News of Note
RBC – English Court of Appeal finds that an oil and gas royalty is not income from immovable property under the Canada-U.K. Treaty where the recipient never had any interest in the oil field
Email this ContentA Canadian corporation (“Sulpetro”), which had rights to direct and receive the proceeds from a licence its U.K. subsidiary (“SUKL”) held in an offshore U.K. oil and gas field, sold its rights (and shares of the subsidiary) to a U.K. purchaser for consideration that included a royalty that became payable, based on production from the field, when the market price of oil exceeded US$20 per barrel. The taxpayer (RBC) received an assignment of this royalty from the receiver for Sulpetro following default by Sulpetro on a secured loan made by RBC in the course of its Canadian banking business.
The principal issue was whether HMRC was permitted by Art. 6 of the Canada-U.K. Treaty to impose tax on the royalty payments received by RBC and, in particular, whether they fell within the portion of the definition of “immovable property” in Art. 6(2) (the “fifth limb”) that referred to "rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources". Before allowing RBC’s appeal, Falk LJ stated that “the better interpretation of the fifth limb is that it is confined to rights to payments held by a person who has some form of continuing interest in the land in question to which the rights can be attributed.” In this regard, she stated:
[C]learer words would be needed to establish that a right of a personal nature, held by a person who has no link to the physical land in question, and comprising a chose in action owed by a person who might also have no link to the State in which the land is situated, falls within Article 6(1).
She concluded:
… RBC does not hold, and indeed has never held, an interest in the Buchan field. It cannot therefore be taxed under the fifth limb.
Neal Armstrong. Summaries of Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs [2023] EWCA Civ 695 under Treaties – Income Tax Conventions – Art. 6, Art. 12.
CRA indicates that holding a gold or silver bar or coin, or a dividend receivable, would taint a trust otherwise exempted under s. 150(1.2)(b) from reporting requirements
Pursuant to s. 150(1.2)(b), the exception from trust reporting requirements under s. 150(1.1) - that may be available to individuals with no Part I tax payable or relevant dispositions - can apply to a trust for a particular tax year where the trust holds assets restricted to listed types of property including “money,” or listed shares, with an FMV not exceeding $50,000 throughout the year. CRA indicated that a trust holding a gold or silver bar or coin, or with a dividend receivable, would not satisfy the types-of-property test.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.3 under s. 150(1.2)(b).
CRA intimates that it generally will process capital losses that a deceased missed claiming if now claimed within the s. 152(4.2) 10-year period
In the context of the executors discovering that the deceased had not claimed an allowable capital loss in a taxation year that was before the normal reassessment period, CRA indicated that, provided that a request to it to amend the return for the particular taxation year was made by the day that was 10 calendar years after the end of that year, CRA generally would provide relief pursuant to s. 152(4.2) where it was satisfied that the request for adjustment would have been processed if it had been made within the normal reassessment period.
If the loss was realized before rather than within this 10-year period, the loss thus could not be used to reduce Part I tax on a smaller taxable capital gain realized in that same year, even though such taxable capital gain would have the effect of reducing the net capital loss that could otherwise be carried forward from that year. However, that (reduced) net capital loss could be claimed to reduce a taxable capital gain realized in, say, 2015 under a request made pursuant to s. 152(4.2) in 2023.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.2 under s. 152(4.2).
Nolinor – Court of Quebec finds that per-flight-hour allowances paid to crew flying to remote locations came within the s. 67.1(2)(d) exception for full deductibility
Nolinor, which carried on a business of providing charter flights to generally remote locations, e.g., in Nunavut or Gabon, paid its pilots, crew and mechanics allowances of $3 to $5 per flight hour to cover costs of meals and cleaning their uniforms. The ARQ denied 50% of the deductions claimed by Nolinor for such allowances pursuant to the Quebec equivalent of ITA s. 67.1(1) (respecting amounts paid in respect of the consumption of food or beverages). Richard JCQ found that such amounts were deductible in full by virtue of the exception under the equivalent of s. 67(2)(d) (regarding amounts required to be included in employees’ income pursuant to s. 6 respecting food or beverages consumed or that would be so included but for the remote site exception in s. 6(6)(a)(ii)) given inter alia that the allowances were in respect of remote work sites described in the Quebec equivalent of s. 6(6)(a)(ii).
