News of Note
CRA finds that a supply of a service may be made for GST/HST purposes by other than the service provider
Email this ContentA recent ruling illustrates an interpretive approach of CRA under which it can consider X to be the supplier of a service for GST and HST purposes even though none of the service actually is performed by X.
A for-profit corporation which charges the families of non-resident minor children a fee for arranging for them to study at a Canadian school district and to be billeted at Canadian families, and pays tuition directly to the school district, was found to be earning its fees (through non-resident agents) from the non-resident families as consideration for an exempt educational service.
Neal Armstrong. Summary of 22 September 2011 Ruling 129475 under ETA, Sched. V, Part III, s. 9.
CRA confirms that the employer GST or HST liability for provision of administrative services to a pension plan potentially can be avoided through using a third-party servicer
CRA considers that an employer is required to self-assess itself for GST or HST under s. 172.1 on the "fair market value" of administrative services it provides to a pension plan for its employees, even if those services all are quite minor (e.g., handling contributions out of payroll), without giving guidance as to how such fair market value is to be determined. On the other hand, there generally will be no GST/HST liability under s. 172.1 where the employer receives a single supply of payroll processing services from a third party notwithstanding that the provision of administrative services to the pension plan is included.
Neal Armstrong Summaries of 19 October 2011 Interpretation 133414 and 19 October 2011 Interpretation 130384 under ETA, .s 172.1(1) - pension activity and summary of 19 October 2011 Interpretation 130384 under ETA, s. 172.1(5).
CRA no longer is scuppering supplier GST/HST rebate applications through automatic assessments
CRA has confirmed that since April 2011 it no longer has been following a practice (prevailing during the previous four years) of assessing GST or HST returns even where there was no adjustment and there was payment with the return of the net tax shown as owing. As also noted by CRA, the effect of assessing a return is that the registrant is precluded from filing for a rebate of tax remitted in error in that month (e.g., where more tax was remitted than charge to its customers) - and the registrant must instead file a timely notice of objection or apply for a reassessment under s. 296(1).
Neal Armstrong. Summary of 2 September 2011 Interpretation 137200 under ETA s. 261(2).
Whitehorse - Tax Court finds that allowances for recreational travel did not qualify for a GST rebate
The City of Whitehorse gave certain employees travel allowances to pay for return flights to Edmonton or Vancouver, which the employees used for personal purposes. These expenses were not sufficiently connected with the taxpayer's activities to qualify for a GST rebate under ss. 174(a)(iv) and 259(4) of the ETA, notwithstanding that they helped Whitehorse attract and retain employees who otherwise might not work in a remote community.
Scott Armstrong. Summary of City of Whitehorse v. The Queen, 2012 TCC 298, under ETA s. 174.
CRA reconfirms that "directly or indirectly" wording in s. 95(2)(a) covers back-to-back loans
CRA has reconfirmed (referring to a published statement of Wally Conway at the Department of Finance) that "the words "directly or indirectly" in subparagraph 95(2)(a)(ii) are meant to deal with back-to-back loan arrangments," so that, for example, interest paid by a CFA (which is engaged in an active business) indirectly "through" an intermediate non-resident company under such a back-to back loan arrangment to a CFA Finco may be recharacterized as active business income to Finco. However, that policy was not applicable here to an interest-bearing loan made by Finco to the intermediate company (the non-resident parent of Canco) because the loan, in turn, made by the parent to the CFA carrying on an active business was non-interest bearing.
Neal Armstrong. Summary of 29 June 2012 Memorandum 2012-0441601I7 under s. 95(2)(a)(ii)(B).
Dundee Industrial REIT IPO will use a trust-on-partnership structure
Another Dundee REIT (Dundee Industrial REIT) is proposed. It will hold a portfolio of Canadian light industrial rental properties through a subsidiary LP (Industrial Partnership). Exchangeable Class B units of Industrial Partnership will be held by a subsidiary LP of Dundee REIT, which will have previously transferred properties into Industrial Partnership on a rollover basis in exchange for both Class A and Class B units, then will have sold the Class A units to the REIT. (This ordering appears to have Ontario land transfer tax benefits.)
This is a departure from quite a number of other REITs which use a trust-on-trust rather than trust-on-LP structure.
