News of Note
Income Tax Severed Letters 30 May 2018
Email this ContentThis morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that employers’ funding of employee health services through a PHSP results in non-creditable GST/HST
ETA s. 175 provides that where an employee acquires taxable services or property “for consumption or use in relation to activities of the employer,” then the employer generally will be entitled to an input tax credit where it reimburses the employee for the related charges. Would s. 175 apply to the employer covering the cost of employee health care under a private health services plan?
Bah, humbug! Obviously, there is no relation between the employer’s business and maintaining the health of the employees of that business. CRA stated:
[S]ince a medical or dental service is acquired by an employee in relation to his or her personal health and well-being, there would not be a direct connection between the service and the activities of the employer. Therefore, while the making of a payment in satisfaction of a PHSP claim may itself relate to the activities of the employer, the employee’s acquisition of a service such as massage therapy does not.
Neal Armstrong. Summaries of 10 January 2018 Interpretation 139614 under ETA – s. 123(1) – financial service – para. (f.1), and s. 175(1).
CRA finds that full compensation to a customer who returned goods precluded access to the GST/HST consideration-adjustment rule
CRA accepts that ETA s. 232 generally applies where a supplier refunds the purchase price of goods that are returned to it by its customer, so that there is no need for the customer to charge GST/HST on the refund payment. However, CRA considered that s. 232 was not available where the supplier, in addition to refunding the purchase price for the returned goods, also covers the incremental freight costs of the customer.
This is odd. If the supplier only refunded the purchase price, and then made a further payment in settlement of a damages claim for not also covering the retailer’s incremental freight expenses, the refund could clearly be covered by s. 232, and the damages payment would be a non-taxable receipt to the customer.
Neal Armstrong. Summary of 21 December 2017 Ruling 157478 under ETA s. 232(2).
Metrogate – Tax Court of Canada finds that the degree of completion of a condo project should reflect land costs
The size of the transitional rebate that a developer was entitled to receive on an Ontario condo project turned on whether the cost to it of the land component could be taken into account in determining its degree of “completion” on the transitional date for the introduction of Ontario HST (July 1, 2010).
Favreau J accepted that the purpose of the rebate provision was to provide a mechanism for refunding a rough estimate of the “embedded” retail sales tax on that date in the project, and that it was unlikely that there would be much embedded RST in the cost of the land (albeit, the same could be said about the labour component of the costs, which was clearly eligible). However, 1096288 established (in a different context) that “land is a necessary element in any construction,” and this judicial interpretation of the concept appearing in the plain text before him was sufficient to trump the result he would have arrived at on a purposive interpretation. Thus, the developer got the enhanced transitional rebate.
Neal Armstrong. Summary of Metrogate Inc. v. The Queen, 2018 TCC 91 under New Harmonized Value-added Tax System Regulations, No. 2, s. 57(4)(c)(iv).
Talbot – Tax Court of Canada finds that a taxpayer did not “reside” in a northern region where he stayed there only during work days in a room provided by his employer
S. 110.7 allows individuals who satisfy conditions, including that they have resided for a period of at least six consecutive months in a "prescribed zone," to take a special deduction in computing their taxable income for the year for travel and accommodation expenses.
The taxpayer would work in a remote area of Quebec for a 22 work-day stint while staying in a room provided by his employer, and then vacate the room and return with his personal belongings to his home in Quebec City for 20 days off, before repeating the cycle. Fournier J found that this was insufficient to consider that the taxpayer ever “resided” in the prescribed northern zone, stating that “The most that can be said is that he intermittently stayed at the work site.”
Neal Armstrong. Summary of Talbot v. The Queen, 2018 TCC 94 under s. 110.7(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Technical Interpretation released in September 2013, as fully translated by us.
These (and the other full-text translations covering all “French” Interpretations released in the last 4 2/3 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 June.
