News of Note
The TOSI rules have resulted in the s. 48.1(1) election being less frequently desirable
Email this ContentAn election under s. 48.1(1) (where available) deems the electing shareholders to have disposed of their shares of a small business corporation for proceeds equalling the amount specified in the election. Capital gains from dispositions of qualified small business corporation (QSBC) shares are not subject to the tax on split income (TOSI). However, it may be advantageous to trigger a capital gain under subsection 48.1(1) even if the shares are not QSBC shares—for instance, to utilize tax attributes such as expiring losses.
The expanded "split income" definition includes taxable capital gains from the disposition of all non-QSBC private corporation shares realized, or deemed to be realized, by most Canadian residents. Thus, it may no longer be beneficial to trigger a capital gain under s. 48.1(1) where the shares are not QSBC shares, unless one of the other excluded-amount exclusions applies.
Neal Armstrong. Summary of Martin Lee, Manu Kakkar, Thanusan Raveendran, “Section 48.1: TOSI Trap in Going Public,” Tax for the Owner-Manager (Canadian Tax Foundation), Vol. 20, No. 1, January 2020, p. 4 under s. 120.4(1) – split income – (e).
CRA has published a new GST/HST Memorandum on school cafeterias and university and public college meal plans
ETA Sched. V, Pt. III, s. 12 exempts:
a supply of food or beverages (other than prescribed food or beverages or food or beverages supplied through a vending machine) where the supply is made in an elementary or secondary school cafeteria primarily to students of the school, except where the supply is for a private party, reception, meeting or similar private event.
Comments made by CRA on s. 12 in its new GST/HST Memorandum on school cafeterias and university and public college meal plans include:
- “primarily” means that “more than 50% of the supplies must be to students of the particular school” – and if the test is met, food and beverages sold at the cafeteria to the minority of non-students generally are exempted.
- where the school does not have a cafeteria, classrooms, gymnasiums or other designated areas can be treated as cafeterias
- a fast-food chain could supply the lunches served at the school cafeteria
ETA Sched. V, Pt. III, s. 13 exempts:
a supply of a meal to a student enrolled at a university or public college where the meal is provided under a plan that is for a period of not less than one month and under which the student purchases from the supplier for a single consideration only the right to receive at a restaurant or cafeteria at the university or college not less than 10 meals weekly throughout the period.
CRA accommodates the use by universities or public colleges of declining balance cards for meal plans and will treat the payments made under this card for the on‑campus meal plan account as contrasted, say, to the portion applied to an off‑campus meal plan account, or a mini‑mart or non‑food account such as for laundry or bookstore purchases, as qualifying for the above exemption if there is appropriate separate accounting and the other conditions are satisfied.
Neal Armstrong. Summaries of GST/HST Memorandum 20-5 “School Cafeterias, University and Public College Meal Plans, and Food Service Providers” December 2019 under ETA Sched. V, Pt. III, s. 12, s. 13, s. 14.
Dare Human Resources – Ontario Court of Appeal finds that placement agencies were the workers’ employers
Two Ottawa placement agencies supplied temporary workers to the Public Service of Canada and federal agencies. When these clients put out a call for temporary workers, the agencies identified appropriately qualified and willing candidates from their inventory, and negotiated an hourly rate of pay for the placement that exceeded what they paid to the workers. The agencies’ primary function during the assignment was to provide the payroll on the basis of time sheets signed off by the client, whereas the client managed and directed the workers. However, both dealt with performance and discipline issues.
In dismissing the agencies’ appeal of a decision of Hackland J that they were liable for Ontario employer health tax on the basis that they were the workers’ employers, the Court stated that Hackland J had appropriately taken into account “that the appellants are the only parties with contractual relationships with the workers and that the contractual documentation with the Government of Canada makes it clear that it was the government’s intention that the workers be the employees of the placement agencies.”
Although the situation arguably was not one of secondment, this decision provides some support for considering that seconded employees can remain employees of their original employer notwithstanding that they become subject to the superintendence and control of the organization with which they are placed.
Neal Armstrong. Summary of Dare Human Resources Corporation v. Ontario (Revenue), 2019 ONCA 549 under Reg. 100(1) – employer.
CRA ruling contemplates that a perpetual note whose interest payments were optional had non-deductible but withholding-exempt interest
The Rulings Directorate has published a 2017 ruling dealing with the issuance by a public company (ACo) of unsecured subordinated Notes, whose more unusual terms were that:
- ACo may in its discretion elect by notice in writing to cancel the payment of the interest coupons on a going-forward basis, but recognizing that it thereupon loses its right to pay dividends (or the equivalent such as share repurchases) until it recommences interest payments.
- On the occurrence of a specified event (presumably, some sort of financial difficulty), the Notes will be converted into a number of common shares based on a formula-determined conversion ratio (such that the shares' value could be well below that of the converted principal amount).
- “The Notes have no scheduled maturity or redemption date. ACo is not required to make any repayment of the Principal Amount except in the event of an event of default.”
The Ruling “Additional Information” states:
The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.
CRA ruled that the interest amounts paid to an arm’s length Noteholder will not be subject to Part XIII tax under s. 212(1)(b). Thus, CRA accepted that the Interest on the Notes was interest, but perhaps did not consider that the Interest was paid “pursuant to a legal obligation to pay interest” as required under s. 20(1)(c). 2017-0732001R3 (which was issued subsequently but published last year) is quite similar (and perhaps even relates to the same ACo).
