News of Note
CRA indicates that trailer fees are GST-exempt except in exceptional circumstances
Email this ContentCRA indicated that, other than in “exceptional circumstances,” trailer fees (a.k.a., trailing commissions) paid by the manager of a mutual fund trust or corporation to a dealer generally would be regarded as part of the exempted consideration for the dealer’s services in arranging for the sale of shares or units, and not as consideration for a separate taxable supply from the dealer to the manager.
The referenced exceptional circumstances included where the dealer was not the same person who arranged for the initial sale of the mutual fund unit, and where the trailing commission was specifically linked in the agreement between the dealer and the manager to the provision of specific services and it could be determined that these services constituted a separate supply from that of arranging for the sale of shares or units.
CRA went on to note that the general exemption of trailer fees did not benefit the fund investors since such fees were paid by the manager out of taxable management fees charged by it to the fund.
Neal Armstrong. Summaries of 28 October 2021 GST/HST Interpretation 217144 under ETA s. 123(1) – financial service – para. (l), para. (q).
CRA finds that dental services provided to the patients of a dentist's professional corporation were GST exempt
ETA Sched. V, Pt. II, s. 5 exempts health care services “rendered” by a medical practitioner, such as a licensed dentist, to an individual. CRA ruled that this exempted the dental services provided by a dentist to patients notwithstanding that it was the corporation of which he was sole shareholder (and not an employee) which billed the patients for his services. It stated:
[R]egardless of whether the dental services are supplied through the Dentist’s clinic or directly by the Dentist, the exemption under section 5 would still apply.
CRA went on to find that the dividends received by him “as the only form of consideration for the work he performs for the Company” were exempted, i.e., CRA did not recharacterize the dividends as compensation for his services.
Neal Armstrong. Summaries of 4 November 2021 GST/HST Ruling 196473a under ETA Sched. V, Pt. II, s. 5 and s. 123(1) – financial service – (f).
Pastuch – Tax Court of Canada applies issue estoppel to preclude reviewing compellability of documents from a Saskatchewan regulatory authority
The taxpayer, who had appealed reassessments of three of her taxation years for which CRA had added approximately $2.8M in shareholder benefits to her income, brought a motion pursuant to Rule 86 to compel the Financial and Consumer Affairs Authority of Saskatchewan (“FCAA”) to turn over certain documents that she considered to be relevant to her appeal.
Graham J found that, with one minor exception, issue estoppel applied to preclude the taxpayer from again seeking to have such documents produced by the FCAA given that in a number of proceedings before a panel to consider allegations that she had breached a number of provisions of the Securities Act (Saskatchewan) the panel had concluded that the FCAA no longer had such documents in its possession.
Neal Armstrong. Summary of Pastuch v. The Queen, 2022 TCC 36 under Tax Court of Canada Rules (General Procedure), s. 86.
GST/HST Severed Letters November 2021
This morning's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their November 2021 release) is now available for your viewing.
Burke – Federal Court of Appeal reverses an administrative tribunal decision rather than referring it back for reconsideration
In 2017, the Minister of Employment and Social Development determined that Ms. Burke had been receiving old age security benefits since 1998 on the basis of a false representation that she had been a resident of Canada for more than 10 years, and asked her to repay over $115,000 in benefits.
After finding that, having regard to the text, context and purpose of the Old Age Security Act, the Appeals Division had unreasonably found that the Minister lacked the statutory authority to require the repayment of the benefits, Mactavish JA took the unusual step of making a final determination (i.e., effectively declaring the benefits to be repayable) rather than remitting the matter for redetermination by the administrative tribunal. In this regard, she referred to the statement in Vavilov as to the desirability of avoiding an “endless merry-go-round of judicial reviews and subsequent reconsiderations,” noted that the facts were not in dispute and also stated that “other factors identified … [in] Vavilov such as concerns about delay, fairness to the parties, costs to the parties and the efficient use of public resources, support a finding that the matter should not be remitted to the Appeal Division for redetermination.”
Neal Armstrong. Summary of Canada (Attorney General) v. Burke, 2022 FCA 44 under Federal Courts Act, s. 52(c)(i) and Statutory Interpretation – Absurdities.
Cheshire Cavity – Court of Appeal of England and Wales finds that a cavity formed out of rock to store gas was not “plant”
The taxpayer, which constructed and operated gas storage facilities in the UK, was found not to be entitled to capital allowances in respect of the expenditure incurred on the introduction of water into salt bearing rock so as to dissolve the rock and create an impervious cavity, and the displacement of the resulting brine by the introduction of gas (“de-brining”) so as to permit the storage of gas in the cavity, on the basis that the cavities were not “plant” (an undefined term).
