News of Note
CRA finds that eligible remuneration that is returned to the eligible employer as a capital contribution or shareholder loan adjustment is excluded for CEWS purposes
Email this ContentThe CEWS (wage subsidy) is generated based on the amounts of “eligible remuneration paid to the eligible employee.” CRA stated, in the context of an employee who also was the controlling shareholder of the eligible entity, that “where salary and wages are only reflected by journal entry as an expense by the employer with a corresponding credit to a due to shareholder loan account, such salary and wages are not considered eligible remuneration paid to an eligible employee.”
Para. (c) of the eligible remuneration definition excludes “any amount received [by the eligible employee] that can reasonably be expected to be paid or returned, directly or indirectly, in any manner whatever to … the eligible entity.” CRA indicated that this exclusion would apply where “salary and wages are paid to an eligible employee and returned to the eligible employer with a corresponding increase or credit to a due to shareholder loan account or other shareholder loan account,” or where “salary and wages [are] paid but returned to the corporation by the shareholder/employee as a capital contribution or as an amount re-loaned to the corporation.”
Neal Armstrong. Summaries of 29 March 2021 Internal T.I. 2020-0865791I7 under s. 125.7(2) and s. 125.7(1) – eligible remuneration – (c).
Income Tax Severed Letters 26 May 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that business interruption insurance proceeds generally are not excluded as extraordinary revenue for CEWS purposes
Regarding the treatment of business interruption insurance proceeds for Canada emergency wage subsidy (“CEWS”) purposes, CRA stated:
[A]n entity would typically acquire business interruption insurance to replace lost revenue when the entity is unable to carry on its ordinary activities. Accordingly … business interruption insurance proceeds would generally be included in qualifying revenue and would generally not be considered an extraordinary item.
This sounds rather like an application of the surrogatum principle: the business interruption itself is extraordinary, but the revenues for which the insurance proceeds are a substitute are ordinary.
Neal Armstrong. Summary of 3 May 2021 Internal T.I. 2020-0852571I7 under s. 125.7(1) – qualifying revenue – (c).
Logix Data – Tax Court of Canada finds that alleged SR&ED work was routine engineering
A taxpayer’s SR&ED claims for work on solar shingles installations were denied by Monaghan J on various bases including that the taxpayer did not have enough knowledge of the field to identify whether its work was advancing the state of knowledge, its work addressed routine engineering challenges and its documentation of the supposed SR&ED work was paltry and not prepared contemporaneously with the work.
Neal Armstrong. Summaries of Logix Data Products Inc. v. The Queen 2021 TCC 36 under s. 248(1) - SR&ED.
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in March and February, 2008. Their descriptors and links appear below.
These are additions to our set of 1,546 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 13 ¼ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Lauzon – Federal Court rejects an unjust enrichment claim by a taxpayer claiming he had not received refund cheques
The taxpayer alleged that he had not received cheques for refunds claimed in his returns for his 2005 and 2006 taxation years, which CRA’s records showed as having been paid, and brought an action against CRA in 2018 for unjust enrichment on the basis that it had not in fact received the refunds. In addition to finding that this action had been brought beyond the two-year limitation period in s. 4 of the Limitations Act (Ontario), Walker J also found that the CRA’s records of the payments having been made were sufficient evidence of this having occurred. She then stated:
I agree with Mr. Lauzon that the CRA’s evidence does not establish whether the Refund Cheques were negotiated by Mr. Lauzon or were stolen and negotiated by a third party. However, the CRA has demonstrated on a balance of probabilities that the Refund Cheques were issued, mailed and cashed with the result that Mr. Lauzon has not established any enrichment of the Crown. Without proof of enrichment, Mr. Lauzon’s claim for unjust enrichment can go no further and his action must fail.
Neal Armstrong. Summaries of Lauzon v. Canada (Revenue Agency) 2021 FC 431 under General Concepts – Unjust enrichment and s. 248(7).
