News of Note
CRA states that the GST/HST gross negligence penalty can be collected on understated net tax resulting from reasonable mistake
Email this ContentAfter listing various factors that may be taken into account in determining whether to assess the 25% GST/HST gross negligence penalty, CRA stated that this percentage is generally applied to the difference between the correct net tax for the reporting period and the net tax calculated on the information in the return. CRA applies this literally, so that if the registrant understated its collectible tax by $1,000 due to gross negligence and by a further $99,000 due to a reasonable mistake, CRA would calculate the penalty as $25,000. (The wording of the ITA s. 163(2) penalty does not have this problem.)
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.5 under ETA s. 285.
CRA indicates that ITCs generally can be claimed at the partner level by a single-purpose GP
ETA s. 272.1(2) generally permits a partner to claim input tax credits on inputs acquired by a partner “for consumption, use or supply in the course of [commercial] activities of the partnership but not on account of the partnership.” When asked to provide an example of the application of s. 272.1(2), CRA referred to a corporation whose only activities were as partner of a general partnership in the construction business, and which acquired equipment for use in the partnership’s construction business without any right to reimbursement.
Some may find the narrowness of this example somewhat disquieting.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.2 under s. 272.1(2).
CRA states that it will not be confused for GST purposes by labelling a corp. with operational control of a JV as a “nominee”
CRA considers that a true bare trustee cannot serve as the “operator” for a GST joint venture. However:
The terms "nominee corporation" and "bare trust" may be used somewhat loosely by businesses. As a result, a so-called nominee corporation or so-called bare trust may in fact have the managerial or operational control of a joint venture…[so that] the so-called nominee corporation or bare trust may be a participant in the joint venture for GST/HST purposes.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.3 under ETA s. 273(1).
CRA indicates documentary flexibility re pipeline zero-rating requirements
In order for the "first seller" to zero-rate the supply of continuous transmission (pipeline) commodity (“CTC”) to the "first buyer" referenced in ETA Sch. VI, Pt. V, s. 15.1, the first buyer must have documentation satisfactory to CRA that the CTC has been supplied to a registrant and all or part of the consideration is property of the same class or kind delivered to the first buyer outside Canada. CRA stated that it will accept invoices or agreements which:
contain such information as would be required to determine the following:
- The CTC exchanged is of the same class or kind purchased.
- The place of delivery of the CTC to the registrant inside Canada.
- The place of delivery of the exchanged CTC to the first buyer outside Canada.
- Identity of the registrant including their BN.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.1 under ETA Sch. VI, Pt. V, s. 15.1.
CRA considers “salary” paid after employment duties had terminated to be retiring allowance
Regular pay is subject to CPP/EI withholding, whereas retiring allowances are not (see Special payments chart). The most challenging of three situations considered by the Directorate was one where a terminated employee received from her employer: "Compensation 1" paid in lieu of notice for the period from Date 2 to Date 3; "Compensation 2," representing severance pay covering the period from Date 3 to Date 4; and her regular salary from Date 4 to Date 5. The taxpayer purportedly became eligible to again start accumulating years of service under the pension plan when her “salary” resumed.
The Directorate unsurprisingly concluded that Compensation 1 was regular pay, and Compensation 2 was a retiring allowance. Respecting the subsequent “salary” payments, it stated:
In spite of the fact that contributions of the taxpayer to the pension plans continued to accumulate for the period from Date 4 to Date 5, … the taxpayer and the employer did not have an employment relationship during that period…since [citing Schwartz] she was not required to provide services. …
Thus, since… there was no [recommencement] of employment on Date 4… the amounts paid between Date 4 and Date 5 constituted the continued payment of a retiring allowance.
…[W]e do not understand how the taxpayer could resume pension accruals on Date 4 when there was no employment on Date 4.
Neal Armstrong. Summary of 6 June 2016 Internal T.I. 2015-0590411I7 Tr under s. 248(1) – retiring allowance.
The Rulings Directorate indicates that per diem or per kilometer “accommodation” allowances paid to long-haul drivers not in excess of their restaurant expenses were likely unreasonable
S. 6(1)(b)(vii) effectively excludes, from the employment income of a long-haul truck driver, a “reasonable allowance for travel expenses…for travelling away [from the home base]….” The Directorate was asked about “accommodation allowances” paid to such employees of $0.04 per kilometer. Although they slept in their cabs for security reasons, these allowances were reasonable in relation to the drivers’ meal costs, which were about $40 per day, whereas the per-kilometre allowance worked out to the equivalent of around $20 per day.
The Directorate started off on a promising footing, stating that “travel expenses include food, beverage and accommodation costs,” but then stated:
[A]n allowance for accommodation expenses calculated exclusively on the basis of distance, time or other criteria will not be considered reasonable if it does not represent an estimate of the cost of accommodation that may be incurred by the employee during the travel that generated entitlement to the allowance. …
[W]here an employee sleeps in the truck cab, it is unlikely that the allowances for accommodation expenses in the three scenarios provided will be considered reasonable for the purposes of paragraph 6(1)(b).
Would this response have been different if the trucking company instead had labelled the same amounts as “traveller meal allowances” - or if it had paid a per diem "accommodation" allowance of $20?
Neal Armstrong. Summary of 15 November 2016 Internal T.I. 2015-0577201I7 Tr under s. 6(1)(b)(vii).
