News of Note
CRA indicates that zero-rating under ETA Sched. VI, Pt. V, s. 2(a) for supplies to an airline relates to connected property or services, but not to the aircraft itself
Email this ContentETA Sched. VI, Pt. V, s. 2(a) refers to a non-resident person who is not registered under the general (Subdivision d) registration provisions and who carries on a business of transporting passengers or property to or from Canada or between places outside Canada by inter alia aircraft, and zero-rates a supply of property or a service made to such a person “in the course of so transporting passengers or property.” Would an aircraft that is being leased or purchased for consumption and use by the airline in transporting passengers qualify for zero-rating?
CRA indicated that the quoted words indicated that “the consumption, use or supply of the property or service by the person must be connected with or arise from the provision of the service of transporting the passengers or property” and then indicated that it was not aware of any situation where the aircraft itself was to be considered as “the actual property being supplied under the provision.”
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.14 under ETA Sched. VI, Pt. V, s. 2(a).
CRA indicates that a Notice of Intent under the E-Commerce GST/HST rules is a CRA, not a taxpayer, tool
ETA s. 211.12(5) provides that where CRA has reason to believe that a non-resident has failed to register under the “simplified regime” provided under the E-Commerce subdivision, it may send a “notice of intent” to the non-resident signifying its intention to require that person’s registration, but providing a brief opportunity to make representations. In response to an inquiry as to whether a non-resident could request a notice of intent in order to get registered under the simplified regime on a prospective basis and avoid the risk of CRA investigating and making the registration effective to the effective date of the new regime, CRA indicated that this was misconstruing the purpose of the notice of intent. It stated:
[T]he Notice of Intent … is a compliance tool to be used at the disposal of the CRA; it is not taxpayer-initiated. Subsection 211.12(5) permits the Minister to send written notice (Notice of Intent) to any person who the Minister believes is required to be registered, but has failed to register as and when required. A person who is required to be registered and receives a Notice of Intent is required to register under subsection 211.12(3).
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.13 under s. 211.12(5).
CRA rules that cash extracted from an estate subsidiary can be rendered substituted property for s. 118.1(5.1)(b) purposes by having such cash paid as redemption proceeds
S. 118.1(5.1)(b) requires that in order for a gift to be deemed to be one made by the deceased rather than the estate, it must be a gift of "property that was acquired by the estate on and as a consequence of the death" or "property that was substituted for that property." 2015-0578551C6 indicated that where an individual, on a post- 2015 death, held "Holdco" owning marketable securities, which Holdco sold and paid to the estate as a cash dividend so that the estate could make a cash donation to a qualified donee, such cash would not be considered to be substituted property (the estate still held its Holdco shares rather than those shares having been replaced by the cash).
CRA has now ruled on transactions which were intended as a workaround.
The estate held all the common shares of Aco which, as a result of quite a number of reorganization transactions, were replacements of shares which the deceased either held on death or was entitled at that time to receive from the spousal trust of the deceased’s mother. Aco then paid a stock dividend on its common shares consisting of newly created preferred shares, redeemed those shares for cash, and made a s. 83(2) election for the resulting deemed dividend to be treated as a capital dividend. The estate then donated the cash to a qualified donee.
CRA ruled that such cash satisfied the substituted property requirement under s. 118.1(5.1)(b). S. 248(5)(b) deems shares received as a stock dividend on shares to be substituted for those shares.
Neal Armstrong. Summary of 2023 Ruling 2020-0862441R3 under s. 118.1(5.1)(b).
CRA has offered 9% over 3 years to its employees
CRA announced that it has presented to the Public Service Alliance of Canada – Union of Taxation Employees (PSAC-UTE) “a fair, competitive offer for wage increases,” namely “a 9% wage increase over three years.”
The PSAC-UTE doubtless is concerned that elevated inflation may prove to be more sticky than this offer implies. John Hussman in “Fabricated Fairy Tales and Section 2A” today expressed the view that the universal “understanding” that increases in the unemployment rate and recessions reduce the inflation rate is a “fairy tale” without empirical support.
CRA News Release, Canada Revenue Agency’s update on negotiations with the Public Service Alliance of Canada – Union of Taxation Employees, 21 April 2023.
We have translated 7 more CRA severed letters
We have published a translation of a CRA ruling issued earlier in the year and a further 6 translations of CRA interpretations released in July and June of 2003. Their descriptors and links appear below.
