News of Note
CRA accepts the bifurcation of a gift card for GST/HST purposes between the complimentary coupon portion and the purchased gift certificate portion
Email this ContentA supplier issues gift cards with stipulated monetary values to purchasing customers, which they can use at its stores or at its e-commerce portal. However, to promote products or as a customer service gesture, the supplier also issues “complimentary gift cards” whose “complimentary value,” when applied by the customer, is treated by it as consideration for the goods or services supplied. Customers can purchase additions (“top-up values”) to such cards.
CRA indicated that, subject to conditions, the complimentary value of a gift card could be treated as a “coupon” for GST/HST purposes so that, in the case of a (non-zero-rated) taxable supply, the supplier could claim an ITC under ETA s. 181(3)(b) for the tax fraction of the complimentary value on the gift cards’ redemption. Those conditions principally were that:
- The complimentary value of each gift card issued is tracked and accounted for separately from any top-up value added to the gift card.
- The person redeeming the complimentary value is believed to be a consumer.
- The supplier accepts the complimentary value as full or partial consideration for a supply of property or service.
- The gift card’s complimentary value is extinguished before any top-up value is applied to a supply.
CRA went on to note that any top-up value added to the gift card would generally be considered the issuance or sale of a gift certificate for consideration and, when redeemed for a supply of property or services, would be deemed to be applied as money as described in s. 181.2.
Neal Armstrong. Summaries of 31 July 2023 GST/HST Interpretation 217772 under ETA s. 181(1) – coupon, and s. 181.2.
The interposition of a Middleco in a spin-off transaction can put it back onside s. 55(3)(a)
Suppose that Opco is owned on an 85-15 basis by two arm’s-length shareholders, Aco and Bco. If Opco wishes to spin off the real property used in its active business to a Newco owned in the same proportions by Aco and Bco, the s. 55(3)(a) exception will not be available since Bco, which is not related to either Opco or Newco, has a significant increase in its interest in Newco occur contrary to s. 55(3)(a)(ii) and (v).
Instead suppose that there is a preliminary step under which Aco and Bco transfer their shares of Opco to newly-incorporated Middleco on an s. 85(1) rollover basis. Then, Opco spins off the real estate to a Newco incorporated by Middleco. Done this way, the spin-off would come within the s. 55(3)(a) exception given, inter alia, the relieving effect of the rule in s. 55(3.01)(g). See also 2015-0570021E5 F.
Neal Armstrong. Summary of David Carolin, Manu Kakkar and Boris Volfovsky, “Tax Alchemy and Paragraph 55(3.01)(g): Converting a 55(3)(b) Divisive Reorganization into a 55(3)(a) Related-Party Butterfly,” Tax for the Owner-Manager, Vol. 24, No. 1, January 2024, p. 7 under s. 55(3.01)(g).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released during May of 2002. Their descriptors and links appear below.
These are additions to our set of 2,694 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 21 3/4 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
GST/HST Severed Letters July/August 2023
Duval – Quebec Superior Court indicates that it has jurisdiction to consider requests for judicial review of ARQ refusals to reassess consequentially on a federal reassessment
The Quebec taxpayers did not object to ARQ reassessments that denied ½ of their claimed business loss for 2010 – but then successfully appealed to the Tax Court similar federal reassessments of that year. They then requested (years after the period for objecting to the earlier ARQ reassessments had expired) that the ARQ reassess their 2010 taxation years in light of the favourable Tax Court judgment (and CRA assessments to implement it) pursuant to s. 1010.0.2 of the Taxation Act (Quebec). S. 1010.0.2 provides that, notwithstanding the expiration of the period to file objections, the Quebec Minister may, within one year of a federal reassessment “make a reassessment for the sole purpose of taking into account elements that may be considered to relate to that assessment or reassessment.”
The taxpayers applied to the Qubec Superior Court for judicial review of the ARQ’s refusal to reassess. Paradis JCS rejected the ARQ position that the Quebec Superior Court lacked the jurisdiction to entertain the judicial review application because the matter came within the exclusive jurisdiction of the Court of Quebec (to which appeals from ARQ reassessments are made). He indicated inter alia that the effect of the ARQ position was that a taxpayer would be required to resort to the Quebec objection procedures as a prerequisite to any reassessment by the Quebec Minister pursuant to s. 1010.0.2, whereas s, 1010.0.2 contained no such precondition for its application.
Neal Armstrong. Summary of Duval v Agence du revenu du Québec, 2023 QCCS 4739 under Federal Courts Act, s. 18.5.
CRA finds that trailer commissions which are temporarily paid by an MFT to an OEO dealer for it to fund rebates to client MFT unitholders are s. 12(1)(x) inclusions to the MFT
S. 12(2.1) deems an amount received by a beneficiary of a trust as an inducement in respect of activities of the trust, or as a reimbursement or other assistance in respect of an expense of the trust, to have been received in that regard by the trust (so as to potentially engage the application of s. 12(1)(x) at the trust level).
A ban was imposed, effective June 1, 2022, on order execution only service dealers (“OEO Dealers”), i.e., dealers not making a suitability determination before arranging for a client to invest in a mutual fund, from being paid trailer fees by a mutual fund or its manager. However, there is a temporary exemption (e.g., until May 31, 2025) from this prohibition in order to facilitate the OEO Dealers in paying a rebate of such amounts to their clients who held their investment in the mutual fund prior to June 1, 2022, or who transferred their mutual fund units into OEO Dealer accounts on or after June 1, 2022 (an “OEO Rebate”). The Directorate stated:
[W]here an OEO Rebate is paid by an OEO Dealer to a unitholder in a trust, in the [above] circumstances … it is likely that the OEO Rebate would be considered to be in respect of the activities of the trust or in respect of an expense of the trust. In the result, subsection 12(2.1) would likely be considered to apply and the amount of the OEO Rebate included in the income of the trust pursuant to paragraph 12(1)(x).
