News of Note
Higgins – Court of Appeal of England and Wales finds that the period of ownership of real estate did not commence until the closing of its acquisition
Email this ContentHMRC sought to deny the UK principal residence exemption to the taxpayer on the basis that he did not satisfy the statutory requirement that the apartment in question had been his “only or main residence throughout the period of ownership.” HMRC took the startling position that the period of ownership began running from the time that the taxpayer entered into an agreement to purchase the apartment – and it was not even constructed until about three years later – but with the taxpayer occupying it as his main residence only from the time of the closing onwards until its sale at a gain. In part, HMRC relied on a provision of general application which provided that the disposal and acquisition of an asset under a non-conditional contract occurred at the time the contract was made.
Newey LJ found that this deeming provision did not sufficiently inform what was meant by the “period of ownership,” and in rejecting HMRC’s position stated:
HMRC's case … runs counter to the ordinary meaning of the words "period of ownership". The expression would not naturally, I think, be taken to extend to the interval between contract and completion. A purchaser would, as a matter of ordinary language, be described as "owner" only once the purchase had been completed.
Similar issues can arise under the ETA as to the scope of s. 133, which generally deems a supply to made at the time the related agreement is entered into.
Neal Armstrong. Summary of Higgins v Revenue and Customs [2019] EWCA Civ 1860 under General Concepts – Ownership.
CRA has issued a GST/HST Memorandum on the elections to render exempt supplies of educational services taxable
Sched. V. Pt. III, s. 6 and 8 permit what otherwise would be exempt supplies of educational, training or examination services under those provisions by one of the educational, trade or professional bodies referred to therein to be rendered as taxable supplies by virtue of the making of an election to that effect. CRA has issued a new GST/HST Memorandum discussing these elections. Points made include:
- Making the election results in the body having a commercial activity and may generate input tax credits, and may also cause the change-of-use rules to apply, thereby generating further credit.
- However, the change-of-use rules could generate a tax liability if the election subsequently is revoked.
- There is no need to submit the election form to CRA.
- If a particular supply otherwise would be exempted both under ss. 6 and 8, the supplier must elect under both sections to ensure that the supply will not be exempt. However, a single election form may be used.
- If other exemptions apply to the supply (e.g., under Sched. V. Pt. III, s. 7 or Sched. V. Pt. V.1, s. 1, their exempt status will apply to effectively override the election.
Neal Armstrong. Summaries of GST/HST Memorandum 20-9 “Election to Make Exempt Supplies of Educational Services Taxable” December 2019 under ETA Sched. V. Pt. III, s. 6 and s. 8.
CRA indicates that a blood relative may be entitled to a s. 118(1)(b) deduction for a child even though the two parents are paying and receiving support respecting the child
The deduction under s. 118(1)(b) for a wholly-dependant person is not available where the claimant supported (or lived with) a spouse or common-law partner. CRA indicated that this denial would continue to apply where the person paying support (Taxpayer B) to the ex-spouse (Taxpayer A) was actually supporting the minor child in question if the court order requiring the payment of support to Taxpayer A was not amended accordingly. However, if the child starts living on a wholly-dependant basis with Taxpayer C, who is a blood relative of Taxpayer B, the credit generally could be available to Taxpayer C, so that it is now irrelevant that the support obligations of Taxpayer B to Taxpayer A have not been altered by court order.
Neal Armstrong. Summary of 6 August 2019 Internal T.I. 2018-0785701I7 under s. 118(1)(b).
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in March, 2011. Their descriptors and links appear below.
These are additions to our set of 1,063 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
A U.S. amendment effectively denying an FTC for Canadian taxes imposed on profits of a U.S. producer on sales into Canada may override the Treaty
Under the prior version of Code s. 863, the gross revenue of a U.S. person from goods produced by it in the U.S. and sold outside the U.S. could often be allocated partly to the other country for U.S. foreign tax credit (FTC) purposes. Revised s. 863 allocates all gross revenue from production and sales to the place of production (the U.S.) for FTC purposes. This has the effect of eliminating FTCs for any income tax that is imposed by the other country on the profits of the sales transaction, thereby triggering double taxation where such taxes are imposed in accordance with any applicable Treaty limitations (e.g., under Art. VII of the Canada-U.S. Treaty – in relation to which Canada and the U.S. have agreed to adopt the “Authorized OECD Approach” (AOA) to the attribution of profits to a Canadian permanent establishment of a qualified U.S. resident).