These are additions to our set of 2,445 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 19 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2023-02-08 | 2021 Ruling 2021-0904311R3 F - Butterfly Reorganization | Income Tax Act - Section 55 - Subsection 55(1) - Distribution | butterfly transaction for a farming corp (DC) of two brothers coupled with an immediate gift of shares of DC and TC to their respective sons under s. 73(4.1) |
| Income Tax Act - Section 191 - Subsection 191(5) | specified amount included in shares issued on butterfly distribution | ||
| Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) | circularity avoided through intervening taxation year end of transferee corp | ||
| 2003-07-04 | 29 May 2003 External T.I. 2002-0160795 F - Crédit d'impôt étranger et pertes
Also released under document number 2002-01607950.
|
Income Tax Act - Section 20 - Subsection 20(12) | whether to amend a return to permit a s. 20(12) deduction where a loss carryback to that year has eliminated the s. 126(1) credit is in the CRA’s discretion |
| 4 June 2003 Internal T.I. 2003-0006967 F - Province de résidence d'une fiducie
Also released under document number 2003-00069670.
|
Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2)(a)(i) inapplicable re settlor being beneficiary of trust beneficiary’s estate/ s. 75(2)(b) inapplicable re power of settlor to replace trustees | |
| Income Tax Act - Section 2 - Subsection 2(1) | Thibodeau applied to find that trust with Quebec trustee therefore was resident in Quebec | ||
| Income Tax Act - Section 120 - Subsection 120(2) | Quebec abatement available even where no Quebec tax was payable on the income (due to abuse of s. 104(13.1) election) | ||
| Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit | scheme generating Quebec abatement without payment of any Quebec tax did not result in a “tax benefit” | ||
| 24 June 2003 External T.I. 2002-0169405 F - Projet d'ingénierie
Also released under document number 2002-01694050.
|
Income Tax Act - Section 122.3 - Subsection 122.3(1) - Paragraph 122.3(1)(b) - Subparagraph 122.3(1)(b)(i) - Clause 122.3(1)(b)(i)(B) | training activity was not an “engineering activity” | |
| 24 June 2003 External T.I. 2002-0177145 F - AVANTAGE IMPOSABLE - REPAS
Also released under document number 2002-01771450.
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Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | requirement to watch the children did not detract from taxability of free lunch | |
| 2003-06-27 | 24 June 2003 External T.I. 2002-0176475 F - DOMMAGES-INTERETS PROFESSIONEL
Also released under document number 2002-01764750.
|
Income Tax Act - Section 8 - Subsection 8(2) | personal liability for damages in excess of liability coverage not deductible given s. 8(2) |
| Income Tax Act - Section 8 - Subsection 8(5) - Paragraph 8(5)(b) | professional liability insurance premiums deductible under s. 8(5)(b) | ||
| 23 June 2003 External T.I. 2003-0004795 F - TRANSPORT AU LIEU D'EMPLOI
Also released under document number 2003-00047950.
|
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | mandatory employer-provided transport from staging area along difficult road to remote mine was not a taxable benefit |
CRA rules on a butterfly transaction for a farming corp. (DC) of two brothers coupled with an immediate gift of shares of DC and TC to their respective sons under s. 73(4.1)
CRA ruled on transactions under which the assets of a farming corporation (DC) owned by the two farmer brothers were split under a net asset butterfly between DC and a Newco for the other brother (TC). Immediately after the butterfly, the brother owning TC gifts a portion of his shares to his adult son (also involved in the farming business) in reliance on the s. 73(4.1) rollover; and similarly, thereafter the brother left with TC effects a s. 51 exchange of a portion of his TC common shares for preferred shares and gifts his common shares to his son, who is active in the business and also on a s. 73(4.1) rollover basis. Perhaps because of this introduction of cousins into the structure, there is an unusual step in which, immediately after the issuance by TC of preferred shares to DC on the butterfly distribution to it of the three types of assets, an agreement is entered into specifying a dollar amount for those preferred shares for purposes of s. 191(4), which does not exceed the FMV immediately before the entering into of the agreement of each such share (with CRA ruling that there will be no Pt. VI.1 or IV.1 tax).
It is also stated that after the butterfly, TC will engage in an asset purchase, or acquire shares of a corporation and merge with it.
Pt. IV tax circularity issues are avoided by having a TC year end occur between TC’s purchase for cancellation of its preferred shares held by DC in consideration for a demand note, and DC’s purchase for cancellation of its shares held by TC for a demand note (so that TC is subject to Pt. IV tax on the second transaction).
The butterfly asset division includes the transfer, on a non-rollover basis in accordance with s. 148(7), of an undivided interest in a life insurance policy.
Neal Armstrong. Summary of 2021 Ruling 2021-0904311R3 F under s. 55(1) – distribution.
CRA finalizes its Memorandum on when transfer payments are taxable consideration
CRA has finalized its GST/HST Memorandum on the issue of when a governmental or other transfer payment is consideration for a supply, with only very minor changes from the previous draft version.
