News of Note
RBC – UK Supreme Court finds that an oil and gas royalty was too remote from a land interest in the oil field to be immovable property under the Canada-U.K. Treaty
Email this ContentA Canadian corporation (“Sulpetro”), which had rights to direct the exploitation of, and to receive the proceeds from, a licence its U.K. subsidiary (“Sulpeto UK”) held in an offshore U.K. oil and gas field, sold its rights (and shares of the subsidiary) to a U.K. purchaser (BP) for consideration that included a royalty that became payable, based on production from the field, when the market price of oil exceeded US$20 per barrel. The taxpayer (RBC) received an assignment of this royalty following default by Sulpetro on a loan from RBC.
The principal issue was whether HMRC was permitted by Art. 6 of the Canada-U.K. Treaty to impose tax on the royalty payments received by RBC and, in particular, whether they fell within the portion of the definition of “immovable property” in Art. 6(2) (the “fifth limb”) that referred to "rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources".
Lady Rose first stated her agreement with the conclusion of the Court of Appeal (per Falk LJ) that the right to work the field was held by Sulpeto UK and not by Sulpeto, stating in this regard:
There is a legal difference between someone having a right to work natural resources and someone having a right to require another person to work those natural resources. Sulpetro has the latter but not the former. …
Lady Rose went on to find that even If the rights of the royalty payer (now, BP) had amounted to a right to work the field, nonetheless RBC's right to royalty payments from BP did not amount to a right to "consideration for" such right to work. In particular:
- It was inherent in the reference in the fifth limb to payments being "consideration for" the right to work that the royalty recipient (RBC) be a person who could confer on the royalty payer the right to work the oil field, whereas RBC never had such right because it never had an interest in the land in which the natural resources were found.
- Furthermore, it was only payments made in return for the first grant of the rights by the landowner that fall within the definition of "consideration for" the right to work, so that payments made for the assignment or transfer of rights conferred on someone by the owner of the rights were not "consideration for" the right to work.
Accordingly, HMRC did not have the right to tax the royalty payments.
Neal Armstrong. Summaries of Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs [2025] UKSC 2 under Treaties – Income Tax Conventions – Art. 6, Art. 12, General Concepts – Separate Existence, and ETA s. 217 – imported taxable supply - (c).
Income Tax Severed Letters 12 February 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Access to the Canadian entrepreneurs’ incentive (CEI) can be enhanced through use of the capital gains reserve
The Canadian entrepreneurs’ incentive (CEI) in draft s.110.63 reduces to 1/3 the inclusion rate for capital gains realized on the disposition of, for example, qualified small business corporation shares, where specified conditions are satisfied. It is apparently still contemplated that it will apply to up to $400,000 of capital gains in 2025, which will increase by $400,000 each year until a lifetime maximum of $2 million is reached in 2029.
Access to the CEI can be enhanced through use of the capital gains reserve.
For example, in 2025 an entrepreneur sells shares, qualifying for the CEI and having an ACB of $100, for $2,000,100. $400,020 is payable immediately, and the balance of $1,600,080 is to be paid equally as to $400,020 in each of the next four years. The entrepreneur will be able to claim a reserve each year, allowing the inclusion of a capital gain of $400,000 per year until 2029, thereby benefiting from the increase in the limit and enabling CEI claims for the years 2026 to 2029.
Neal Armstrong. Summary of Julien Théberge, “Benefiting from the Annual Increase in the CEI Limit by Using a Capital Gain Reserve,” Canadian Tax Focus, Vol. 15, No, 1, February 2025, p. 2 under s. 110.63(2).
S. 132(5.3) may not apply to unit redemptions occurring by virtue of the winding–up of a mutual fund trust
S. 132(5.3) generally prohibits pushing out a capital gain realized by a mutual fund trust on a redemption of its units by a unitholder to the extent that such gain exceeds the accrued gain of the unitholder on the redeemed units.
It is suggested that, given that s. 132(5.3) refers to a “redemption by [a] beneficiary” rather than to a redemption “by the trust,” it would not appear to apply to the type of redemption occurring on a winding-up of an MFT.
Neal Armstrong. Summaries of Etienne C. Laplante, “Two Methods of Winding Up Mutual Fund Trusts,” Canadian Tax Focus, Vol. 15, No, 1, February 2025, p. 6 under s. 132(4) – CGR, and s. 132(5.3).
CRA declines to follow Davis Dentistry, and treats all of a dentist’s supply in providing an artificial tooth as exempt rather than zero-rated
Regarding the supply by a dentist’s professional corporation of an artificial tooth (e.g., a denture, crown or bridge) to a patient, CRA applied the 2022 Tax Court (Informal Procedure) decision in Axelrod to find that “the predominant element of a supply made by a dentist to their patient, through a dental corporation, is their professional dental services and not the artificial tooth per se” so “that when a dentist provides artificial teeth in the course of rendering a dental treatment to an individual, the dentist is making a single supply of a dental treatment, which is a health care service.” Accordingly, no portion of such supply was zero-rated under ETA s. VI-II-11, which applies to “a supply of artificial teeth.”
CRA did not discuss the 2023 FCA decision in Kevin Davis Dentistry (which found, regarding the similar zero-rating under s. VI-II-11.1, for “a supply of an orthodontic appliance,” that “a supply of an orthodontic appliance is intended to be zero-rated even when accompanied by orthodontic services.”)
