News of Note
Uber Canada – Quebec Superior Court indicates that Uber drivers, as "taxi" operators, should have QST-registered – and ARQ officials on a search could seize computers and smart phones for complete copying
Email this ContentThe ARQ obtained a search warrant for searching an Uber Canada office in Montreal. In order to be granted the search warrant, the ARQ employee laying the information was required to have reasonable grounds to believe that Uber Canada was committing an offence. The search warrant was granted inter alia on the suspected grounds (found to be reasonable) that Uber Canada was aiding the drivers in committing the offence of wilfully evading the collection of QST. This was alleged to be occurring inter alia by virtue of its system - for collecting the customer fares (through the customers’ credit cards) - not treating those fares as being subject to QST (or GST).
Cournoyer JCS, in his capacity of judge reviewing the validity of the search warrant after it had been granted and executed, rejected an argument that many of the Uber drivers could be considered to be small suppliers who, thus, were not required to register. Under the Quebec equivalent of ETA s. 240(1.1), a small supplier who carried on a taxi business was required to register, and the Quebec Act respecting transportation services by taxi required the registration of the Uber drivers’ cars as taxis.
On the search, 74 smart phones and 14 computers, which included personal information, were seized. Cournoyer JCS quoted approvingly an American view that given “the massive storage capacity of computers, combined with the ease of hiding evidence inside them,” government officials should be permitted to “seize the entire haystack for subsequent searching off-site.” (He was not über-impressed by the remote rebooting (from San Francisco) of the Montreal office computers when the search commenced, terming this an "obstruction of justice" evidencing an intent to hide illegal conduct.)
It was unnecessary for him to address an alternative alleged offence, namely, that Uber Canada was committing tax evasion by not charging QST on the 20% commissions that it charged its drivers. The judgment (at para. 154) discloses that CRA also has assessed Uber Canada for uncollected HST on its Ontario commissions.
Neal Armstrong. Summaries of Uber Canada Inc. v. ARQ, 2016 QCCS 2158 under ETA s. 240(1.1), ITA s. 231.3(1), General Concepts – Illegality.
CRA notes that the excessive eligible dividend election must be made on a pro rata basis rather than being streamed
When an Canadian-controlled private corporation has been assessed Part III.1 tax for having designated eligible dividends in excess of its general rate income pool (GRIP), it can eliminate that tax by making valid excessive eligible dividend designations (EEDDs) to effectively convert the excess into ordinary (full rate) dividends.
The amount of the EEDD must be pro-rated among the eligible dividends paid in the year. This means, for example, that if three shareholders of a CCPC holding separate classes of shares each received a $30,000 dividend (designated to be an eligible dividend) and CRA then assessed the CCPC on the basis that the year-end GRIP was only $60,000, not $90,000, the maximum EEDD for each dividend would be $10,000 – so that it would not be possible to make the election so that one shareholder would be considered post-election to have received an ordinary dividend of $30,000, with the other two shareholders each continuing to benefit from full eligible dividends of $30,000 each.
The EEDDs for all shareholders can be combined into one letter.
Neal Armstrong. Summary of 2016-0626371E5 under s. 185.1(2)(a).
CRA indicates that income distributions from a non-resident trust are deemed to be property income
CRA indicated, in light of the wording of ss. 250.1(b) and 104(13), that s. 108(5) extends to non-resident trusts, so that income distributions from a non-resident trust are deemed to be income from property.
Neral Armstrong. Summary of 24 March 2016 Memo 2016-0634191I7 under s. 108(5).
Income Tax Severed Letters 8 June 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Andrei 95 Holdings – Tax Court of Canada finds that legal fees for litigation respecting minority shareholdings were ineligible for input tax credits notwithstanding their being a source of management fees
A private company together with its individual shareholder had a 50% interest in two operating companies from which it earned management fees. Legal fees incurred in connection with negotiations with the other 50% shareholder for either one to buy out the other, and in connection with a lawsuit brought by the other shareholder against them for breach of an agreement not to compete with the operating companies, were found not to be eligible for input tax credits notwithstanding that the two companies were a source of management fees. Paris J focused on the fact that the shares were financial instruments.
