News of Note
Chan – Tax Court of Canada finds that there is a due diligence defence under s. 162(7) where the taxpayer reasonably believed that he was not the foreign property’s beneficial owner
Email this ContentThe taxpayer was assessed a penalty under s. 162(7)(a) for failure to file T1135 forms regarding a bank account with the Bank of China (BofC), which he had assisted his father (Joseph) to open up in his name, as well as a gross negligence penalty under s. 162(10)(a). In finding that the taxpayer was not required to file T1135s, Russell J stated:
[A]s Joseph sourced the funding of the account at all times and he alone exercised control and usage of the account, it appears reasonably clear that he alone utilized and thus enjoyed the benefit of the account. Thus I conclude that Joseph was the beneficial owner of the account, while his son the appellant merely held legal title, as his father’s nominee.
Russell J found that the penalties should be vacated for this reason, and also because, in any event, the taxpayer “had reasonable cause to believe that his father, and not he himself, held the beneficial interest in the account assets.” Accordingly, even in the case of the lower threshold for a penalty under s. 162(7)(a), “the defence of due diligence has been established – that is, the appellant reasonably believed in a mistaken set of facts that if true would have made his act or omission to act innocent.”
Neal Armstrong. Summary of Chan v. The Queen, 2022 TCC 87 under s. 162(7), s. 233.3(1) and General Concepts - Ownership.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations released in July and June of 2004. Their descriptors and links appear below.
These are additions to our set of 2,167 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 18 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 MFT trailer fees paid to a dealer, and by it to its representatives, generally are GST/HST exempt
CRA indicated that where a dealer, who was a distributor of mutual fund units, received both up-front commissions and trailing commissions from the mutual fund manager, the trailing commissions were generally part of the consideration for the single supply made by the dealer to the manager, namely, arranging for the sale of the units, so that the trailing commissions also were exempt - even though there was an element of on-going servicing of the investors as well.
Regarding front end load funds, where the investor is ordinarily charged an upfront fee or commission directly by the dealer upon the initial purchase, but the dealer also receive an ongoing trailing commission from the manager, CRA indicated that if the agreement between the manager and dealer “is for the distribution of units or shares of the fund, the supply made under that agreement by the dealer to the manager would [generally] be one of arranging for a financial service” even though the trailers are the only consideration received.
The dealer uses agents, i.e., self-employed proprietorships, to solicit orders as its representatives, and pays them a portion of its trailer commissions. CRA indicated that such amounts also were generally exempt consideration for an arranging-for financial service.
217144 is similar, but narrower in scope.
Neal Armstrong. Summary of 13 January 2022 GST/HST Interpretation 187184 under ETA s. 123(1) – financial service – (l).
CRA indicates that a trust cannot get a deduction for distributing phantom income if the trust deed lacks a phantom income clause
Regarding a trust that receives FAPI from a CFA or a s. 84(1) dividend from a Canadian corporation, and then distributes an equivalent cash amount to its beneficiaries, CRA reiterated the general principle that “[i]f the amount cannot be paid in accordance with the terms of the trust and the relevant trust law, the amount cannot be considered to have become payable for the purposes of subsections 104(6) and (13),” and then stated, more specifically:
[W]here an amount included in the taxable income of a trust is not recognized as income or capital for trust law purposes (referred to as “phantom income”), the terms of the trust must specifically permit an amount equivalent to the phantom income to be paid or payable or, alternatively, provide the trustees with the discretion to pay out or make payable amounts that are defined as income under the Act in order for the phantom income to become payable to any beneficiary.
Accordingly, whether the distribution of the phantom (FAPI or s. 84(1)) income generated a s. 104(6) deduction to the trust turned on whether or not the trust deed contained a clause granting the trustee the power to use other assets of the trust to distribute the deemed income.
Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q.9, 2022-0928891C6 under s. 104(6).
CRA indicates that stock options may not generate business income until they vest
A Canadian-controlled private corporation (“CCPC”) is granted an option to acquire shares of an arm’s length CCPC. The option will only vest upon completion of a medical research project in which it is engaged in the course of its business. Such vesting occurs at the end of the third year, and the corporation exercises its option to purchase the shares at the beginning of the fourth year.
Regarding the timing of the recognition of any business income, CRA stated:
[Here] the vesting of the option is linked to the completion of the long-term research project. As such, it may be difficult to conclude that the income is earned before the vesting date under the particular arrangement. … [G]enerally, it is at the time where the services have been rendered and the contingency has been fulfilled, that the FMV of the underlying share over the aggregate of the exercise price of the option should be included in income under subsection 9(1).
Neal Armstrong. Summary of 7 June 2022 External T.I. 2019-0796641E5 under s. 9 – timing.
