News of Note
Bonnybrook – Federal Court of Appeal finds no reviewable error in CRA’s decision that failure to file returns for 13 years was not justified by major health problems
Email this ContentFor its 2003 to 2015 taxation years, Bonnybrook did not file corporate tax returns and, consequently, was not entitled to receive dividend refunds. The Minister’s denial of Bonnybrook’s initial application in May 2016 for relief (based on the serious health issues for many years of its sole director) was found at 2018 FCA 136 to be based on the incorrect view that s. 220(3) does not accord the Minister the discretion to extend the limitation in s. 129(1) in order to obtain the dividend refunds. The FCA directed the Minister to reconsider. The Minister then requested and received details of the director’s health problems. In her reconsideration decision, the Minister acknowledged that the health issues were serious but concluded that taxpayer relief was not warranted because the director was capable of arranging for assistance in filing the returns and should have done so.
In finding that there were no reasonable grounds for interfering with this decision, Woods JA applied the Vavilov principle that in order for the Minister’s decision to be reasonable “the outcome should be considered in light of the underlying rationale to ensure that the decision as a whole is transparent, intelligible and justified” - and concluded that the decision satisfied those requirements. She also stated:
The fact that the Minister did not discuss the harshness of the tax result does not mean that it was not considered and does not render the decision unreasonable.
Neal Armstrong. Summary of Bonnybrook Park Industrial Development Co. Ltd. v. Canada (National Revenue), 2023 FCA 145 under s. 220(3).
It may be desirable to deliberately taint a non-resident estate (through a small bequest to a distant Canadian relative) as a s. 94(3) trust so as to access s. 164(6)
CRA has considered (e.g., in 2010-0384531E5) that a non-resident estate of a deceased resident may only use s. 164(6) to reduce or offset the deceased’s gain under s. 70(5), by carrying back a capital loss realized by it on shares, where such shares are taxable Canadian property (TCP).
This issue might be addressed by drafting the will such that the non-resident estate will have a “resident contributor,” so that the estate will be deemed by s. 94(3) to be resident, thereby permitting (per 2012-0437211I7) the estate to elect under s. 164(6) even if the shares are not TCP.
Given that the deceased likely would qualify as a “resident contributor” and that the definition of “beneficiary” in s. 94(1) includes those who are “beneficially interested” in the estate (as expansively defined in s. 248(25)), a minor or contingent bequest to a distant resident beneficiary should result in there being a “resident beneficiary” so as to engage deemed residency for the estate.
Neal Armstrong. Summary of H. Michael Dolson, Balaji (Bal) Katlai, and Leanne Rodrigo, “Will Planning, Subsection 164(6), and Non-Resident Trusts,” International Tax Highlights, Vol. 2, No. 3, August 2023, p. 15 under s. 164(6).
Income Tax Severed Letters 16 August 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Rules referencing OECD guidelines may expand somewhat the OECD influence on ITA interpretive questions
Current or draft ITA rules referencing OECD guidelines now include:
- s. 270(2), which specifies that the provisions in Pt. XIX are to be interpreted consistently with the common reporting standard rules published by the OECD, unless the context otherwise requires
- similar provisions in the anti-hybrid mismatch rules, the draft reporting rules on digital platform operators and the Pillar 2 implementation legislation.
Although this by itself would not have much impact (Canada’s tax treaties are interpreted in light of the OECD commentaries where relevant, without a specific provision to that effect), what is more significant is that these rules refer to the relevant OECD recommendations “as amended from time to time” – which raises the possibility of an interpretive expansions of the rules in the Act through OECD later-in-time materials.
Somewhat conversely, s. 247(2.03) of the draft transfer-pricing rules refer to them being “applied” (not “interpreted”) so as to achieve consistency with the 2022 OECD transfer pricing rules. This seems to direct “the CRA to use a particular vintage of the OECD transfer-pricing guidelines in the application of Canada’s transfer-pricing rules.”
Given the exception in s. 247(2.03) for where “the context otherwise requires,” Canadian courts may not confirm such application where, for instance, they consider that it departs from the arm’s-length principle.
Neal Armstrong. Summary of Michael Kandev, “Interpretation or Delegation: The Increasing Prevalence of Formal References to OECD Materials,” International Tax Highlights, Vol. 2, No. 3, August 2023, p. 9 under ITA s. 247(2.03).
Azzopardi – Tax Court of Canada finds that a limited partner was bound by the settlement made by the partnership’s designated member
After the Minister made an initial determination that the losses of a film partnership for its 2001 fiscal period were $134.9 million rather than the claimed amount of $255.8 million, the partner who was the designated member filed a notice of objection on behalf of the partnership, resulting in the Minister redetermining the loss to be $194.9 million. The taxpayer, who had an interest in the partnership of under 0.115%, took the position that he was entitled to have a say in how the partnership loss was redetermined.
Spiro J rejected the various arguments advanced by the taxpayer, who had an interest in the partnership of under 0.115%, that he should not be bound by the redetermination, including that:
- the Minister should not have accepted the designated member as the taxpayer’s representative (Spiro J found that the designated member was designated as such in the partnership information return or otherwise authorized by the partnership to so act and that it was unnecessary for the taxpayer to have separately authorized that partner to so act under the “streamlined process” contemplated by s. 165(1.15)); and
- the Minister should not have taken 10 years to reassess the taxpayer (Spiro J found that s. 152(1.7)(b) allows the Minister one year to reassess from the time that a redetermination becomes final and binding, and the Minister was well within the one year period).
