News of Note
In TOSI context, CRA considers that “income” means “revenue” and applies a single supply doctrine to incidental provisions of property
Email this ContentUnder the split income proposals, dividends or gains from “excluded shares” are excluded from the tax on split income. Subpara. (a)(i) of the excluded share definition requires that at least 90% of the corporation’s "business income" be from the provision of services, and para. (c) requires that "all or substantially all of the income" of the corporation be not derived directly or indirectly from related businesses.
CRA indicated that these references to “business income” and “income” are to gross income rather than net income.
Where the corporation has income from the provision of services and from income from non-services, the two should generally be computed separately. However, CRA apparently considered that where the non-service income was necessary for or incidental to the provision of the services themselves, all of the income would be considered to be services income. This is reminiscent of the single supply doctrine applied on the GST side (see, e.g., OA Brown and, most recently, Intrawest).
It remains to be seen whether CRA ports over the expansive interpretation it has given in the GST context to the concept of a supply of property. For example, it considers (e.g., in 2014 CBAO Roundtable, Q.35) that a fee for a training session or seminar is for the supply of intangible personal property rather than of a service. Or maybe CRA will look more to the M&P and Class 29 cases (see, e.g., Reg Rad, Crown Tire, Canadian Wirevision and Will-Kare).
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.5 under s. 120.4(1) – excluded shares.
626468 New Brunswick – Tax Court of Canada finds that safe income was reduced by corporate income taxes that would be computed on that income
An individual rolled his apartment building into a Newco in consideration for a mortgage assumption and shares with nominal paid-up capital, and then rolled those shares into a new Holdco. Following the realization shortly thereafter by Newco of a taxable capital gain and recapture of depreciation on a sale of the building, Newco increased the adjusted cost base to Holdco of its shares by effecting a series of s. 84(1) dividends (including a capital dividend) – following which the individual sold his shares of Holdco to a third party for a sale price based on the amount of cash sitting in Newco.
D’Auray J followed Deuce Holdings and a statement in Kruco in finding that the safe income of Newco was reduced by the amount of corporate income tax ultimately payable by it on its gain on the building sale. She also rejected the argument of Holdco that at the time of sale, no income taxes had yet become payable (because the income for the year had not yet been determined) so that there were not yet any corporate income taxes to deduct from safe income.
Neal Armstrong. Summary of 626468 New Brunswick Inc. v. The Queen, 2018 TCC 100 under s. 55(2.1)(c).
CRA confirms that safe income flows through on a spousal rollover of shares on death
CRA considers that there is no flow-through to the estate and beneficiaries of safe income attributable to shares where they were deemed to have been disposed of on death for their fair market value (thereby crystallizing that safe income in the shares’ stepped-up adjusted cost base) whereas the safe income does flow through where there was a rollover of the shares under s. 70(6).
Neal Armstrong. Summary of 2018 STEP Roundtable, Q.4 under s. 55(2.1)(c).
CRA considers that a non-GRE trust can have a calendar tax year even where it was dissolved
Ss. 249(1)(b) and 249(5) provide that the taxation year for a graduated rate estate is based on the period for which the accounts are normally made up, which in CRA’s view means that the final T3 return for a GRE is due within 90 days of the final distribution (thereby ceasing the need to make up accounts). For a non-GRE trust, s. 249(1)(c) defines the taxation year to be the calendar year (except as otherwise provided), so that the due date is 90 days thereafter.
Thus, if a non-GRE trust is wound up in mid-February, it might seem that the return cannot be filed until the following year. However, in fact, the T3 assessing personnel will assess such a return that is filed after the final distribution date and before the calendar year end.
The proposition that a non-GRE trust’s taxation year can end after it ceases to exist may generate difficulties in applying any throughout-the-year test to it.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.3 under s. 249(5).
CRA confirms that the 21-year rule’s application to testamentary trusts is almost always computed from the testator’s date of death
CRA considers most testamentary trusts to arise on the date of death of the testator, so that the 21-year rule generally is computed from that date.
