News of Note
CRA declines to expand an exception from Reg. 105 withholding for reimbursing expenses of non-resident subcontractors
Email this ContentCanco entered into a contract (“Initial Contract”) with a non-resident corporation (“NR”) for the supply and installation of boilers in Canada. Prior to the completion of the services, and in light of the financial difficulties of NR, Canco and NR entered into “Payment Agreements” under which Canco provided payments to NR, in respect of the contract for service in Canada, performed by the non-resident subcontractors of NR, with such funds placed into dedicated bank accounts and paid to the subcontractors upon the authorization of both NR and Canco.
CRA found that such payments were subject to Reg. 105 withholding, stating:
If NR subcontracts its obligations under the Initial Contract rather than performing them directly and the amounts are ultimately paid by NR to subcontractors, that does not alter the fact that Canco is required to pay NR for services in Canada under the terms of the contracts and the Payment Agreements.
It noted that Weyerhaeuser found that Reg. 105 withholding is required only from those payments “having the character of remuneration for services rendered in Canada,” and that reimbursement of expenses of the subcontractor would not be subject to Reg. 105 withholding - but the payments here did not fit within that exception, i.e., they satisfied Canco’s obligation to NR under a contract for the performance of services in Canada.
Neal Armstrong. Summary of 16 October 2020 Internal T.I. 2019-0823641I7 under Reg. 105(1).
CRA indicates that a nominee potentially could qualify as an operator for purposes of the GST JV election if it also has a “marginal” beneficial ownership interest
Until CRA announced that it would start challenging such arrangements, it was somewhat common for nominee corporations to be designated as operators under an ETA s. 273 JV election for a real estate co-ownership. Can the CRA position be addressed by providing that the nominee will also have a marginal interest (e.g. 0.001%) in the joint venture?
CRA responded that although it is “a question of fact whether such an arrangement is a joint venture at law,” a “corporation with a marginal financial contribution to a joint venture in exchange for a co-ownership interest and proportionate share of profit (or losses) as well as other necessary attributes may be a ‘participant’ as defined in paragraph (a) of … P-106 … .
It went on to indicate that the earning by the corporation of “its own income brings into question whether the corporation is a nominee corporation; in other words, whether the nominee corporation is a trustee of a bare trust.” (This latter point presumably is pointing only to the need for clear documentation that the nominee is holding, except as to the marginal interest, as nominee and agent.)
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.20 under ETA s. 273(1).
CRA finds that the purchase price of a business allocated to the actuarial surplus for a defined benefit plan was a non-deductible capital expenditure
A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan.
Although, in fact, the acquisition occurred before 2017, the Rulings Directorate also addressed what would have happened on a post-2016 acquisition, and concluded that the amount allocated to the actuarial surplus would not have qualified as the cost of a Class 14.1 property, and instead would have been a non-deductible capital expenditure. Its findings towards this conclusion were:
- Having regard for the exclusion for an amount that is not deductible by virtue of a specific provision other than s. 18(1)(b), such amount was excluded by s. 18(1)(e), which prohibited the deduction for a reserve (“described by the courts as something set aside that can be relied upon for future use”) given that “any actuarial surplus in this case can be applied as a contribution holiday to relieve the Purchaser from its future contribution obligations.”
- Furthermore, the exclusion under s. 78(4) would also apply because it prohibits the deduction of an amount for pension benefits which will be paid more than six months after the current taxation year, including (in this context) the use of surplus to cover the employer’s current service costs.
- The exclusion for “an amount that is the cost of … an interest in a trust” also applied since the Purchaser acquired an equitable interest in the Plan, i.e., it could potentially take a contribution holiday, receive a return of contributions on a winding-up of the Plan, and potentially receive the surplus in other circumstances.
- Regarding the specific inclusion in Class 14.1 of “goodwill,” this was defined in TransAlta as “an unidentified intangible asset,” whereas the surplus here instead was specifically identifiable and “[u]nlike goodwill … can be separated from the employer’s business if, as in this case, the plan terms permit surplus to be returned to the employer when the appropriate regulatory procedures are followed.”
- The surplus amount would also not be deemed goodwill under s. 13(35) because of failure of the condition in s. 13(35)(a) (it would represent the cost of a property, e.g., the right to apply actuarial surplus to contribution obligations under a defined benefit pension plan) and failure of the condition in s. 13(35)(c) (it was not otherwise deductible because of s. 18(1)(e) or 78(4)).
