News of Note
CRA confirms that, under the ETA s. 182 rules, a payment by a guarantor can generate an ITC to the defaulter
Email this ContentAco (a corporate registrant) agreed to make taxable supplies in Canada of tangible personal property to Bco (a registered partnership). A corporate partner of Bco (Cco) agreed to guarantee the obligations of Bco under the contract. As a result of Bco’s default on its obligations, Cco is required to pay liquidated damages to Aco.
CRA indicated that, under ETA s. 182, Aco is deemed to have collected the GST/HST as part of the liquidated damages amount, which is deemed to be consideration for a taxable supply by it, and Bco would be deemed to have paid that GST/HST (notwithstanding that Cco is the actual payer) – so that Bco (not, Cco) would be able to claim an ITC for the deemed GST/HST payment if the usual conditions in s. 169 were satisfied.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.18 under ETA s. 182.
CRA confirms that an employee cannot access the 2019 business use by a predecessor of a car to generate standby-charge relief under s. 6(2.3) in 2020/2021
Although an employee must use the employer-provided automobile over 50% in the course of the employment in order for a reduction under the standby formula in s. 6(2) to be available, the COVID-relief rule in s. 6(2.3) deemed an employee who used an automobile more than 50% of the distance driven for business purposes in 2019 to have done the same in 2020 and 2021. CRA confirmed that where a position was filled by a replacement employee in 2020, the 2019 business usage by the predecessor could not be used by the current employee to access the relief under s. 6(2.3).
Neal Armstrong. Summary of 13 January 2022 External T.I. 2021-0900691E5 under s. 6(2.3).
Income Tax Severed Letters 31 August 2022
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on pipeline transactions of an alter ego trust implemented over an extended period
CRA provided the usual pipeline rulings respecting transactions, which contemplated that:
- shares of an investments company (ACo), whose ACB had been stepped up in the hands of an alter ego trust on the death of the settlor (“Father”) are transferred by the trust to a “Newco” in consideration mostly for notes of Newco
- the Newco common and preferred shares and the Newco notes are distributed pro rata to Father’s children on a s. 107(2) rollover basis
- at least one year after step 1, Newco and ACo amalgamate (under a long-form amalgamation, given that the children until then had been minority shareholders of ACo)
- Amalco repays no more than 10% of the initial aggregate principal amount of the notes during the first year following the amalgamation and, absent extraordinary events, repays no more than that sum in each of the subsequent years.
Neal Armstrong. Summary of 2021 Ruling 2021-0906111R3 under s. 84(2).
CRA indicates that agreeing to purchase a new apartment for the purpose of headleasing it renders the purchaser a builder for GST purposes
S. (b)(ii) of the ETA definition of “builder” provides that, in the case of a corporation, that it is a builder of a residential complex where the person acquires an interest in the complex at a time when the complex is under construction or substantial renovation – but para. (h) of the definition excludes from a para. (b) builder a person whose only interest in the residential complex is a right to purchase any interest in the complex from a builder of the complex.
However, a corporation is a builder under para. (f) if inter alia it acquires the complex (before its occupancy by an individual) for the primary purpose of selling the complex (or parts thereof) or leasing the complex (or parts thereof) to persons other than to individuals who will use the complex (or parts thereof) for their personal use.
In response to a query as to the relationship between paras. (b) and (d) where a corporation acquired one or more pre-build residential complexes to be leased it to a person for personal use of individuals, CRA indicated that “a corporation that is a purchaser-landlord who acquires a right to purchase an apartment building that is under construction for the primary purpose of leasing the completed apartment building to another person under a head lease (or for the primary purpose of leasing the completed apartment units to tenants) would not be a paragraph (b) builder because of the exclusion in paragraph (h).” However, it would be a para. (d) builder if it was not acquiring its rights for the primary purpose of leasing the apartment units to tenants for their personal use, for example, if it acquired a right to purchase the apartment building (before any individual occupancy) for the primary purpose of leasing the apartment building to another person under a head lease.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.16 under ETA s. 123(1) – builder – para. (d).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations released in May of 2004. Their descriptors and links appear below.
These are additions to our set of 2,191 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 18 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA addresses further questions on the intractable CEWS dividend-payment rules
CRA confirmed that there is a full denial under s. 125.7(2.01) of the CEWS (wage subsidy) amount where a publicly traded company pays any taxable dividend in a qualifying period to an individual who is a “holder” of its common shares. CRA also indicated that para. (b) of A in the s. 125.7(14.1) formula for computing the amount of the subsidy that must be repaid requires the eligible entity to determine (in addition to determining its “executive compensation repayment amount”) the dividend amounts paid to holders of common shares who are individuals.
