News of Note
CRA considers that nursing homes do not qualify for the 83% GST rebate
Email this ContentCRA considers that a public institution operating a nursing home (in this case, one focusing on Alzeimer's residents) did not qualify for the higher 83% GST rebate available to qualifying operators of "qualifying facilities" (as opposed to a 50% rate) given that the level of "active" physician involvement in the care services was significantly short of that traditionally provided in hospitals. Examples of qualifying facilities included "those that offer a high level of therapeutic care, cancer clinics, day surgery clinics and community health centres that render primary care services."
Neal Armstrong. Summary of 20 May 2011 HQ Letter 115028 under s. 259(1) - "facility supply".
HST/GST: CRA finds mortgage broker services to be exempt notwithstanding associated credit assessment and processing services - but warns that trailer fees may not be exempt
CRA has indicated that the fees earned by a mortgage broker from mortgage lenders (and, in some instances, from the borrowers) were exempt financial services for HST and GST purposes. The services of the mortgage broker included credit monitoring and administrative/processing services, which were sufficient to cause the similar services provided by a web-based loan broker described in the post below to be taxable supplies (see also 19 July 2011 HQ Letter Case 125864). However CRA noted that the mortgage broker had a high degree of responsibility and involvement in making the loans occur.
Although it was not asked to comment on trailer commissions, it went out of its way to warn that "a renewal commission payable in future years may not be [exempt]."
Neal Armstrong. Summary of 27 May 2011 HQ Letter 129882 and 14 July 2011 HQ Letter 132388 under s. 123(1) - financial service.
HST/GST: CRA confirms the potential bite of new exclusions from financial services
When various financial industry participants expressed alarm at the scope of various amendments to the definition for HST and GST purposes of financial service, which appeared to substantially narrow this category of exempt supply, the Minister of Finance issued a press release on March 26, 2010 reassuring the participants that the intent was only to "restore the situation that existed prior to [certain] court decisions" (principally Canadian Medical Protective Association).
This has not stopped CRA from relying on the new provisions to justify a narrow interpretation of what is exempt. CRA has indicated that a service of arranging for banks to provide loans to customers of a manufacturer and its dealers was not an exempt "financial service" because the service provider was providing credit management services (excluded under new para. (r.3) of the definition) and preparatory services such as customer assistance and document processing (excluded under new para. (r.4)).
Neal Armstrong. Summary of 29 July 2011 HQ Letter 82567 under s. 123(1) - financial service.
Envision - Supreme Court grants leave to appeal
The Envision decision considered whether the statutory amalgamation rules in s. 87 could be avoided by effecting a transfer, on the amalgamation, of property of one of the amalgamating corporations to a subsidiary, and on what the consequences of an amalgamation are if s. 87 does not apply.
Scott Armstrong. See: 21 June SCC Press Release; and the current summary of the Federal Court of Appeal decision in Envision Credit Union v. The Queen, 2012 DTC 5055 [at 6842], 2011 FCA 321, under s. 87, s. 13(21) - UCC - E.
Brookfield proposes spin-off of non-resident commercial real estate partnership
Brookfield Asset Management Inc. is proposing a spin-off to its shareholders of units of a non-resident partnership (BPY) that will hold its commercial real estate portfolio, so that following the distribution the public will hold 10% of BPY on a fully-diluted basis and Brookfield will continue to hold approximately 90% (including through exchangeable units of a subsidiary Bermuda LP).
The spin-off is taking the form of a taxable dividend (no vote required), rather than a paid-up capital distribution under s. 84(2) or 86.
Neal Armstrong. See summary of Preliminary prospectus of Brookfield Property Partners L.P..
