News of Note
MEO – European Court of Justice finds that an early termination fee was consideration for the contracted service
Email this ContentSubscribers to the services of a Portuguese telecommunications company (“MEO”) agreed to pay for a minimum subscription period - and when they discontinued service before the end of that guaranteed period they were required under the terms of their contracts to pay a lump sum equal to their monthly subscription fee multiplied by the number of remaining months in the guaranteed period. The ECJ found that this lump sum was taxable “consideration” received by MEO for its services on ordinary principles for VAT purposes, stating:
[I]t must be held that the consideration for the amount paid by the customer to MEO is constituted by the customer’s right to benefit from the fulfilment, by MEO, of the obligations under the services contract, even if the customer does not wish to avail himself or cannot avail himself of that right for a reason attributable to him.
In Canada, the distinction between consideration received by the supplier of services pursuant to the services contract, and compensation received by it for termination of the contract, is relevant because the latter amount is deemed by ETA s. 182 to be inclusive of GST/HST.
Neal Armstrong. Summary of MEO — Serviços de Comunicações e Multimédia SA v. Autoridade Tributária e Aduaneira, ECLI:EU:C:2018:942 (ECJ (5th Chamber)) under ETA s. 123(1) – consideration.
6 more translated CRA interpretations are available
We have published translations of a CRA interpretation released last week, an interpretation released in July 2012 (which a few months ago we missed translating in its proper sequence) and a further 4 CRA interpretations released in February, 2012. Their descriptors and links appear below.
These are additions to our set of 867 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/3 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for June.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2019-05-22 | 26 May 2016 External T.I. 2014-0527251E5 F - Interest Deductibility | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) | interest was deductible on a note indirectly issued to satisfy a dividend |
| 2012-07-27 | 3 July 2012 External T.I. 2012-0448651E5 F - Allocation of Safe Income | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | apportionment of safe income amongst three classes of discretionary common shares took into account the entitlement of the first class under the USA to a preferential dividend |
| 2012-02-17 | 8 February 2012 Internal T.I. 2011-0431581I7 F - Sous-alinéa 6(1)a)(vi) proposé | General Concepts - Effective Date | taxpayers can file based on proposed legislation and wait until announcement that it will not be implemented |
| Income Tax Act - Section 220 - Subsection 220(3.1) | no penalties if taxpayer promptly refiles after announcement that favourable amendment will not proceed | ||
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(vi) | “studies” are at all levels and bursaries and tuition reimbursements potentially are included | ||
| 2012-02-10 | 27 January 2012 Internal T.I. 2011-0428831I7 F - Crédit d'impôt pour frais médicaux | Income Tax Act - Section 118.2 - Subsection 118.2(3) - Paragraph 118.2(3)(b) | taxpayer could claim credit for years where he was no longer entitled to claim repaid Quebec drug benefit against private plan due to being out of time |
| Income Tax Act - Section 152 - Subsection 152(4.2) | application under s. 152(4.2) for drug claim deductions that later emerged | ||
| 12 January 2012 External T.I. 2011-0421791E5 F - Usufruit de terres boisées acquises avant 1987 | Income Tax Act - Section 248 - Subsection 248(3) - Paragraph 248(3)(a) | gift of bare ownership resulted in deemed disposition to deemed s. 248(3)(a) personal trust | |
| Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c) | property acquired before 18 June 1987 will qualify if s. 110.6(1.3)(c) (i) or (ii) satisfied | ||
| 27 January 2012 External T.I. 2011-0421551E5 F - Pompiers volontaires | Income Tax Act - Section 3 | modest amounts received by volunteers are not taxable | |
| Income Tax Act - Section 118.06 - Subsection 118.06(1) | “volunteer” firefighters are not true volunteers |
Finance official indicates that the PPT should be applied before GAAR
Stephanie Smith provided various MLI-related comments, including several noted below:
- The Canadian MLI implementing bill provides that, to the extent of any inconsistency between the provisions of the MLI (e.g., the principal purpose test (“PPT”)) and those of the Income Tax Convention Interpretation Act, the latter (the “ITCIA”) will prevail. S. 4.1 of the ITCIA provides that “notwithstanding the provisions of a Convention … the GAAR, applies to any benefit provided under the Convention.” The intention is that if the PPT applies, there will be no tax benefit under the Convention, to which the GAAR could apply. Conversely, if there is a benefit under the Convention after any application of the PPT, s. 4.1 ensures that the benefit can be subject to the application of GAAR. Thus, the correct order of application is: PPT 1st; GAAR 2nd.
