News of Note
CRA confirms its right to consequentially assess to reduce rebates if, following an objection or appeal, it reduces an ETA s. 191(3) assessment
Email this ContentWe have published summaries of the questions posed at the 2021 CBA Commodity Taxes Roundtable and the full text of the CRA written responses (translated by us, where applicable).
Regarding Q.1, CRA confirmed that where an appeal of the builder against a CRA assessment under ETA s. 191(3) (showing an increased FMV of a new multiple unit residential complex at the time of first occupancy) resulted in that assessment being reduced or vacated, CRA has the authority (without regard to the usual time limitation periods) under ETA s. 298(6) to make a consequential reassessment to reduce the builder’s new residential rental property (“NRRP”) rebate (which also is affected by the building’s FMV).
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.1 under ETA s. 298(6) and s. 301(1).
CRA indicates that a spouse who was a registered co-owner of a property could be considered its beneficial owner even though she did not contribute to its purchase
S. 45(2) permits a taxpayer to elect to avoid a deemed disposition from a conversion of “property of the taxpayer” from personal to income-producing use. After noting that under s. 45, as in the rest of the Act, the quoted reference would be to the beneficial rather than legal owner, CRA went on to note that a wife who legally was the co-owner of the home in question (which had been converted to rental use) could be considered to be a ½ beneficial owner of the house for these purposes even though her husband provided all the purchase funds and had reported all the rental income. It defined beneficial ownership as:
[T]he type of ownership of a property by a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership. A person who has beneficial ownership but not legal ownership can enforce their ownership rights against the holder of legal title. … There is generally a presumption that the holder of legal title of a property is also the beneficial owner of the property, unless the facts support otherwise.
It concluded:
[I]f both spouses are considered to have beneficial ownership … they would both be required to file the election … .
Neal Armstrong. Summary of 9 May 2022 Internal T.I. 2018-0790251I7 under s. 45(2).
CRA explains the implications of the new GST/HST treatment of home purchase flips
Para. (d) of the ETA definition of “builder” generally has the effect of exempting an assignment of an agreement to purchase a home from the builder where the assignor was acquiring the home for personal use, and para. (f) effectively provides a further exemption regarding such an assignment where the assignor is an individual who is not engaged in an adventure in the nature of trade or a business – whereas ETA draft s. 192.1 will eliminate this exemption. Comments of CRA on the effects of this new rule include:
- Under the new rule, where the (post-May 22, 2022) assignment agreement indicates that a part of the consideration is attributable to the reimbursement of a deposit paid by the assignor to the builder under the subject purchase and sale agreement, that deposit amount is excluded from the taxable amount of the assignment – whereas under the old regime, if the assignment was taxable, the total consideration for the assignment - including any portion referable to the assignment of the deposit - was taxable.
- Given that the amount of the new housing rebate is based on the total consideration for the taxable supply of the house, including any consideration paid by an assignee for a taxable assignment sale of an agreement to purchase the house from the builder (but excluding the amount attributable to a deposit assignment), the new rule will affect the Ontario or federal new housing rebate amounts.
- As only one new housing rebate application can be made for each new house, and the builder (“Builder A”) does not receive the consideration for the assignment of the purchase contract to the assignee:
[T]he assignee purchaser may want to file their new housing rebate application directly with the CRA rather than through Builder A. In this way, the assignee purchaser can include in the new housing rebate application the tax paid to Builder A and the tax paid to the assignor in determining the amount of their GST/HST new housing rebate and, where applicable, a provincial new housing rebate.
Neal Armstrong. Summaries of GST/HST Notice 323, Proposed GST/HST Treatment of Assignment Sales, May 2022 under ETA s. 123(1) – builder – (d), s. 254(1) - single unit residential complex, s. 254(2)(i), s. 254(4), s. 256.2(3) and s. 192.1.