Given that most public companies could not enumerate who are the beneficial owners of their shares, this might suggest that “holders” are registered holders. CRA did not discuss this point (nor did Finance, who did not draft this mess) – but thanks to Ian Caines for pointing out that this point among others was discussed in Committee, where MP Sophie Chatel complained:
Who is a holder? I don't know. … This is not serious drafting. I see five problems with this particular definition. … Despite what my colleagues want to achieve, it's not rigorous and it is not the way people do drafting in this country [as to which the rejoinder was that “CRA … will have a significant amount of time to clarify any ambiguity or vagueness.”]
Which brings us to the next query in the same technical interpretation, namely, in what situations does s. 125.7(14.1) apply, given that s. 125.7(2.01) seems to apply in the same circumstances?
CRA indicated that ss. 125.7(2.01) and (14.1) both apply where a publicly traded company pays certain dividends, and that the legislation does not prevent the two subsections from incorporating the same dividends in their respective operations. It did not indicate whether this meant that there could in actual practice be a punitive double application by CRA of the two provisions.
Neal Armstrong. Summaries of 25 July 2022 External T.I. 2021-0922321E5 under s. 125.7(2.01) and s. 125.7(14.1).
CRA applies the CEWS dividend-payment rule on an unconsolidated basis
S. 125.7(2.01) of the CEWS (wage subsidy) rules provides that no CEWS amount arises in the qualifying period respecting “a qualifying entity that is a publicly traded company or a subsidiary of such a company if, in the qualifying period, it paid taxable dividends to an individual who is a holder of common shares of the company or of the subsidiary of the company.”
CRA confirmed that this denial applies only to the dividend payer, so that, for example, the payment of dividends by a public company would not affect any of its subsidiaries’ CEWS entitlements.
Neal Armstrong. Summary of 3 August 2022 External T.I. 2021-0922231E5 under s. 125.7(2.01).
Barrs – Federal Court of Appeal finds that disproportionate interest could be cancelled by CRA to compensate for the s. 220(3.1) 10-year limitation and produce horizontal equity
A group of taxpayers, who were the victims of a tax fraud, i.e., purported partnerships giving rise to large reported losses in the mid-1980s where, in fact, the partnerships were non-existent, ultimately had their Tax Court actions decided against them in 2014. They sought relief in 2014 (in the case, for example, of Mr. Barrs), or in 2004 (in the case of the other group of taxpayers), for interest cancellation under s. 220(3.1). CRA ultimately cancelled approximately 15 years and 63 months of accrued interest for the 2004 and 2014 applications, respectively. The lower relief for the 2014 application was considered by CRA to reflect the application to those applicants of the prohibition, after a 2005 amendment to s. 220(3.1), to going back more than 10 years with interest relief. However, in their request for interest relief, the 2014 applicants requested the grant of a larger quantum of relief regarding the interest that had accrued within the 10 year period than for the 2004 applicants so as “to ensure equitable treatment with the other taxpayers who made their requests earlier.”
In finding that the relief-request of Mr. Barrs (being a member of the 2014 application group) should be remitted for re-determination by another CRA officer, Gleason JA found that:
- There was no prohibition against granting this request to provide more generous relief to Mr. Barrs regarding the interest that had accrued during the 10-year period than for the 2004 application group in order to, in a sense, make up for the unavailability of interest relief for the prior period to Mr. Barrs’ group.
- Mr. Barrs’ submission that it was equitable to do so was plausible given that both groups had “all invested in the same scheme and had their claims for interest relief examined by the same review officers based on the same facts.”
- Furthermore:
Given that the independent third-level review officer failed to engage with the request for greater relief in the open years to ensure equitable treatment, his decision must be set aside. … Failure to engage with an important argument advanced by a party will generally render an administrative decision unreasonable [citing Vavilov] … .
Neal Armstrong. Summary of Barrs v. Canada, 2022 FCA 147 under s. 220(3.1).
CRA releases the official 2022 IFA Roundtable
CRA has released the final version of the May 17, 2022 IFA Roundtable. We commented in May on most of the oral responses. For your convenience, the table below provides links to the official responses and our summaries thereof.