Neal Armstrong. Summary of Andrei 95 Holdings Ltd. v. The Queen, 2015 TCC 224 under ETA, s. 169(1).
Brian Ernewein indicates that there are major issues to be addressed in deciding the process for the country-by-country choice of options in the proposed multilateral instrument
Brian Ernewein noted that there will be numerous options to choose from in the proposed BEPS multilateral instrument. In order for the MLI not to degenerate into the effective equivalent of a multitude of bilateral negotiations, it may be contemplated that countries may, for example
choose their type of platform - minimum standards plus whatever things they want to do - and that is what they have to offer to everyone.
Another issue arises where the standards to be addressed in the MLI may already be addressed in existing treaties – would any change be required in that regard to those treaties? Also, a country may not want the MLI to affect its treaties with some countries, and may wish to opt out respecting those countries. Yet another complexity relates to the fact that under one of the minimum standards there is a choice between using a principal purpose test or LOB standard - whose standard prevails, or could each country agree to provide its own standard to its own treaty benefits?
Brian indicated that these and other complexities indicate that the MLI is a very ambitious undertaking.
Neal Armstrong. Brian Ernewein on BEPS under Multilateral Instrument process.
Thompson – Supreme Court of Canada indicates that lawyers cannot provide their client-related accounting records to CRA
In a companion case to Chambre des notaires, the Supreme Court held that CRA was precluded from requiring an Alberta lawyer to provide detailed accounts receivables listings for his clients (with the focus being on the fact that this would reveal their names) – even though the apparent purpose of this was only for the purpose of garnishing those receivables rather than finding out about the clients’ tax affairs. In the course of their joint judgment, Wagner and Gascon JJ stated:
[S]olicitor-client privilege is a right that belongs to, and can only be waived by, a client of a legal professional… .
In order to properly afford clients the opportunity to raise their right to solicitor-client privilege, they must… be afforded the opportunity to decide whether they wish to contest the disclosure of the information requested by the state, and if they do wish to do so, they must be permitted to make submissions in that regard on their own behalf.
Thus, for example, it would be professional misconduct for a law firm, on a GST audit, to provide client-specific particulars of their billing respecting zero-rating, government-exempt disbursements or the provincial place-of-supply rules.
Neal Armstrong. Summary of Canada (National Revenue) v. Thompson, 2016 SCC 21 under s. 232(1) – solicitor-client privilege.
Chambre des notaires – Supreme Court of Canada finds that lawyers are immune from s. 231.2 demands for information
CRA issued s. 231.2(1) demands to Quebec notaries to provide information about their clients for tax collection or audit purposes. The Supreme Court held that:
[T]he requirement scheme in the ITA infringes s. 8 of the Charter and must be declared to be unconstitutional insofar as it applies to notaries and lawyers in Quebec…[and] the exception for a lawyer’s accounting records set out in the definition of “solicitor‑client privilege” in s. 232(1) of the ITA is unconstitutional and invalid. The manner in which it limits the scope of professional secrecy is not absolutely necessary to achieve the purposes of the ITA, which means that the exception is contrary to s. 8 of the Charter.
They noted that potentially confidential information in accounting records includes not only description of services, but also the client names (and presumably any specific address that would permit the identification of a client) and the amount of the fees charged.
Thus, Canadian lawyers do not have to respond to s. 231.2 demands, at least until it (and the exclusion in the s. 232(1) definition of solicitor-client privilege for accounting records) is amended. The Court gave a sort of hint as to what might be acceptable when it noted that that it was helpful to their analysis that the ARQ and the Chambre des notaires had reached a settlement in which it was agreed that, before issuing a formal demand to a notary, the ARQ would try to obtain the information from various public records or by requesting the information from the taxpayer or another third party to the contract, that the permission of the taxpayer would be sought if the ARQ determined that only a lawyer or notary had the information, that if the ARQ determined that professional secrecy did not apply, a court order would be sought, that any formal demand would specify the information or documents covered, and that a notary who invoked professional secrecy in good faith would not be prosecuted.
Neal Armstrong. Summary of Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20 under Charter, s. 8 and 232(1) – solicitor-client privilege.