Income Tax Severed Letters 1 June 2022
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kraft Heinz – BC Supreme Court accepts that a self-help Dutch-law annulment declaration retroactively voided a s. 212.3(10)(b) contribution
A B.C. ULC made a cash capital contribution to a Dutch cooperative of which it was the sole member. It was realized four months later that this contribution gave rise under s. 212.3 to a deemed dividend by the B.C. ULC to its US parent that was subject to Part XIII tax. About a year after the contribution, the B.C. ULC and the co-op entered into a formal declaration, governed by Dutch law (and not reviewed by any Dutch court), declaring that the capital contribution agreement was annulled with retroactive effect and that the contribution was returnable to the B.C. ULC (which occurred). The petitioners sought declarations that the capital contribution was void ab initio and, alternatively, an order rescinding the transaction. The Attorney General opposed.
Regarding the requested declaration, Gomery J first stated:
The transaction is governed by Dutch law and the evidence is that, pursuant to Dutch law and by virtue of the steps the petitioners have taken, the agreement for the capital contribution is deemed never to have existed, and the contribution has been repaid. There is nothing left to rescind. An order declaring the rescission effective in Canadian law would be purely declaratory… .
Accordingly, since a declaration could only be granted where there was a “live controversy,” whereas here there was none (CRA had not audited the B.C. ULC, let alone, assessed it), the requested declaration should not be granted.
The request for rescission, was denied essentially for reasons of redundancy:
[T]he capital contribution was governed by foreign (Dutch) law and has been completely nullified, “ab initio”, pursuant to Dutch law. An order for rescission would only repeat or reinforce that which has already occurred.
In my view, the petitioners have already obtained an adequate remedy through the annulment declaration.
Accordingly, it was unnecessary to address the issue that “[t]he availability of rescission for the avoidance of unexpected tax obligations is controversial.”
Although, in form, the requested relief was denied, this appears like a substantive success.
Neal Armstrong. Summary of Kraft Heinz Canada ULC v. Canada (Attorney General), 2022 BCSC 796 under General Concepts – Rectification & Rescission.
Khanna – Federal Court of Appeal finds that a gross negligence penalty could not be sustained where the trial was all about the taxpayer’s husband and she was ignored
The taxpayer conceded that she had unreported income from rental properties owned equally by her and her husband, but appealed the imposition of a gross negligence penalty.
Monaghan JA noted that the taxpayer was not called to testify (which the Crown could have done) and that essentially the only testimony was of the taxpayer’s husband, which “was almost entirely about his actions and inactions,” so that essentially “nothing on the record address[ed] her involvement in or knowledge about the details of the rental business … and nothing on the record establish[ed] whether … the appellant knew she had unreported income prior to receipt of the reassessments.” Before allowing the taxpayer’s appeal, Monaghan JA stated:
Where is the evidence or finding about the appellant’s deliberate choice not to make inquiries or the finding of deliberate ignorance? I see nothing in the record.
Neal Armstrong. Summaries of Khanna v. Canada, 2022 FCA 84 under s. 163(2) and Tax Court Rule 146(2).
CRA applies the proposition (regarding a s. 90(3) PUC distribution election) that a partnership cannot be a related person
A limited partnership (LP) - whose 90% general partner is FA1 (held by Canco1) and whose 10% limited partner is FA2 (held by Canco2, which is related to Canco1) – receives a paid-up capital distribution from its wholly-owned subsidiary (FA3). CRA confirmed that an s. 90(3) election respecting the distribution could be made by LP alone (or, to be more precise, by FA1 in its capacity of the general partner of LP) given that there is no “connected person or partnership” in respect of LP within the meaning of s. 90(4).
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.14 under s. 90(4).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in December of 2004. Their descriptors and links appear below.