Neal Armstrong. Summary of 8 September 2023 Internal T.I. 2023-0987091I7 under s. 12(2.1).
The increase in the AMT exemption will increase the tax-free level of dividends which an individual can receive
Two benefits of the increase in the AMT exemption from $40,000 to $173,205 going from 2023 to 2024:
- In 2023, a Canadian individual taxpayer with income of $55,000 that consisted solely of eligible dividends would not be subject to federal tax, but would be subject to AMT on eligible dividends in excess of $55,000 until the regular net federal tax payable exceeded the minimum amount – whereas for 2024 and subsequently, income consisting only of eligible dividends will not generate AMT at any income level.
- A taxpayer in 2024 will be able to receive tax-free eligible dividends of up to $71,780 for federal purposes, which is an increase of $16,780 compared to 2023. Taking into account provincial income tax, there is also an increase in all the provinces (also from $55,000 to $71,780 in Ontario, Alberta, B.C. and Saskatchewan, and a smaller increase, and from lower levels, for other provinces.)
Jay Goodis and Evan Crocker, “Alternative Minimum Tax and Eligible Dividends,” Tax for the Owner-Manager, Vol. 12, No. 3 January, p. 5 under s. 127.51.
Joint Committee notes that Pangaea is undercutting the ITA’s policy not to impose Part XIII tax on cross-border payments to arm’s-length debenture holders
In a 2020 submission, the Joint Committee expressed concerns that a broad reading of Pangaea could result in the imposition of Part XIII tax on commitment fees, and consent fees and restructuring fees, paid to arm's length non-resident lenders/ debt holders – which would run contrary to the policy choice made to reduce the cost of capital to Canadian businesses by eliminating the withholding tax payable to arm's-length lenders.
After Finance asked for information on the "real world" market implications of Pangaea in the above context, and after canvassing publicly available information on recent transactions in this context, the Joint Committee identified that the majority of such transactions have a risk factor disclosure as to the potential imposition of Canadian withholding tax on such fees.
Furthermore, the boards of directors of such issuers may well be concerned by their potential joint and several liability for unremitted Part XIII taxes of a restructuring issuer in financial difficulty, so that they may insist on withholding. For instance, in the Aleafia Health debt restructuring, there was withholding on the consent fees paid to the non-resident debenture holders.
Neal Armstrong. Summary of Joint Committee, “Impact of Pangaea case,” 10 January 2024 Joint Committee Submission under s. 212(1)(i).
The s. 94 rules contain potential traps for U.S. citizens
To provide a sampling of a broader coverage of s. 94 issues that U.S. citizens may face:
- It is common for U.S. citizens to settle irrevocable trusts for the benefit of descendants and make gifts to those trusts in in amounts equal to the U.S. federal gift tax applicable exclusion amount (currently, $13.61 million per donor), thereby allowing for gifts to be made tax-free for the benefit of the trusts’ beneficiaries while maintaining the flexibility of using a trust.
- However, the s. 94 rules potentially may apply to such a trust even if none of the beneficiaries was ever resident in Canada and the contributions to the trust by a resident contributor were immaterial. This would occur for instance if a U.S. resident and citizen who has never been resident in Canada established a discretionary U.S.-resident trust in 2010 for his U.S.-resident children and contributed an aggregate of $10 million to the trust over the following 10 years – but his brother, a U.S. citizen and Canadian resident, over the same 10-year period gave an aggregate of $100,000 cash to the trust to take advantage of his applicable credit (part of the $13.61 million amount) or his annual exclusion limit (currently, $18,000).
- The adverse consequences of s. 94 applying can be ameliorated by making a resident portion election under s. 94(3)(f) – but this election cannot be made if the trust has already filed a return for a year in which it was deemed resident pursuant to s. 94.
- Given that the definition of “contribution” includes transfers and loans that form part of a series of transactions that includes a transfer or loan of property by another person to the relevant trust, to the extent the transfer or loan to the trust can reasonably be considered to be made “in respect of” the transfer or loan at issue, an outright gift by a Canadian resident to a nonresident donee should be appropriately documented and care should be taken that any subsequent dealing with the donated property by such donee, such as a transfer to a U.S. trust for the benefit of that individual, is independent from the original gift.
- No Canadian foreign tax credit is available to a U.S.-resident trust that is a grantor trust but is deemed to be a resident trust under s. 94 for the U.S. tax not paid by the trustee but instead paid by the grantor.
- However, this mismatch can potentially be addressed by having a resident contributor elect to have s. 94(16) apply to the trust. For example, if a U.S. citizen and Canadian resident who is the sole contributor to a U.S.-resident grantor trust, elects to have s. 94(16) apply, all the trust’s income will be allocated, and the foreign tax credit will be available, to the individual regarding such foreign income designated to that individual pursuant to s. 94(16)(c).
Neal Armstrong. Summaries of Mark Brender and Marc Roy, “Canadian Tax Trap Arising from Cross-Border Gift Tax Planning,” Tax Notes International, Vol. 111, 4 September 2023, p. 1217 under s. 94(3), s. 94(1) – contribution, s. 94(16), s. 104(7.01), s. 94(2)(a) and s. 94(2)(k).
Income Tax Severed Letter 10 January 2024
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.