Such Canadian taxes should be allowed by the U.S. as an FTC under Code s. 901 - notwithstanding the amendment to s. 863 - by virtue of Arts. XXIV(1) and (3) of the Treaty. However, does this amendment override (to deny the credit) Art. XXIV, either because of the later in time rule in Code s. 7852(d)(1) (respecting conflict between a Code rule and Treaty provision) or because of language in the 1984 Treasury Technical Explanation contemplating that, to at least some extent, the U.S. would be able to amend its FTC rules? Respecting the later in time rule, it may be germane that application of this rule requires clear Congressional intent for a Treaty to be overridden, whereas Congressional expressions of intent do not evince any focus on this issue.
Neal Armstrong. Summaries of Nathan Boidman, “Will Revised Code Section 863 Be Constrained by the Canadian Treaty on Sales of Inventory into Canada,” Article for Tax Notes International, 3 February 2020 under Treaties – Income Tax Conventions – Art. 7, Art. 24, ITA s. 115(1)(a)(ii).
Richards – Tax Court of Canada finds that legal fees incurred in an oppression action were both on capital and income account
The main source of income of the taxpayer and her husband was distributions from a family trust of dividends from two family corporations. However, shortly after their separation, her husband refused to consent to the dividend distributions, leaving her with no source of income other than her RRSP. She commenced an action including a claim for spousal support and an oppression remedy. The oppression action was settled with her receiving a dividend of $1.5 million as a result of her transferring shares of one of the companies to her husband. (She also was successful in her action for support.)
This might have been sufficient for a finding that the legal expenses of the oppression action were fully deductible as being incurred in order to generate continued income. However, regarding the oppression action, the taxpayer “agreed on cross-examination that the main relief she sought was the redemption of her shares.” McPhee J allowed the deduction of only about 25% of the legal expenses, stating:
Legal expenses incurred for the purpose of preserving capital assets are not deductible [citing Keating].
… [T]he fees incurred pursuing the Oppression litigation had as its dominant purpose, the intention to protect the Appellant’s interest in her shares in the corporations. …
[T]here is no question that professional fees were incurred seeking both the support and/or the payment of dividends by the corporations and the redemption of the Appellant’s shares. … Therefore, I have apportioned the fees in issue.
Neal Armstrong. Summary of Richards v. The Queen, 2019 TCC 289 under s. 18(1)(a) – legal fees.
CRA publishes a draft Bulletin on apportionment among multiple employers for defined benefit plans
CRA has released for comment a draft Bulletin on “Reasonable Methods to Apportion Assets and Actuarial Liabilities" for multi-employer defined-benefit (DB) plans, as required under s. 147.2(2)(a)(vi). It states that actuarial valuation reports sent after December 31, 2020, must use apportionment methods that are consistent with this Bulletin. The following apportionment methods are considered to be reasonable.
- Liability apportionment – prorated to earnings
This method apportions the liabilities based on each participating employer’s share of a member’s lifetime retirement benefits. If a member receives pensionable earnings (compensation) from multiple participating employers in the year, the actuary must use those pensionable earnings to prorate the accrued lifetime retirement benefit (LRB) and DB limit in the year.
- Asset apportionment – prorated to liabilities
This method apportions the assets in proportion to the liabilities allocated to each participating employer using the pensionable earnings. However, if one of the participating employers takes a contribution holiday and makes a lower contribution than the amount recommended in the actuarial valuation report, while the other participating employers keep making the recommended contributions, this may result in a significant shift in assets between participating employers. In such cases, the actuary must use the separate accounting method.
