News of Note

We have uploaded a copy of the questions posed at today’s 2022 STEP Roundtable and summaries of the CRA responses.

In response to Q.1, CRA indicated that the effect of the formula in s. 104(21.2) is to require a proportionate allocation of gains of a discretionary personal trust from the disposition of qualified small business corporation shares so that, for example, if it realized capital gains in the year from both public company shares and QSBC shares, it would be precluded under the formula from allocating a disproportionate share of its capital gains distributions for the year to one of its beneficiaries (who had unused capital gains deduction room) as a distribution of QSBCS gains, and from allocating a disproportionate share of its “ordinary” capital gains distributions to the other beneficiary, who no longer had access to the deduction.

Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.1 under s. 104(21.2).

A supplier after debiting accounts receivable and crediting revenue for an amount it has invoiced, immediately reverses this entry because, for example, the recipient has declared force majeure but the supplier continues to invoice to protect its legal rights but, on the other hand, is advised by its auditors that it cannot recognize the revenue even though it has a more-likely-than-not legal option that it could successfully sue.

The supplier would be required to add the GST/HST amount invoiced to its net tax under s. 225(1) – but could it claim an offsetting bad deduction under s. 231(1)?

In its response, CRA did not make anything out of the fact that the receivable essentially was not recognized as revenue in the first instance – rather than being recognized and then promptly written off, and instead stated:

[I]t does not appear that the conditions of subsection 231(1) would be met. For example, it is not clear that all reasonable steps have been taken to obtain payment and that it has become evident that the debt has become a bad debt.

Accordingly, it may not be problematic under s. 231 for a debt to become bad essentially at the outset.

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.8 under ETA s. 231(1).

A securitization trust (“CFI”) used a concurrent lease structure under which it became the concurrent (head) lessee of automobiles from automobile dealer and sublessor of the automobiles to the dealership customers, and financed the automobile dealers by prepaying rents under the head leases. Before finding that CFI had satisfied the documentary requirements for claiming ITCs for the HST on the rent prepayments, and in rejecting the Crown position that various CFI spreadsheets did not satisfy its alleged requirement that “a supporting document … must originate from or be signed by the [supplier]”, Hogan J stated:

[T]he broad term “form” was used in subsection 169(4) of the Act and section 2 of the Regulations because Parliament was mindful of the benefits of paperless record keeping. …

[I]nformation stored on a registrant’s computer server qualifies as supporting documentation. …

[T]he Regulations do not set out a general requirement for the supporting documentation to be issued or signed by the supplier. The definition of “supporting documentation” only requires the document to be issued or signed by the supplier where the documentation does not fit within one of the document types outlined in paragraphs (a) to (g) [of the “includes” definition of “supporting documentation”] or fall within the meaning of “form” as set out in the preamble to the definition.

Neal Armstrong. Summary of CFI Funding Trust v. The Queen, 2022 TCC 60 under Input Tax Credit Information (GST/HST) Regulations – supporting documentation.

Prior to the October 30, 2007 announcement of the GST rate reduction from 6% to 5%, a builder agreed with numerous buyers to sell them (on a GST-included basis) condo units in a project that had not yet received site plan approval or a building permit. The transitional provision indicated that the reduced rate applied inter alia “to any supply … made on or after January 1, 2008.”

In concluding that there were supplies of real property under the agreements that occurred prior to 2008, so that the 6% rate applied, D’Arcy J. found:

• That there was a supply at the time each agreement was entered into on general principles given that such agreement gave the buyer a conditional right to acquire a specific (albeit, so far, non-existent) condo and: “This was the provision of something and thus constituted a supply.”
• In any event, ETA s. 133 (which, in approximate terms, deems supplies of property to occur when the agreement for their supply is entered into) deemed the agreements to be supplies of the condos, with D’Arcy J. noting in this regard that “[t]he application of section 133 is also not contingent on the existence of the Condo Units at the time the parties entered into the … Agreements … .”

He also accepted the Crown’s alternative argument that the appellant had in fact collected GST at the 6% rate (and thus, would have been required to remit tax at that rate under the s. 225(1) formula, which included "all other amounts collected by the person … on account of tax,” even if the 5% rate applied under the transitional rule), noting that the 6% rate was referenced in the statements of adjustments at the closings, and that the buyers claimed the new housing rebates on the basis of a 6% rate.

CRA had incorrectly computed the GST as being 6/106 of the agreed consideration for the purchase plus the new housing rebate amount that was assigned by the buyer to the appellant, rather than only 6/106 of the agreed consideration – but this did not matter since this erroneous tax was, in fact, collected and, therefore, was required to be remitted.

Neal Armstrong. Summaries of Great Land (Olive) Inc. v. The Queen, 2022 TCC 56 under ETA s. 133 and s. 225(1) – A(a).