News of Note
Income Tax Severed Letters 27 September 2023
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that distributions of trust income for a year deemed to be paid to a non-resident beneficiary 90 days after the year must still be reported on the NR4 for that year
CRA indicated that, where an estate or trust had income payable at its year end of, say, December 31, 2020, to a non-resident beneficiary, but that amount remained unpaid 90 days after that year-end, such amount would be deemed by s. 214(3)(f) to be paid at that time (March 31, 2021), so that the Part XIII withholding tax thereon would be due by April 15, 2021, and both the income and withholding tax would be required to be reported on an NR4 slip issued for the 2020 taxation year.
CRA also noted that this situation could result in late-remittance penalties being levied in error – but that “these late-remitting penalties can be cancelled once the CRA is provided additional information regarding the timing of the payments made to the non-resident.”
Neal Armstrong. Summary of 2021 Alberta CPA Roundtable under “Estates/ Trusts and Nonresident Withholding Tax” under s. 214(3)(f).
Mold Leaders – Tax Court of Canada finds that challenging engineering involving standard procedures was not SR&ED
ML was engaged in the custom designing and making of injection moldings. CRA disallowed all of ML’s SRED claims (which were for its eight most-difficult projects). In finding that the first four of the five criteria for SR&ED, as listed in National R&D, were not satisfied, Russell J stated (at paras. 6, 65):
… ML’s success or advancement as to those projects involved a routine engineering and standard practices approach, using methodology familiar to ML. [The president’s] answers did not reveal or identify technological uncertainties being addressed in a scientific manner. …
ML’s favoured approach … was to basically try various options, anticipating that one likely would work. For me that is indicative of routine engineering or standard procedures.
Neal Armstrong. Summary of Mold Leaders Inc. v. The King, 2023 TCC 127 under s. 248(1) – SRED.
Fiera – Tax Court of Canada confirms that no particular form of supplier documentation is required for ITC purposes
Two bakery plants of Fiera were staffed in significant part by temporary workers (“TWs”), who were sourced from third parties (the “Agencies”), which solicited for the TWs and directed them to Fiera and used part of the payments from Fiera on their invoices to pay the TWs in cash without taking or remitting source deductions. They pocketed rather than remitting the HST collected by them. CRA denied Fiera’s ITC claims.
Owen J found that Fiera “chose to ignore the obvious signs that the Agencies were not treating the TWs as employees and/or were not meeting the obligations of an employer” - but nonetheless concluded that Fiera was entitled to its ITC claims given his finding that Fiera in fact was the recipient of a taxable supply of the TW services from the Agencies.
The Crown also took the position that the invoices received by Fiera did not satisfy the documentary requirements of ETA s. 169(4)(a) and the related Regulations, apparently on the grounds that the invoices were issued, not by the Agencies but, rather, by unauthorized “representatives” of the Agencies who in fact were not “linked” to the Agencies. Before finding that such documentary requirements were met, Owen J indicated that:
- S. 169(4)(a) did not require information to enable a determination of the ITCs to be in any particular form.
- However, the specific information listed in s. 3 of the Regulations was required to be obtained by the ITC claimant in some form (para. 289), a requirement which was satisfied here.
- If (contrary to his view), the definition of “supporting documentation” in the Regulations had a significant role to play, para. (h) of that definition “does not impose a requirement that all forms in which information prescribed by section 3 is contained be validly issued or signed by a registrant in respect of a supply made by the registrant.”
Neal Armstrong. Summaries of Fiera Foods Company v. The King, 2023 TCC 140 under ETA s. 169(1) and Input Tax Credit Information (GST/HST) Regulations, s. 2 – supporting documentation.
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released during December and November of 2002. Their descriptors and links appear below.
These are additions to our set of 2,591 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 20 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
The AMT changes will adversely affect charitable giving and inter vivos trusts incurring interest expense
PwC provided the following examples illustrating the impact of the harsher proposed federal AMT rules (provincial tax is not factored in):
Example 1
An individual earning ordinary income of $250,000 disposes of capital property in the year at a capital gain of $1,500,000 would compute regular federal income tax of $304,778 and federal AMT of $322,271 [the AMT inclusion rate for capital gains will increase to 100%].
Example 2
An individual earning ordinary income of $450,000 donates a capital property that is not a publicly listed security, with an ACB and FMV of $100,000 and $1,000,000 will compute regular federal income tax of $49,483 and federal AMT of $129,123 [the capital gains inclusion rate for the donated security will increase, and the donation tax credit will be limited to 50%].
Example 3
An inter-vivos trust (that is neither excluded from AMT, nor qualifies for a basic exemption amount) which borrows $1,000,000 at 1% to earn interest income at 3% and distributes the resulting net income of $20,000 to the trust beneficiaries would compute regular federal income tax of nil and federal AMT of $1,025 [50% of the interest expense deduction will be denied, an inter‑vivos trust will not generally benefit from the basic AMT exemption, and the $20,000 distribution does not fully eliminate the higher income for AMT purposes]
Neal Armstrong. Summary of PwC, “Tax Insights: Proposed changes to the alternative minimum tax ─ How will it affect individuals and trusts?” Issue 2023-31, 22 September 2023 under s. 127.52(1).
