News of Note
GST/HST Severed Letters 9 October 2024
Email this ContentIncome Tax Severed Letters 9 October 2024
This morning's release of four severed letters from the income Tax Rulings Directorate is now available for your viewing.
CRA comments on directed gifts to a municipality
Regarding a situation where a municipality issued a press release in which it solicited donations that were redistributed to a specific fund for individuals following an unfortunate event, CRA stated:
[D]onations can be receipted by a municipality in Canada on behalf of a program or entity which operates under the authority of the municipality (e.g., a committee established by a municipal bylaw) provided the municipality retains discretion as to how the donated funds are to be spent. If a municipality is merely collecting funds from donors that will simply be redistributed to a person or organization that is not a qualified donee and the latter is legally or otherwise entitled to the property so transferred, the municipality is not in receipt of a gift and cannot issue a donation receipt.
Neal Armstrong. Summary of 2 April 2024 External T.I. 2024-1005231E5 under s. 118.1(1) – total charitable gifts.
CRA declines to provide guidance on a Pt. IV tax circularity issue
2022-0957491R3 F, discussed in yesterday’s post, contemplated initial distributions by an estate and trust, followed by a split-up butterfly reorganization. The Rulings Directorate granted an extension for the implementation of the proposed transactions given that clearance certificates had not yet been received from CRA and the ARQ respecting the various distributions.
As ruled on, after the redemption of preferred shares issued by the two transferee corporations (TCs), and before the winding-up of the distributing corporation (DC) into the TCs, the TCs would establish their first taxation year ends, thereby avoiding circularity issues under s. 186(1)(b). Due to the implementation delay, this was no longer possible.
The Directorate noted this circularity issue, but declined to provide any guidance on it.
Neal Armstrong. Summary of 2023 Ruling 2023-0998411R3 F under s. 186(1)(b).
We have translated 6 more CRA interpretations
We have translated a ruling letter and supplemental ruling letter released last week and a further 6 CRA interpretations released in July of 2001. Their descriptors and links appear below.
These are additions to our set of 2,966 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 23 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA rules on a butterfly split-up that is integrated with a prior pipeline transaction
Following the death of the Parent, the estate of Parent, whose two beneficiaries were testamentary trusts for the two children of Parent, implemented a pipeline transaction respecting the preferred shares of an investments holding company (Holdco) that had been held by Parent. As a result of that pipeline transaction, the estate ended up holding both preferred shares and a note of the corporation (the distributing corporation or DC) resulting from the amalgamation of the Newco used in connection with the pipeline transaction and Holdco. A portion of that note was then repaid and distributed by the estate to the two testamentary trusts, from them in equal shares to the two children, and by each child to their respective new wholly-owned holding companies (TC1 and TC2). The common shares of DC, which were held in an inter vivos trust (the Trust) principally for the two children, were unaffected by the pipeline transaction.
Preliminarily to a proposed butterfly split-up of DC between TC1 and TC2, the note owing to the estate, and the DC preferred shares, would be distributed on a 50-50 basis under s. 107(2) to the two testamentary trusts, from them on a s. 107(2) rollover basis to the two respective children, and by each of them to her or his TC on a s. 85(1) rollover basis – and similarly, the DC common shares would be distributed on a s. 107(2) rollover basis by the Trust to the two children, and by them on a s. 85(1) rollover basis to their respective TCs. These transactions were to be followed by the butterfly split-up of DC between the two TCs, which would include the assumption by each TC of half of the note owing by DC, so that such pipeline note would be extinguished by operation of law (implied set-off). In order to avoid circularity issues, the preferred shares of the TCs would be redeemed before their first taxation year ends, and DC would be wound up into the TCs under s. 88(2) after those year ends.
Neal Armstrong. Summary of 2023 Ruling 2022-0957491R3 F under s. 55(1) – distribution.
RBC – Tax Court of Canada finds that foreign interchange fees earned by RBC were zero-rated – entitling it to ITCs on a portion of its interchange expenses, but not on loyalty point costs
When cardholders of RBC credit cards used their cards for purchases from a foreign merchant, RBC would earn an “interchange fee” from the foreign bank of the foreign merchant for accepting the charge. Upon such acceptance, the cardholder discharged their purchase obligation to the merchant, RBC advanced the amount charged (less its interchange fee) to the foreign bank for crediting to the merchant’s account, and RBC would then request payment of the balance from the cardholder at the end of the applicable billing cycle.
