News of Note
CRA finds that Canadian royalties received exempt of U.K. tax by a non-domiciled U.K. resident were ineligible for Treaty-reduced rate
Email this ContentA former Canadian author, who now was resident but not domiciled in the UK, was not subject to UK tax on royalties he received from a Canadian publisher because the royalties were not remitted to the UK. Art. 27(2) of the Canada-UK Convention effectively provides that where under the Convention “any income is relieved from tax in” Canada and that income is subject to tax in the UK only on a remittance basis, then “relief to be allowed under this Convention in [Canada] shall apply only to so much of the income as is taxed in” the UK.
CRA interpreted these words as indicating that the royalties that he thus received free of UK income tax were subject to Canadian withholding tax at 25% rather than the Treaty-reduced rate of 10%. CRA was not asked what would happen if that income was then taxed in the UK as a result of its subsequent remittance to the UK.
Neal Armstrong. Summary of 1 June 2018 External T.I. 2017-0723051E5 under Treaties – Income Tax Conventions – Art. 29.
Income Tax Severed Letters 1 August 2018
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Medallion – Tax Court of Canada finds that a property management agreement with a rental property’s sole owner qualified as a joint venture for GST/HST purposes
A corporation (MC) acted as a property manager for the rental properties of 10 corporations (the “Owners”) with which it did not deal at arm’s length in consideration for a percentage of the rents (which apparently included exempt residential rents) and other gross revenues that it collected. In addition to some of the more usual features of a property management agreement (which in this case were labelled “Joint Venture Agreements”), most significant decisions respecting their “joint venture” was required to be approved unanimously by a management committee consisting of a representative of each of MC and the Owner. MC took the view that its share of the gross revenues was not consideration for a taxable supply made by it to the Owners (so that effectively GST, on a mangement fee, that would not have been eligible for an input tax credit was being avoided). The Crown took the view that there was no joint venture on the four grounds (taken from its Westcan listing of JV criteria) noted below (with Russell J’s finding noted after each):
MC did not have a joint property interest in the subject matter of the venture:
- Its right to a share of the revenues was a property interest in the venture.
MC had no right of mutual control or management of the enterprise:
- This was present in the joint management committee. Sales (as contrasted to leasing) were outside of the purview of the JV so that it did not matter that MC had no say on sales.
MC had no expectation of profit (or of “adventure”):
- It was entitled to a percentage of the rents and other gross income.
MC had no right to participate in the profits:
- Again, it was entitled to a percentage of the gross operating revenues, and the fact that it would not share in any gain on sale did not matter as “any sale of a Property simply was beyond the scope of the JVs as asserted in this case.”
Accordingly, the property management relationship qualified as a JV, and there was no requirement on MC to collect GST/HST on its share of the revenues.
Neal Armstrong. Summary of Medallion Corporation v. The Queen, 2018 TCC 157 under ETA s. 273(1).
St-Pierre – Federal Court of Appeal effectively treats a retroactive judgment of a Superior Court as only having prospective effect for ITA purposes
A private corporation that sold eligible capital property in 2008 declared a capital dividend in the year in an amount which included the untaxed portion of this sale receipt. This was a mistake, as the addition to the capital dividend account for this amount does not occur until the beginning of the following year. When CRA discovered this mistake a number of years later, it indicated that it would not assess the corporation for Part III tax provided that the mistake was rectified through an order of the Quebec Superior Court.
Only a small portion of the dividend made payable in 2008 was actually paid in 2008, so that the CDA addition from the sale was not needed to cover that dividend payment. Accordingly, all that was necessary to fix the problem was to get the court order to declare the payable date for most of the dividend to be on or after January 1, 2009.
