News of Note
CRA rules on transferring already-earned profits to an affiliate through use of a partnership
Email this ContentIt may be possible to transfer profits which already have been earned to a Lossco in the same group in order to access Lossco’s non-capital losses. CRA has ruled on a transaction in which (to simplify somewhat) the units of an LP which already has earned profits for the year will be transferred to the Lossco before the fiscal year end of the LP – so that most of those LP profits will be allocated to Lossco. The partnership agreement for LP will be amended "to clarify that it allocates its income for income tax purposes only to those partners that are partners at the end of its fiscal period."
Neal Armstrong. Summaries of 2014 Ruling 2013-0516071R3 under s. 111(1)(a), s. 34.2(14) and s. 96(1)(f).
Tele-Mobile – Tax Court of Canada rejects an attempt to bifurcate U.S.-to-Canada cell phone calls into a non-taxable U.S.-roaming service and a taxable Canadian leg
When Telus charged its Canadian customers for calls made from the U.S. to Canada, its invoices contained a separate charge for a roaming service, relating to the part of the service that was performed in the U.S., on which it did not charge GST, and a second charge for connecting the call from the U.S. to Canada, which it conceded was subject to GST. C Miller acknowledged that in the context of local calls in the U.S., a roaming service had "commercial efficacy as a standalone supply." However, in this context of cross-border long distance calls, insofar as the customers were concerned they were getting a "seamlessly integrated" service of the long distance call. As there was only a single supply, all the charges therefor were subject to GST under ETA s. 142.1(2)(b)(ii) given that a part of the supply (i.e., the receiving of the telecommunication in Canada) was performed in Canada.
Similar issues respecting whether a supply can be bifurcated arise, for example, under ETA 142(1)(g), which deems a supply of a service to be made in Canada if the service "is to be performed in whole or in part in Canada."
Neal Armstrong. Summary of Tele-Mobile Company v. The Queen, 2015 TCC 197 under ETA, s. 123(1) – supply.
Discovery Trust – a trust, whose Alberta trustee (Royal Trust) followed all the requests of the Newfoundland beneficiaries after careful review, was resident in Alberta
A trust with Newfoundland beneficiaries but whose sole trustee was the Calgary office of Royal Trust was resident in Alberta, notwithstanding that essentially everything it did was on the recommendation of the non-Alberta advisors for the Newfoundland beneficiaries. Royal Trust carefully reviewed each suggested trust action first, before agreeing to it, to ensure that it seemed to be in the interests of the beneficiaries – which indicated that Royal Trust was an independent trustee rather than that the trust’s central management and control was in Newfoundland.
Neal Armstrong. Summary of Discovery Trust v. MNR, 2015 CanLII 34016 (NL SCTD) under s. 2(1).
CRA considers that life insurance policy premiums on a corporate-owned policy reduce safe income on hand if they do not increase the policy’s CSV
Where prior to a sale by Holdco of all the shares of Opco to an arm's length purchaser, Opco transfers a life insurance policy on the life of Holdco’s shareholder to Holdco through a dividend-in-kind, CRA considers that the resulting gain to Opco (based on the policy’s cash surrender value ("CSV")) will not increase the safe income on hand ("SIOH") for purposes of the sale because that time will be before the realization of that gain.
The (non-deductible) policy premiums that had been paid by Opco would reduce its SIOH except to the extent that their payment increased the policy’s CSV and thereby increased the accrued gain on the shares of Opco.
Neal Armstrong. Summaries of 14 May 2015 CLHIA Roundtable, Q. 5, 2015-0573821C6 under s. 55(2) and s. 148(7).
CRA finds that income from the sale of life insurance business asset by a Canadian insurer’s FA to the insurer’s non-resident branch generally will not generate FAPI
S. 95(2)(a.1) may deem business income realized by FA from a sale of property to its Canadian parent to be foreign accrual property income where the cost to Canco of the property "is relevant" in computing its business income. However, if Canco is an insurer which acquires property (previously used by FA in its foreign life insurance business) for use in Canco’s foreign life insurance branch, CRA accepts that the cost to that branch of the property will not be relevant to computing Canco’s business income (so that s. 95(2)(a.1) will not apply) as any gain or loss to Canco from a subsequent sale of the property would be excluded from its income by ss. 138(2) and (9).
Neal Armstrong. Summary of 14 May 2015 CLHIA Roundtable, Q. 2, 2015-0573801C6 under s. 95(2)(a.1).
CRA accepts that a designation (but not an election not listed in Reg. 600) can be made late
Reg. 2411 prescribes an amount which is intended to ensure that a multinational insurer’s net investment revenue derived from its designated insurance properties is not less than the net investment revenue that would be determined for that property if the average rate of return on its designated assets of each class equaled an average rate of return on all its investment property of each class. Reg. 2411(3)(a) provides that in specified circumstances the insurer may elect in its return for a specific formula to be used for these purposes.
If this election is not made in the return, CRA will not accept a late election, given that it is not listed in Reg. 600. It considers decisions on late-filed designations (e.g., Nassau Walnut, Lussier) to be inapplicable to late elections.
Neal Armstrong. Summary of 14 May 2015 CLHIA Roundtable, Q. 3, 2015-0573861C6 under Reg. 2411(3)(a).
CRA considers that a s. 88(2) distribution of an insurance policy occurs at FMV rather than CSV
CRA considers that where an insurance policy is distributed on the winding-up of a corporation under s. 88(2), s. 69(5), as "the more specific provision," generally will take precedence over s. 148(7), so that the policy would be disposed of at fair market value rather than cash surrender value.
Neal Armstrong. Summary of 14 May 2015 CLHIA Roundtable, Q. 4, 2015-0573841C6 under s. 69(5).
CRA finds that monthly payments to employees to cover part or all of the costs of cell phones required for their duties were fully taxable
An employer whose employees were required to use cell phones in the course of their duties but which had a "bring your own device policy," paid monthly amounts to each such employee based on their particular requirements not in excess of their actual cell phone costs. CRA found that these monthly amounts were taxable allowances given that the employer did not require detailed receipts.
Neal Armstrong. Summary of 7 April 2015 T.I. 2014-0552731E5 F under s. 6(1)(b).
Income Tax Severed Letters 12 August 2015
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The exemption of the services provided by naturopaths from GST/HST may have imposed a substantial financial penalty on them
Beware your wishes, for they may be granted.
Most naturopathic services of qualified practitioners were exempted effective February 11, 2014. Accordingly, the practitioners became subject to the change-of-use rules in which they were required to remit HST/GST equal to the input tax credits they previously had claimed on their previous purchases of equipment, furniture and other personal capital property (assuming such property was now being used primarily in making exempt supplies) – subject to a pro rata reduction based on declines in the properties’ fair market values since purchase. A similar rule applied to capital property which was realty, except that the recaptured ITCs were mostly based on the percentage increase in exempt use - rather than being an all-or-nothing (primary use) test.
Accordingly, this "gift" from the government could be very expensive for those practitioners who had purchased their own buildings.
Neal Armstrong, Summaries of B-109 "Application of the GST/HST to the Practice of Naturopathic Doctors" under ETA, s. 200(2), s. 206(5), s. 123(1) – recipient, s. 123(1) – supply, s. 182(1), Sched. V, Pt, II, s. 1 – qualifying health care supply, Pt, II, s. 7.