News of Note
Income Tax Severed Letters 8 January 2025
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CIBC – Tax Court of Canada finds that CIBC’s interchange fees from a non-resident credit-card processor were not zero-rated as relating to the loans effectively made to its Cdn. cardholders
CIBC had outsourced part of its Visa-card operation to an arm’s length non-resident (“GPDI”) so that, in a typical transaction in which a Canadian cardholder presented their CIBC Visa card to a Canadian merchant, GPDI would process the point-of-sale information received from the merchant and transmit it to CIBC for credit authorization, transmit the authorization (assuming no “decline”) back to the merchant and send this and the other day’s transactions to VISA for clearing, following which there was a process involving CIBC, GPDI and VISA by which the settlement funds were paid to the merchant. GPDI would charge the merchant a merchant discount fee of, say, 2%, and pay CIBC an interchange fee of, say, 1.5% in consideration for CIBC’s authorization and payment services.
Before concluding that the interchange fees were not zero-rated on the basis of the exclusion in ETA VI‑IX‑1(a)(ii) for a service that “relates to (a) a debt that arises from … (ii) the lending of money that is primarily for use in Canada”, Sommerfeldt J found that:
- regarding the “relates to” test, “there only needs to be ‘some connection’ between the interchange services and the debt described in the carve‑out;
- in this context the verb “lend” should have “a broad meaning (recognizing that a loan arises when the lender, at the request of the borrower, pays money to a third party in satisfaction of an obligation owed by the borrower to the third party)”, so that “when a Cardholder used a CIBC Visa Card in respect of a transaction, CIBC loaned to the Cardholder, and the Cardholder borrowed from CIBC, the monetary amount of the transaction” (even though the funds went to the merchant);
- “in a tax context, the word primarily generally means (among other things) principally, mainly, most importantly, or more than 50%”; and
- “the loaned money was used to pay merchants located in Canada” so that “the money paid by CIBC indirectly to the merchants (i.e., through the Visa Payment System), in satisfaction of the Cardholders’ obligations to the merchants, was loaned money that was primarily for use in Canada”.
However, CIBC established a due diligence defence to reverse the penalties imposed under former ss. 280(1)(a) and 280(2)(a) given inter alia that “CIBC’s filing position was not unreasonable” and had been prepared by qualified tax-group employees.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. The King, 2024 TCC 160 under ETA s. VI‑IX‑1(a)(ii) and s. 280(1)(a).
CRA confirms that it is the bare trustee rather than the beneficial owner who has any UHT filing obligations
Regarding the situation where a Canadian corporation held title to a residential property as bare trustee for an individual, CRA indicated that such corporation was the “owner” of the property for UHTA purposes, whereas the individual was not, i.e., the individual was not a person that “could reasonably be considered to be an owner in respect of the residential property based on [the land registry] system” under the definition of owner. Accordingly, the individual had no UHT filing obligations, whereas the corporation did (assuming that it was not an “excluded owner”).
Neal Armstrong. Summary of 4 June 2024 Underused Housing Tax (HST) Ruling 246073 under UHTA, s. 2 – owner.
CRA finds that the merchant rather than the consumer was the recipient of delivery services for goods sold through a platform
Consumers purchased goods from merchants through a platform which acted as facilitator, and as collection agent on behalf of the merchant and delivery drivers.
CRA found on construction of the platform webpage that the delivery driver was making a supply of its delivery service to the merchant, which the merchant used as an input into the supply that it made to the consumer.
Neal Armstrong. Summary of 17 July 2024 GST/HST Ruling 219794 under ETA s. 123(1) – recipient.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in March of 2001. Their descriptors and links appear below.
These are additions to our set of 3,053 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 23 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Various oddities in the EIFEL rules are discussed
Comments on the EIFEL rules (respecting limitations on leverage) include:
- The inclusion in eligible group entities of resident corporations or trusts that are related to the taxpayer in the application of the “excluded entity” exemption has the effect of requiring corporate groups controlled by respective siblings to be aware of each other’s affairs.
- For example, a corporation group controlled by one sibling relying (under para. (b) of the excluded entity definition) on its annual interest and financing expenses being under $1 million would also need to take into account the IFE of the resident corporations in a group controlled by a second sibling.
- Similarly, if the first sibling group was relying on the para. (c) exclusion, it would be offside if there was relevant participation in the structure of the second sibling’s group by a family trust one of whose related beneficiaries had ceased to be a resident.
- S. 95(2)(f.11)(ii)(D) provides, respecting s. 95(2)(f)(ii) (but not (i)) amounts included in the relevant affiliate IFE (RAIFE) of a controlled foreign affiliate (CFA) of a Canadian taxpayer for a taxation year, for a denial of such RAIFE amounts otherwise deductible in computing foreign accrual property income (FAPI) in proportion to the of overall denial (if any) computed under s. 18.2(2) – so that deduction of the RAIFE of the CFA is potentially subject to the same proportionate denial as for its Canadian parent in respect of the parent’s IFE.
- However, the rules do not seem to explicitly provide for situations where a foreign affiliate is a CFA of two or more Canadian taxpayers, each with a different potential denial proportion under s.18.2(2) so that it might be necessary to perform separate FAPI calculations for different Canadian taxpayers with a participating percentage in the same CFA.
- The election under s. 95(2)(f.11)(ii)(E) - to forego foreign accrual property losss (FAPL) amounts (derived from RAIFE) otherwise realized in a taxation year of a CFA of a Canadian taxpayer in exchange for non-inclusion of an equivalent amount in its RAIFE - can be beneficial where the FAPL for the year has more value in reducing the current year’s RAIFE (and thus IFE of the Canadian parent) than it would in a future or prior year as a FAPL carryforward or carryback.