What the corporation instead sought and obtained was a court order dated January 6, 2014 that retroactively annulled the dividend and ordered the individual shareholder to repay the dividend, which he then did in 2015 and with a fresh capital dividend then being declared and paid. When CRA found out that annulment rather than rectification had been requested, and while this annulment order was still being awaited (and the period for making a s. 15(2) assessment was about to run out), it assessed the individual under s. 15(2) on the basis that, as the dividends would be annulled, the payments to the individual instead represented advances (i.e., amounts which he was required to repay, as retaining them would have given rise to unjust enrichment).
Boivin JA found that the s. 15(2) assessment was without foundation, essentially on the basis of his not treating the judgement of the Superior Court as having retroactive effect for ITA purposes. He stated:
[I]f restitution was not possible before the date of the declaratory judgment of the Superior Court, it necessarily follows that there was no debt (in this context, an unjustified enrichment), before that date. The appellant could not at the same time be indebted to the Corporation and be legally incapable of repaying that debt to it.
Thus, the CRA assessment could not take an annulling judgment, which had not yet been given, into account. Furthermore, the “enrichment” of the individual taxpayer resulting from the Superior Court judgment was merely “theoretical” given his obligation to make restitution to the corporation, which he did.
Neal Armstrong Summary of St-Pierre v. Canada, 2018 CAF 144 under s. 15(2).
Over 600 translations of CRA French-language interpretations are available
The table below provides descriptors and links for six Interpretation released in May and June 2013, as fully translated by us.
These (and the other full-text translations covering all of the 609 French-language Interpretations released in the last 5 1/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. Next week is the "open" week for August.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-06-12 | 20 March 2013 External T.I. 2012-0442571E5 F - Coût d'acquisition d'un terrain | Income Tax Regulations - Schedules - Schedule II - Class 8 | cost of water and sewer lines connecting mobile home units, included in Class 8 |
| Income Tax Act - Section 54 - Adjusted Cost Base | cost of land acquired from developer equal to total barter value minus amounts allocated to Classes 8 and 17 | ||
| 9 January 2013 External T.I. 2010-0384221E5 F - Paiements indirects | Income Tax Act - Section 56 - Subsection 56(2) | cost of land acquired from developer equal to total barter value minus amounts allocated to Classes 8 and 17 | |
| 14 February 2013 Internal T.I. 2011-0424341I7 F - Amounts forwarded to trustee/beneficiary | Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2) not applicable to dividends on common shares issued to discretionary family trust on estate freeze | |
| Income Tax Act - Section 56 - Subsection 56(2) | s. 56(2) did not apply to trustee/beneficiary of discretionary trust who directed income to her children and did not exercise discretion in her own favour | ||
| Income Tax Act - 101-110 - Section 104 - Subsection 104(13) | income was received by children beneficiaries as agent for their mother | ||
| Income Tax Act - 101-110 - Section 104 - Subsection 104(6) - Paragraph 104(6)(b) | Quebec discretionary trust with two named trustees but, in fact, only one trustee, would not be entitled to s. 104(6)(b) deductions | ||
| 2013-06-05 | 12 February 2013 Internal T.I. 2012-0437211I7 F - NRT rules and subsection 164(6) | Income Tax Act - Section 164 - Subsection 164(6) | s. 94 deemed resident trust could carry back under s. 164(6) re capital loss on non-TCP shares |
| Income Tax Act - Section 54 - Personal-Use Property | personal residence of deceased potentially would not be personal-use property to estate | ||
| Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(a) | estate of resident deceased with one resident beneficiary was subject to s. 94(3) | ||
| 2013-05-29 | 17 April 2013 External T.I. 2012-0457011E5 F - Coop Shares in RRSP and Prohibited Invest. Rules | Income Tax Act - Section 207.01 - Subsection 207.01(1) - Excluded Property - Paragraph (c) | shares can become prohibited investments as a result of other shareholders dispose of their shares |
| Income Tax Act - Section 207.04 - Subsection 207.04(4) | dispositions that generate the refund are not limited to redemptions of the shares | ||
| Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (c) | advantage tax on net capital gains and income of RRSP from cooperative shares | ||
| 2013-05-15 | 5 April 2013 External T.I. 2012-0471151E5 F - Binding Agreement | Income Tax Act - Section 9 - Computation of Profit | side letter would not reduce owner’s entitlement to rents from property if not entered into at same time as property acquisition |
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense | counter letter payments non-deductible because Quebec counter letter entered into after apparent letter |
THD – Tax Court of Canada finds that damages received for the “modification” of a supply contract were deemed to be GST-inclusive irrespective of an ITC to the purchaser
A trucking company (THD) had a contract with McKesson Canada for the delivery of pharmaceutical products to various locations. After McKesson eliminated various of the routes and forced a renegotiation of the rates, THD brought an action, which then was settled for a lump sum.
