News of Note
3087-1883 Québec – Federal Court finds that a determination of CRA not to reassess a taxpayer is a reviewable decision
Email this ContentTwo co-owners paid a portion of the expropriation proceeds received for one of their properties to their affiliated tenant of that property. However, when CRA treated that receipt in the tenant’s hands as a s. 9 receipt, rather than as a s. 12(1)(x) receipt that was eligible for the s. 13(7.4) election, the two co-owners and the tenant requested CRA (within the normal reassessment period) to amend their returns for the year of expropriation to treat the amount that had been paid to the tenant not as income to the tenant but instead as capital gains realized by the co-owners. CRA essentially refused this request. The taxpayers considered it to be unfair that CRA had not issued any reassessment that they could appeal, and applied for an order of mandamus compelling CRA to reassess in some manner.
Walker J found that the refusal of CRA to reassess was a decision that could be subject to judicial review (e.g., if the decision was unreasonable) – although, of course, the substantive question of whether the requested adjustment was correct could not be reviewed by her. However, this decision was not before her because their application had not been brought on a timely basis and the criteria for extending the 30-day period for bringing such an application had not been made out.
In any event, CRA had no legal obligation to issue a reassessment notice following the taxpayer request – that was a decision that was within its discretion (s. 152(4) used the word “may”).
Neal Armstrong. Summary of 3087-1883 Québec Inc. v. Canada (National Revenue), 2019 CF 785 under s. 152(4).
CRA publishes written answers to 15 May 2019 IFA Roundtable
Although we summarized most of the oral responses provided at the 2019 IFA CRA Roundtable a month ago, for you convenience the table below provides descriptors and links to the published version of the CRA answers.
CRA elaborates on the surplus effects of a MAP settlement
CRA provided some further commentary on 2017-0729431R3, which helps fill in some of the redacted details.
This related to a situation where CRA had assessed a Canadian subsidiary (Canco) in a Canadian multinational group under s. 247(2) on the basis that the fees earned by a CFA (resident in Country A) of Canco’s Canadian parent from management services were too high from a transfer-pricing perspective and the fees earned by Canco itself from providing management services to group companies were too low. After negotiations between the competent authorities, it was agreed (under the “MAP Settlement”) that the income of CFA (which was from an active business) would be reduced by assessment by the Country A taxing authority, thereby generating income tax refunds for the affected years, and that there would be no adjustment to the actual fees charged by CFA (to which it was entitled under the Country A domestic law) and that there also would be no secondary adjustments.
CRA in its discussion indicated that, as a result:
- The “earnings” of CFA, under Reg. 5907(1)(a)(i), were reduced by the income adjustment under the MAP Settlement as reassessed by Country A.
- Upon receipt of such Country A reassessments reducing CFA’s income to reflect the MAP Settlement adjustments, the “net earnings” of CFA, under Reg. 5907(1), were increased by the amount of income taxes that had been paid to Country A but, in fact, were not payable after giving effect to the MAP Settlement and consequential Country A reassessment.
- The amount of the MAP Settlement adjustment (reassessed by Country A) that was excluded from the computation of income or profit from an active business pursuant to the income tax law of Country A for each of the reassessed taxation years was added to the earnings of CFA pursuant to Reg. 5907(2)(f) given that the amount of such adjustment constituted “revenue, income or profit” of CFA for purposes of Reg. 5907(2)(f).
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable Q. 10, 2019-0798781C6 under Reg. 5907(2)(j).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in December 2011 (including 3 questions from the October 2011 APFF Roundtable). Their descriptors and links appear below.
These are additions to our set of 885 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/2 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA is allowing immediate application of the new non-supply rules for human ova or embryos but won’t process rebate claims until passed
A proposed GST/HST amendment would zero-rate the supply of an ovum – which would have the effect of rendering the importation of an ovum as a non‑taxable importation. A further amendment will add the importation of in vitro embryos to the list of non-taxable importations. “As a result, the importation of in vitro embryos would no longer be subject to tax” – so that implicitly CRA is treating supplies of in vitro embryos under current law as supplies of goods rather than humans.
Respecting the application of the ovum amendment, for example, CRA indicates:
[S]uppliers can stop charging GST/HST on supplies of human ova in accordance with the proposed amendment as of March 20, 2019. … [C]onsistent with its standard practice, the CRA is administering this measure on the basis of the proposed amendment [and similarly re embryos]
… However, the CRA cannot pay a rebate for an amount paid in error as or on account of tax until the proposed amendment becomes law.
A supplier who has charged or collected GST/HST on human ova supplied after March 19, 2019, must include that amount in the calculation of their net tax on their GST/HST return … .
CRA goes on to indicate that ova or in vitro embryos provided at a fertility clinic are considered to be part of a single exempt supply of an institutional health care service.
