News of Note
CRA treats a Swiss collective investment vehicle as a flow-through for purposes of the pension/ retirement fund dividend exemption in the Canada-Swiss treaty
Email this ContentA collective investment scheme (the “Fund”) established under Swiss law is an arrangement by which investors pool their assets to be managed by and in the name of a Swiss regulated fund management company (the “Management Company’) for the account of the investors, whose proportionate entitlements to income and to cash or in-kind redemption proceeds are represented by non-voting units. The Fund was established by a contract of the investors with the Manager and the non-resident custodian of the Fund assets (the “Custodian”), and lacks legal personality. The Custodian delegated the custody of Canadian securities (being mostly listed shares of Canadian companies) to the “Canadian Sub-Custodian.” The Fund unitholders are all Swiss entities providing pension or retirement plans.
CRA effectively ruled that this arrangement would be treated like a co-ownership arrangement rather than like an entity such as a trust, so that dividends paid on the Canadian shares would benefit from the Canadian withholding tax exemption in Art. 10 of the Canada-Swiss Treaty for Canadian dividends received by Swiss pension/ retirement entities.
Neal Armstrong. Summary of 2024 Ruling 2019-0817961R3 under Treaties – Income Tax Conventions – Art. 10.
CRA rules on transactions to increase the PUC of shares of Cdn. parent in its Canadian subsidiary before the re-domestication of parent engaging s. 128.1(4)
After being acquired by a foreign acquiror, a Canadian mining company (Parent Amalco) re-domesticated to a foreign jurisdiction (presumably, the U.S.) so that it was subject to the s. 128.1(4) emigration rules. Before this continuance out of Canada, it engaged in transactions to increase the PUC of the shares of its principal Canadian subsidiary, e.g., transferring under s. 85(1) a royalty interest and shares of other Canadian subsidiaries to that subsidiary for treasury shares.
CRA ruled that the PUC-increase steps were effective, and would not be altered by s. 245(2). However, it required a representation of the subsidiary that it will not use its retained earnings or contributed surplus in computing its equity amount for s. 18(5) purposes without first obtaining a positive ruling.
Neal Armstrong. Summary of 2020 Ruling 2019-0817051R3 under s. 89(1) – paid-up capital.
Declaration of a private company dividend immediately before an s. 128.1(4)(b) emigration of the shareholder appears to be tax-neutral
Suppose that, shortly before the emigration of a resident individual holding shares of a private corporation (Xco), Xco declared a dividend in an amount equal to the FMV of Xco’s net assets but did not pay it until after the individual became non-resident. The unpaid dividend represented a right of the individual (likely, a capital property) that was owned at the time of ceasing to be resident, so that the tax on the capital gain from the disposition thereof pursuant to s. 128.1(4)(b), plus the Part XIII tax, equals the s. 128.1(4)(b) and Part XIII tax that would have been paid by the individual had the individual emigrated before the dividend declaration.
The position in 9640475 – that s. 128.1(4)(b) would apply to tax the individual on the emigration as if the declared and unpaid dividend had been paid - appears to be incorrect. As noted, the individual is only deemed to have disposed of the right to the dividend and not to have received it.
Neal Armstrong. Summary of David M. Sherman, Bal Katlai and Kenneth Keung, “Can an Unpaid Dividend Avoid Departure Tax?”, Tax for the Owner-Manager, Vol. 24, No. 1, January 2024, p. 9 under s. 128.1(4)(b).
CRA discusses the GST/HST treatment of crowdfunding pledges
A Canadian corporate registrant (“X”) raises money to fund a project through a crowdfunding website from supporters around the world. By their pledging funds to support X’s project in exchange for a reward such as a copy of a product, a limited edition, or a custom experience related to the project, they thereby enter into a contract with X. The contract does not specify whether the pledge amounts are inclusive or exclusive of GST/HST.
CRA indicated:
- If the product was essentially a digitized product to be downloaded by the supporters, CRA would regard this as a supply of intangible personal property (“IPP”).
- If the contract did not provide any restrictions regarding the place of use of the IPP, then it would be the case that the IPP may be used in whole or in part in Canada, so that the place of supply would be in Canada (which would be relevant if there was no zero-rating under ETA Sched. VI, Pt. V, s. 10.1.)
- If there were no restrictions regarding where the Canadian rights could be used, and X did not obtain the address of the supporter then, pursuant to s. 11 of the New Harmonized Value-Added Tax System Regulations, the provincial place of supply would then be in the specified (highest-rate) province “closest in proximity, determined in any reasonable manner, to the supplier’s business address that is most closely connected with the supply.”
- Pursuant to s. 133, “the tax applies to any advance payment or part payment of the consideration for a supply even if, at the time payment is made, property has not in fact been transferred.”