Neal Armstrong. Summary of Azzopardi v. The King, 2023 TCC 51 under s. 165(1.15).
CRA finds that a non-resident supplied software licences directly to Canadian users rather than to non-resident sales representatives
ACo, a non-resident that was registered under the regular GST/HST registration provisions and had no physical presence in Canada, appointed non-resident representatives to solicit orders from Canadian business end-users to use its software permitting safe access to their company networks. Some aspects of the arrangements made it appear as if Aco was selling the software licences to the representatives rather than the end-users, i.e., it charged an agreed price for each licence to the representative, who established the price at which the licence would be sold to the end-user – and it was the representative who invoiced the end user and was responsible for collecting the invoice.
However, CRA considered that Aco was not making supplies of the licences to the representatives but rather to the end-user in Canada and that GST/HST applied to such supplies. In this regard, it noted that ACo retained all ownership rights in the software, the representative was not granted a licence to use or reproduce or distribute the software, and it was Aco who was solely authorized to provide the related support services to end-users.
Neal Armstrong. Summary of 21 February 2023 GST/HST Ruling 217305 under ETA s. 142(1)(c).
We have translated 6 more CRA interpretations
We have translated 6 translations of CRA interpretations released in March and February of 2003. Their descriptors and links appear below.
These are additions to our set of 2,552 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 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA finds that payments made for loyalty points that had been applied to receive free services without a fixed dollar amount, did not generate ITCs
Aco sells taxable goods under its brand to a network of independent dealers managed by Bco, and also to Bco for sale by it or for resale to such network. Cco provides loyalty points to Aco or (through Aco) Bco or (through Aco and Bco) to the dealers. Such points entitle the retail customer to a 10% discount on widgets purchased at the applicable retail outlet of Bco or a dealer upon redeeming one loyalty point for each widget purchased. Aco reimburses Bco for 85% of the discount provided and (where the retail sale occurs at a dealer) Bco pays over the reimbursement so received by it to the dealer.
Instead of receiving a discount on widget purchases, the customer may be able to choose to redeem points for a free service provided by Bco or the dealer, the cost of which would be reimbursed by Aco directly to Bco or indirectly (via Bco) to the dealer.
CRA indicated that the ETA s. 181 coupon rules would to some extent apply, so that:
- On the acceptance of the points (viewed as “coupons”) by Bco or the dealer as part consideration for the taxable supply of the widgets, they are deemed to have collected tax equal to the GST/HST that would have been collected had the points not been collected (i.e., equal to the tax fraction of the points’ value).
- When Aco pays an amount to Bco respecting the points redeemed by Bco, s. 181(5) would allow Aco an input tax credit (ITC) for the amount of tax embedded in such redeemed “coupons.”
- However, additional information would be required to determine whether Aco would also be entitled to ITCs when making payments to Bco for points redeemed in turn by a dealer.
- Similar consequences would attend the redemption of loyalty points by a customer in exchange for a free service provided by Bco or the dealer – except that, regarding Aco’s payment to Bco respecting the points redeemed by Bco, no ITC would be generated to Aco: s. 181(5)(c) would not be met, i.e., the coupon does not entitle the recipient of the supply by Bco or the dealer to a reduction of the price of the taxable supply by a fixed dollar amount specified in the coupon, and instead the recipient of the service, on redeeming the points, opts in lieu of a fixed dollar amount off the price of widgets for a free service, the value of which varies depending on the location where the service is performed.
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.19 under ETA s. 181(5).
CRA rules that a Canadian sub providing computer and admin/ marketing support services to its non-resident parent would not cause the parent to carry on business in Canada
CRA ruled that the provision of various services by Canco to its immediate foreign parent and to other non-resident members of the group would not by themselves cause those members to carry on business in Canada. These services consisted of various “computer services” including hosting the group website on a Canadian servicer and handling email and time and billing systems and central network management services, as well as “other support services” including accounting, financial, anti-money laundering, compliance, administrative support, information resources management and marketing services. Canco would not have the authority to execute or deliver any contract, agreement or instrument in the name of, or on behalf of, or to act as agent of, its parent or any other non-resident member of the group.
Neal Armstrong. Summary of 2021 Ruling 2019-0800191R3 under s. 2(3)(b).
CRA finds that an employer’s lump sum contribution to an employee life and health trust in relation to future hires was non-deductible
An employer discontinued providing health and welfare benefits for employees hired after a certain date pursuant to the terms of a collective bargaining agreement. In consideration for this discontinuance, it agreed to make contributions to a trust to fund certain designated employee benefits as described in s. 144.1(1) for the New Hires.
CRA indicated that, in order for this lump sum contribution to satisfy the requirements of s. 144.1(6)(b) for a deduction, it was required to have been “directly attributable to specific active employees” and stated that “[w]here a contribution is made in respect of new or future hires comprised of unidentified individuals, most of whom are not yet employees of the employer, this requirement would not be met and the contribution would not be deductible under subsection 144.1(6).”
Neal Armstrong. Summary of 14 March 2023 External T.I. 2022-0925831E5 under s. 144.1(6)(b).