News of Note
CRA finds that an amendment of a lease to extend its term would result in a new agreement for GST/HST purposes
Email this ContentAn unregistered non-resident lessor leases equipment to a registered resident for use in the course of its commercial activities in Canada. At the start of the lease, the lessee takes possession of the equipment at the lessor’s premises outside Canada, and pays GST on its subsequent importation of the equipment into Canada.
Before the end of the lease, the lessor and lessee negotiate a lease renewal to extend the lease term. CRA indicated that this would result in a new lease agreement, even if it was only the lease term that was amended rather than any other terms such as the monthly rent, stating:
[T]he modification of the lease in respect of any of its essential elements, such as the rent or the term of the lease, would be considered a significant change that goes to the root of the agreement. These types of fundamental changes result in a new agreement between the parties and a new supply for GST/HST purposes. Accordingly, the place of supply must be established for this new supply, based on where possession or use of the tangible personal property is given or made available to the Lessee under the lease renewal agreement.
Thus, if the situs of the equipment was inside Canada at the time of the lease renewal, the place of supply of the equipment under the lease would commence to be in Canada pursuant to ss. 142(1)(b) and 136.1(1)(d), and the lease payments would commence to be taxable.
CRA did not mention the General Electric case, which most would interpret as indicating that the mere extension of the term of an agreement (in that case, a loan agreement) would not give rise to a new agreement, or the position of the Income Tax Rulings Directorate also emphasizing the question of whether, under the applicable provincial law, there is a novation, or a mere amendment (e.g., Folio S3-F9-C1, para. 1.9 and 2012-0451431R3; see also 2000-0050255).
Neal Armstrong. Summaries of 25 May 2019 GST/HST Interpretation 185880 under ETA s. 142(2)(b) and s. 136.1(1)(d).
Our translations of CRA interpretations go back over 18 years
We have published a further 8 translations of CRA interpretations released in July of 2004. Their descriptors and links appear below.
These are additions to our set of 2,159 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 18 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2004-07-23 | 13 July 2004 External T.I. 2004-0058141E5 F - Transfert du droit aux revenus provenant d'un bien | Income Tax Act - Section 248 - Subsection 248(3) | assignment of the rents from a rental property to a corporation would result in a disposition to a deemed trust under s. 248(3) |
| Income Tax Act - Section 85 - Subsection 85(1) | rollover not available to assignment of the rents from a rental property to a corporation for shares since the transferee was a deemed trust under s. 248(3) | ||
| Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2) applicable to assignment of the rents from a rental property to a corporation giving rise to a deemed trust under s. 248(3) | ||
| 2004-07-16 | 6 July 2004 External T.I. 2004-0081631E5 F - Price Adjustment Clauses | General Concepts - Effective Date | no requirement to notify CRA of price-adjustment clause otherwise than by ticking box on any prescribed form |
| Income Tax Act - Section 51 - Subsection 51(1) | no requirement to notify CRA of price-adjustment clause regarding a s. 86 or 51 exchange | ||
| Income Tax Act - Section 85 - Subsection 85(1) | ticking "yes" box on election form is sufficient notice of price adjustment clause | ||
| 2004-07-09 | 29 June 2004 External T.I. 2004-0065941E5 F - Revenu de bien ou d'entreprise exploitée active | Income Tax Act - Section 129 - Subsection 129(6) | double application of s. 129(6) where active business sub pays interest to its Holdco parent which, in turn, pays interest to its parent |
| 24 June 2004 Internal T.I. 2004-0068381I7 F - Date d'exécution | Income Tax Act - Section 56.1 - Subsection 56.1(4) - Commencement Day - Paragraph (b) - Subparagraph (b)(ii) | change in required support amount triggers commencement day regardless of the number of children covered by the changed support | |