- Approximately 20 of Canada’s treaties will be updated to include arbitration. Of those 20, 13 counties have agreed to Canada’s preference for baseball-style arbitration (e.g., Australia, France, Italy and Spain) and seven (e.g., Sweden and Japan) have indicated their preference for independent opinion. For those seven, further negotiation is needed.
- When the Notice of Ways and Means motion for the implementation of the MLI was tabled, Canada indicated that it would adopt additional provisions of the MLI including the tie-breaker rule for dual-resident entities, so that about 23 of Canada’s tax treaties are expected to be updated with that rule. Many of Canada’s tax treaties already have that rule, so this will result in that provision covering almost all of Canada’s treaty network.
- Finance is hopeful that Canada will be among the additional jurisdictions that will deposit their MLI instruments of ratification by the end of 2019. There are a number of procedural steps still to go.
- Finance is in the course of preparing “synthetic” unofficial Treaty texts, i.e., consolidations that show the effect of the application of the MLI to each covered tax treaty.
Neal Armstrong. Summaries of 14 May 2019 IFA Conference – Stephanie Smith on MLI – GAAR and PPT under Treaties – MLI – Art. 7(1), Art. 19 and Art. 4.
Morrissette – Tax Court decision casts doubt on the s. 184(3) short-cut method
In 2011-0412071C6 F, CRA indicated that if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short-cut” method under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income.
That is more-or-less what happened here. However, the taxpayer then appealed the assessment of the taxable dividend arising to him pursuant to the s. 184(3) election on the ground that the purported capital dividend paid to him by the corporation in fact was a valid capital dividend – and stating that he only agreed to make the election in order to avoid a punitive assessment of his corporation for Part III tax on the supposedly excess dividend. The Crown moved to have the taxpayer’s appeal struck on the grounds that it disclosed no reasonable cause of action (he was bound by his election).
Smith J dismissed the Crown’s motion, stating that he “cannot gloss over a legislative provision which requires the Minister to make an assessment permitting the taxpayer to then make an election” - i.e., a valid s. 184(3) election requires a preceding Part III tax assessment. Although this strongly suggests that the Minister’s assessment based on a void s. 184(3) election was also void, he noted that all that was necessary for him to determine was that the Crown had not established that the taxpayer’s appeal had no reasonable prospect of success.
His finding nonetheless suggests that other assessments made pursuant to assessments of taxable dividends made on the basis of the short-cut method could be attacked as being void if timely proceedings were brought.
Neal Armstrong. Summaries of Morrissette v. The Queen, 2019 CCI 103 under s. 184(3) and Tax Court Rules s. 53(1)(c).
Roofmart Ontario – Federal Court authorizes a CRA requirement for a construction material company to disclose its customers with significant purchases
Campbell J authorized a requirement by the Minister for Roofmart to disclose the particulars of all its customers who in any of the past 4 ½ years had made purchases of construction materials from Roofmart in excess of an annualized total of $20,000. He found that they constituted an ascertainable group, and the request was made to verify that they were meeting their ITA and ETA obligations, e.g., their return reporting requirements.
Neal Armstrong. Summary of Minister of National Revenue v. Roofmart Ontario Inc., 2019 FC 506 under s. 231.2(3).
Finance has issued a comfort letter respecting umbrella corporation interests where there is no tax avoidance purpose
Following some discussions and consultations with the funds industry and their advisors, the Department recently issued a comfort letter. The comfort letter provides an exception from the tracking interest rules if it cannot reasonably be considered that one of the purposes for the creation or issuance of a tracking interest in an umbrella corporation or for the acquisition of the interest by a taxpayer is to avoid the corporation being a CFA for the year. Thus, if the purpose is commercial rather than tax-related, there can be an exception from the tracking interest rules.
Neal Armstrong. Summary of 15 May 2019 IFA Finance Roundtable – “Tracking Interest Rules & Umbrella Corporations” under s. 95(8).
Finance is looking into the circular interactions between draft s. 247(1.1) and other parts of the Act
At the 15 May 2015 IFA Finance Roundtable, Ted Cook indicated that the purpose of s. 247(1.1) was to resolve ambiguity as to the ordering of the respective operations of Parts I and XVI.1 – for example, where a management fee paid by a Canadian taxpayer to a non-arm’s-length non-resident was found to be inappropriate, that could trigger s. 247, but the fee could also trigger s. 18(1)(a) on the grounds that the fee was not paid for the purpose of earning business income. Accordingly, s. 247(1.1) establishes that the operation of the transfer rules occurs as the first step. Finance considers that this is a sensible approach, as s. 247 adjusts the tax base, and the tax base should be set before other types of adjustments are applied.