Neal Armstrong. Summary of 21 August 2024 GST/HST Ruling 174773 under ETA s. VI-II-11.
CRA finds that delivery services supplied to a platform, which had contractual responsibility for the delivery to the purchasing consumer, were zero-rated
A platform contracted with delivery drivers to deliver goods to the consumers who had purchased goods on the platform.
CRA found that the delivery services supplied by the drivers to the platform were zero-rated under ETA s. VI-VII-11, which applies to a freight transportation service made by a carrier of the property to a second carrier of the property and zero-rates the second carrier’s fee. In particular, CRA indicated that “[f]or a person to be considered a 'carrier', the person need only assume liability as a supplier of a freight transportation service,” so that the platform was the first carrier even though it did not do any of the transporting.
Neal Armstrong. Summary of 20 June 2024 GST/HST Ruling 247341 under ETA s. VI-VII-11.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in February of 2001. Their descriptors and links appear below.
These are additions to our set of 3,103 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 24 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA finds that licence fees received from a registrant for worldwide rights to use copyright were fully subject to GST/HST
A registered resident individual who carried on a business of producing videos entered into an agreement with a Canadian “Web Publisher” under which the individual granted the Web Publisher the worldwide right to distribute and reproduce the videos in consideration for a percentage of the revenues generated. The Web Publisher posted the videos on a platform and was paid a percentage of the resulting advertising revenues.
In finding that all the consideration paid by Web Publisher to the individual was subject to GST/HST pursuant to ETA s. 142(1)(c), which deems a supply of intangible personal property to be made in Canada if it may be used in whole or in part in Canada, CRA stated:
[T]he rights are granted on a worldwide basis, without any restrictions on where they may be used, from which we conclude that they may be used in Canada.
Thus, by licensing to Web Publisher, the individual’s supply was subjected to GST/HST, whereas if the individual had dealt directly with the platform and it was a non-resident which was not registered under the regular registration provisions, the individual’s supplies would have been zero-rated.
Neal Armstrong. Summary of 26 June 2024 GST/HST Ruling 179543 under s. 142(1)(g).
Pyxis Real Estate – Ontario Court of Appeal finds that capital dividends were agreed to be paid in amounts that overlooked a CDA deficit: no rectification
A plan was implemented for successive capital dividends to be paid up a chain of corporations so that the individual who was the ultimate shareholder could have a tax-free receipt of $1.4 million. However, to accomplish this objective, the successive payments should have started with the payment of a $1.7 million capital dividend by the “bottom” corporation, given that an intermediate corporation in the chain had a CDA deficit of $0.3 million (which the accountants had overlooked).
In allowing the Attorney General’s appeal from the granting of an order rectifying the corporate documents so as to direct a capital dividend of $1.7 million, Nordheimer JA stated):
[T]he [Fairmont] test requires that the executed documents fail to accurately record the parties’ agreement. The agreement here was for a $1.4 million tax-free capital dividend to be paid. … The fact that the agreement did not result in the intended fiscal objective of being tax-free, or tax neutral, is not a basis for granting rectification.
Neal Armstrong. Summary of Pyxis Real Estate Equities Inc. v. Canada (Attorney General), 2025 ONCA 65 under General Concepts – Rectification.
CRA finds that s. 152(4)(b)(vii) does not apply to extend the period for adjusting the income computation of a trust that filed as a s. 94 trust
A s. 94(3) trust reported a capital gain from the disposition of the shares of a foreign affiliate in its 2020 T3 return. In finding that s. 152(4)(b)(vii) did not authorize CRA to reassess the trust within three years of the expiry of the normal reassessment period to adjust the proceeds of disposition, the Directorate indicated:
- The relevant scoping condition in s. 152(4)(b)(vii) – that the assessment was “to give effect to the application of section 94” - meant “to cause section 94 to apply.”
- In this regard, s. 94 does not provide rules for computing the trust’s income which instead, in the case of capital gains, are set out in subdivision C of Part I.
- Accordingly, “a reassessment to adjust the proceeds of disposition of the foreign affiliate’s shares held by the Trust would not give effect to the application of section 94” so that s. 152(4)(b)(vii) could not apply to extend the normal reassessment period.
However, CRA stated:
Clause 152(4)(b)(iii)(B) may, however, have application depending on the circumstances.
S. 152(4)(b)(iii)(B) allows for the extended reassessment period where the assessment
is made
(A) as a consequence of a “transaction” (as defined in subsection 247(1)) involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm’s length, or
(B) in respect of any income, loss or other amount in relation to a foreign affiliate of the taxpayer
The above CRA statement regarding s. 152(4)(b)(iii)(B) seems to imply CRA uncertainty as to whether a capital gain from an FA sale would be an “other amount in relation to” the FA. It also is noteworthy that there was no mention of s. 152(4)(b)(iii)(A), i.e., a sale of an FA may not be a transaction “involving” a person (the FA) with whom the taxpayer is relevantly not dealing at arm’s length.
Neal Armstrong. Summary of 28 October 2024 Internal T.I. 2024-1029911I7 under s. 152(4)(b)(vii).