| 28 June 2004 Internal T.I. 2004-0073761I7 F - Dommages-intérêts-perte d'emploi | Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | damages for failure to reinstate the taxpayer were a retiring allowance | |
| Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(l.1) | reimbursement of legal costs incurred to recover damages for failure to reinstate were includible under s. 56(1)(l.1) | ||
| Income Tax Act - Section 60 - Paragraph 60(o.1) | deduction for legal fees incurred to recover damages that were retiring allowance | ||
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) | change regarding pre-judgment interest judicially ordered after 2003 | ||
| 29 June 2004 External T.I. 2004-0078951E5 F - Non Arm's Length Sale of Shares, Surplus Stripping | Income Tax Act - Section 84.1 - Subsection 84.1(1) | s. 84.1 could apply if unrelated purchaser is an accommodation party | |
| 29 June 2004 Internal T.I. 2004-0081901I7 F - Taxable Benefit - Life Insurance Premiums | Income Tax Act - Section 15 - Subsection 15(1) | benefit from payment by corporation of life insurance premiums on policy of which shareholder’s spouse is the beneficiary is based on the premiums so paid | |
| 2004-07-02 | 28 June 2004 External T.I. 2004-0059311E5 F - Associated Corporations | Income Tax Act - Section 256 - Subsection 256(3) - Paragraph 256(3)(a) | "controlled, directly or indirectly in any manner whatever" includes de jure control |
| Income Tax Act - Section 256 - Subsection 256(6) | where s. 256(6) applies, it excludes both de jure and de facto control by the creditor | ||
| Income Tax Act - Section 256 - Subsection 256(5.1) | the defined phrase includes de jure control |
CRA accepts that it must issue a requested notice of determination of loss arising from a taxpayer-requested adjustment provided that the adjustment is only partially accepted
A taxpayer may request a notice of determination of loss for procedural reasons, e.g., to give it the right to object, or to start statute-barring running. CRA commented on the following two conditions in s. 152(1.1) for the Minister to be required to issue such a determination:
1. The Minister ascertained the amount of a taxpayer’s loss for a taxation year.
2. The loss amount ascertained differs from the one reported in the taxpayer’s income tax return.
Regarding the first condition, CRA indicated that the previous CRA interpretation “that no ascertainment occurs when the change is requested by the taxpayer is not supportable,” i.e., the ascertainment can arise in response to a taxpayer request for an adjustment, as well as after an audit.
CRA considers that the second condition is not satisfied if a taxpayer adjustment request is completely denied (i.e., there is no variance from the original return) or if the adjustment request is completely accepted (i.e., there is no variance from the return as amended).
However, if such a request is partially agreed to by the CRA, then a Notice of Determination can be issued if the taxpayer requests one as the amount ascertained by the Minister differs from the amount reported by the taxpayer in the filed return.
Neal Armstrong. Summary of 6 December 2021 Internal T.I. 2019-0792581I7 under s. 152(1.1).
Focus Micro Ondes – Court of Quebec finds that general estimates of SR&ED proportionate time by the company president were insufficient for Reg. 2900(2)(b) purposes
The claim of the taxpayer for the portion of the salaries of its employees that directly related to the prosecution of SR&ED as described in Reg. 230R1(b) pursuant to the Taxation Act (similar to Reg. 2900(2)(b) under the ITA) was determined on the basis of the president’s estimates made after the year of the percentage of their salaries that represented such involvement based on his perception of the efforts of those employees in the various SR&ED projects. No time sheets were kept.
In affirming the ARQ denial of 2/3 of the salary amounts claimed for the purposes of the SR&ED credit, Chalifour JCQ stated:
The arbitrariness of an officer relying on his knowledge of the business is not sufficient to demonstrate the proportion of salaries eligible for a tax credit.
Neal Armstrong. Summary of Focus Micro Ondes Inc. v. Agence du revenu du Québec, 2022 QCCQ 2070 under Reg. 2900(2)(b).
