News of Note
CRA finds that a litigant receiving a court award of costs plus GST/HST is not required to report such tax
Email this ContentCRA considers that as court awards of costs (including any awards on a solicitor and client scale) “do not constitute consideration for a taxable supply or a service and do not form part of the consideration paid for the lawyer’s services of the winning party,” that party is not required to account for any GST or HST in computing its net tax for the reporting period in question, even where the award of such costs included a GST or HST amount.
The point, that the award does not represent compensation for services supplied by the winner to the loser (or the Court), is obviously correct. Of greater interest, this interpretation represents a restrictive and favourable interpretation of the requirement, in ETA s. 225(1) – A, that net tax of a person includes “all…amounts collected by the person…as or on account of tax.”
Neal Armstrong. Summaries of 3 April 2017 Interpretation 164742 under ETA s. 123(1) - supply and s. 225(3.1).
CRA finds that expenses incurred respecting a subsidiary unit trust are ineligible for ITCs unless incurred as management-services inputs
A parent corporation argued that it should be entitled to claim input tax credits for GST/HST on expenses incurred in relation to subsidiary unit trusts, on the basis that it was providing management services to them. In the absence of much background information on the management services, including not being provided with any management services agreements, CRA stated that “the nature of any management services provided by the Parent would have to be clarified to determine how any particular property or service could be considered to be an input into those services, before determining the extent that the property or service was acquired for the Parent’s commercial activities.”
In the absence of the consulting and other expenses in question qualifying as inputs to the Parent’s supply of management services, the Parent would not be entitled to ITCs therefor. For instance, the s. 186 rule (generally permitting a holding company to claim ITCs for GST/HST on expenses incurred in relation to its investment in a corporate subsidiary) was unavailable for investments in subsidiaries that were trusts rather than corporations.
Neal Armstrong. Summaries of 23 November 2016 Interpretation 165129 under ETA s. 141.01(2) and s. 186(1).
S. 55(2) does not apply to an estate pipeline transaction
CRA confirmed that conventional pipeline planning by an estate does not engage s. 55(2) issues.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.7 under s. 55(2.1)(b).
CRA indicates that using s. 55(3)(a) to create a high-basis redemption note is abusive even if that high basis is not used right away
In 2015-0604521E5, a promissory note issued to Holdco on a share redemption was subsequently transferred to Newco as a capital contribution. Since the amount of the promissory note was higher than the ACB of the redeemed shares and increased Holdco’s ACB of the shares of Newco, CRA indicated that it would seek to apply GAAR to Holdco’s reliance on s. 55(3)(a).
CRA has now confirmed that this finding did not turn on the high-basis note being immediately “used” to create high basis in the Newco shares, and indicated that where a purpose is to increase the cost amount of property of the dividend recipient, GAAR would be triggered, and it is irrelevant whether the cost amount has been used in a series of transactions that includes the dividend. (Also, this oral comment that GAAR “would” be triggered is not the fuzzier language in the Technical.)
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.6 under s. 55(2.1)(b).
CRA is still studying the allocation of SIOH to discretionary dividend shares
CRA’s study of how safe income on hand should be allocated to discretionary dividend shares is still on-going, and it is not prepared to announce anything at this point.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.5 under s. 55(2.1)(b).
CRA indicates that a dual-resident individual who is subject to direct U.S. tax on income from a s. 94(3) trust can generate a FTC if the trust income is annually distributed or he elects under s. 94(16)
A Canadian resident and U.S. citizen who settled a revocable living trust for him and his family, is considered for U.S. purposes to be earning the U.S.-source property income of a grantor trust directly, whereas for Canadian purposes, the trust is subject to Canadian tax on its worldwide income under s. 94(3). CRA accepted that the individual likely could generate Canadian foreign tax credits if all the trust income was distributed annually to him. In particular, the income received by him would be considered to have a U.S. source on general principles, given that s. 94(3) would not deem the trust to be resident in Canada for s. 108(5) purposes.
Alternatively, he could elect under s. 94(16) so that the trust’s income would be attributed to him. Since s. 94(16)(c) would source such income to the U.S. for s. 126 purposes, he could claim the foreign tax credit.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.4 under s. 126(1).