Neal Armstrong. Summary of preliminary prospectus for IPO by Dundee Industrial REIT under REIT and LP offerings.
Mertrux - UK Upper Tribunal reverses a broad interpretation given to "goodwill"
The additional amount received by a Mercedes dealer for the early termination of its dealership was found to be consideration for the surrender of a contractual right (giving rise to capital gains treatment) rather than for goodwill (for which rollover treatment was available) - notwithstanding that Daimler-Chrysler (UK) Ltd. arranged for this additional amount to be paid directly to the dealer by the third party purchaser of the dealership.
This case could be relevant to the interpretation of s. 167.1 of the Excise Tax Act (no GST on the consideration for the purchase of a business or business division that is attributable to goodwill) and also to the Canadian income tax distinction between a capital gain and an eligible capital amount - although it is hard to be sure about the latter point because following some amendments to get rid of the "mirror image rule" (see Toronto Refiners) that distinction now is utterly circular: under ss. 14(1) and 14(5) - CEC-(E), an eligible capital amount is 1/2 of an amount receivable on capital account in respect of a business that is not included in computing a capital gain; and under s. 39(1)(a)(i), a capital gain does not include gain from the disposition of an eligible capital property!
Neal Armstrong. Summaries of R & C Commrs v. Mertrux, [2012] UKUT 274 (Tax and Chancery Chamber) under s. 14(5) - CEC (E) and ETA, s. 167.1.
CRA considers GAAR to be applicable where a holding partnership is used to avoid s. 84.1
CRA has indicated that it has previously concluded that there is an abusive avoidance of s. 84.1 resulting in the application of the anti-avoidance rule where all the shares of a family farm corporation are rolled into a family partnership whose only asset is those shares, and the family partnership is subsequently sold (utilizing the capital gains exemption) to a family Newco for notes of the Newco. In situations where the partnership has other (farming) assets as well (as posited in this technical interpretation), then "in order to determine if there is an abuse having regard to section 84.1, the CRA would need in particular to consider the source of funds used to pay off the consideration for the disposition of the partnership interests, as well as the value attributable to the shares of the corporation held by the partnership relative to the total value of the interests in the partnership" [TaxInterpretations transalation].
The hypothetical facts also posited a five-year gap between the roll-in of the family farm corporation shares into the partnership, and the sale of the partnership interests for the Newco notes. In this regard, CRA noted the broad meaning accorded to "series of transactions" by Canada Trustco and Copthorne in light of s. 248(10) - i.e., the subsequent sale presumably would be considered by CRA to have been made "in contemplation of" the previous roll-in transaction.
Neal Armstrong. Summary of 3 July 2012 T.I 2012-0443421E5 F under s. 245(4).
CRA gives s. 84(2) ruling on distribution of share consideration received for sale of a business
CRA ruled that where a Canadian public corporation transfers a Canadian business to a Newco, and sells Newco to a public company purchaser in consideration for equity of the purchaser, it can then distribute that equity to its shareholders, without there being a deemed dividend by virtue of the exemption in s. 84(2) (PUC distribution on the discontinuance or reorganization of a business).
This transaction would also appear to be exempted from deemed dividend treatment under the proposed amendments to s. 84(4.1) (one-time distribution of proceeds of disposition) if it were not already exempted by s. 84(2).
Neal Armstrong. Summary of 2012 Ruling 2012-0435291R3 under s. 84(2).
Michael Durst notes that OECD Working Party No. 6 has corrected a widespread notion on intangibles transfer pricing that has "always has been flatly incorrect."
In an earlier article (see post below), Michael Durst suggests that the recent OECD discussion draft on transfer pricing for intangibles performs a "valuable service" by correcting "the apparently widespread misapprehension" that bearing the financial costs of IP development entitles an affiliate to the profits of the IP's exploitation.
He also suggests that "the best indicator of [the] arm’s-length division of income [between those managing and implementing intangibles creation] normally will be the relative values that the multinational group itself places on the managers and on the implementers — that is, the relative values of their compensation."
Neal Armstrong. Summary of Michael C. Durst, "The OECD Discussion Draft on Transfer Pricing for Intangibles," Tax Notes International, 30 July 2012, p. 447 under Treaties - Art. 9.