News of Note
Loblaw - Federal Court of Appeal finds that a Barbados bank sub of Loblaw conducted its business of investing in short-term debt principally with arm’s length persons (no FAPI)
Email this ContentThe taxpayer, an indirect wholly-owned subsidiary of the Loblaw public company, wholly-owned a Barbados subsidiary (Glenhuron), that was licensed in Barbados as an international bank and that used funds mostly derived from equity injections by the taxpayer to invest in U.S.-dollar short-term debt obligations, loans to several thousand independent U.S. distributors of Weston baked goods (i.e., drivers) and intercorporate loans – and entered into cross-currency and interest rate swaps with an arm’s length bank to effectively convert much of its income stream into fixed rated Canadian-dollar interest. CRA assessed on the basis that Glenhuron had realized $473 million of foreign accrual property income (FAPI) between 2001 and 2010.
In allowing the taxpayer’s appeal, Woods JA found that Glenhuron have conducted its business principally with arm’s length persons, stating:
Parliament could not have intended that the foreign bank exclusion should be denied as a result of support and oversight provided by a parent corporation … .
[T]he vast majority of Glenhuron’s assets were invested in US denominated short-term debt securities, cross-currency swaps, and interest rate swaps … [which] generated by far the most income. Except for Loblaw’s supporting role discussed above, this business activity was conducted entirely with arm’s length persons.
In finding that what the Crown argued to be the “receipt side” of Glenhuron’s business, i.e., “the capital investments by the Loblaw group [,] were not part of Glenhuron’s conduct of business” she stated:
Applying the meaning of “business,” there is no reason to conclude that the capital invested by the Loblaw group would have occupied the time and attention of Glenhuron in any meaningful way. ...
[T]his approach is consistent with long-standing jurisprudence which draws a distinction between “capital to enable [people] to conduct their enterprises” and “the activities by which they earn their income” … .
Neal Armstrong. Summaries of Loblaw Financial Holdings Inc. v. Canada, 2020 FCA 79 under s. 95(1) - investment business - (a), s. 248(1) - business, General Concepts - Separate Existence and Statutory Interpretation - Reading in Words.
CRA suggests that a child likely was not a majority-interest beneficiary as a valuation matter
The residue of Father’s estate was divided equally among his children including Son, with each child being entitled to the income from that child’s share, with the power of the trustees to distribute all of a portion of a child’s share to the child on or after attaining 25 (but with no such encroachment having occurred), and with the child’s remaining share to be held in trust for that child’s issue on the child’s death.
Whether Son was a “majority-interest beneficiary” impacted whether s. 69(11) applied to a “lossco transaction”. Although s. 251.1(4)(d)(i) deemed the trustees to have fully exercised their discretion to encroach, this by itself did not render Son a “majority-interest beneficiary” as the trustees did not have the discretion to pay one child’s share to another. The Directorate went on to note that “Son also held contingent beneficial interests in the remaining … Estate [assets], which would only be realized if the other Children die without issue surviving” and that:
…[I]t is unlikely that the FMV of Son’s contingent beneficial interests at the Time could result in him being considered a “majority-interest beneficiary” of Father’s Estate. … Accordingly, it is unlikely that the FMV of the total of Son’s respective income or capital interests in Father’s Estate could reasonably be considered to be greater than 50% of the FMV of all of the income or capital interests in Father’s Estate … .
Neal Armstrong. Summaries of 2 October 2019 Internal T.I. 2019-0803691I7 under s. 251.1(4)(d)(i) and s. 251.1(3) - majority-interest beneficiary .
CRA determines that an employer reimbursement of up to $500 for the cost of a telework computer is non-taxable during COVID-19
CRA stated, respecting payments made by an employer to its employees, to enable them to equip themselves to telework during the COVID-19 pandemic:
In principle, an employee receives a taxable benefit when the employee’s employer reimburses a personal expense to acquire telework equipment. ...
However … [i]n this particular [COVID] context, the Canada Revenue Agency is prepared to accept that the reimbursement, upon presentation of supporting documentation, of an amount not exceeding $500, of all or part of the cost of acquiring personal computer equipment to enable the employee to immediately and properly perform the employee’s work, is primarily for the benefit of the employer, so that it does not result in a taxable benefit to the employee.
Neal Armstrong. Summary of 14 April 2020 APFF Roundtable Q. 5, 2020-0845431C6 F under s. 6(1)(a).
Income Tax Severed Letters 22 April 2020
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA publishes a webpage on the emergency wage subsidy
CRA has added a plain-language webpage on calculating the Canada emergency wage subsidy.
It confirms that an “eligible entity” (i.e., employer) includes a trust.
Can you claim that you have suffered the required15% or 30% drop in revenue if your income on an accrual basis is good, but the cash has been slow in coming in? CRA states:
Use your normal accounting method when calculating revenue. You can use the cash method or the accrual method, but you must use the same approach throughout.
Ss. 125.7(6) and 163(2.901) are summarized as follows:
If you artificially reduce your revenue for the purpose of claiming the wage subsidy you will be required to repay any subsidy amounts you received plus a penalty equal to 25% of the total value.
CRA also states:
Employees who have been laid off or furloughed can become eligible retroactively, as long as you rehire them and their retroactive pay and status meet the eligibility criteria for the claim period.