- Asset apportionment – separate accounting
The separate accounting method divides plan assets based on each participating employer’s actual contributions, related investment income and other cash flows. This method may result in there being an unfunded liability for employees of one participating employer at the same time as there is an actuarial surplus for employees of another participating employer.
If one of the participating employers stops participating in the plan due to bankruptcy, winding up, dissolution, sale of business, or its voluntarily removing itself as a participating employer, assets and actuarial liabilities must continue to be apportioned to that employer.
CRA also monitors compliance with the continuity rules where there is a business acquisition or a merger.
Neal Armstrong. Summaries of Actuarial Bulletin No. 4 - Draft Bulletin for Industry Consultation, "Reasonable Methods to Apportion Assets and Actuarial Liabilities" 8 January 2020 under s. 147.1(1) - participating employer, s. 147.2(2)(a)(vi) and s. 147.2(8).
Reg. 5907(2.02) may be limited to transactions for excluded property dispositions whose purpose is converting low-taxed taxable surplus into accessible exempt surplus
Reg. 5907(2.02) can reclassify additions of exempt earnings (or deductions from exempt loss) as additions to taxable earnings. Although this anti-avoidance rule clearly can apply to some intercompany excluded-property transfers that are “avoidance transactions,” on a literal reading its application could be much broader. However, it is suggested that:
On the basis of the legislative history leading up to Bill C-48, it is clear that regulation 5907(2.02) is one of several rules designed to target a specific form of tax avoidance, namely, foreign affiliate surplus-stripping transactions, which involve a disposition of excluded property by a foreign affiliate for the purpose of converting, on a tax-free basis, low-taxed taxable surplus into exempt surplus that can then be repatriated, or otherwise relied on, to minimize Canadian income taxes. A textual, contextual, and purposive interpretation of regulation 5907(2.02) supports the view that the rule should apply only in these limited circumstances.
Neal Armstrong. Summary of Gwendolyn Watson, "The Foreign Affiliate Surplus Reclassification Rule", Canadian Tax Journal (Canadian Tax Foundation) (2019) 67:4, 1233-66 under Reg. 5907(2.02).
CRA considers that a contribution of shares to a TFSA is not a “sale” for Reg. 230 purposes
CRA considers that a contribution of shares of a public corporation is not a “sale” of those securities for purposes of Reg. 230. Consequently, there is no obligation of a licensed securities dealer who held shares of a public corporation of an individual in a regular brokerage account to report a transfer of those shares to the individual’s TFSA on a T5008 slip.
Neal Armstrong. Summary of 12 November 2019 External T.I. 2019-0822161E5 F under Reg. 230(1) – “sale.”
Scotti – Court of Quebec agrees with CRA position that broker-paid rebates of life insurance policy premiums are taxable under s. 12(1)(x)
CRA has taken the position (most recently in 2008-0271381E5 and 2010-0359401C6) that a rebate paid by a life insurance broker out of its commission to the client purchasing the policy is taxable to the client under s. 12(1)(x), stating, for example, in 2008-0271381E5, that:
[B]ecause income from a life insurance policy is taxed under section 12.2 or paragraph 56(1)(j) … an amount received as an inducement to purchase a life insurance policy would be an amount received in the course of earning income from property for the purposes of paragraph 12(1)(x).
Croteau, J.C.Q. referred approvingly to these CRA technical interpretations (and a similar ARQ one), which she described as a view that “the holder of a policy that includes both a life insurance component and a savings component holds property that is a source of income.”
The facts before her were more extreme. An insurance broker, whose licence subsequently was revoked, engaged in a scheme to cheat insurers, resulting in his pocketing commissions from them in excess of the amounts he agreed to pay to his clients. One of these clients was the taxpayer, who received amounts ($90,000) that were well in excess of the premiums he was required to pay under a universal whole life policy before he was able to terminate the premium obligations. The $90,000 was taxable to him under the Quebec equivalent of s. 12(1)(x).
Neal Armstrong. Summary of Scotti v. Agence du revenu du Québec, 2019 QCCQ 7579 under s. 12(1)(x).