These are additions to our set of 2,053 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 17 1/3 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 |
|---|---|---|---|
| 2004-12-03 | 25 November 2004 External T.I. 2004-0079751E5 F - Dépenses d'une auberge limitées par 18(12) | Income Tax Act - Section 96 | pro rata rent received by the 2 equal partners of a partnership operating an inn jointly owned by them would not be respected as rent |
| Income Tax Act - Section 18 - Subsection 18(12) | s. 18(12) would apply to the joint owners of an inn whose wives operate it, with them staying with them on weekends/ no avoidance if partnership interposed | ||
| 29 November 2004 External T.I. 2004-0105131E5 F - Avantages sur options - Diminution de valeur | Income Tax Act - Section 7 - Subsection 7(8) | s. 7(1)(a) benefit is realized under s. 7(8) based on shares’ FMV at exercise, and capital loss is realized if the shares decline before their disposition | |
| 30 November 2004 External T.I. 2004-0090181E5 F - Assurance maladie grave | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | premiums paid by corporation for critical illness policy of which it is beneficiary are non-deductible per s. 18(1)(a) or (h) | |
| Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(a) - Subparagraph 39(1)(a)(iii) | no capital gain on receipt by corporation of benefit under a critical illness insurance policy or of refund of premiums | ||
| Income Tax Act - Section 15 - Subsection 15(1) | misallocation shareholder benefit could arise if corporation pays premiums for its critical illness policy and sole shareholder pays for rider entitling him to premium refunds | ||
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) | premiums paid by corporation for critical illness policy of which it is beneficiary are non-deductible pursuant to s. 18(1)(h) | ||
| 30 November 2004 External T.I. 2004-0092941E5 F - Déductibilité des intérêt | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | interest deduction not generally denied where negative spread | |
| 12 November 2004 External T.I. 2004-0080051E5 F - Allocation et remboursement de dépenses-employé | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(x) | per-kilometre allowance tainted because a per-diem allowance also paid | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) | per-hour reimbursement of employees’ use of equipment is taxable allowance/ reimbursed employment-related internet use is not taxable | ||
| 23 November 2004 External T.I. 2004-0094101E5 F - IT-474R Administrative Relief | Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a) | IT-474R, para. 10 provides no administrative relief from short taxation year from amalgamation | |
| Income Tax Act - Section 20 - Subsection 20(24) | amalgamated corporation can make s. 20(24) election | ||
| 29 November 2004 External T.I. 2004-0080891E5 F - Régime d'assurance invalidité | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | employer cannot render a disability plan a full employee-funded plan by arbitrarily allocating composite employee contributions to that plan | |
| 17 November 2004 External T.I. 2004-0097131E5 F - Travail temporaire; négociation de contrats | Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(a) - Subparagraph 6(6)(a)(i) | union executives standing for election every 4 years would not have duties of a temporary nature | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(v) | expenses of union employee in negotiating contracts with the union members’ employers would not be included |
CRA notes that around half of its recent MAP cases resulted in full relief
CRA provided the following statistics on MAPs for the 2020 calendar year:
- … The average time to complete a negotiable MAP case was 17.83 months;
- Of the 74 MAP cases closed in 2020, 36 cases (i.e., 48.6%) resulted in full relief from double taxation upon negotiation, 9 cases (i.e., 12.2%) had objections not justified, and 8 cases (i.e., 10.8%) were resolved through unilateral relief. The remaining 21 cases (i.e., 28.4%) were either withdrawn by the taxpayers, resolved via domestic remedy, resulted in no agreement or were denied MAP access;
- Of the 74 MAP cases closed in 2020, 60 (i.e., 81%) were initiated by Canada and 14 (i.e., 19%) were initiated by countries other than Canada;
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.13 under Treaties – Income Tax Conventions – Art. 26.
CRA is monitoring PPT compliance on a priority basis and it, Finance and Justice are still considering Alta Energy
Regarding a query as to any applications by CRA of the principal purpose test (“PPT”) under Art. 7(1) of the MLI, CRA stated:
[T]he CRA has started monitoring compliance with the MLI on a priority basis in advance of the normal audit cycles. To date, the CRA has not issued any assessments on the basis of the PPT, although compliance review processes are underway.
CRA further indicated that, other than a pre-ruling consultation received some time ago that was put on hold pending the Supreme Court decision in Alta Energy, to date, no PPT-related ruling or consultation requests have been received.
As for Alta Energy:
The SCC considered a matter central to the CRA’s ongoing efforts to protect Canada’s tax base and the integrity of its tax treaties. The meaning and effect of the decision continues to be analyzed by the CRA, the Department of Finance and the Department of Justice as the processing of the files that were held in abeyance at different audit or litigation stages pending the decision of the Supreme Court in Alta Energy resumes.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.12 under Treaties – MLI - Art. 7(1).