GST/HST Severed Letters January/February 2022
Kute Knit - Court of Quebec requires time sheets or other concrete evidence to support supervisory SR&ED salary claims under Reg. 2900(2)(b)
Kute Knit, which was acknowledged by the ARQ to be engaged in SR&ED, had claimed percentages (ranging from 15% to 75%) of the salaries incurred during its 2011 and 2012 taxation years for 13 management and supervisory employees as being the times that they were directly supervising the prosecution of SR&ED within the meaning of the Quebec equivalent of Reg. 2900(2)(b). These same percentages had been used for the managers and supervisors since 2006.
Alcindor JCQ confirmed the full denial by the ARQ of such management and supervisor salary claims in the absence of any documentary evidence (such as time sheets) or other concrete evidence (such as testimony from the employees themselves as to what they did on each project) as to the nature and extent of the alleged supervisory SR&ED work performed by those employees.
Neal Armstrong. Summary of Manufacture Kute Knit Inc. v Agence du revenu du Québec, 2022 QCCQ 3480 under Reg. 2900(2)(b).
CRA indicates that a life insurance policy’s sale to an employee for less than FMV could produce a s. 6(1)(a) benefit even where the employer’s payment of premiums had been taxable
An employer (Opco) acquires a term life insurance policy on the life of an arm’s-length key employee, whose estate or spouse is designated as beneficiary. The annual premium is paid by the corporation and included in the employee’s income as a taxable benefit. Upon its renewal, the policy is transferred to the employee for no consideration under s. 148(7), whereupon the employee starts paying the annual premiums.
Given that the key employee has been including the annual premium in income as a s. 6(1)(a) benefit, does a further benefit arise on such transfer of the policy to the individual for no consideration?
CRA indicated that s. 6(1) “may apply to include in the income of the individual the amount by which the fair market value of the policy exceeds any actual consideration paid by the individual for the policy.”
CRA went on to indicate that where “the person on whom the benefit has been conferred is both a shareholder and an employee … a determination will have to be made … as to whether the benefit was conferred by the corporation on the person as a shareholder or as an employee.”
Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q. 8, 2022-0928871C6 under s. 6(1)(a).
CRA suggests that s. 15(1) might apply where a corporation pays the premiums on a segregated fund insurance policy under which its shareholder or spouse is the beneficiary
A CCPC owns a segregated fund insurance policy under which its sole shareholder is the life insured and his spouse has been named as a revocable beneficiary under the policy. As the policyholder, the corporation receives the annual income and capital gains under the policy.
CRA noted its longstanding position that there is a s. 15(1) benefit when a corporation pays the life insurance premiums on a policy under which its shareholder or a related person is the beneficiary, and that the amount of the annual benefit is “usually” equal to the annual amount of the insurance premiums paid by the corporation.
It then indicated that since a segregated fund policy is a type of life insurance policy, it could not confirm that no s. 15(1) benefit could arise in this situation, but that the question of whether there was such a benefit conferred “is generally one of fact to be determined on a case-by-case basis.”
Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q.6, 2022-0928841C6 under s. 15(1).
CRA indicates that excess s. 60 deductions disappear
CRA indicated that where deductions under s. 60 (e.g., the deduction under s. 60(s) arising on repayment of a policy loan to the extent of previous-policy loan inclusions) exceed the taxpayer’s income for the year, “such excess amount cannot be deducted by the taxpayer in any other taxation year,” e.g., as a non-capital loss. There is no non-capital loss as defined in s. 111(8) given that s. 60 deductions (per s. 4(3)) do not give rise to losses from a source and given that s. 60 deductions cannot give rise to a negative amount under s. 3(c).
Neal Armstrong. Summaries of 3 May 2022 CALU Roundtable Q. 5, 2022-0928831C6 under s. 60(s) and s. 111(8) – non-capital loss – A.
Income Tax Severed Letterss 27 July 2022
This morning's release of three severed letter from the Income Tax Rulings Directorate is now available for your viewing.