Neal Armstrong. Summaries of GST/HST Notice 312 Proposed GST/HST Treatment of Supplies of Human Ova and In vitro Embryos May 2019 under ETA Sched. VI, Pt. I, s. 6 and Sched. VII, s. 13.
CRA accepts Applewood (re GST/HST exemption for car dealers who promote, sell and process credit insurance provided to their customers)
The car dealer in Applewood entered into a “Dealer Agreement” with a distributor of credit insurance products under which it was agreed that it would “up sell” the insurance products and assist the car customers in explaining the coverage and in applying for the insurance in consideration for a commission of over 50% of the insurance premium. Pizzitelli J applied the single supply doctrine in finding that the predominant element of what was being supplied by the dealer was an exempt supply of arranging for the insurance – and that the exclusion in (r.4) of the definition of an exempt financial services for promotional and various administrative services did not apply.
CRA has stated that it will apply Applewood “in the same fact situation” as well as where the car dealer deals directly with the insurer (rather than with the distributor), if “the car dealer performs the activities referred to in the Applewood decision.” CRA went on to state:
Within the context of the insurance industry, the Applewood decision does not have an impact on the CRA’s position with respect to the services provided by managing general agents and similar entities performing management and administrative services for insurers. Supplies of these management and administrative services are taxable.
Neal Armstrong. Summary of Excise and GST/HST News - No. 106 June 2019 under ETA – s. 123(1) – financial service – para. (l).
CRA indicates that subjecting dividend income paid to a preferred beneficiary to TOSI accords with tax policy – but that it’s easy to avoid the designation
As noted re Q.13, CRA considers that the exclusion from para. (c) of the “split income” definition of amounts included in a preferred beneficiary’s income does not apply where a s. 104(19) designation is made respecting the preferred beneficiary income amount, so that the amount is included under subpara. (a)(i) of the split income definition. There is thus, in CRA’s view, the absence of a legislative exclusion from the tax on split income for such dividend amounts.
This seems anomalous and arguably is contrary to the Savage principle (that a specific exclusion implies the same exclusion from a more general charging provision). However, CRA noted that it has received confirmation in discussions with Finance that its interpretation accords with tax policy.
In order to avoid making the s. 104(19) designation when preparing a T3 slip, the amount should simply be included in Box 26 (“other income”).
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.14 under s. 120.4(1) – split income – s. (a)(i).
CRA indicates that dividend income flowed through to a preferred beneficiary can be TOSI
Para. (c) of the “split income” definition refers to amounts included in a beneficiary’s income under s. 104(13), but not under s. 104(14) as a result of a preferred beneficiary election.
CRA noted however that s. (a)(i) of the split income definition provides for the inclusion of taxable dividends received by the specified individual in respect of the shares of the corporation (other than listed or mutual fund shares). Thus, if the income allocated to a preferred beneficiary is also subject to a s. 104(19) designation, the designated amount will be included in the beneficiary’s split income, unless one of the TOSI exceptions applies.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.13 under s. 120.4(1) – split income – para. (c).
Satoma has not changed the CRA view that trusts must report income that is attributed to the settlor under s. 75(2)
CRA acknowledged that, in Satoma, Noël CJ. noted that express exclusions in most of the attribution provisions (e.g., s. 74.1) of the attributed income in the hands of the income transferor were inserted for greater certainty, and that the same dividend cannot be received by two persons at once – with the implication that income attributed to a trust contributor under s. 75(2) is not income of the trust even in the absence of such a specific exclusion.
However, CRA indicated that these comments were not specifically directed at the T3 return, which is a return of information (in addition to a return of income) affecting the taxation of persons with some connection to the trust. Reg. 204 imposes a requirement to file a T3 return where the trustee has control of, or receives, income, gains, or profits in the trustee’s fiduciary capacity – even if the Trust computes nil income, e.g., because of the application of s. 75(2). The trust must still report the income on its T3 return and issue a T3 slip reporting the amount as that of the contributor of the property.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.12 under Reg. 204(1).
CRA indicates that a GRE likely cannot be continued indefinitely as a QDT
An estate that qualified as a graduated rate estate (GRE) was not able to convert some of the estate property into cash until late in the third year after the death of the deceased. During the 36 month GRE period, the residuary estate beneficiary becomes disabled. Can the estate continue indefinitely and elect to be treated as a qualified disability trust each year such that graduated tax rates will continue to apply?
CRA indicated, likely “no” since once the estate administration was completed (or should have been completed), there would be no estate income (as the beneficial ownership of its property had passed to the residuary beneficiary) – or if the estate somehow were viewed as still earning income, such income would be payable to the beneficiary and, therefore, be income of the beneficiary under ss. 101(24) and 104(13) rather than of the estate.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.11 under s. 122(3) – qualified disability trust – s. (a)(i).