Potash Corp. – Tax Court of Canada denies the deductibility of Saskatchewan potash tax “base payments” on the basis that they were not incurred to produce income
The taxpayer, which produced and sold potash from mines in Saskatchewan, was subject to both a profit tax and to the making of “base payments” under the Mineral Taxation Act, 1983 (Saskatchewan). In finding that the base payments made in its 1999 to 2002 taxation years did not satisfy the requirement under s. 18(1)(a) of having been incurred for the purpose of producing income from the taxpayer’s business, Owen J applied the principle that since an income tax is imposed on the profits generated by a business rather than being incurred to generate those profits, it cannot satisfy this purpose test. Although the base payments in fact were computed in substantial part based on potash sales made in the year, he indicated that such sales had been chosen “as a proxy for income to ensure that a minimum amount of tax would be collected in respect of such potash even if the producer did not have profits for the year.”
Owen J went on to find that deduction of the base payments was also denied for those taxation years by former s. 18(1)(m) – on the basis that this provision essentially denied deductibility of a tax that could "reasonably be regarded as being in relation to” mineral production, and on his view that the potash sales on which the base payment tax actually focused “related” to the antecedent production.
Neal Armstrong. Summaries of Potash Corporation of Saskatchewan Inc. v. The Queen, 2022 TCC 75 under s. 18(1)(a) – income-producing purpose and s. 18(1)(m).
GST/HST Severed Letters March 2022
Yesterday's release of 11 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their March 2022 releases) is now available for your viewing.
Income Tax Severed Letters 3 August 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that the ETA s. 150 election can accommodate a minority interest of management employees
An LP fund structure entailed a manager charging management fees to a carried interest corporation (CIP Inc.) in which it held 50% of the equity but 100% of the voting shares, with most of the balance of the equity (all non-voting shares) held by management employees of the parent of the manager (a credit union). CIP Inc. received “carried interest fees” from the LP. Could such fees be exempted using the ETA s. 150 election given that the credit union was a financial institution?
The credit union and manager clearly were closely related. However, the manager was also closely related to CIP Inc. given that it held 100% of the fully-voting shares of CIP Inc. Thus, the management fees paid by CIP Inc. could be exempted by the election.
CRA further noted that even if the manager held as few as 50% of the voting shares of CIP Inc., but at least 90% of the total value and number of the CIP Inc. shares, having full voting rights under all circumstances, were owned by the manager and the employees collectively, the manager and CIP Inc. would be closely related pursuant to s. 128(1)(b) and s. 3(a) of the Closely Related Corporations (GST) Regulations, which accommodate employee incentive shares to that extent.
However, CRA indicated that the definition of a closely related group is restricted to a group of corporations, so that the LP could not make the s. 150 election to exempt the “carried interest fees” paid by it to CIP Inc.
Neal Armstrong. Summaries of 18 November 2021 GST/HST Interpretation 232687 under ETA s. 128(1)(a)(i) and s. 150(6).
CRA finds that an amendment of a lease to extend its term would result in a new agreement for GST/HST purposes
An unregistered non-resident lessor leases equipment to a registered resident for use in the course of its commercial activities in Canada. At the start of the lease, the lessee takes possession of the equipment at the lessor’s premises outside Canada, and pays GST on its subsequent importation of the equipment into Canada.
Before the end of the lease, the lessor and lessee negotiate a lease renewal to extend the lease term. CRA indicated that this would result in a new lease agreement, even if it was only the lease term that was amended rather than any other terms such as the monthly rent, stating:
[T]he modification of the lease in respect of any of its essential elements, such as the rent or the term of the lease, would be considered a significant change that goes to the root of the agreement. These types of fundamental changes result in a new agreement between the parties and a new supply for GST/HST purposes. Accordingly, the place of supply must be established for this new supply, based on where possession or use of the tangible personal property is given or made available to the Lessee under the lease renewal agreement.
Thus, if the situs of the equipment was inside Canada at the time of the lease renewal, the place of supply of the equipment under the lease would commence to be in Canada pursuant to ss. 142(1)(b) and 136.1(1)(d), and the lease payments would commence to be taxable.
CRA did not mention the General Electric case, which most would interpret as indicating that the mere extension of the term of an agreement (in that case, a loan agreement) would not give rise to a new agreement, or the position of the Income Tax Rulings Directorate also emphasizing the question of whether, under the applicable provincial law, there is a novation, or a mere amendment (e.g., Folio S3-F9-C1, para. 1.9 and 2012-0451431R3; see also 2000-0050255).
Neal Armstrong. Summaries of 25 May 2019 GST/HST Interpretation 185880 under ETA s. 142(2)(b) and s. 136.1(1)(d).