Nolinor was required pursuant to a covenant under its loan agreement with a Canadian bank to take out a policy on the life of its (indirect) wholly-owning shareholder and CEO (Mr. Prudhomme) and assign that policy to the bank as security for the loan. The ARQ denied to Nolinor deductions for the premiums paid by Nolinor on the policy since Mr. Prudhomme was named as the policyholder. In allowing the deduction under the equivalent of ITA s. 20(1)(e.2), Richard JCQ found that in substance Nolinor was the policyholder.
Neal Armstrong. Summaries of Les Investissements Nolinor Inc. v. ARQ, 500-80-039880-191 (Court of Quebec, 19 June 2023) under s. 67.1(2)(d) and s. 20(1)(e.2).
Income Tax Severed Letters 21 June 2023
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that personal-use property (PUP) of the deceased may not be PUP of the estate
We have uploaded the questions posed, and provided summaries of the oral responses given, at the 2023 STEP Roundtable held today.
In Q.1, CRA confirmed that since an estate is a separate taxpayer from the deceased, items that were personal-use property (PUP) of the deceased and, thus, deemed on death to be disposed of for minimum proceeds and ACB of $1,000 per item pursuant to s. 46(1), could potentially not be PUP to the estate (e.g., they could be put in storage). If not PUP to the estate, they would be deemed pursuant to s. 70(5)(b) to have an ACB equal to their FMV immediately before death (without regard to the $1,000 rule) and any subsequent sale would generally give rise to a capital gain or loss computed in the normal way.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.1 under s. 46(1).
CRA discusses the application of the procedural provisions for adjusting CEWS and CERS claims
After noting that the instructions provided by CRA both on the application for the CEWS benefit and the CRA website indicated that a separate application must be filed for each RP account, the Directorate indicated that such separate applications aggregating to an overall deemed overpayment for a qualifying period should be considered to constitute an application for the qualifying period in the prescribed form and manner as required by para. (a) of the “qualifying entity” definition. It further indicated that it would consider s. 152(8) to apply so that the notices of determination issued by RP account would be valid and binding. Furthermore, offsetting of upward or downward adjustments between various RP accounts through redeterminations might be permitted by CRA, provided that (as required by s. 125.7(5)(a)) the overall deemed overpayment did not exceed the amount claimed in the applications filed within the deadline for the qualifying period.
The Directorate noted that pursuant to s. 152(1.2), the normal reassessment period rules in s. 152(4) also essentially were applicable to redeterminations made to s. 152(3.4). Furthermore, s. 125.7(16) (allowing the Minister the discretion to extend the period for making an application) did not allow the Minister to extend the periods for making such a redetermination in relation to a taxpayer’s request to amend an s. 125.7 application for a qualifying period.
Similar considerations applied to the CRHP and CERS benefits.
Neal Armstrong. Summaries of 8 November 2022 Internal T.I. 2022-0941391I7 under s. 152(3.4), s. 125.7(1) – qualifying entity – (a), s. 125.7(5)(a), s. 152(1.2), s. 125.7(16), and s. 160.1(1).
We have translated over 2500 CRA severed letters
We have translated two interpretations released by CRA last week and a further 6 translations of CRA interpretations released in May and April of 2003. Their descriptors and links appear below.
These are additions to our set of 2,502 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 20 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 |
|---|---|---|---|
| 2023-06-14 | 23 May 2023 External T.I. 2017-0713011E5 F - Avantages imposables relatifs aux automobiles ou autres véhicules | Income Tax Act - Section 248 - Subsection 248(1) - Automobile - Paragraph (e) - Subparagraph (e)(i) | a minivan with a permanent reduction to a below-four seat capacity could be excluded from being an “automobile” |
| Income Tax Act - Section 6 - Subsection 6(2) - Element A - Paragraph A(a) | driving to or from home as a result of responding to emergency calls is not personal use | ||
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(k) | travel of on-call employees between home and customer sites was not personal | ||
| 13 April 2023 External T.I. 2017-0684341E5 F - Perte au titre d’un placement d’entreprise | Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) | active business for SBC purposes can continue after regular business operations have ceased/ sale of debt for $1 to unrelated purchasers might be a non-arm’s length transaction | |
| Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation | a corporation may continue to qualify as an SBC well after it has in fact ceased to transact its business | ||
| Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | sale of debt for $1 in order to trigger a loss might be a NAL transaction | ||
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | business does not cease until the prior commitments incurred in the course of the business are fulfilled | ||
| 2003-05-02 | 17 April 2003 Internal T.I. 2003-0181507 F - PRET SANS INTERET
Also released under document number 2003-01815070.
