News of Note
CRA confirms the cumulative application of the ETA change in use rules
Email this ContentAco changes its use of a building, which had been used 100% in making exempt supplies, so that thereafter it is used 90% for making exempt supplies and 10% in the course of commercial activities. Two years later, the commercial use is further increased to 20%.
ETA s. 197 indicates that changes of “less than 10%” are not to be taken into account, suggesting that a change of 10% is to be recognized for purposes of the change in use rules. However, s. 141 indicates that a use of 90% (under CRA’s interpretation of “substantially all”) for exempt use is equivalent to 100% for exempt use, so that in Year 1, Aco could not claim an input tax credit based on a 10% change in use, whereas two years later, it could claim an ITC based on a 20% change in use.
CRA essentially confirmed this interpretation, stating:
While a change in use of 10% or more is normally considered to be a significant change in use (i.e. because section 197 considers any change of less than 10% to be insignificant), section 141 nevertheless considers that the entire use of the capital property is not commercial activities.
Accordingly, ETA s. 206(2) would only apply when the registrant (Aco) began to use capital property in commercial activities to an extent greater than 10% - which occurred two years later, permitting Aco at that time to claim an ITC based on a 20% change in use.
However, CRA went on to note that if Aco instead was a financial institution (to which the s. 141 rules do not apply), the rules in s. 206(2) could now apply to generate an ITC based on a 10% change of use in Year 1 and s. 206(3) would permit an ITC based on a further 10% change in use two years later.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.19 under ETA s. 206(2).
CRA rules on 2-year pipeline transactions
Preliminary transactions to pipeline transactions on which CRA ruled entailed the subject corporation (a portfolio investments company) using its CDA account (which had been increased through the receipt of life insurance proceeds on the life of A) to pay a capital dividend to the estate of A, thereby reducing the FMV of the estate’s shares.
Then:
- The estate transferred all its shares of the corporation to Newco in consideration for four notes maturing 3, 6, 9 and 12 months after the amalgamation below (and in consideration for voting common shares of Newco, with an election filed under s. 85(1),) - and with the resulting capital loss (which was not denied under ss. 40(3.61) and (3.6)) being carried back under s. 164(6).
- Newco will be amalgamated with the corporation (presumably after a year) and the notes will thereafter commence to be repaid consistently with their maturity dates.
The transfer to Newco in 1 above had been completed by the time of the ruling letter.
Neal Armstrong. Summary of 2021 Ruling 2021-0895631R3 under s. 84(2).
We have translated 9 more CRA severed letters
We have published a translation of a CRA ruling released last week and a further 8 translations of CRA interpretations released in May and April of 2004. Their descriptors and links appear below.
These are additions to our set of 2,200 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 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Ristorante a Mano – Federal Court of Appeal finds that net tips on restaurant credit card sales distributed to the servers were pensionable wages and insurable earnings for CPP/EI purposes
The appellant, which operated a restaurant, paid “due-backs” to its servers representing the tips on sales processed on credit and debit cards (“electronic tips”) minus deductions made by it as a processing charge and amounts to be paid to kitchen staff, and further deductions based on the amount of cash sales collected by the servers. Monaghan JA indicated that the question of whether a due-back constituted pensionable wages and insurable earnings for CPP and EI purposes turned on the question whether the amount “is paid by the employer to the employee in respect of their employment.”
The due-backs were amounts in respect of the servers’ employment:
But for their employment with the appellant, the servers would not have received the due-backs from the appellant.
Furthermore, the due-backs were paid by the appellant to the servers:
[T]here is no dispute the electronic tips came into possession of the appellant or that the appellant transferred the due-back, representing a portion of those electronic tips, to the servers.
Neal Armstrong. Summaries of Ristorante a Mano Limited v. Canada (National Revenue), 2022 FCA 151 under General Concepts – Payment and Receipt and s. 6(1)(a).