CRA indicates that post-closing adjustments to a real estate sale price are generally not subject to an obligation to charge GST/HST
On a real estate sale, the parties normally prepare a statement of adjustments whereby, at closing, adjustments are made for expenses pre-paid by the vendor (e.g., lawn mowing or snow removal fees, property taxes, amenities fees) and for revenues of the vendor, e.g., unearned prepaid rents that should be credited to the purchaser. Regarding whether such adjustments should be regarded as being to the purchase price for the real estate, so that normally no GST/HST should be charged on such adjustments (based on the ETA ss. 221(2) and 228(4) self-assessment rule or a residential real estate exemption), CRA treated this as essentially a question relating to an application of the single-supply doctrine, so that “if an obligation is inextricably tied to the real property itself, then it is likely not a separate supply from the sale of the real property and the adjustment likely increases or decreases the value of consideration” for the real estate, whereas “if it is determined that an obligation giving rise to the adjustment is a separate supply from the sale of the real property that is not incidental to the sale of the real property, then the application of the GST/HST to the adjustment depends on the nature of the separate supply itself.”
Other than adjustments for real property taxes, which it accepted were adjustments to the real estate purchase price, it did not pass on which of the typical adjustments satisfied this test.
However, it went on to indicate that it did not make much difference to the application of this distinction whether the adjustments were made at closing or as a post-closing item.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.29 under ETA s. 221(2).
CRA states that a badly-drafted HST Reg. that could deem all ILPs to be SLFIs should be broadly interpreted
Under s. 9(a) of the SLFI Regulations, an investment limited partnership ("ILP") whose partners are all resident in a single HST province, such as Ontario, will also be a selected listed financial institution (“SLFI”) if it has a permanent establishment in a non-HST province. As per s. 3(e)(i) of the SLFI Regulations, it will be deemed to have a PE in such a province where it “is qualified, under the laws of Canada or a province, to sell or distribute units of the [ILP] in the particular province.”
If the quoted phrase were interpreted broadly, then all ILPs would be regarded as being permitted under the securities laws of each provinces to distribute their securities on a private-placement basis - so that all ILPs would be regarded as qualified to distribute securities in each province. However, such an interpretation would render s. 3(e)(i) redundant, i.e., all ILPs would be SLFIs. What likely would come within s. 3(e)(i) is something like a conventional mutual fund which has already gone through the hoops so as to be qualified to be in continuous distribution – as contrasted, at the other extreme, to a conventional ILP which if it, for example, has no intention of preparing a current offering memorandum, is not yet qualified to distribute securities, even on a private placement basis.
When asked about s. 3(e)(i), CRA gave the following opaque answer:
It is CRA’s understanding that the policy intent is that the words of subparagraph 3(e)(i) of the SLFI Regulations are intended to be broadly interpreted. Similar to other distributed investment plans, the ILP would be required to determine if it is qualified under the laws of Canada or a province, to sell or distribute its units in a particular province in order to determine whether the ILP is deemed to have a permanent establishment in a particular province.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.26 under SLFI Regs. s. 3(e)(i).
CRA implies that hair stylists’ chair rents might qualify as rent for CERS purposes
Regarding a query as to whether an amount paid by a barber or hairdresser (“Stylist”) as “chair rent” to the owner of a salon may be claimed as a “qualifying rent expense” for Canada emergency rent subsidy (“CERS”), CRA first indicated that the term “chair rent” may “refer to an amount paid for the use of, or right to use, a portion of the Salon,” and then stated:
Where an amount paid by a Stylist (who is an eligible entity) as “chair rent” is rent for the use of, or right to use, an area within the Salon that is real or immovable property such that it is capable of being a qualifying property, it may be a qualifying rent expense for the Stylist, provided all of the conditions in the definition of qualifying rent expense are met.
It is highly likely that the stylist would be a non-exclusive licensee of the salon space rather than a tenant, given the absence of a right of exclusive possession. Accordingly, these comments may imply that amounts paid by a licensee of space or a portion thereof could qualify as “rent.”
Neal Armstrong. Summary of 11 May 2021 Internal T.I. 2020-0869981I7 under s. 125.7(1) – qualifying rent expense.
CRA confirms that a property can be bifurcated into a qualifying property and a residence for CERS purposes
The definition of “qualifying property” for Canada emergency rent subsidy (“CERS”) purposes excludes a self-contained domestic establishment (“SCDE”) that is used by the eligible entity or a person with whom it does not deal at arm’s length. CRA indicated that the fact that a particular property included a portion that was subject to the SCDE exclusion would not necessarily “preclude the remaining part of the property from being a qualifying property.” For example, if part of a building was used as a personal residence, the remainder of the building that was used as a store could potentially generate qualifying rent expense. (A particular example provided by CRA to this effect confusingly refers to the eligible entity as being the owner rather than the tenant of the property.)
Neal Armstrong. Summary of 17 May 2021 Internal T.I. 2020-0870041I7 under s. 125.7(1) – qualifying property.