News of Note
Dow & Duggan – Tax Court of Canada finds that CRA does not have the discretion to stipulate the documentary requirements for direct-shipment export zero-rating
Email this ContentSched. VI, Pt. V. s. 1 generally zero-rates sales made in Canada to a recipient who promptly exports the goods, whereas Sched. VI, Pt. V. s. 12 may inter alia zero-rate sales made in Canada to a non-resident where the supplier itself ships the goods out of Canada. Unlike s. 1, s. 12 does not state a requirement that the supplier “maintains evidence satisfactory to the Minister of the exportation of the property by the recipient.”
Wong J noted:
This Court has previously held that the evidentiary threshold in section 1 of Schedule VI, Part V means: (1) that the Minister has the discretion to set the standard as to what evidence will satisfy her for the purposes of zero-rating under that section; and (2) this Court should not intervene unless the Minister commits a reviewable error in exercising her discretion… .
She found that the Minister did not have the same discretionary authority under s. 12, although she indicated that it would be “reasonable to refer to the Minister’s [published] list of satisfactory evidence for qualifying under section 1, as a guideline for section 12.” However, she found that most of the supplies before her were not zero-rated in the absence of satisfactory documentary support in any form.
Neal Armstrong. Summaries of Dow & Duggan Log Homes International (1993) Limited v. The Queen, 2019 TCC 280 under Sched. VI, Pt. V. s. 12 and s. 168(9).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in April and March, 2011, including 3 items from the 2010 APFF Roundtable. Their descriptors and links appear below.
These are additions to our set of 1,029 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
GST/HST Severed Letters June 2019
This morning's release of three severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their June 2019 release) is now available for your viewing.
Landbouwbedrijf Backx – Federal Court of Appeal confirms that a Dutch company with a sole Dutch director was resident in Canada
When a Netherlands couple immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. in 2009 of the partnership interest, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on.
Rivoalen JA found that there was no reversible error in the Tax Court’s finding that B.V.’s central management and control was in Canada, given the evidence that “the shareholders in Canada were making the decisions, not the director in the Netherlands.”
Rivoalen JA next addressed the Tax Court’s finding that that there had been no previous step-up to B.V. in the adjusted cost base of the partnership interest under s. 128.1(1)(c), as it was likely that B.V. had been resident in Canada from the time of the acquisition of the farm. She allowed B.V.’s appeal and referred the matter back to the Tax Court for reconsideration of this finding based on what appears to be a minor linguistic quibble: in one part of its reasons, the Tax Court had expressed its finding in this regard on the basis that “there was no evidence that [B.V.] actually ceased to be a resident of the Netherlands” - rather than stating that there was no evidence that B.V. had not been resident in Canada at all times. (Given that central management and control was in Canada at all times, this appears to be a distinction without a difference.)
Furthermore, the Tax Court had found that B.V. was resident in Canada for Treaty purposes as its effective management and control was in Canada - and if it was resident in both countries, this was a matter for the competent authorities to address, which had not been done. The Tax Court merely quoted Art. IV(3) of the Treaty in this regard – which provides:
Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both States, the competent authorities of the States shall endeavour to settle the question by mutual agreement ... . In the absence of such agreement, such person shall be deemed not to be a resident of either State for the purposes of Articles 6 to 21 inclusive and Articles 23 and 24.
The Tax Court did not go on to indicate (presumably because this was obvious) that, given that the competent authorities had not been engaged, this meant that the Treaty could have no application to B.V. Rivoalen JA found that there also was an error here:
[T]he Convention provides an exception or relief to the appellant, it would take precedence over the Act. The Tax Court did not apply and consider the provisions of the Convention to the facts of this case.
The allowing of its appeal likely will be an illusory victory for B.V.
Neal Armstrong. Summaries of Landbouwbedrijf Backx B.V. v. Canada, 2019 FCA 310 under s. 2(1), s. 128.1(1)(c) and Treaties - Income Tax Conventions - Art. 4.
CRA indicates that there can be no interest ultimately payable to the extent that a life interest trust realizes a capital loss in the stub period following death
Life interest trusts, such as alter ego trusts and joint spousal trusts, are deemed under s. 104(4)(a) to have a deemed year end on the date of the death of the last life interest beneficiary and to have disposed of certain property on the date of death. However, if there is a loss in the first taxation year after death, this loss will be reported on the tax return filed for that year and carried back to offset or reduce the gain for the year ending with the death.
