have given evidence of importance.
The principal sticking point to allowing this new evidence was the first of the four tests enunciated in Coady (2019 FCA 102), namely, that “the party seeking to adduce fresh evidence [must] establish that the evidence: (1) could not have been adduced at trial with the exercise of due diligence.”
Regarding the failure to satisfy this test, Locke JA noted that the Crown did not become aware of the relevance of the additional evidence until six days before the hearing of the Tax Court motion, at which point there was no established procedure for introducing such evidence – but nonetheless found that he was “not convinced that the appellant could not have sought, and possibly obtained, leave to put the evidence before the Tax Court.”
In nonetheless allowing the new evidence, he stated:
… I am conscious that the motion before the Tax Court was an interlocutory matter, and the respondent’s opportunity to adduce this evidence was limited because of the absence of a clear procedural mechanism for doing so. Leave might have been sought at, or shortly before, the hearing before the Tax Court to adduce the New Evidence, but such a request would have been irregular and might well have been unsuccessful.
On balance, and having regard for the limited opportunity the respondent had for putting forward the New Evidence before the Tax Court, I find that the interests of justice require that the Court exercise its discretion to admit the New Evidence.
Neal Armstrong. Summary of Canada v. Pomeroy Acquireco Ltd., 2020 FCA 221 under Rule 351.
CRA indicates that amending a foreign-law debt to transition to RFRs is a disposition only if there is discharge and substitution under that law
A number of jurisdictions are working on replacing existing interbank offering rates (IBORs) by “risk-free-rates” (RFRs), for example, replacing CDOR by the Enhanced Canadian Overnight Repo Rate Average (CORRA), and USD LIBOR by the Secured Overnight Funding Rate (SOFR) – so that existing debts with floating interest rates may have consequential amendments to the benchmark rates.
After stating the general principle that “the determination of whether an obligation has been disposed of for Canadian income tax purposes depends on whether these events are considered to result in the discharge of the obligation and the substitution of a new obligation under the law governing the former obligation,” CRA indicated that where the governing law is Canadian, such an amendment “in and of itself, would generally not constitute a disposition of the IBOR Instrument,” and then stated:
Where foreign law governs an obligation … the legal effect of these events on such an obligation under the relevant foreign law must be considered in order to determine if the obligation has been disposed of … .
Neal Armstrong. Summary of 16 December 2019 Roundtable, 2019-0828571C6 under s. 248(1) – disposition.
Income Tax Severed Letters 6 January 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Belchetz - Federal Court of Appeal confirms that CRA’s decision to waive “only” 15 out of over 30 years of interest was reasonable
Taxpayers who were the “innocent dupes” of a tax fraud, i.e., purported partnerships giving rise to large reported losses in the mid-1980s where, in fact, the partnerships were non-existent, ultimately had their Tax Court actions decided against them in 2014. A large part of the delay (including CRA not assessing the taxpayers’ returns for quite some time) was attributable to CRA and Justice wanting to bring a criminal prosecution against the promoters before dealing with the taxpayers. In the meantime (in 2004, i.e., before the 10-year limitation on interest relief in s. 220(3.1) was introduced) the taxpayers sought interest relief.
After three levels of review, CRA cancelled approximately 15 years of accrued interest. The Federal Court dismissed the taxpayers’ application for judicial review. In dismissing their appeal of that decision, Mactavish JA noted that the “Minister’s discretion must … be genuinely exercised, and must not be fettered or dictated by policy statements such as … IC 07-1R1” – but found that no such fettering had occurred here – the Minister’s delegate had “clearly turned his mind to the question of whether additional interest relief was warranted” and had “conducted a holistic review of the processing delays that had occurred,” and his “decision was transparent, intelligible and justified.”
Neal Armstrong. Summary of Belchetz v. Canada (National Revenue), 2020 FCA 225 under s. 220(3.1).
BCS Group – Federal Court of Appeal finds that a corporation must be represented by counsel in General Procedure appeals
In Masa Sushi, Graham J found that a corporation could not appear “in person” in a General Procedure matter and had to appear through counsel, so that a Rule purporting to permit a corporation to appear in person with the Court’s consent would be ultra vires. Gauthier JA essentially agreed, stating (at paras. 6, 33):
[T]he legislator did not intend to oust the common law and civil law principle that a corporation, because of its very nature, cannot appear “in person” before a court. It can only be represented by an agent who is a distinct person than the corporation. … By adopting detailed provisions dealing with representation in the Act, the legislator limited the TCC’s implied power to control who may represent the corporation in their courtroom, especially in proceedings subject to the General Procedure. …
[T]he common law/civil law concept that a corporation cannot appear in person because of its very nature strongly suggest[s] that under section 17.1 [of the TCCA], a party who is a corporation must be represented by counsel as defined by subsection 17.1(2).
Neal Armstrong. Summaries of Canada v. BCS Group Business Services Inc., 2020 FCA 205 under Tax Court of Canada Act, s. 17.1(1) and Rule 30(2).