CRA confirms that, under the ETA s. 182 rules, a payment by a guarantor can generate an ITC to the defaulter
Aco (a corporate registrant) agreed to make taxable supplies in Canada of tangible personal property to Bco (a registered partnership). A corporate partner of Bco (Cco) agreed to guarantee the obligations of Bco under the contract. As a result of Bco’s default on its obligations, Cco is required to pay liquidated damages to Aco.
CRA indicated that, under ETA s. 182, Aco is deemed to have collected the GST/HST as part of the liquidated damages amount, which is deemed to be consideration for a taxable supply by it, and Bco would be deemed to have paid that GST/HST (notwithstanding that Cco is the actual payer) – so that Bco (not, Cco) would be able to claim an ITC for the deemed GST/HST payment if the usual conditions in s. 169 were satisfied.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.18 under ETA s. 182.
CRA confirms that an employee cannot access the 2019 business use by a predecessor of a car to generate standby-charge relief under s. 6(2.3) in 2020/2021
Although an employee must use the employer-provided automobile over 50% in the course of the employment in order for a reduction under the standby formula in s. 6(2) to be available, the COVID-relief rule in s. 6(2.3) deemed an employee who used an automobile more than 50% of the distance driven for business purposes in 2019 to have done the same in 2020 and 2021. CRA confirmed that where a position was filled by a replacement employee in 2020, the 2019 business usage by the predecessor could not be used by the current employee to access the relief under s. 6(2.3).
Neal Armstrong. Summary of 13 January 2022 External T.I. 2021-0900691E5 under s. 6(2.3).
Income Tax Severed Letters 31 August 2022
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on pipeline transactions of an alter ego trust implemented over an extended period
CRA provided the usual pipeline rulings respecting transactions, which contemplated that:
- shares of an investments company (ACo), whose ACB had been stepped up in the hands of an alter ego trust on the death of the settlor (“Father”) are transferred by the trust to a “Newco” in consideration mostly for notes of Newco
- the Newco common and preferred shares and the Newco notes are distributed pro rata to Father’s children on a s. 107(2) rollover basis
- at least one year after step 1, Newco and ACo amalgamate (under a long-form amalgamation, given that the children until then had been minority shareholders of ACo)
- Amalco repays no more than 10% of the initial aggregate principal amount of the notes during the first year following the amalgamation and, absent extraordinary events, repays no more than that sum in each of the subsequent years.
Neal Armstrong. Summary of 2021 Ruling 2021-0906111R3 under s. 84(2).
CRA indicates that agreeing to purchase a new apartment for the purpose of headleasing it renders the purchaser a builder for GST purposes
S. (b)(ii) of the ETA definition of “builder” provides that, in the case of a corporation, that it is a builder of a residential complex where the person acquires an interest in the complex at a time when the complex is under construction or substantial renovation – but para. (h) of the definition excludes from a para. (b) builder a person whose only interest in the residential complex is a right to purchase any interest in the complex from a builder of the complex.
However, a corporation is a builder under para. (f) if inter alia it acquires the complex (before its occupancy by an individual) for the primary purpose of selling the complex (or parts thereof) or leasing the complex (or parts thereof) to persons other than to individuals who will use the complex (or parts thereof) for their personal use.
In response to a query as to the relationship between paras. (b) and (d) where a corporation acquired one or more pre-build residential complexes to be leased it to a person for personal use of individuals, CRA indicated that “a corporation that is a purchaser-landlord who acquires a right to purchase an apartment building that is under construction for the primary purpose of leasing the completed apartment building to another person under a head lease (or for the primary purpose of leasing the completed apartment units to tenants) would not be a paragraph (b) builder because of the exclusion in paragraph (h).” However, it would be a para. (d) builder if it was not acquiring its rights for the primary purpose of leasing the apartment units to tenants for their personal use, for example, if it acquired a right to purchase the apartment building (before any individual occupancy) for the primary purpose of leasing the apartment building to another person under a head lease.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.16 under ETA s. 123(1) – builder – para. (d).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations released in May of 2004. Their descriptors and links appear below.
These are additions to our set of 2,191 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 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).