Neal Armstrong. Summaries of 12 July 2023 GST/HST Ruling and Interpretation 174441 under ETA s. 142(1)(c)(i), s. 133, s. 223(1) and New Harmonized Value-Added Tax System Regulations, s. 11.
Income Tax Severed Letters 17 January 2024
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA accepts the bifurcation of a gift card for GST/HST purposes between the complimentary coupon portion and the purchased gift certificate portion
A supplier issues gift cards with stipulated monetary values to purchasing customers, which they can use at its stores or at its e-commerce portal. However, to promote products or as a customer service gesture, the supplier also issues “complimentary gift cards” whose “complimentary value,” when applied by the customer, is treated by it as consideration for the goods or services supplied. Customers can purchase additions (“top-up values”) to such cards.
CRA indicated that, subject to conditions, the complimentary value of a gift card could be treated as a “coupon” for GST/HST purposes so that, in the case of a (non-zero-rated) taxable supply, the supplier could claim an ITC under ETA s. 181(3)(b) for the tax fraction of the complimentary value on the gift cards’ redemption. Those conditions principally were that:
- The complimentary value of each gift card issued is tracked and accounted for separately from any top-up value added to the gift card.
- The person redeeming the complimentary value is believed to be a consumer.
- The supplier accepts the complimentary value as full or partial consideration for a supply of property or service.
- The gift card’s complimentary value is extinguished before any top-up value is applied to a supply.
CRA went on to note that any top-up value added to the gift card would generally be considered the issuance or sale of a gift certificate for consideration and, when redeemed for a supply of property or services, would be deemed to be applied as money as described in s. 181.2.
Neal Armstrong. Summaries of 31 July 2023 GST/HST Interpretation 217772 under ETA s. 181(1) – coupon, and s. 181.2.
The interposition of a Middleco in a spin-off transaction can put it back onside s. 55(3)(a)
Suppose that Opco is owned on an 85-15 basis by two arm’s-length shareholders, Aco and Bco. If Opco wishes to spin off the real property used in its active business to a Newco owned in the same proportions by Aco and Bco, the s. 55(3)(a) exception will not be available since Bco, which is not related to either Opco or Newco, has a significant increase in its interest in Newco occur contrary to s. 55(3)(a)(ii) and (v).
Instead suppose that there is a preliminary step under which Aco and Bco transfer their shares of Opco to newly-incorporated Middleco on an s. 85(1) rollover basis. Then, Opco spins off the real estate to a Newco incorporated by Middleco. Done this way, the spin-off would come within the s. 55(3)(a) exception given, inter alia, the relieving effect of the rule in s. 55(3.01)(g). See also 2015-0570021E5 F.
Neal Armstrong. Summary of David Carolin, Manu Kakkar and Boris Volfovsky, “Tax Alchemy and Paragraph 55(3.01)(g): Converting a 55(3)(b) Divisive Reorganization into a 55(3)(a) Related-Party Butterfly,” Tax for the Owner-Manager, Vol. 24, No. 1, January 2024, p. 7 under s. 55(3.01)(g).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released during May of 2002. Their descriptors and links appear below.
These are additions to our set of 2,694 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 21 3/4 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
GST/HST Severed Letters July/August 2023
Duval – Quebec Superior Court indicates that it has jurisdiction to consider requests for judicial review of ARQ refusals to reassess consequentially on a federal reassessment
The Quebec taxpayers did not object to ARQ reassessments that denied ½ of their claimed business loss for 2010 – but then successfully appealed to the Tax Court similar federal reassessments of that year. They then requested (years after the period for objecting to the earlier ARQ reassessments had expired) that the ARQ reassess their 2010 taxation years in light of the favourable Tax Court judgment (and CRA assessments to implement it) pursuant to s. 1010.0.2 of the Taxation Act (Quebec). S. 1010.0.2 provides that, notwithstanding the expiration of the period to file objections, the Quebec Minister may, within one year of a federal reassessment “make a reassessment for the sole purpose of taking into account elements that may be considered to relate to that assessment or reassessment.”
The taxpayers applied to the Qubec Superior Court for judicial review of the ARQ’s refusal to reassess. Paradis JCS rejected the ARQ position that the Quebec Superior Court lacked the jurisdiction to entertain the judicial review application because the matter came within the exclusive jurisdiction of the Court of Quebec (to which appeals from ARQ reassessments are made). He indicated inter alia that the effect of the ARQ position was that a taxpayer would be required to resort to the Quebec objection procedures as a prerequisite to any reassessment by the Quebec Minister pursuant to s. 1010.0.2, whereas s, 1010.0.2 contained no such precondition for its application.
Neal Armstrong. Summary of Duval v Agence du revenu du Québec, 2023 QCCS 4739 under Federal Courts Act, s. 18.5.