Argent Energy Trust files updated IPO prospectus
Argent Energy Trust has filed an amended preliminary prospectus. Its proposed structure for carrying on a US energy business is similar to Eagle Energy, except that it will use a corporate structure (i.e., investing in a Canadian holding corporation which will hold a US Opco, as well as investing in notes of the US Opco) rather than a hybrid structure (i.e., holding units and interest-bearing notes of a Canadian sub trust that is a corporation for US tax purpose which, in turn, holds a Delaware LP that is disregarded for US tax purposes).
Scott Armstrong. See summary of IPO of Argent Energy Trust.
Molycorp acquisition of Neo Material uses exchangeable share structure
The proposed acquisition of TSX-listed Neo Material Technologies by NYSE-listed Molycorp would use an exchangeable share structure, so that taxable Canadian investors can elect to receive exchangeable shares of a BC subsidiary of Molcorp (Exchangeco). The electing NEM shareholders must provide completed s. 85 election forms to Exchangeco within 90 days of the effective date of the plan of arrangement, and full rollover treatment may not be available to them depending on the portion of the consideration which they are required to receive in cash.
Neal Armstrong. See summary of Circular for Acquisition of Neo Material Technologies by Molycorp
CRA provides Treaty exemption ruling based on internal going-concern valuation
CRA ruled that an internal reorganization, that would have entailed a disposition by UK companies of their shares of another UK company whose sole significant asset was a "Canco," would be exempt under the Canada-UK treaty based on the Canco shares deriving most of their value from its gas storage business, rather than hydrocarbon assets (which are not eligible for the treaty exclusion for property in which the company business is carried on).
Of interest is that the ruling was based on an internal management estimate of the going concern value of the gas storage business; and that the rulings process was used to establish that the shares were treaty-protected property (and treaty-exempt property if a s. 116(5.02) notice was given.)
Neal Armstrong. Summary of 2012 Ruling 2011-0429961R3 under Treaties - Article 13.
CRA faces difficulties in triggering price adjustment clauses for transactions in statute-barred years
Suppose that the redemption amount of preferred shares issued in Year 1 is subject to a price adjustment clause, and in auditing Year 16, when the taxpayer was deemed to dispose of those shares for their fair market value (e.g., under s. 70(5)), CRA concludes that the redemption amount was set too low. The Rulings Directorate has stated that if the price adjustment clause complied with IT-169, it will treat the redemption value of the shares as having been increased to fair market value, thereby increasing the gain in Year 16. On the other hand, if the clause did not so comply, the Directorate rather lamely states that "it could be argued" that the misvaluation in Year 1 constituted a misrepresentation that opened it up to reassessment (in this particular example, under s. 86(2)).
This situation illustrates a CRA dilemma. One of the requirements in IT-169 is that the valuation method used in Year 1 was "fair and reasonable." Accordingly, a CRA argument that the misvaluation of the shares was material may effectively be an argument that the fair market value of the shares disposed of in Year 16 cannot be increased - and CRA likely would find it difficult to discharge its onus (see D'Andrea, Cameron and Jencik) to establish that a valuation error made in Year 1 amounted to misrepresentation "attributable to neglect [or] carelessness."
Neal Armstrong. Summary of 4 May 2012 T.I. 2011-0429991E5 under General Concepts - Effective Date.
506913 N.B. - Solicitor-client privilege potentially can be retained in documents which are inadvertently disclosed
Legal advice from the Department of Justice to CRA was inadvertently disclosed to the taxpayer. D'Arcy J. found that the Minister had implicitly waived solicitor-client privilege in these documents - not when the documents were disclosed, but when the Minister failed to object when they were introduced into court records several years later (i.e., the Minister lost the privilege due to failure to act promptly once the inadvertent disclosure was discovered).
Similar considerations arise when a taxpayer inadvertently provides privileged documents to CRA or another third party, e.g., failing to remove such documents before providing a file to a CRA auditor. In such circumstances, a prompt request should be made to CRA to return the privileged documents and to destroy all copies.
Scott Armstrong. See summary of 506913 N.B. Ltd. v. The Queen, 2012 TCC 210 at s. 232.