CRA ruling contemplates the operation of the s. 212.3(9)(b)(ii) PUC restoration for upper-tier QSCs on the payment by a U.S. LLP of a “dividend” to lower tier CRIC partners
A U.S. corporation will indirectly subscribe for units in a (presumably U.S.) limited liability partnership (FA1) by subscribing for preferred shares in its two immediate Canadian subsidiaries (Canco1, the general partner of a Canadian LP (“LP1”), and Canco2, the limited partner), with those funds going down through a long stack of Canadian subsidiary LPs (starting with LP1) and corporations as preferred unit and preferred share subscription proceeds, so as to land in FA1. A number of months later, FA1 will pay a distribution proportionately to its partners, who directly comprise (i) a limited partner corporation (Canco9), and (ii) a general partner which is a general partnership (“GP”) - whose partners on a s. 212.3(25) look-through basis are two other indirect Canadian corporate subs in the group (Canco7 and Canco8).
Consistently with the CRA policy on LLPs (see 2016 IFA Roundtable, Q. 1), the CRA ruling letter described FA1 as a (non-resident) subject corporation rather than as a Canadian partnership, and described the distribution as being deemed by s. 90(2) to be a dividend.
S. 212.3(3) provides for the making of an election for a dividend to be deemed to be paid by “the” qualifying substitute corporation which is party to the election. The first CRA ruling was simply that Canco1 and Canco2 (atop the Canadian stack) will each be considered to be a QSC. The letter does not specify how the s. 212.3 effect of the investments made by the three CRICs (namely, the three direct or indirect partners of FA1 – or one CRIC if the partnership interests of Canco7 and Canco8 are nominal) is effectively allocated to the one or both of the QSCs – which may imply that there was flexibility as to how that could be done. But maybe there was no practical significance to this. If all the relevant general partner interests were nominal, there effectively would be only one significant CRIC (Canco9) and only one significant QSC (Canco2).
The second CRA ruling was that the distribution will be considered to be received as a dividend in respect of a class of shares of capital stock of FA1 by Canco7, 8 and 9 for the purposes of s. 212.3(9)(b)(ii) – A(B). This is the same allocation issue in reverse – it appears to be contemplated that the “dividend” received by the three (or one) CRIC can effectively be allocated to restore the cross-border PUC in the QSCs under s. 212.3(9)(b)(ii). The wording of this ruling treats the distribution paid by FA1 to its limited partner (Canco9) and general partners (being effectively Canco7 and Canco8) as the payment of a dividend on a single class of shares to those three shareholders - so that each of Canco 9, 7 and 8 will qualify under s. 212.3(9)(b)(ii) – A(B) as having received a dividend in respect of that single class of shares.
Neal Armstrong. Summaries of 2015 Ruling 2014-0541951R3 under s. 212.3(9)(b)(ii), s. 212.3(3), s. 90(2) and s. 248(1) – corporation.
CRA rules that a US sub servicing the collection of both its own debt portfolios and that of a U.S. sister was a good mothership to the sister
A Canadian corporation has a U.S. business of purchasing and collecting defaulted or other higher risk debts which, for risk management and state licensing reasons, it carries on through multiple U.S. subsidiaries. However, at least in the case of the “FA5 Subsidiaries,” all the work is done by the (apparently numerous) employees of their sister, FA4. CRA ruled that s. 95(2)(a)(i) deemed the income of one of the FA5 Subsidiaries to be active business income (and an addition to its exempt surplus).
This likely does not represent a reversal of 2000-0044387 (see also 9622545), where a U.S. sub, which only carried on the management of the respective real estate development properties of other U.S. subs, was found not to be eligible for s. 95(2)(a)(i) treatment because its management business would have been separate from the development businesses even if it had held the properties directly. Here, FA4 also held distressed debt portfolios of its own, albeit partly through a subsidiary LP – and one of the conditions for the CRA ruling was that LP qualified as a partnership for ITA purposes. Thus, the management and debt collection activities of FA4 may have been regarded by CRA as an integrated business.
Neal Armstrong. Summary of 2015 Ruling 2015-0573141R3 under s. 95(2)(a)(i).