|
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | accessing the exceptional circumstances test requires demonstrating “a sufficient connection between the interest-free loan and an indirect source of the person's income” |
| 25 April 2003 Internal T.I. 2003-0181797 F - FRAIS JURIDIQUES-DECISION
Also released under document number 2003-01817970.
|
Income Tax Act - Section 60 - Paragraph 60(o.1) | legal expenses incurred to recover loss to taxpayer’s RRSP from negligence of investment advisor, were non-deductible | |
| 2003-04-25 | 22 April 2003 External T.I. 2002-0169565 F - ACTIF UTILISE DANS L'ENTREPRISE
Also released under document number 2002-01695650.
|
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share - Paragraph (c) | tax credits generated from an active business due to SR&ED expenditures or over-installing are assets used in that active business as per Ensite |
| 2003-04-18 | 10 April 2003 External T.I. 2002-0152065 F - DEFINITION D'AGRICULTURE
Also released under document number 2002-01520650.
|
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Farm or Fishing Property | goodwill of veterinary practice of servicing farmers did not constitute “qualified farm property” |
| Income Tax Act - Section 248 - Subsection 248(1) - Farming | veterinary practice of providing medicine to livestock was not “farming” | ||
| 11 April 2003 External T.I. 2002-0173065 F - REPAS FOURNIS COURS SEMINAIRES
Also released under document number 2002-01730650.
|
Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(a) | s. 67.1(2)(a) exception applied to meals and snacks added to the cost of training courses provided in the ordinary course | |
| 9 April 2003 External T.I. 2003-0011555 F - Application of 13(21.2) - Affil. Persons
Also released under document number 2003-00115550.
|
Income Tax Act - Section 13 - Subsection 13(21.2) | likely terminal loss where corp. equally owned by A and B disposed of beneficial co-ownership interest to corp. in which their respective spouses held 25% by each of Mrs. A and Mrs. B | |
| General Concepts - Agency | CCRA tests for accepting the presence of an agency agreement, here, re property of a nominee |
CRA indicates that a minivan with a permanent reduction to a below-four seat capacity could be excluded from being an “automobile”
Employees were provided with a minivan (specially adapted to carry specialized equipment) only during periods that they were on-call to respond to emergency calls from home. CRA indicated that for purposes of the exclusion in (e)(i) of the “automobile” definition for “van”-type vehicles for transporting equipment having a “seating capacity” of under four, it considered a minivan to be a van-type vehicle and that the three seat test would be satisfied "if the modification reducing the number of seats to a maximum of three seats is of a permanent nature.” CRA further confirmed that for purposes of computing taxable benefits under ss. 6(1)(e) and (2) and s. 6(1)(k) (if the minivans were automobiles) or under s. 6(1)(a) (if not), use of the vehicles in responding travelling to and from the customers with emergencies would not be personal use, but conversely for travel between the home and office.
Neal Armstrong. Summaries of 23 May 2023 External T.I. 2017-0713011E5 F under s. 6(2) – A(a) and s. 248(1) – automobile – (e)(i).
CRA notes that a corporation may continue to qualify as an SBC well after it has in fact ceased to transact its business
An individual owned an interest-bearing debt of a wholly-owned corporation operating a restaurant which in 20X1 sued the franchisor at the same time as closing the restaurant. If, notwithstanding good prospects of success in the action, it is dismissed by the court in 20X6, can a business investment loss (“BIL”) then be claimed?
CRA noted that, if the capital loss was triggered under s. 50(1), the recognition of a BIL would require that the corporation qualify as a small business corporation (an “SBC”) - which would entail a requirement for instance that it have been carrying on a Canadian active business at some point within the preceding 12 months. CRA then stated:
Following [Poulin], we accept … that an amount for damages may be deducted in a year in which a taxpayer no longer carries on business, since the taxpayer is presumed not to have ceased carrying on business for as long as the taxpayer is engaged in carrying through on acts committed to by the taxpayer in the course of the business, even if, at the time the amount is deducted, the taxpayer is no longer transacting and can no longer attend to the taxpayer’s customers.
Regarding whether a BIL could be realized as a result of the debt’s assignment for $1 to unrelated creditors of the corporation pursuant to a proposal filed with the corporation's creditors, CRA stated:
A situation where one party to a transaction is merely accommodating the other party in an attempt to obtain a certain tax result may be a situation where the parties are not dealing at arm's length because they do not have separate economic interests which reflect ordinary commercial dealings between parties acting in their own separate interests.
Neal Armstrong. Summary of 13 April 2023 External T.I. 2017-0684341E5 F under s. 39(1)(c).