Lewison LJ noted a “fundamental preliminary hurdle” in that “even after the de-brining, the land is still land.” He further found that even if this hurdle was surmounted, it was less appropriate to describe the item as apparatus for carrying on the business rather than as the premises in or upon which the business was conducted, so that under this jurisprudential test, the cavities were not plant.
The first question as to whether the cavities were land is reminiscent of the distinction in Canada between land (Reg. 1102(2)) and a building “or other structure" (Class 1). Cf. Hampton Golf Club (golf club greens not a structure) and Mont-Sutton (downhill ski trails qualified as surface construction).
Neal Armstrong. Summary of Cheshire Cavity Storage 1 Ltd & Anor v Commissioners for Her Majesty's Revenue and Customs [2022] EWCA Civ 305 under Reg. 1102(2).
CRA indicates that pay equity awards agreed to consensually did not qualify for tax reductions under s. 110.2
Ss. 110.2 and 120.31 effectively permit employees receiving awards for lost pay or employment to benefit from the lower rates of tax that would have applied had the amounts been received in the course of the years to which the awards related rather than subsequently as a lump sum. However, to be “qualifying amounts,” they must be received pursuant to a court or arbitration award or an agreement settling a legal proceeding.
Regarding amounts paid in 2019 by an employer to some of its employees as part of a pay equity settlement, the Directorate indicated that only arbitration award amounts (that were included in the employees’ employment income), and not pay equity salary adjustments paid pursuant to a Memorandum of Understanding between the Employer and the Union, were "qualifying amounts" - notwithstanding that the latter amounts were set out in an Annex to an arbitration award.
Neal Armstrong. Summary of 1 June 2021 Internal T.I. 2020-0858471I7 F under s. 110.2(1) – qualifying amount - (a).
CRA indicates that additional dentists’ charges for COVID precautions qualify as s. 118.2(2)(a) medical expenses
CRA indicated that extra fees paid to a dentist for additional “asepsis” provided for COVID reasons, i.e., for additional procedures to guard against COVID infection such as personal protective equipment and sterilization, qualified as eligible dental services under s. 118.2(2)(a), reasoning that dental “services cannot be provided without asepsis.”
Neal Armstrong. Summary of 4 May 2021 External T.I. 2020-0853361E5 F under s. 118.2(2)(a).
Income Tax Severed Letters 16 March 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The s. 18.2 rules include anomalies
Observations on the interest-limitation rules in ss. 18.2 and 18.21 include:
- The effect of the apparent exclusion of interest received from any non-arm’s length nonresident from interest and financing revenues (IFR) is that they are instead included in adjusted taxable income (ATI) so as to result in a 30% rather than 100% capacity per dollar of income.
- This is especially anomalous where the IFR is for example interest paid by a Canadian branch business of the non-resident such that the deductibility of that interest to the non-resident in computing its income earned in Canada was restricted under s. 18.2.
- This rule could also apply to a Canadian parent, acting as the market-facing entity for a group of companies, that borrows in the market (thus incurring interest expense) and then on-lends to its foreign affiliates.
- Variable C of the adjusted taxable income definition effectively reverses inclusions in taxable income of various items including foreign income covered by tax credits claimed under ss. 126(1) and (2). “[T]here appears to be a circularity problem with respect to foreign income, in that the amount of tax credits to which the taxpayer may be entitled under subsections 126(1) or (2) could be affected by its deductible IFE, which cannot be determined without first taking into account the tax credits.”
- Unlike under s. 18.2, there is no requirement under the s. 18.21 rules to determine the “excess capacity” for any particular group member and then separately transfer excess capacity of one particular group member to another. Rather, the total amount of IFE that may be deducted for the group is determined and as part of the joint election is merely allocated out to each member in that election itself. No group member should have restricted IFE to the extent that the allocated group ratio amount allocated to that member is less than that member’s net IFE.
- Unlike the s. 18.2 rules, under which there is no ability for trusts within a group to transfer or receive excess capacity, the mechanics of the s. 18.21 rules effectively permit the transfer of excess capacity to or from trusts within the Canadian group (although the s. 18.21 rules are unavailable where a group member is a mutual fund trust).
Neal Armstrong. Summaries of EY, “Proposed EIFEL rules,” Tax Alert 2022 No. 13, 9 March 2022 under s. 18.2(12), s. 18.1(1) – excluded interest, adjusted taxable income – B(a), adjusted taxable income – C(b), s. 111(1)(a.1), s. 18.21(3) and s. 18.21(2).