Favreau J found that the lump sum was deemed by ETA s. 182 to include GST (on the basis that THD had received the sum as a consequence of the “modification” of its contract with McKesson), so that it had to itself bear this GST. In response to an argument that this result could unjustly enrich McKesson, Favreau J stated that the s. 182 rule “applied irrespective whether McKesson had claimed an input tax credit respecting the damages paid.”
On a separate issue, he indicated that an input tax credit could not be claimed for GST that had been invoiced to THD, because at the time of claiming its ITC, the invoice did not satisfy the documentary requirements in the applicable Regulation (although, as it turned out, there also was the more fundamental issue that Revenu Québec had retroactively annulled the GST registration number of the supplier in question).
Neal Armstrong. Summaries of THD Inc. v. The Queen, 2018 CCI 147 under ETA s. 182 and Input Tax Credit Information (GST/HST) Regulations, s. 3(b)(i).
2078970 Ontario – Tax Court of Canada finds that CRA cannot issue a s. 152(1.4) notice of determination denying partnership losses on the basis that the partnership did not exist
CRA determined that two limited partnerships did not exist because their partners were not carrying on business in common with a view to profit, and issued notices of determination to the partnerships under s. 152(1.4) determining that losses reported by the purported partnerships were, for this reason, nil. On a Rule 58 determination, Graham J accepted the partners’ submission that once CRA has determined that a partnership does not exist, any purported notice of determination that it thereafter issued to the partnership was invalid.
S. 152(1.8) provides that when, after a s. 152(1.4) notice of determination has been made, the Minister (or the Tax Court or above) concludes that the partnership in question did not exist, the Minister has a further year without limitation by the normal reassessment period to reassess the purported partners directly. Graham J indicated obiter that s. 152(1.8) could not be utilized if the notice of determination was invalid because the Minister had already concluded before issuing it that the partnership did not exist.
Neal Armstrong. Summaries of 2078970 Ontario Inc. v. The Queen, 2018 TCC 141 under s. 152(1.4) and s. 152(1.8).
Armour Group – Federal Court of Appeal finds that a lump sum paid on the acquisition of a property subject to a ground lease to the purchaser group coupled with the ground lease surrender did not generate a lease termination deduction
An investment company (“Armour”), which was the lessee under a long-term ground lease from the Province of Nova Scotia, had constructed a building on the property and leased the building back to the Province. The Province then breached terms of the building lease and, in the subsequent settlement agreement, the parties agreed that, in addition to making a cash payment, the Province owed $2.4 million to Armour and that Armour, in consideration for $2.4 million to be paid by way of set-off, would be granted an irrevocable option to acquire the Province’s freehold interest (with the ground lease being terminated). Without the encumbrance of the ground lease, the property had a fair market value of $14 million. Accordingly, it likely would have been clear that on exercise of the option by Armour, it would have acquired a capital property with a cost of $2.4 million.
However, Armour calculated that the present value of the remaining ground lease rentals was $2.24 million. This meant that if it were able to have $2.24 million of the $2.4 million to be paid by it characterized as a fully-deductible lease termination payment, this could reduce the capital expenditure to only $0.16 million. What it did was to assign the option to an affiliate (“ADL”) along with the right to $0.16 million of the $2.4 million owing by the Province, with ADL agreeing as a condition of the assignment that it would provide a long-term ground lease of the property to Armour for nominal rents. Armour then took the view that the $2.4 million liability of the Province which was extinguished at closing on the exercise of the option should be viewed as the payment by it of a $2.24 million deductible lease termination payment, and the payment by ADL of a $0.16 million option exercise price, to the Province.