Neal Armstrong. Summary of 2017 Ruling 2016-0649061R3 under s. 212(1)(b).
CRA finds that compensation received by residential tenants from a developer to compensate them for their dislocation costs was non-taxable
The City required a developer to pay tenants, whose units in a residential complex were to be replaced or renovated, (at their option) lump sums to compensate them for their moving and relocation expenses, or a supplement equal to their additional rental cost (subject to a cap) while they were awaiting a return to the developed complex – without being subject to any means testing. CRA concluded:
[I]t does not appear that these amounts would constitute income from a source, including social assistance under paragraph 56(1)(u) ... .
Neal Armstrong. Summary of 4 October 2019 External T.I. 2019-0825431E5 under s. 3.
Income Tax Severed Letters 15 January 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A Canco with excess credits could use them to offset the imputed interest on a PLOI to its NR parent
A Canadian high tech company with operating losses and no immediate use for SR & ED credits could get more benefit from them by making a loan to its non-resident parent which is elected under s. 15(2.11) to be a PLOI and then use such credits to offset the imputed interest on the PLOI.
Neal Armstrong. Summary of Bal Katlai, “Simple Planning Around Outbound Loans Using Tax Incentives,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 9 under s. 15(2.11).
Robitaille – Tax Court of Canada finds that a fully-unintended TFSA overcontribution generated over-contribution tax
The taxpayer, as a result of tapping the wrong icon on an ATM machine, inadvertently deposited $40,000 to his TFSA rather than his chequing account. He did not discover this until the overcontribution was drawn to his attention by a CRA agent almost a year later, at which point he immediately withdrew the $40,000. He had in a previous year made a $5,000 over-contribution, so that CRA did not apply its policy of automatic relief for first-time over-contributors.
In a decision that came out several months ago, Spiro J found that the Minister’s assessment of tax under s. 207.07(1)(b) was correct, but then stated, obiter:
Should the Minister decide to exercise her discretion under subsection 207.06(1) of the Act to cancel the Appellant’s liability in respect of the inadvertent deposit of $40,000 to his TFSA on the night of July 21, 2016, such cancellation would find ample support on the extraordinary facts of this case
Neal Armstrong. Summary of Robitaille v. The Queen, 2019 TCC 200 (Informal Procedure) under s. 207.02.
CRA provides a new GST/HST Memorandum on zero-rated training services
ETA Sched. VI, Pt. V, s. 18 provides for the zero-rating of supplies of educational or examination services made to a non-registered non-resident who is not an individual. S. 18, which is difficult (nay, impossible) to parse, is paraphrased as follows by CRA in a new GST/HST Memorandum:
The supply must consist of a service of instructing non-resident individuals in, or administering examinations in respect of, certain courses. These courses must lead to certificates, diplomas, licences or similar documents, or classes or ratings in respect of licences, that attest to the competence of the individuals to practise or perform a trade or vocation.
Points made by CRA include:
- “Competence … to practise” means that the mooted vocational or trade “course has a direct link to skills that are recognized by the CRA as relating to an individual’s ability to gain or retain employment.”
- The certificate etc. requirement is satisfied by “any document that demonstrates that the student has successfully completed a course of study and attests to the competence of the individual to practise or perform a trade or vocation.”
- “[T]he course or courses leading to the certificate, diploma, licence or similar document must have a pass/fail element based on the evaluation of an individual’s performance on one or more tests, graded materials and/or projects.”
- An example of training that is not zero-rated is safety training provided to employees of a non-resident forestry company: “While stand-alone industry safety courses may be beneficial … on their own they would not be considered to lead to an occupation … and … do … not lead to a diploma or certificate attesting to the competence of the individual to practice a trade or vocation.”
- There is no requirement that the resident supplier be of a particular type, e.g., a school authority.
Neal Armstrong. Summary of GST/HST Memorandum 20-8 “Educational Services Made to a Non-resident” December 2019 under ETA Sched. VI, Pt. V, s. 18.
Higgins – Court of Appeal of England and Wales finds that the period of ownership of real estate did not commence until the closing of its acquisition
HMRC sought to deny the UK principal residence exemption to the taxpayer on the basis that he did not satisfy the statutory requirement that the apartment in question had been his “only or main residence throughout the period of ownership.” HMRC took the startling position that the period of ownership began running from the time that the taxpayer entered into an agreement to purchase the apartment – and it was not even constructed until about three years later – but with the taxpayer occupying it as his main residence only from the time of the closing onwards until its sale at a gain. In part, HMRC relied on a provision of general application which provided that the disposal and acquisition of an asset under a non-conditional contract occurred at the time the contract was made.
Newey LJ found that this deeming provision did not sufficiently inform what was meant by the “period of ownership,” and in rejecting HMRC’s position stated:
HMRC's case … runs counter to the ordinary meaning of the words "period of ownership". The expression would not naturally, I think, be taken to extend to the interval between contract and completion. A purchaser would, as a matter of ordinary language, be described as "owner" only once the purchase had been completed.
Similar issues can arise under the ETA as to the scope of s. 133, which generally deems a supply to made at the time the related agreement is entered into.
Neal Armstrong. Summary of Higgins v Revenue and Customs [2019] EWCA Civ 1860 under General Concepts – Ownership.