Smith J rejected the Crown position that such interchange financial services supplied by RBC to the non-resident merchant acquirer to be the recipient) were not zero-rated under Sched. VI, Pt. IX, s. 1 by virtue of the exclusion in para. 1(a) thereof for a “service [that] relates to (a) a debt that arises from … (ii) the lending of money that is primarily for use in Canada”. He noted that, in contrast to para. (g) of the financial service definition, which referred to “the making of any advance, the granting of any credit or the lending of money”, the carve-out in subpara. 1(a)(ii) referred only to the “lending of money”. He found that, on a proper legal analysis, RBC was not lending money to the foreign bank but, rather, advancing credit: there was a three-party arrangement under which the cardholder became indebted to RBC and RBC became liable to the foreign merchant (but not pursuant to a loan of money). According, RBC was entitled input tax credits (ITCs) based on the proportion of its expenses incurred in providing interchange services that it apportioned to its zero-rated interchange fees.
However, RBC unsuccessfully submitted that it offered loyalty reward points to its cardholders to entice them to use their cards and increase the volume of interchange fee revenues, so that the costs to it of honouring loyalty points when redeemed were a direct input to generating the interchange fee revenues , including the zero-rated charges, In rejecting this position, so that RBC had no ITCs for its GST/HST incurred in honouring points redemptions, Smith J stated:
[E]xpenses incurred by RBC in the redemption of loyalty reward points were inextricably linked and an integral component of the Appellant’s agreement to extend credit pursuant to the Cardholder Agreement.
It followed from this finding of the loyalty points being related to an exempt supply of credit that RBC could also not rely on the “free supply” rule in s. 141.01(4).
Neal Armstrong. Summaries of Royal Bank of Canada v. The King, 2024 TCC 125 under ETA s. 301(1.2)(a), s. 141.02(21), s. 141.02(31)(f), s. 141.02(1) – direct input, s. 123(1) – recipient, Sched. VI, Pt. IX, s. 1(a), and Statutory Interpretation - Exclusionary provisions.
BlackBerry – Tax Court of Canada finds that s. 95(2)(b)(i) is inapplicable where no net inbound services are provided, and the s. 95(3)(b) and (d) exclusions apply to integrated R&D services
BlackBerry had acquired four US companies (the “US Affiliates”) so that it could benefit from the tech expertise and services of their employees, who mostly remained in the US. The US Affiliates charged fees to BlackBerry for R&D services on a cost plus 8% basis, and BlackBerry provided service of greater value to the US Affiliates.
Bocock J indicated that s. 95(2)(b)(i) “is unclear whether only the R&D services paid for by the taxpayer are to be considered or whether all services provided between the foreign affiliate and the taxpayer should be considered.” However, a key objective of the foreign accrual property income (FAPI) regime was “to prevent erosion of the Canadian tax base”, and here there was no base erosion going on given that the cross-border services were fully reciprocal. In this light, s. 95(2)(b)(i) should be interpreted as applying “solely to situations where a net positive amount is paid from Canada to the foreign affiliate”, which was not the case here.
In the alternative, he found, in light of the broad meaning of “in connection with” and the important and ongoing role which the R&D services played in meeting the immediate demands of smartphone customers (e.g., teleco carrier testing and bug fixes), that the exclusion in s. 95(3)(d), for “services performed in connection with the … sale of goods,” applied.
The s. 95(3)(d) exclusion regarding manufacturing outside Canada applied for similar reasons, e.g., that “the product development process was indistinguishably meshed with the manufacturing process”.
In obiter, he accepted the Crown’s submission that, if the fees for the R&D services were FAPI, there was no foreign accrual tax (FAT) deduction because the CIRA (US tax credit for increasing research activities) should be wholly allocated to the US Affiliates, whose R&D activities generated the credit, rather than to the consolidated US group as a whole.
Neal Armstrong. Summaries of BlackBerry Limited v. The King, 2024 TCC 123 under s. 95(2)(b)(i). s. 95(3)(b), s. 95(3)(d) and s. 91(4).
Income Tax Severed Letters 2 October 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Mandic – Tax Court of Canada orders the implementation of a settlement agreement notwithstanding the taxpayer’s death before the final version could be signed
Mandic reached a form of agreement with the Crown regarding a reassessment of his 2015 taxation year, and the parties signed a consent to judgment stating that the reassessment would be vacated. However, on review by a Tax Court judge, that judge directed that the agreement refer instead to referring the reassessment back to the Minister for reconsideration (not vacating it). Mandic died before the parties signed an amended consent to judgment with the corrected wording. With such death and the lack of an executor for Mandic’s estate, the Crown now refused to implement the settlement.
After referring to a degree of discretion accorded to him by the General Procedure rules, MacPhee J stated (at para. 10):
[P]ursuant to subparagraph 171(1)(b)(iii) this Court should allow the appeal by referring the assessment back to the Minister for reconsideration and reassessment in accordance with the settlement agreement, with the amendment requested by the Court.
Neal Armstrong. Summaries of Mandic Estate v. The King, 2024 TCC 91 under s. 171(1)(b)(iii) and Tax Court General Procedure Rules, s. 126(4)(e).