News of Note
CRA may bifurcate what otherwise might be a single supply of flight training time into a GST/HST taxable and exempt component
Email this ContentCRA indicates that the supply of solo and dual flight time by a flight school to would-be pilots can qualify as exempt vocational training only to the extent that such flight time does not exceed the minimum times set by federal regulation for the provision of licences and ratings – and that the purchase of hours in excess of this minimum is taxable.
This is an unusual example of CRA purporting to bifurcate what otherwise might be a single supply of a service into two components. Such bifurcation arguably could be justified by Intrawest.
Neal Armstrong. Summaries of GST/HST Memorandum 20-4 “Vocational Schools and Courses” December 2019 under ETA Sched. V, Pt. III, s. 1 – vocational school, s. 6 and s. 8.
Univar – Tax Court of Canada faults the Crown for arguing for adherence to the Tariff of costs
Univar lost it appeal of a s. 212.1-related GAAR assessment in the Tax Court but succeeded in having that decision reversed by the Federal Court of Appeal. Boyle J awarded costs against the Crown of $300,000, or approximately ½ of Univar’s tax counsel’s fees. In addition to more mundane factors such as the significant amount at stake ($40M), and the volume and complexity of the case, he rejected the Crown’s argument that a subsequent Budget amendment (announced after the case was heard) detracted from the significance of the GAAR issue at stake, and also indicated that a further factor tending to increase his cost award was “the Crown’s stubborn clinghold to the Tariff amount [of $6,500], and its incorrect view that this Court needs to identify a principled reason to depart from the Tariff.”
Neal Armstrong. Summary of Univar Holdco Canada ULC v. The Queen, 2020 TCC 15 under Rule 147(3).
5 more translated CRA interpretations are available
We have published a further 5 translations of CRA interpretations released in March, 2011 (all of them, from the 2010 APFF Roundtable). Their descriptors and links appear below.
These are additions to our set of 1,078 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for February.
FAPI earned by foreign sub of a CCPC will be double-counted under the s. 125(5.1)(b) passive-income grind
The reduction of the US federal corporate tax rate from 35% to 21% (assuming no substantial state income tax) may now necessitate a determination of whether central management and control of an FA is exercised in Canada. If a US-incorporated foreign affiliate nonetheless is centrally managed and controlled in Canada, its net earnings from an active business will be added to its taxable surplus rather than its exempt surplus. On a full distribution of the FA's after-tax earnings of $79 out of taxable surplus, Canco would be required to use the deductions under both ss. 113(1)(b) and (c) to shelter the dividend inclusion and, even so, there would be $20 of unsheltered income that was recognized by Canco.
Where active business income earned by a controlled foreign affiliate that is an LLC in Year 1 is distributed to its member in a subsequent year, this results in an effective tax rate (in the case of a B.C. resident) of 66.87%. This high effective tax rate results from the member being entitled to a deduction only under s. 20(12) respecting the US tax. If there is no timing mismatch, then the ETR improves to 57.67%.
Where there is a Canadian-controlled private corporation, the optimal structure for the earning of aggregate investment income entails the AII being earned by a C corp. that is a CFA of the CCPC. The all-in ETR is 50.75%, which compares favourably to the ETR for AII earned by a CCPC directly of 54.99%.
S. 125(5.1)(b) provides an additional restriction on the business limit of a CCPC based on the passive income (a.k.a., AAII) of it and associated corporations. A CFA usually will be associated with the CCPC, in which case, the AAII of the CFA will be taken into account for these purposes. However, such income, by virtue of being foreign accrual property income, also will be AAII of the CCPC itself (without any “FAT” deduction under s. 91(4).)
Therefore, FAPI earned by a CFA that is associated with the Canadian corporate taxpayer may be counted twice toward the new passive income restriction.
Neal Armstrong. Summaries of Tim Barrett and Kevin Duxbury, “Corporate Integration: Outbound Structuring in the United States After Tax Reform,” 2018 Conference Report (Canadian Tax Foundation), 18:1-76 under s. 113(1)(c), s. 20(11), s. 20(12), Reg. 5907(1) – net earnings, s. 91(4), s. 91(5), s. 129(1), s. 120.4(1) – split income – (a)(i), s. 129(4) – NERDTOH, s. 125(5.1)(b).
Lilyfield –a dissolved corporation’s appeal to the Tax Court was a nullity notwithstanding a prior Tax Court approval of an application to appeal
Similarly to the corresponding provision of the OBCA considered in 1455257 Ontario, s. 219(2)(a) of the Corporations Act of Manitoba provides that a proceeding commenced by a corporation before its dissolution can be continued as if it had not been dissolved. A taxpayer, before its dissolution for failure to file returns, had brought an application (to which its proposed Notice of Appeal was attached) to extend the time for launching its appeal, with that Notice being filed immediately after the granting of the application, which occurred after the corporation was dissolved.
MacPhee J found that the filing of the extension application was insufficient to consider that the proceeding (the appeal) had been launched before the dissolution – and essentially followed 1455257 Ontario in finding that the Manitoba statute “does not allow a dissolved corporation to initiate a civil procedure.”
Neal Armstrong. Summary of Lilyfield Development Inc. v. The Queen, 2020 TCC 16 under s. 169(1).
McCartie – Federal Court of Appeal agrees that it was inappropriate to make a Rule 58 reference where the evidentiary record needed to be established by witnesses
The unrepresented taxpayer appealed the determination by the Tax Court that four questions that he had sought to have determined under Rule 58, including whether evidence relied on by CRA in assessing him had been obtained in violation of his Charter rights, were not appropriate for determination under that Rule. In dismissing the appeal, Rivoalen J.A. noted that the questions would require the calling of witnesses to establish the evidentiary record, so that it was reasonable for Bocock J to consider that the objective under the Rule, that the answers provided “may dispose of all or part of the proceeding or result in a substantially shorter hearing or a substantial saving of costs,” would not be met.