Galaxia – Court of Quebec finds that a company whose shareholder was named as a VP of its only client did not have a personal services business
For the three taxation years in issue, the ARQ assessed Galaxia on the basis that it was carrying on a personal services business. Galaxia’s shareholder was engaged, through Galaxia, by Galaxia’s sole client during those years (“SM”) to canvas her extensive network of overseas contracts to obtain contracts for SM’s business of providing security-related services. Before concluding that Galaxia was not engaged in a personal services business, Riverin JCQ found:
- The shareholder was not under the control of SM, so that, for instance, she had no marketing plans to meet, and she did not inform SM of her travels.
- The only revenues of Galaxia were commissions calculated and collected as a percentage of the billings received by SM from the contracts generated by Galaxia – so that its revenues were highly variable.
- Galaxia incurred significant expenses, and thus was significantly at risk of generating losses.
- Although the shareholder was named as a vice-president of SM with an SM email address, this was done only for marketing reasons and her title was honorific.
Neal Armstrong. Summary of Consultants Galaxia Inc. v. Agence du revenu du Québec, 2023 QCCQ 5871 under s. 125(7) - personal services business.
CRA indicates that generally only the GL rather than ancillary journals or back-up are subject to the extended corporate accounting-record retention period
The various records or books of account of a corporation described in Reg. 5800(1)(a) are to be kept until two years after its dissolution, whereas other records or books of the corporation need only by kept until six years after the taxation year to which they relate.
Regarding the scope of Reg. 5800(1)(a)(iv), which refers to “the general ledger or other book of final entry containing the summaries of the year-to-year transactions of a corporation,” CRA indicated that:
- In general, the term “summary” refers only to the summary items posted to the general ledger (GL), so that more details, such as the names of the parties and the dates of the transactions, are not required.
- However, in some cases, the GL may present only a total for several transactions otherwise presented individually in another book of final entry, such as a subsidiary ledger, in which case such subsidiary ledger is also subject to the longer retention period.
- Notwithstanding some ambiguity in this regard arising under the wording of ITA s. 230(4)(a). the vouchers and accounts required to verify the information contained in the GL are only subject to the shorter (six-year) retention period.
Reg. 5800(1)(a)(v) refers to “any special contracts or agreements necessary to an understanding of the entries in the [GL]”. CRA stated:
Generally speaking, we are of the view that a special contract or agreement is one that includes particular provisions or conditions that are not generally found in a contract or agreement of a similar nature.
Neal Armstrong. Summaries of 5 July 2023 External T.I. 2022-0954271E5 F under Reg. 5800(1)(a)(iv) and Reg. 5800(1)(a)(v).
CRA does not consider a pilot’s aviation headset to be a “tool”
CRA considers that pilots are not entitled to the deduction under s. 8(1)(s) for tools for the cost to them of aviation headsets (which are worn so as to prevent hearing loss and to facilitate communications with Air Traffic Control). It considered that such headsets come within the exclusion in s. 8(6.1)(d), from what otherwise would qualify as an eligible “tool,” for an “electronic communication device” and also considered that the headsets did not come within its understanding of the ordinary meaning of "tool," namely, an item that is “designed to create a physical change in something or be used as an instrument of measurement or manipulation.”
CRA also indicated that a pilot could not claim the deduction under s. 8(1)(g) (“transport employee’s expenses”) for the individual’s meal expenses incurred while away from the municipality of the employer establishment where the pilot reported for work (the “home city”), because the individual would fly back to the home city on the same day, and CRA considered that s. 8(1)(g) required that the “employee must generally be away from home overnight in the performance of their employment duties.” However, such meal expenses could be deducted pursuant to s. 8(1)(h) assuming inter alia that, as required by s. 8(4), the pilot was away from the home city on each trip for at least 12 consecutive hours.
Neal Armstrong. Summaries of 26 May 2023 External T.I. 2023-0962521E5 under s. 8(1)(s), s. 8(1)(g) and s. 8(1)(h).
Standard withholding tax gross-ups do not engage the mandatory tax disclosure rules
It is suggested that the mere presence of contractual protection (CP) is not sufficient to engage the CP hallmark and that a “discernible link must exist between the CP and the avoidance transaction in question.” This is consistent with CRA’s example of an RRSP trustee receiving an indemnity regarding the RRSP acquiring non-qualified investments, as such indemnity “relates to transactions (for example, the making of non-qualified investments) that do not form part of the tax motivation that gives rise to the avoidance transaction” (establishing the RRSP).
To apply a similar approach in the context, for example, of a cross-border loan transaction with a gross-up clause, where the loan itself was not an avoidance transaction but was part of a series of transactions that included an avoidance transaction (e.g., a rollover transaction), an entirely appropriate conclusion would be that the usual indemnity and gross-up are not CP “in respect of” that avoidance transaction.
Furthermore, given that CP is defined in relation to a “tax benefit,” which, in turn, refers to a reduction, avoidance, or deferral of amounts payable under the ITA, because interest to an arm’s-length foreign lender generally is not taxable under the ITA, there is no identifiable “reduction, avoidance or deferral” that would make the existence of a tax benefit clear. A tax benefit may also be identified by referring to an alternative transaction that might reasonably have been carried out but for the existence of the tax benefit (Copthorne) - yet, in normal cross-border lending situations, no such reasonable alternative is likely to exist.
Accordingly, the absence of a tax benefit is a further potential basis for a standard gross-up and indemnity in an arm’s-length lending transaction not engaging the CP hallmark.
Neal Armstrong. Summary of Andrew Spiro and Jessica Charendoff, “Mandatory Disclosure Is Here: Now What?” Perspectives on Tax Law & Policy, Vol. 4, No. 3, September 2023, p. 1 under s. 237.3(1) – contractual protection.