CRA substantially expands on its Bulletin on capital dividends
There are various comments in the CRA Folio on capital dividends which did not appear in IT-66R6, including:
- A recipient of a capital dividend need not be a shareholder provided it was a shareholder on the record date.
- Negative ACB gains of partners are not added to their CDA.
- A partner adds its share of a capital dividend to its CDA at the time of partnership receipt “if the partnership agreement provides that [such] partner is entitled to a share of a capital dividend at the time the dividend is received by the partnership.”
- Where a death benefit is paid pursuant to a creditor’s group life term policy, the full amount of the death benefit (as opposed to the net proceeds) can be added to the debtor’s CDA - whereas only the net proceeds of a life insurance policy owned by the debtor as policyholder may be added to the debtor’s CDA.
- CRA provides a numerical example illustrating that Amalco has a memory of the excess capital losses of a predecessor, which do not reduce the other CDA components, but which must first be filled before there is a component (a) to Amalco’s CDA.
- After describing various ways in which a CDA deficiency relative to a capital dividend can arise, CRA notes its policy in 2013-0504951E5 that an election to convert an excessive capital dividend into a taxable dividend can be held in abeyance until an objection respecting whether there, in fact, should have been a reduction to the CDA has been dealt with.
- CRA agrees with Groupe Honco that, under s. 83(2.1), a person can have more than one main reason for the acquisition of shares.
Neal Armstrong. Summaries of S3-F2-C1 under s. 83(2), s. 89(1) – capital dividend account – para. (a), s. 89(1) – capital dividend account – para. (b), s. 89(1) – capital dividend account – para. (d), s. 87(2)(z.1), s. 184(3) and s. 83(2.1).
CRA indicates that insurance assets transferred to a subsidiary in consideration for assuming obligations of the insurance business could qualify as “reinsurance premiums”
In the context of a tax-deferred transfer under s. 138(11.94) of an insurance business carried on in Canada to a corporation within the same wholly-owned group, s. 138(11.5)(m) provides that a reinsurance premium paid or payable by the transferor to the transferee respecting the assumed or reinsured obligations will be included or deducted, as the case may be, only to the extent that doing so may reasonably be regarded as necessary to determine the appropriate amount of income of both the transferor and the transferee.
After noting that whether s. 138(11.5)(m) can apply depends, in part, on whether the drop-down occurs under a reinsurance arrangement, CRA stated that “the assets transferred by the transferor to the transferee in exchange for assuming the transferred obligations may be a ‘reinsurance premium’” (although that term could also extend to “any amounts paid or payable to the transferee as consideration for the assumed obligations in respect of the transferred insurance business.”)
Neal Armstrong. Summary of 15 November 2016 External T.I. 2015-0597921E5 under s. 138(11.5)(m).
The mammoth Folio on the general CCA rules carries forward most of the positions in predecessor Bulletins
The new Folio on the general capital cost allowance rules is in many respects a consolidation of various IT Bulletins which it replaces (285R2, 418, 220R, 190R2, 128R and 478R2). CRA has been very conservative about changing the previous positions even where subsequent developments might justify changes. For example, it has carried forward the statement in IT-128R that “where the building is used to earn income for only a short time prior to demolition, it is likely that the building will not be regarded as depreciable property unless the taxpayer can clearly establish that the prime intention on acquiring the building was for the purpose of gaining or producing income,” notwithstanding the Ludco ancillary purpose doctrine (see also Rich: subordinate purpose; and Hickman Motors: 5 days’ rental use.)
CRA also maintains some positions that it likely would not adopt if it were starting afresh, e.g., that the taxpayer has the choice of treating the cost of demolishing an old established rental building as a current expense or as a cost of the new building. Consistently with this conservatism, its new policy on assessing recapture for the first non-statute-barred year following statute-barred years in which there were proceeds received in excess of UCC, applies only to properties acquired after December 31, 2015.
A helpful discussion has been added on the more recent available-for-use rules, and briefer discussions of some other newer rules such as in s. 16.1 also are provided. Some illuminating numerical examples have been added, e.g., on the operation of the rules under s. 13(21.1) for allocating between land and building, and the s. 13(7.5) rule re access properties.
Neal Armstrong. Summaries of S3-F4-C1 under s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs or running expenses, s. 13(21) – UCC – A, s. 13(21) – depreciable property, s. 16.1(1), s. 13(28), s. 13(27), Reg. 1100(2.2). 18(3.1), s. 13(7.5), s. 261(2), s. 68, s. 13(21.1)(a), s. 13(21.1)(b), s. 8(2), s. 13(9), s. 152(4), s. 13(5), and s. 13(6).
A purported transfer of goodwill or knowhow separately from the related business may not be effective
Given a judicial view that goodwill is inseparable from the business to which it adds value, it would appear that the accrued gain on goodwill cannot be realized apart from a disposition of the business.
Knowhow might be considered to have been disposed of only if the transferor can no longer avail itself of the knowledge in question—for example, where it sells the business to which the knowledge relates. An exception may exist if the knowhow is of a type that can be clearly documented and separated from the employees who developed it.
Neal Armstrong. Summary of Alison Spiers, "ECP Planning: Some Practical Considerations", Canadian Tax Focus, Vol. 6, No. 4, November 2016, p 1 under s. 248(1) – disposition.