However, CRA noted that s. 104(13.4)(c), which postpones the balance due date for the first deemed taxation year to March 31 (or March 30 for a leap year), can provide relief. Suppose that a capital loss sustained in the second taxation year ending on December 31 equals or exceeds the capital gain realized in the first taxation year ending on, say, July 31. By filing the two tax returns, and the loss-carryback request before the balance due-date of March 31, once the first taxation year has been reassessed to recognize the loss for the second taxation year, the effect should be that no Part I tax is payable, and the Part I tax that was initially assessed on the first taxation year should be reversed.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.15 under s. 104(13.4)(c)(i).
CRA indicates that a replacement property can be acquired before disposing of the former property
In order to expand its operations, a manufacturer acquires vacant land, takes three years to build a new plant, moves its operations there and, eight months later, sells the former property. CRA indicated that there is no requirement that the replacement property be acquired after the former property is disposed of – so that the acquisition of the new property in advance of the disposition of the former property would not prevent it from being a replacement property for ss. 13(4.1) and 44(5) purposes.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.14 under s. 44(5).
CRA indicates that GAAR may apply to the use of a “Midco” to step up the tax basis of a target investment on a triangular amalgamation
In a conventional domestic triangular amalgamation, in which the shareholders of Targetco receive shares of Parentco, and Parentco receives shares of the Amalco resulting from the amalgamation of Targetco and Subco (a wholly-owned subsidiary of Parentco), ss. 87(9)(a.4) and (c) limit the cost of such Amalco shares to Parentco. Some ancient technical interpretations of CRA indicated that Parentco could achieve a step-up of its investment to fair market value if it inserted a “Midco” between it and Subco. On the amalgamation, Parentco receives additional shares of Midco (having an FMV equaling the FMV of the shares of Parentco issued to the former shareholders of Targetco and to compensate it for such issuance (and Midco receives compensatory shares of Amalco).
CRA continues to acknowledge that as a purely technical matter, the “compensatory” shares issued by Midco to Parentco have full (FMV) basis (although of course the cost of the shares issued by Amalco to Subco continues to be limited by ss. 87(9)(a.4) and (c).) However, CRA indicated that if an amalgamation is subject to the application of s. 87(9), and is structured in a manner to frustrate the application of ss. 87(9)(a.4) and (c), it will potentially be subject to the application of GAAR.
Accordingly, for transactions implemented after the Conference date of December 3, 2019 (or for amalgamations implemented before March 31, 2020 as part of a series of transactions or an arrangement that were substantially advanced, as evidenced in writing, before December 3, 2019) taxpayers should not rely on the old technical interpretations.
CRA has now provided its official written responses to the Canadian Tax Foundation, which are available to those who attended the conference. In its oral comments, CRA queried whether giving FMV tax basis to Parentco for the shares issued by Midco, which would be in excess of the basis described in ss. 87(9)(a.4) and (c), would be in accordance with the scheme of such provisions, and the scheme of the Act’s rollover provisions in general.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.13 under s. 87(9)(a.4).
CRA indicates that a cost-recovery method earnout can be based on the earnings of a lower-tier corporation
The proceeds of disposition of the shares of Company A are determined pursuant to an earnout clause, which is basede on the future earnings (i.e., its goodwill) generated by Company B , whose shares are held by Company A.
CRA indicated that the mere fact that the earnout feature relates to the underlying goodwill of Company B will not preclude the application of the cost recovery method in IT-426R. This position reverses 2013-0480561E5, and follows 2015-0589471R3.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.12 under s. 12(1)(g).
Canada uploads common reporting standards (CRS) data onto its systems for full-spectrum compliance use
Canada so far has activated CRS exchange relationships with 90 jurisdictions for incoming CRS data and 64 for outgoing CRS data. This data assists inter alia in identifying Canadians’ overseas financial accounts and in complementing CRA’s existing risk assessment process, and is being incorporated in CRA’s system and made available to those involved in the spectrum of compliance and collection efforts.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.11 under s. 217(1).
CRA indicates that earnout payments under cost recovery method generally are not subject to Pt XIII tax
At the 2005 APFF Roundtable, CRA indicated that an amount payable under an earnout feature in a sales agreement is subject to s. 212(1)(d)(v), but indicated that, in a situation where the shares are taxable Canadian property, it would not generally apply s. 212(1)(d)(v) to the TCP, assuming that the first four conditions in IT-426R, para. 2 (re use of the cost recovery method) were met.
CRA has now reaffirmed this position and indicated that it also applies where the shares that were sold were not TCP.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.10 under s. 212(1)(d)(v).