News of Note
CRA confirms that the GST/HST test of an investment limited partnership is not a day-by-day numerical test
Email this ContentThe ETA definition of an “investment limited partnership” (ILP) includes a test as to whether the “primary purpose” of the limited partnership was to “invest funds in property consisting primarily of financial instruments.” CRA confirmed its position in Notice 308 that this encompassed situations where the purpose of the LP was to invest in real estate through subsidiary LPs. CRA indicated that this was a primary purpose test which “would generally reflect its main or fundamental purpose at the time it was established – and may be reassessed later on.” Thus, the application of this test would not be affected solely by short-term changes in the value of investments due to market shifts.
Respecting this scenario:
On day one, LP uses 40% of the capital raised to acquire interests in other limited partnerships which invest in commercial and residential real property; and on day two, it uses the remaining 60% to invest directly in real property. On day 180, due to market shifts, the interests LP owns in the limited partnerships are now worth $1,200,000, while the direct investments in real property (acquired with 60% of the original capital) are now worth $800,000.
CRA stated that “we would likely conclude that the LP is not an ILP and further information would be required to determine if the LP … is considered an ILP at a later time."
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.25 under ETA s. 123(1) - investment limited partnership.
Diamond Stacking – B.C. Supreme Court finds that a purchaser could not rely on a vendor’s GST exemption certificate where he knew of the property’s commercial use
ETA s. 194 provides that where a supplier has incorrectly certified that a sale of real estate was of exempt residential real estate, then the sale price is deemed to have been inclusive of the applicable GST/HST (so that it is that supplier rather than the purchaser who bears that GST/HST) – except where the purchaser “knows or ought to know that the supply is not an exempt supply.”
A vendor certified that an 18-acre property was an exempt residential property and, when it was assessed by CRA for failure to charge GST on the 16-acre portion of the property that was used as a blueberry farm, sued the purchaser for the GST thereon, plus interest. Saunders J found that the purchaser knew of the property’s use as a blueberry farm, and stated that the purchaser thus “possessed knowledge of fact which, through taking the appropriate advice a reasonable person would seek on those facts, would have indicated that GST would apply to the sale.” Accordingly, since the contract was silent on GST, the vendor was entitled under ETA s. 224 to recover its GST assessment from the purchaser – but had no entitlement to recover interest that CRA has assessed against it.
Neal Armstrong. Summaries of Diamond Stacking Co. Ltd. v Zuo, 2019 BCSC 1849 under ETA s. 194 and s. 224.
Income Tax Severed Letters 13 November 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Addy – Federal Court of Australia finds that the imposition of flat tax on UK working-holiday visa holders contravened the Treaty non-discrimination Article
The taxpayer, who was a British citizen aged 23, came to Australia on a “working visa” for a 20-month stint, during which period she was found by Logan J to be resident in Australia on ordinary principles. A citizen and resident of Australia would have largely escaped income taxation on her modest income as a waiter due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.
The taxpayer, although an Australian resident, was by virtue of her citizenship a UK national and not an Australian national under the definition in the Australia-U.K. Treaty. That Treaty's non-discrimination clause (also found in many of the Canadian treaties) read:
Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.
Logan found that this 15% tax contravened this clause given that “Only non-citizens can hold the types of visa that constitute a “working holiday visa.” He stated:
[T]he discrimination between resident derived income from the same source in Australia is based on nationality. It is disguised by the reference to “working holiday maker” but the definition of that term makes it plain that what the disguise covers is nationality. A resident “national” of Australia undertaking the same work as did Ms Addy … would have the benefit of the tax free threshold.
This decision potentially also is of corporate interest given that “nationals” can include companies deriving their status from the domestic law.
Neal Armstrong. Summaries of Addy v Commissioner of Taxation [2019] FCA 1768 under Treaties – Income Tax Conventions – Art. 25 and ITA s. 2(1).
S. 125(5.1)(b) passive income grind can be avoided by winding-up subs
The passive income grind to the small business deduction under s. 125(5.1)(b) potentially can be avoided by promptly winding-up an associated corporation that has realized a passive gain. For example , if Holdco holds Opco and Realtyco, and Realtyco realized a capital gain from selling its land in Year 1, and Realtyco is wound-up before the end of Year 1, then that passive gain will neither affect Opco’s ability to claim the SBD in Year 1 (because s. 125(5.1)(b) operates on a lagged basis) nor in Year 2 (because in Year 2, Realtyco no longer is associated with Opco).