CRA states that, in the context of TCP characterization, upstream and downstream loans within a wholly-owned corporate group generally are to be treated differently
In the context of providing guidelines on whether shares of non-resident corporations (“NRCos”), with various direct or indirect wholly-owned Canadian operating subsidiaries holding to some extent Canadian real property or other potentially tainting properties, are taxable Canadian property, the Rulings Directorate’s established position is that (i) the gross asset (rather than net asset) value method should be used to determine whether more than 50% of the fair market value of the NRCo shares was derived directly or indirectly from the Canadian real property etc., and (ii) that for these purposes the proportionate value approach should be used to determine the proportion of the FMVs of the shares of the Opcos that derived from the Canadian real property etc.
For these purposes, a downstream loan within the group is effectively ignored and is treated instead as increasing the FMV of the shares of the particular wholly-owned subsidiary. However, recognizing an upstream loan would result in double counting because the assets acquired by the parent out of the proceeds thereof would already be counted for purposes of the tests – so that the loan’s value decreases the relevant FMV of the shares of the particular wholly-owned subsidiary. The treatment of a loan made to a sister depends on a range of factors but, generally, will be treated similarly to a downstream loan if that is reflective of the ultimate use of the funds, and otherwise generally will be recognized (if it is not part of a back-to-back loan made by the parent to a subsidiary).
Neal Armstrong. Summary of 1 May 2017 Internal T.I. 2015-0624511I7 under s. 248(1) – taxable Canadian property para. (d).
CRA posts its draft Memorandum on GST/HST voluntary disclosures to its new subsite
The new draft GST/HST Memorandum on the Voluntary Disclosure Program, which would become effective after 2017, is similar to the draft Income Tax Circular which was released at the same time. For example, where there has been “major non-compliance” (determined in accordance with essentially the same vague guidelines) no interest or penalty relief will be provided other than of the gross negligence penalty. One difference is that CRA draws a distinction between “Track 1” transactions which satisfy the CRA wash-trading guidelines (generally, where a registrant with a good history failed for reasons other than negligence to charge GST/HST to a registrant who would have been entitled to a full input tax credit therefor), which are entitled to full interest relief, and other “Track 2” situations (other than of “major non-compliance” – which are “Track 3”), where only 50% interest relief is provided.
A second difference is that in an income tax voluntary disclosure, the taxpayer is required to go back for all the years in which there was deficient disclosure, whereas under a Track 1 and Track 2 GST/HST disclosure, there is only a requirement to go back 4 or 6 years, respectively.
The old CRA website (cra-arc.gc.ca) is being migrated to a subsite on the federal government website (canada.ca). Both the draft income tax circular and the draft GST/HST memorandum were posted to the latter rather than the former.
Neal Armstrong. Summary of June 2017 Draft GST/HST Memorandum 16.5 – Voluntary Disclosures Program under ETA – s. 281.1(2).
CRA states that the residence of a dual-resident s. 94(3) trust generally will not be ceded to the IRS, but double taxation relief should be provided
Where a U.S. estate is deemed to be a Canadian-resident trust under s. 94(3) (or it has Canadian central management and control), Art. IV(4) of the Convention contemplates that the competent authorities “shall…endeavor to settle the [dual residence] question and to determine the mode of application of the Convention to such person.” CRA considers it quite unlikely that the Canadian competent authority would agree under Art. IV(4) that the trust was not resident in Canada. However, CRA indicated that the Canadian competent authority will accept requests from trusts that are deemed resident in Canada seeking relief from double tax - which could be provided unilaterally or following negotiations with the U.S.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.3 under Treaties – Art. 4.
CRA indicates in its draft VDP Circular that it intends to unlawfully fetter its discretion
In a draft revised version of its Information Circular on the Voluntary Disclosures Program (to become effective on January 1, 2018), CRA states that it will not provide any penalty relief other than for the gross negligence penalty, and no interest relief, where the taxpayer has disclosed major non-compliance. CRA will consider the occurrence of one or more of various listed markers to represent major non-compliance, including: large dollar amounts; multiple years of non-compliance; or a sophisticated taxpayer.
CRA has a statutory obligation to exercise its discretion under s. 220(3.1) to determine whether or not to grant interest and penalty relief having regard to the circumstances of each taxpayer, rather than being permitted to pre-announce narrow criteria for the provision of relief which it then applies rigidly (see TD Bank and Stemijon). If the announced criteria for refusing to provide relief (other than for the gross negligence penalty) are not rigid, that is only because they are too capricious and vague to qualify as such. That presumably will not improve the CRA legal position in seeking to follow the approach in the draft Circular.
Neal Armstrong. Summary of June 2017 Draft Information Circular - IC00-1R6 - Voluntary Disclosures Program under s. 220(3.1).