Webb JA found that these transactions did not generate the targeted $2.24 million deduction. It was difficult to see how these largely internal transactions had the effect of transforming the $2.4 million paid (by way of set-off) to the Province into a lease termination payment rather than payment of the exercise price for the option.
Neal Armstrong. Summary of Armour Group Limited v. Canada, 2018 FCA 134 under s. 18(1)(b) – capital expenditure v. expense – contract cancellation.
CRA indicates that an open-end non-listed mutual fund trust could suspend redemption rights for up to one year without ceasing to qualify as a unit trust
In order to qualify as a unit trust under s. 108(2)(a)(i), the unit conditions must include a condition “requiring the trust to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units.” CRA has provided a ruling on the satisfaction of this condition in the case of a unit trust whose principal asset will be an illiquid investment in the LP units of a subsidiary partnership and that intends to qualify as a mutual fund trust by distributing its units to more than 150 unitholders but will not list its units. In the event that cash redemptions (which can occur on a monthly basis) exceed $X in a month, the trust will transfer LP units to a wholly-owned unit trust (with heretofore nominal capitalization) in exchange for interest-bearing notes, and distribute those notes to the redeemed unitholder in satisfaction of the balance of the redemption price (which is the amount determined by the trustee, who also is the trust’s manager, to be the redeemed units’ fair market value).
The ruling letter states that the trustee may suspend or postpone the right to redeem trust units provided that such suspension or postponement complies with securities legislation. After providing a ruling that the terms of the redemption feature will satisfy the requirements of s. 108(2)(a)(i) for purposes of determining whether the Trust qualifies as a unit trust, CRA went on to indicate, in the form of an opinion (presumably because this was not a planned transaction) that should a postponement or suspension of the right to redeem units occur and that postponement or suspension exceeded a period of more than one year, the trust would cease to meet the requirement of s. 108(2)(a)(i).
Neal Armstrong. Summaries of 2018 Ruling 2017-0723421R3 under s. 108(2)(a) and s. 253.1.
CRA confirms the use of average monthly exchange rates in a GST/HST context
ETA s. 159 (which is quite truncated as compared to ITA s. 261) provides that the consideration for a supply expressed in a foreign currency shall be converted using the exchange rate on the day the tax became payable “or such other day as is acceptable to the Minister.” CRA has replaced P-222 by significantly more detailed commentary in Memorandum 3-6 on various FX issues.
In picking an FX rate, the registrant may use:
- the day the consideration for the supply is paid
- the day the foreign currency is acquired (as to which CRA provides a simplistic example of the day on which a money order for US$1,000 is acquired, with Canadian funds, to pay a USD invoice in that exact amount)
- an average rate of exchange for the month in which the tax becomes payable (as to which CRA provides an example in which only two USD invoices were rendered in a month, showing that this method can be used even if it would be practicable to be more precise)
CRA provides a somewhat broad list of the acceptable sources for determining the exchange rate to use:
- the source used for an actual conversion (that is, the source where the foreign currency was exchanged for Canadian dollars)
- the source the person typically uses for actual conversions (for example, if a US company regular exchanges currency with a local US bank, it can use that bank as its source of FX rates)
- a Canadian chartered bank
- the Bank of Canada
- the CBSA rate used for purposes of converting the value for duty of imported goods
An example of an unacceptable source is a commercial database service. (Bloomberg is relied on by the banks and investment dealers, but CRA presumably would not want to pay the Bloomberg fees.)
Neal Armstrong. Summary of GST/HST Memorandum 3-6 Conversion of Foreign Currency July 2018 under ETA s. 159.