CRA rules on using the s.132.2 merger and a renunciation of most of the units otherwise issuable on the merger in order to eliminate a REIT corporate subsidiary held through an LP
A Canadian REIT (the “Fund”) holds the units and notes of a subsidiary unit trust (“Sub-Trust”), whose principal asset is most of the partnership interests, other than exchangeable LP units, in a subsidiary LP (“Partnership”) which holds real estate and a corporate subsidiary (“Opco”).
The Fund eliminates Sub-Trust by setting up a unit trust (“MFT”), transferring its assets to MFT under s. 107.4, distributing just enough units of MFT to its unitholders for MFT to qualify as a mutual fund trust, and then instigating a s. 132.2 merger of MFT into the Fund.
The Fund also does not want Opco to pay corporate income tax. Had the Fund now held Opco directly, this would have been accomplished by incorporating a subsidiary (“MFC”), distributing relatively modest shareholdings in MFC to its unitholders sufficient to qualify MFC as a mutual fund corporation, amalgamating MFC and Opco so that Amalco MFC also qualifies as a mutual fund corporation, and then instigating the merger of Amalco MFC into the Fund under s. 132.2 – so that the former assets of Opco are now held directly by a REIT (the Fund).
A complicating factor is that Opco is held by the Partnership. Accordingly, the Partnership first transfers its Opco shares to MFC under s. 85(2) in consideration for most of the shares of MFC (so that Opco then can be vertically amalgamated with MFC). On the s.132.2 merger of Amalco MFC into the Fund, the Partnership renounces the receipt of the Fund units that otherwise would be receivable by it on the merger. CRA ruled that the Partnership will not realize any gain or loss on the disposition of its Fund units as a result of the renunciation because their proceeds of disposition should be equal to their ACB pursuant to s. 132.2(3)(g)(vi)(C)(I), and that none of the conferral-of-benefit provisions in the Act would apply.
Neal Armstrong. Summary of 2017 Ruling 2016-0660321R3 under s. 132.2(1) – qualifying exchange.
Finance has issued a comfort letter respecting a deemed repayment rule for upstream loans
The upstream loan regime in s. 90 provides for income inclusions under s. 90(6) for certain indebtedness owing to foreign affiliates, and offsetting deductions on repayment under s. 90(14), and contain back-to-back loan provisions in s. 90(7). When the s. 15 shareholder loan rules were expanded to add s. 15(2.17) dealing with back-to-back loans, together with deemed repayment rules in ss. 15(2.18) and (2.19), no similar deemed repayment rule was added to s. 90.
Finance has issued a comfort letter recommending the introduction of repayment rules similar to those in ss. 15(2.18) and (2.19) effective for repayments after April 10, 2018.
Neal Armstrong. Summary of 16 May 2018 IFA Finance Roundtable, Q.10 under s. 90(14).
Finance is considering further significant changes to the foreign demerger rules
Proposed amendments to the foreign demergers rule in s. 15(1.4)(e) disappeared when most of the balance of the 2016 technical amendments were put in Bill form and enacted. Some issues were identified with the s. 15(1.4)(e) amendments and Finance did not proceed with them - but intends to do so once it has made further changes. Whether they are left in s. 15 or reformulated to give them a somewhat different application and scope is still under discussion.
Neal Armstrong. Summary of Comment on s. 15(1.4)(e) in the 16 May 2018 IFA Finance Roundtable under s. 15(1.4)(e).
Finance notes the narrow scope of the s. 15(2.11) PLOI election
S. 15(2.11) PLOI elections can be made to elect out of s. 15(2) only by corporations resident in Canada (CRICs) where controlled by a non-resident corporation. However, similar s. 15(2) issues arise on loans made by CRICs to non-resident sistercos, where they are both controlled by non-resident individuals or a Canadian-controlled private equity fund.
Finance indicated that it has not had time to really consider the broader issues that would be engaged under these structures were this requirement for control by a non-resident corporation to be relaxed. It traced this requirement to its formulation of the foreign affiliate dumping rules.
Neal Armstrong. Summary of 16 May 2018 IFA Finance Roundtable, Q.9 under s. 15(2.11).