- As the election is limited to the lesser of the CFA’s FAPL and RAIFE for the year, there appears to be no ability to elect to forego only a portion of FAPL for the year (i.e., the election is potentially an all or nothing proposition if the FAPL amount is the lesser amount in s. 95(2)(f.11)(ii)(E)(II)).
- The proposed definition of “exempt interest and financing expenses” (not subject to the EIFEL limitations) references inter alia the expenses that are reasonably attributable to the portion of the borrowing used by the taxpayer for the purpose of acquiring, building or converting a purpose-built residential rental.
- Since a “purpose-built residential rental” can refer to a part of a mixed-use building, there could be significant uncertainties associated with allocating a financing to such portion of the project.
Neal Armstrong. Summaries of Larry Nevsky, Brian Kearl and Aaron Chai, “Unexpected EIFEL Issues and Uncertainties,” Draft 2024 CTF Annual Conference paper under s. 18.2(1) – excluded entity, ATI – B (h), RAIFE, exempt interest and financing expenses, s. 95(2)(f.11)(ii)(D), s. 95(2)(f.11)(ii)(E) and s. 18.21(2).
CRA finds that as a partly owned LP of a 1st Nations band did not generate significant economic benefits to the reserve, its Indian employees were not exempted on off-reserve income
CRA found that an arrangement under which a business was carried on through a limited partnership (LP) in which a First Nations band indirectly had a 50.5% limited partnership interest and a non-first Nations corporation (NFNC) had a 48.5% limited partnership interest did not appear to result in “any direct and significant benefits flowing to the reserve from LP’s business activities” given that the business activities were primarily carried on off-reserve, the day-to-day business decisions of LP are made off-reserve by NFNC (although designated major decisions would be taken by the general partner which was 51% owned by the band but based off the reserve), the First Nations employees performed 50% or more of their employment duties off-reserve and at least 48.5% of LP’s profits flowed to NFNC.
Accordingly, the employment income earned off-reserve by the First Nations employees was not situated on a reserve (i.e., not exempted), regardless of where the employees lived and where their employer was regarded as resident.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.16 under Indian Act, s. 87.
Pierre Elliott Trudeau Foundation v. Millenium Golden Eagle - Quebec Superior Court orders the rescission of two donations
The Foundation received two donations, each of $70,000, from Millenium in July 2016 and July 2017. These amounts were restituted by the Foundation to Millenium through the delivery to, and cashing (in April 2023) by, the Foundation of a cheque. On application of the Foundation for annulment of the two donations, which Millenium did not answer, and the two impleaded parties (the A.G.C. and ARQ) did not contest, Barin JSC ordered that the two donations were resolved and deemed never to have existed.
Neal Armstrong. Summary of Pierre Elliott Trudeau Foundation v. Millenium Golden Eagle International (Canada) Inc., File No. 500-17-125795-230 (Quebec Superior Court) under General Concepts - Rectification and Rescission.
CRA finds that the property of an alter ego trust “belonged” to its sole trustee and life beneficiary rather than to the trust
In order for a fee paid to a corporation for the executive producer servicers of an individual employed by the corporation to qualify for the B.C. production services tax credit, there was a requirement (essentially copied from ITA s. 125.4(1) – labour expenditure – (b)(iii) and s. 125.5(1) – Canadian labour expenditure - (b)(iii)) that the shares of the corporation “belong” to a BC-based individual – whereas, here, the shares were held by the individual in his capacity of trustee of an alter ego trust which had been settled by him (to avoid B.C. probate duties) and of which he was the life beneficiary.
In finding that this shareholding satisfied the above “belong to” test, rather than the shares belonging to the trust as suggested by the TSO, Headquarters stated:
[T]he shares … belong to [the individual] and not the Trust for purposes of the tax credit. As a matter of law, a trust does not have an independent legal existence and is a legal relationship. Property to which a trust relationship applies is held by the trustee(s) of a trust in order to fulfil their obligations as trustees. [Here] … [the individual] has legal ownership of the shares in [the individual’s] role as trustee, and beneficial ownership of the shares as the sole beneficiary who is entitled to the income on the shares while [the individual] is alive … .
Neal Armstrong. Summary of 9 July 2024 Internal T.I. 2023-0976691I7 under s. 125.4(1) – labour expenditure – (b)(iii).
CRA confirms that active business income includes income from property that (having regard to Ensite) is held principally for the purpose of producing active business income
The definition “income of the corporation for the year from an active business” in s. 125(7) includes, in para. (a) thereof, the corporation’s income for the year from an active business carried on by it, including any income for the year pertaining to or incident to that business, other than income for the year from a source in Canada that is a property (within the meaning assigned by s. 129(4)). Subpara. (b)(ii) of the definition “income” or “loss” of a corporation for a taxation year from a source that is a property in s. 129(4) does not include the income or loss from any property that is used or held principally for the purpose of gaining or producing income from an active business carried on by it.
In response to a question to this effect, CRA confirmed that, as a result, where a property of a CCPC that is used or held principally for the purpose of gaining or producing income from its active business, any income from that property would qualify as “income of the corporation for the year from an active business”, as defined in s. 125(7). Before so concluding, CRA referred to the Ensite test of whether property was used or held by a corporation in the course of carrying on a business, under which the “property had to be employed and risked in the business to fulfil a requirement which had to be met in order to do business” and that “[i]f the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.”
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.14 under s. 129(4) – “income” or “loss”.