Neal Armstrong. Summaries of Canada Emergency Wage Subsidy (CEWS) Calculator, 21 April 2020 CRA Webpage under s. 125.7(1) - eligible employee, eligible entity, eligible remuneration, qualifying revenue and s. 125.7(6).
The CRA approach to upstream loans in determining share TCP status may permit the manipulation of that status
2015-0624511I7 and 2012-0444091C6 indicate that the indebtedness between a parent and a wholly owned subsidiary has no impact on the determination of whether the value of the shares of the parent was derived directly or indirectly from real property situated in Canada. However, where an upstream loan is made to a parent, the funds in fact received by the parent are not ignored in determining whether the parent’s shares are taxable Canadian property (TCP). This creates the potential for the simple expedient of making an upstream loan to convert the shares of the parent from TCP to non-TCP.
An example is given of a grandchild Canadian real estate subsidiary (Cansub), whose shares to its immediate parent (Canco) proportionately represent a 55% real estate asset to Canco given that it also has substantial cash, making an upstream loan of that cash to Canco. Because that upsteam loan is to be ignored, there is a pro tanto reduction in the value of the Cansub shares to Canco under the special CRA approach (although the Cansub shares thereby effectively become a 100% real estate asset under that approach). However, because of the influx of cash to Canco, its assets now are proportionately only 40% real estate. Accordingly (leaving aside the 60-month tainting rule), the shares of Canco no longer are TCP to its Canadian shareholder (Canhold), and the shares of Canhold no longer are TCP to its non-resident shareholder.
Neal Armstrong. Summary of Jin Wen, “TCP and Intercompany Loans,” Tax for the Owner-Manager, Vol. 20, No. 2, p. 9 under s. 248(1) – taxable Canadian property – (d).
5 more translated CRA interpretations are available
We have published a further 5 translations of CRA interpretations, which were released in October 2010. Their descriptors and links appear below.
These are additions to our set of 1,152 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
San Domenico Vetraria – ECJ finds that a secondment was a taxable supply for VAT purposes
Although the European VAT Directive provided that supplies of services (or goods) for consideration were taxable for VAT purposes, Italian VAT legislation provided that the secondment of staff where only the payroll costs were reimbursed was to be ignored for VAT purposes. In finding that this Italian legislation was contrary to the VAT Directive, so that VAT was applicable to the payments made by an Italian subsidiary (San Domenico Vetraria) to its Italian parent (Avir) to reimburse the latter for the payroll costs of a staff member who had been seconded to San Domenico Vetraria, the 7th Chamber of the European Court of Justice stated:
[A] supply of services is effected ‘for consideration’ … if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient. … .
[T]he secondment was carried out on the basis of a legal relationship of a contractual nature between Avir and San Domenico Vetraria … [and] there was reciprocal performance, namely the secondment of a director from Avir to San Domenico Vetraria, on the one hand, and the payment by San Domenico Vetraria to Avir of the amounts invoiced to it, on the other.
This is consistent with the CRA position that the payroll reimbursement payments (in the absence of a s. 150 or 156 election) would generally be taxable unless the remuneration was paid by the one company as agent for the other company (see 15 May 2012 Ruling 142436 and 25 February 2016 CBA Roundtable, Q. 7).
Neal Armstrong. Summary of San Domenico Vetraria SpA v. Agenzia delle Entrate, Case C-94/19 (ECLI:EU:C:2020:193) (7th Chamber) under ETA, s. 123(1) – supply.
CRA finds that a credit generated by a business under the Ontario Net Metering Program is only income when applied, and is offset by a deduction for the electricity consumed
Under the Net Metering Program administered by the Ontario Power Authority, a participant who generates electricity primarily for its own use from a renewable energy source is billed only for the excess of the value of the electricity consumed by it over the value of the electricity supplied to grid. Where the value of the participant’s electricity consumption is less than the value of the electricity supplied, it generates credit, which is available for use against its future electricity consumption in the next billing period – but to the extent that the accumulated credit cannot be used within a given 12-month period, it will then be forfeited.
CRA stated:
[W]here a participant in the Net Metering Program generates electricity that is consumed in the course of carrying on a business or earning income from another property (such as a rental building), the value of such a credit would be included in the participant’s income from such business or property. This income inclusion will be realized in the taxation year in which the credit is applied against the participant’s electricity consumption costs and it will be equal to the value of the credit applied. However at that time, the participant would typically be entitled to an offsetting deduction for the cost of the electricity consumed by the participant, being an expenditure incurred for the purpose of earning income from the business or property.
Neal Armstrong. Summaries of 17 January 2020 External T.I. 2017-0685341E5 under s. 9 – computation of profit, s. 3 – business source, Sched. II – Class 43.1 and Reg. 1100(25).
Duque - Federal Court of Appeal finds that a director was able to establish that CRA had incorrectly included holdbacks in the corporate assessment
Webb JA confirmed that a director who was assessed under ETA s. 323 for failure of the corporation to remit GST can challenge the correctness of the assessment of the corporation for the unpaid GST, even where it had failed to do so. Here, the director was able to establish that the corporate taxable billings assessed by CRA had incorrectly included construction lien holdback amounts, even though ETA s. 168(7) deemed there to be no GST payable on the holdback amounts until they became payable.
Neal Armstrong. Summaries of Duque v. Canada, 2020 FCA 73 under ETA s. 323(1) and s. 168(7).