CRA indicates that if there is a direct link between a supply made by the grantee and a transfer payment, the transfer payment is consideration for that supply, and provides various guidelines to assist in that determination.
Sometimes the distinctions drawn are subtle. For example (Example 10), a government department. which is required under its governing legislation to maintain public parks, makes a transfer payment to a grantee so that the grantee will undertake such maintenance: the government department is considered to likely be contracting out to acquire taxable services from the grantee.
On the other hand (Example 11), a government department provides a transfer payment to a grantee to subsidize the construction of low-income housing although, under its governing legislation, it is not required to provide low-income housing but rather has a mandate to fund or otherwise support activities that increase the availability of low-income housing: the government department is not contracting out its responsibilities, so that there may not be a direct link between the funding provided and a supply made by the grantee.
Neal Armstrong. Summary of GST/HST Memorandum 18-4 “Determining Whether a Transfer Payment is Consideration For a Supply” June 2022 under ETA s. 123(1) – consideration.
CRA provides more comprehensive UHTA interpretations
CRA has provided numerous interpretations of underused housing tax issues in a recent notice, including the following:
- A “trust” is viewed as including a bare trust so that, for example, an individual citizen holding as a bare trustee would not qualify as an excluded owner.
- The extension of the definition of an “owner” (which otherwise essentially refers to a registered owner) to a person who “could reasonably be considered to be an owner” does not include the beneficiaries of a trust, but could apply, based on the wording of a deed in a province using a deed-registration, rather than land titles, system.
- A corporation holding title to a residential property in Canada as bare trustee would be required to file a return, but its holding may be exempted if the trust is a specified Canadian trust (no reference was made to the possibility that it alternatively might be excluded as a specified Canadian corporation).
- For purposes of the definition of a residential property (including as it applies to condo units), CRA considers that a property in construction does not become a residential property until “construction of the property is substantially completed (generally 90% or more) so that an individual could reasonably inhabit the property” – so that there is no reporting obligation for the property if on December 31 it has not yet become a residential property.
- Where, for example, the municipally assessed value of a 10 hectare plot of land reflects the value of land (9.5 hectares) that is not necessary for the use of the house on the land as a residence, the taxable value of that property nonetheless is based on that assessed value, unless an election is made to use the FMV of the residential property (which generally would only include the ½ hectare).
- An affected owner of multiple residential properties on December 31 must file a separate return for each property rather than filing a single UHT return and attaching a spreadsheet.
- Having regard to the requirement that the beneficiaries of a specified Canadian trust must all be Canadian (as defined), CRA considers that a beneficiary does not include any contingent beneficiary of the trust (being “a person who may or will benefit if a primary beneficiary dies or otherwise loses rights as beneficiary”).
- As a trust is not a person for UHT purposes, it is likely that where a trust is a beneficiary of another trust, the beneficiaries of the first trust are to be treated as beneficiaries of the second trust.
Neal Armstrong. Summaries of Underused Housing Tax Notice UHTN15, Questions and Answers About the Underused Housing Tax, 17 April 2023 under UHTA, s. 2 – excluded owner – (b), (c), owner, dwelling unit, residential property, taxable value, specified Canadian trust, s. 7(1).
Income Tax Severed Letters 18 April 2023
This evening's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Pharma Coréalis – Court of Quebec finds that putting pharmaceutical companies’ drugs into capsules for clinical tests qualified as manufacturing for sale
Coréalis entered into “service agreements” with pharmaceutical companies pursuant to which it would develop and manufacture clinical lots of solid oral dosage forms (tablets, capsules and granules) containing an active pharmaceutical ingredient provided by the companies. These along with placebos, which were also manufactured and provided by Coréalis, were used in clinical trials of the drugs by the companies.
Whether equipment that Coréalis had purchased and used in manufacturing the clinical lots qualified for Quebec investment tax credits turned on whether such equipment satisfied the requirement under the description of a Class 29 property that it had been acquired “to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale.” The ARQ argued that Coréalis was not making sales to the companies as it had not established that the manufacturing process regarding the clinical lots was more important than the services furnished by Coréalis to them, and in this regard further argued that the companies were essentially accessing Coréalis’ expertise and noted that the active ingredient (viewed by the ARQ as the key material) remained their property at all times.
Before allowing Coréalis’ appeal, Lachapelle JCQ stated:
The most important element in this case is the manufacture of the physical product, the actual capsule, without which the clinical tests of Coréalis' customers could not take place. Of course, the customers call on Coréalis' knowledge, but ultimately they are ordering and paying for clinical lots and thus purchasing and receiving delivery of those clinical lots, which the customer will then use as it sees fit.
Neal Armstrong. Summary of Pharma Coréalis Inc. v. Agence du revenu du Québec, 2023 QCCQ 156 under Schedule II - Class 29.