Unusually, the creation date of the testamentary trust might not be concurrent with the testator’s date of death - for example, the will provides that, on the date of the death of the first-generation beneficiaries, such as the spouse, the trustee is to divide the remaining property into equal parts and hold each portion in a new trust for each of the testator’s children. In that situation, the latter trust may be viewed as being created some time after the testator’s date of death. However, the deemed disposition date of those new trusts would still be based on the testator’s date of death because of the rule in s. 104(5.8), which was described as intended to prevent any restarting of the 21-year clock through trust-to-trust transfers.
Neal Armstrong. Summary of 2018 STEP Roundtable, Q.2 under s. 104(4)(b).
Income Tax Severed Letters 30 May 2018
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that employers’ funding of employee health services through a PHSP results in non-creditable GST/HST
ETA s. 175 provides that where an employee acquires taxable services or property “for consumption or use in relation to activities of the employer,” then the employer generally will be entitled to an input tax credit where it reimburses the employee for the related charges. Would s. 175 apply to the employer covering the cost of employee health care under a private health services plan?
Bah, humbug! Obviously, there is no relation between the employer’s business and maintaining the health of the employees of that business. CRA stated:
[S]ince a medical or dental service is acquired by an employee in relation to his or her personal health and well-being, there would not be a direct connection between the service and the activities of the employer. Therefore, while the making of a payment in satisfaction of a PHSP claim may itself relate to the activities of the employer, the employee’s acquisition of a service such as massage therapy does not.
Neal Armstrong. Summaries of 10 January 2018 Interpretation 139614 under ETA – s. 123(1) – financial service – para. (f.1), and s. 175(1).
CRA finds that full compensation to a customer who returned goods precluded access to the GST/HST consideration-adjustment rule
CRA accepts that ETA s. 232 generally applies where a supplier refunds the purchase price of goods that are returned to it by its customer, so that there is no need for the customer to charge GST/HST on the refund payment. However, CRA considered that s. 232 was not available where the supplier, in addition to refunding the purchase price for the returned goods, also covers the incremental freight costs of the customer.
This is odd. If the supplier only refunded the purchase price, and then made a further payment in settlement of a damages claim for not also covering the retailer’s incremental freight expenses, the refund could clearly be covered by s. 232, and the damages payment would be a non-taxable receipt to the customer.
Neal Armstrong. Summary of 21 December 2017 Ruling 157478 under ETA s. 232(2).
Metrogate – Tax Court of Canada finds that the degree of completion of a condo project should reflect land costs
The size of the transitional rebate that a developer was entitled to receive on an Ontario condo project turned on whether the cost to it of the land component could be taken into account in determining its degree of “completion” on the transitional date for the introduction of Ontario HST (July 1, 2010).
Favreau J accepted that the purpose of the rebate provision was to provide a mechanism for refunding a rough estimate of the “embedded” retail sales tax on that date in the project, and that it was unlikely that there would be much embedded RST in the cost of the land (albeit, the same could be said about the labour component of the costs, which was clearly eligible). However, 1096288 established (in a different context) that “land is a necessary element in any construction,” and this judicial interpretation of the concept appearing in the plain text before him was sufficient to trump the result he would have arrived at on a purposive interpretation. Thus, the developer got the enhanced transitional rebate.
Neal Armstrong. Summary of Metrogate Inc. v. The Queen, 2018 TCC 91 under New Harmonized Value-added Tax System Regulations, No. 2, s. 57(4)(c)(iv).
Talbot – Tax Court of Canada finds that a taxpayer did not “reside” in a northern region where he stayed there only during work days in a room provided by his employer
S. 110.7 allows individuals who satisfy conditions, including that they have resided for a period of at least six consecutive months in a "prescribed zone," to take a special deduction in computing their taxable income for the year for travel and accommodation expenses.
The taxpayer would work in a remote area of Quebec for a 22 work-day stint while staying in a room provided by his employer, and then vacate the room and return with his personal belongings to his home in Quebec City for 20 days off, before repeating the cycle. Fournier J found that this was insufficient to consider that the taxpayer ever “resided” in the prescribed northern zone, stating that “The most that can be said is that he intermittently stayed at the work site.”
Neal Armstrong. Summary of Talbot v. The Queen, 2018 TCC 94 under s. 110.7(1).