If the passive asset with the accrued gain instead is held by Holdco, Holdco could drop-down that asset to a Newco sub under s. 85(1), with Newco then selling the asset and being promptly wound-up. However, in “this situation…GAAR must be considered” (see e.g., Iberville re using s. 85 to avoid rather than defer tax).
Neal Armstrong. Summary of Martin Lee and Thanusan Raveendran, “Possible Anomaly in the Passive Income SBD Grind?,” Canadian Tax Focus, Vol. 9, No. 4, November 2019, p.1 under s. 125(5.1)(b).
CRA reiterates that the ETA s. 167 is unavailable where a newly-formed Amalco immediately transfers its assets
Two registrants amalgamate to form AmalCo, which immediately thereafter sells all its assets to a registered third party. In finding that no ETA s. 167 election could be made for this sale, CRA indicated that the supplier (AmalCo) did not satisfy the s. 167 requirement that it have “established” the business (this was done by its predecessors, who were deemed separate persons) and by assumption it also did not satisfy the s. 167 requirement that it have “carried on” the business.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.24 under ETA s. 167(1).
CRA is reviewing the Medallion decision
In Medallion, a corporation that acted as a property manager for the rental properties of 10 non-arm’s length owner-corporations in consideration for a percentage of the rents, was found to qualify as the participant in a joint venture, notwithstanding that it had no ownership interest in the properties, so that it had validly elected to be the JV operator. In response to a question as to whether a participant in a joint venture includes a person who contributes solely property management services to the joint venture pursuant to a written joint venture agreement, CRA responded:
We are currently reviewing the extent to which the Medallion decision would affect our position with respect to the issue of who can be considered to be a participant in a joint venture for purposes of section 273 …, and this includes taking into consideration the issue described in the question.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.23 under ETA s. 273(1).
CRA finds that a developer was not entitled to a rebate of its HST costs where it subleased its developed housing lots to a home builder for construction and sale
DeveloperCo which holds land under a 99-year headlease, pays the fees of a third-party contractor (Contractor) to develop the land as housing lots, and subleases the lots to Builder who constructs houses thereon, which are sold to the third party buyers through a sale to them of the subleases. (Polygon, which CRA accepts, effectively found that these sales are taxable, rather than the builder being subject to the self-supply rule under s. 191).
CRA found that because the subleases by DeveloperCo to Builder were exempted under Sched. V, Pt. I, s. 7 rather than s. 6.1 or 6.11, DeveloperCo was not entitled to a rebate under s. 256.1 for the HST charged to it on the development costs borne by it – notwithstanding that the transactions generated fully-taxable revenues from the sublease purchasers. CRA recognized that this result was anomalous, but did not think that the provisions offered up a solution.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.22 under ETA s. 256.1(1).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in June and May, 2011. Their descriptors and links appear below.
These are additions to our set of 999 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Kufsky – Tax Court of Canada finds that a dividend that had not been declared nonetheless was a dividend for tax purposes
In finding that a corporation should be treated as having paid dividends to its shareholder, so that CRA validly assessed the shareholder under s. 160 for a tax debt of the corporation, even though no dividend had been declared, and the only evidence of the payment of a dividend was the cash movements and the corporation’s subsequently-fired accountant issuing T5 slips to the taxpayer, MacPhee J stated:
[A] reported dividend, even if not in compliance with the provincial statute, remains valid for tax purposes … .
The only authority cited for this statement was 2753-1359 Québec dealing with a payment that apparently was not argued to be something other than a dividend; and this statement also might seem at odds with the well-accepted view (codified in s. 8.1 of the Interpretation Act) that tax law attaches consequences to the transactions that occurred as a matter of provincial (or corporate) law. However, the proposition - that a payment can be a dividend under the corporate law even if none of the usual formalities are observed - very well may be correct. See e.g., Cangro Resources (“dividend” was to be given its “accepted ordinary meaning” – that is, of a pro rata distribution to all shareholders, other than a formal reduction of paid-up capital or liquidating distribution.”)
The Kufsky proposition that a dividend declaration is unnecessary also suggests that there may be no need to rectify a badly-drafted dividend resolution.
Neal Armstrong. Summary of Kufsky v. The Queen, 2019 TCC 254 under s. 160(1).