Finance has heard the tax community’s concerns about circular interactions between s. 247 and other parts of the Act, and is looking into this issue.
An example (provided by Stephanie Smith) of the interaction of Part XVI.1 and a Part I provision (s. 18(4)), occurs where Canco is paying interest at 5% on a $100 million debt owing to a non-arm’s-length non-resident shareholder where an appropriate arm’s-length interest rate would have been 3%, resulting in the disallowance of $2 million of interest expense under s. 247(2). The next step is to turn to Part I. If Canco had $60 million in equity, meaning its debt-equity ratio was about 1/10 higher than the 1.5:1 ratio in s. 18(4), approximately 1/10, or $300,000, of the interest deduction then would be denied under s. 18(4).
She indicated that Finance would not normally expect an upward adjustment under Part XVI.1 to have tax consequences to a Canadian corporation under s. 85.
Neal Armstrong. Summary of 15 May 2019 IFA Finance Roundtable – “Proposed s. 247(1.1)” under s. 247(1.1).
CRA finds that interest was deductible on a note indirectly issued to satisfy a dividend
Opco wishes to distribute its accumulated profits of $500,000 to its parent (Holdco) without using cash and so as to generate an interest deduction. It declares and satisfies a $500,000 dividend through the issuance of preferred shares that have a redemption amount and paid-up capital of $500,000 – and then immediately redeems the preferred shares through its issuance to Holdco of a $500,000 promissory note bearing interest at a reasonable rate.
Before concluding that the interest was deductible under s. 20(1)(c)(ii), CRA referenced its position in Folio S3-F6-C1, para. 1.65 that “where a note is issued to purchase and cancel (or otherwise redeem) shares, interest expense may be deductible under subparagraph 20(1)(c)(ii),” and then stated:
In a situation such as described above where there is a capitalization of a portion of a corporation's accumulated profits as stated capital of the preferred shares of the capital stock of the corporation, the CRA is of the view that the "capital" attributable to the preferred shares for the purpose of applying the "fill the hole" concept … generally corresponds to the paid-up capital of the shares. The purpose test in subparagraph 20(1)(c)(ii) would generally be met since the Note replaces the capital that was used by Opco for eligible purposes.
Neal Armstrong. Summary of 26 May 2016 External T.I. 2014-0527251E5 F under s. 20(1)(c)(ii).
CRA indicates that it generally denies a s. 113(1) deduction where Canco has failed to prepare surplus accounts – which failure also will preclude a late-filed Reg. 5901(2)(b) election
Canco does not prepare detailed calculations of its various surplus and underlying tax balances in respect of a wholly-owned subsidiary (FA) from which it received a dividend, and claims a full s. 113(1) deduction for that dividend (without knowing how much is a deduction under s. 113(1)(a) rather than, say, s. 113(1)(d).)
CRA indicated that if a complete surplus computation is not provided to it, its current general practice is to deny the s. 113(1) deduction. Furthermore, an unsupported s. 113(1) claim could be subject inter alia to ss. 152(4), 163(2), 163(2.2) or 239(1), depending on the circumstances. (This seems to be misaligned with the jurisprudence. An assessment is of a particular dollar amount of tax, and it does not matter what route was reached to get to that figure – see, e.g., Consumers’ Gas. Furthermore (to draw an analogy with surplus account records), expense deductions may be accepted in circumstances falling well short of full supporting documentation – see, e.g., Staltari, Weinberger, Samra, Savoidakis, Sidhu.)
A related question: Would CRA accept the late-filing by Canco of an election under Regs. 5901(2.1) and (2.2) in order for the dividend to be completely sheltered by the s. 113 (e.g., if it later discovered that it had hybrid or taxable surplus)?
CRA indicated that relying on surplus balances unsubstantiated by a detailed computation would generally not meet the condition in Reg. 5901(2.1)(b) of having demonstrated making reasonable efforts respecting this predicament before the filing-due date.
In addition to the situation submitted not satisfying that test, it also would be the CRA view that it would not be “just and equitable” (per Reg. 5901(2.2)) to permit the filing of a late election where Canco did not make detailed calculations of its relevant surplus accounts because of its assumption that the late election, and related ACB deduction, would result in no income inclusion.
Neal Armstrong. Summaries of 15 May 2019 IFA Roundtable, Q.9 under s. 113(1)(a) and Reg. 5901(2.2).
Income Tax Severed Letters 22 May 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.