Neal Armstrong. Summary of McCartie v. Canada, 2020 FCA 18 under Rule 58(2).
CRA indicates that a functional currency reporter realized a capital gain when a Cdn. dollar refund claim appreciated until receipt
Canco, which had elected to use a functional currency, claimed a refund (made in Canadian dollars as required by s. 261(11)) by filing an amended return for a year (apparently for the carryback of a loss to that year). As a result of the subsequent appreciation of the Canadian dollar as compared to the rate applicable to the particular year, it realized an FX gain (relative to the qualifying currency) when it received the refund in Canadian dollars. Was this gain ordinary income, a capital gain or a nothing?
After noting that “where a loss from a subsequent taxation year is carried back to a particular taxation year, the revised income taxes payable and any resulting refund are computed using the exchange rates applicable to that particular year, regardless of the exchange rate in the subsequent year,” CRA indicated that this situation was essentially dealt with in Folio S5-F2-C1, which addresses the reverse situation of FX gains in Canadian dollars on foreign tax refunds or payments – so that, here, the FX gain was a capital gain to be computed based on the FX rate change between that appliable to the previous year and that at the time of receipt. The response was quite vague as to how to compute the FX rate applicable to the previous year (the ILBD didn't seem to be asking for detailed guidance on this point).
Neal Armstrong. Summary of 31 July 2018 Internal T.I. 2016-0649631I7 under s. 261(5)(c).
CRA would seriously consider applying GAAR where excluded share status is achieved through shifting a professional services business
A professional corporation (PC1) whose non-voting equity was held equally by a physician (Dr. A) and Spouse A (who had no involvement in the practice) applied earnings to build up a large investment portfolio, which CRA noted very well might be an investment business (notwithstanding that a brokerage did all the investing work) given that the “courts have generally held that the level of activity required to conclude that a corporation has a business is low.” However, on December 30 of Year 1, PC1 ceased carrying on its medical services business, on December 31, Spouse A acquired 50% of Dr. A’s voting shares, and on January 1 of Year 2, Dr. A commenced carrying on the medical services business in a newly- incorporated professional corporation (PC2) with the same ownership as prior to December 30.
After finding that (i) the medical services business of PC1 constituted a related business in respect of Spouse A as regards any dividends paid on December 31 of Year 1 notwithstanding that such business had been previously discontinued and (ii) that such dividends paid by PC1 likely were “derived directly or indirectly” from such related business “given that the capital invested in the Portfolio was wholly-derived from either after-tax earnings of PC1’s medical services business or reinvested investment income,” CRA turned to the question of whether, if PC1 had an investment business the shares of Spouse A qualified as “excluded shares” in Year 2 - and found that this technically appeared to be the case. In particular, the test under para. (c) of the excluded share definition was by its terms to be applied to the results of the previous year (Year 1) and “all or substantially all of the income of PC1 is derived directly or indirectly from one or more related businesses (i.e., the medical services business and the investment business) in Year 1, and PC1 is still carrying on these businesses in Year 1” so that “any dividends paid from PC1 to Spouse A in Year 2 would be an ‘excluded amount’ and not subject to TOSI.”
However, CRA stated:
[T]he facts in the above scenario strongly suggest that these transactions were undertaken primarily to ensure that the shares of PC1 could meet the definition of “excluded shares” such that the “excluded amount” exemption would be available to Spouse A. If it is determined that any transaction, either alone or as part of a series, has been undertaken primarily to obtain the “excluded amount” exemption under paragraph 120.4(1) in a manner that would frustrate the object, spirit and purpose of section 120.4, the CRA would seek to apply the GAAR.
The condition in para. (c) of “excluded shares” would not be satisfied in Year 3 or subsequently, so that the shares of Spouse A would not be excluded shares in those years. Furthermore, "any dividend paid by PC1 to Spouse A would be considered to be derived directly or indirectly from a 'related business' carried on by PC2 (and not PC1) in Year 2 and subsequent years," given that the "derived directly or indirectly" phrase was to be construed broadly.
Neal Armstrong. Summaries of 10 January 2020 External T.I. 2019-0819431E5 under s. 120.4(1) – “related business”, “excluded shares” – (c) and "excluded amount" - (e)(ii).
Income Tax Severed Letters 29 January 2020
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Minority shareholders transferring their shares of Power Financial Corporation to Power Corporation of Canada must elect under s. 85 to get rollover treatment
Power Corporation of Canada (“PCC”), whose subordinate voting common shares trade on the TSX, holds approximately 2/3 of the common shares of Power Financial Corporation (the “Company”), with the balance of those common shares trading on the TSX. In order to eliminate the holding company discount for this structure and to effectively privatize the Company (thereby reducing costs) it is proposed that each of the minority’s common shares be exchanged under a CBCA Plan of Arrangement for 1.05 subordinate voting common shares of PCC and $0.01 of cash. The exchanging shareholders will thereby receive, as an economic matter, an incremental 0.7% interest in the assets and liabilities of the Company they already own, plus a 36.7% interest in the non-Company assets of PCC.
Eligible (i.e., taxable) minority shareholders may provide an s. 85 election form to PCC within 120 days of the Arrangement in order to secure rollover treatment. The exchange is taxable for U.S. purposes.
Neal Armstrong. Summary of Power Financial Corporation Circular under Mergers & Acquisitions – Mergers – Privatizations.