Neal Armstrong. Summary of 28 January 2021 Internal T.I. 2019-0817641I7 under s. 18(1)(b) – capital expenditure v. expense – actuarial surplus.
GST/HST Severed Letters October 2020
This morning's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their October 2020 release) is now available for your viewing.
The original version of the September 2020 post below indicated that there were five letters in that bundle; there were two.
GST/HST Severed Letters September 2020
This morning's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their September 2020 release) is now available for your viewing.
Income Tax Severed Letters 28 April 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Bernardin – Quebec Court of Appeal finds that interest that arose prior to a class action judgment becoming res judicata was non-taxable
An individual, by virtue of being part of a group of class action claimants, was awarded damages in 2004 of $1,200 for each of the seven winter seasons in which she had endured snowmobile noise. In 2010 she received damages pursuant to Article 1619 of the Quebec Civil Code of $8,400 (capital) and $6,148 (interest).
Gagné JCA applied the principle:
[O]ne cannot speak of interest in the strict sense unless the debt is both certain and liquidated. These two qualities arise at the time when the judgment becomes res judicata, that is, when it is not, and is no longer, subject to appeal. As long as the validity and/or the amount of the debt is the subject to debate on appeal, it cannot constitute a debt that is certain and liquidated or, in other words, a capital sum on which interest may accrue.
Accordingly, the damages did not become a liquidated sum until all rights of appeal against the 2004 judgment were abandoned on October 1, 2009. It was only at that point that the 2004 judgment became res judicata.
On the other hand, it did not matter that the precise quantum of the amount payable to that individual was not established until the judgment of the Court Clerk issued on March 3, 2010. In this regard, Gagné JCA stated:
[T]he debt does not have to be due and payable to bear interest. It is sufficient (and here I paraphrase Rand J. in … Farm Security …) that there be a use or retention by one person of a sum of money belonging to or owed to another. This, in my view, is a debt that is certain and liquidated. …
The fact that [the Quebec Attorney General] was unaware of the extent of the members' claims at the time is irrelevant. … [T]he determination of whether an amount received or receivable is interest income must be made from the perspective of the taxpayer.
Neal Armstrong. Summary of Agence du revenu du Québec v. Bernardin, 2021 QCCA 625 under s. 12(1)(c).
Danby Products – Federal Court of Appeal applies a rebuttable presumption that the ordinary meaning of a word should prevail over its industry meaning
Locke JA rejected a taxpayer submission that a wine cooler was not a refrigerator notwithstanding that there was “no dispute … that the industry does not treat wine coolers as refrigerators,” stating:
I do not wish to suggest that the ordinary meaning of a term should always apply even where it has a meaning in the industry. But there is a presumption to that effect, and that presumption is not rebutted by the mere fact that the industry meaning of the term in question differs from the ordinary meaning.
Neal Armstrong. Summaries of Danby Products Limited v. Canada (Border Services Agency), 2021 FCA 82 under Customs Tariff Act, Customs Tariff Schedule, Chapter 84, Tariff Item 84.18 and Statutory Interpretation – Ordinary meaning.
An ETA s. 273 election for a real estate JV can prevent a subsequent unregistered purchaser of an interest therein receiving retroactive relief
CRA indicated that, in general, GST/HST “retroactive registration is only available if a person was required to be registered for GST/HST purposes pursuant to subsection 240(1).”
Thus, where a new co-venturer purchased an interest in an existing real estate joint venture for which an ETA s. 273 election was already in place (so that all the rental supplies of that real property were to be reported by the JV “operator” and not by it), it could not become retroactively registered to the date of acquisition so as to claim an ITC for the GST/HST payable by it on that acquisition, and to relieve the supplier from collecting tax under ss. 221(2)(b) and 228(4).
Neal Armstrong. Summaries of 27 February 2020 CBA Roundtable, Q.18 under ETA s. 273(1) and s. 167(1.1)(a)(iii).
We have translated over 1500 CRA Interpretations
We have published a further 10 translations of CRA interpretation released in July 2008. Their descriptors and links appear below.
These are additions to our set of 1,506 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 3/4 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.