News of Note
Westcoast Energy – Federal Court of Appeal confirms that an employer was not entitled to ITCs for the GST/HST on reimbursed employee health care services
Email this ContentWestcoast reimbursed (through Manulife as its agent) employees who had incurred various health care services – including some which were GST/HST-taxable, namely, acupuncture, massage therapy, naturopathy and homeopathy services. On appeal, Westcoast submitted, contrary to the finding below, that the employees should be considered to have consumed or used the services “in relation to activities of [Westcoast]” so as to generate ITCs under s. 175(1)(c).
Stratas JA agreed with the Tax Court below that ExxonMobil, which had held under the similar wording of s. 174 that “property or services which are intended by the employer for the exclusive personal use of the employees and which lend themselves to such a use bear no relationship with the employer’s activities,” also applied here in the context of s. 175, such that if “an employer reimburses for a service or property that is for the exclusive personal use of employees, the employer will not enjoy the deeming effect of subsection 175(1).” Accordingly, no ITCs were generated to Westcoast under s. 175.
Neal Armstrong. Summaries of Westcoast Energy Inc. v. Canada, 2022 FCA 57 under ETA s. 175(1)(b) and s. 170(1)(b)(ii).
Our translations of CRA interpretations go back more than 17 years
We have published a further 8 translations of CRA interpretation released in April and March, 2005. Their descriptors and links appear below.
These are additions to our set of 1,985 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA provides for expanded PLOI election disclosure and permits PLOI elections to be made on loan-by-loan basis
Where a pertinent loan or indebtedness (PLOI) election is made under s. 15(2.11) or 212.3(11) respecting an amount owing by a corporation resident in Canada (CRIC) to certain non-residents, the loan or indebtedness will be subject to notional interest imputation rules instead of potentially being treated as a deemed dividend paid by the CRIC to the non-resident debtor. Until about now, CRA required that separate elections be filed in respect of each amount owing to the same non-resident regardless of whether such amounts pertained to the same debt instrument.
Effective for elections filed after April 11, 2022, CRA will require only one election to be made in respect of a particular legal instrument where multiple amounts are owed under its terms. An election must be made in respect of each non-resident person that owes an amount under the terms of the legal instrument. In order to be eligible for this administrative policy, taxpayers will need to send to the CRA, along with the PLOI election, a copy of the agreement detailing the terms and conditions of the loan or indebtedness for which one single PLOI election is being filed for multiple amounts owing under that legal instrument.
CRA is also requiring expanded disclosure from the electing CRIC, including the total changes in the amount of the PLOI on a monthly basis showing total increases (including capitalized interest) and total decreases, and the total amount of deemed interest on the PLOI, the total amount of interest charged by the CRIC on the loan or indebtedness and the net adjustment to interest income required (if any).
These and related changes are reflected in the updated CRA Webpage on the “Pertinent loans or indebtedness (PLOI)” .
Neal Armstrong. Summary of Notice to Tax Professionals: Updates to filing process for a pertinent loan or indebtedness election, 25 March 2022 under s. 15(2.11).
CRA indicates that expenses focused on determining the economic feasibility of a deposit are not exploration expenses
Regarding the test in para. (f) of “Canadian exploration expense” that the expense generally has been incurred “for the purpose of determining the existence, location, extent, or quality of a mineral resource,” CRA rejected an argument that the “qualify” aspect of this test could encompass expenses for determining the economic feasibility of a deposit, such as expenses for preparing pre-feasibility or feasibility studies, stating:
[E]xpenses that qualify for CEE do not … include expenses for determining the economic viability of a mineral resource if those expenses do not relate to a determination of the natural (e.g., physical, chemical or mechanical) characteristics of the mineral resource. Such expenses are too remote to be described as expenses incurred for the purpose of determining the “quality” of a resource.
Before so concluding that the word ‘quality’ focussed more narrowly on the physical aspects of a deposit as contrasted to its commercial value, CRA:
- Applied the ejusdem generis rule (noting that the first three words in the quoted purpose test referred to “the inherent physical characteristics of the mineral resource.”)
- Indicated that various materials suggested that the purpose of the provision was “the search for, or discovery of, the minerals in the ground,” and that expenses related to “external factors” such as “an overall assessment of economic viability” of the project “extend well beyond the focused nature of an incentive targeted at the activity of mineral exploration.”
Neal Armstrong Summary of 9 February 2022 External T.I. 2020-0873931E5 under s. 66.1(6) – CEE – (f).
Tiessen Interior Design – Federal Court of Appeal confirms s. 256(2.1)’s application to stop a professional firm multiplying the small business deduction
An incorporated firm of architects and interior designers restructured, so that their practice was now carried on by a partnership between “Partnercos” owned by each of them. The principals were now exclusively employed by respective Servicecos controlled by them, which provided their services to the respective “paired” Partnerco for fees, which were deemed to be business income under s. 129(6).
The Tax Court found that one of the main reasons for the reorganization and for the separate existence of the 30 corporations was the reduction of taxes through multiplication of the small business deduction (“SBD”), so that s. 256(2.1) applied to deem the corporations to be associated, thereby denying the SBD multiplication.
The taxpayers now submitted that the Tax Court had erred by not focusing on whether one of the main reasons each particular Partnerco had chosen to pair itself with a new Serviceco was tax reduction rather than on what was the purpose of undertaking the reorganization for the 30 corporations as a whole. Woods JA found that “the evidence and factual findings in the Tax Court may well have been different had the parties been focussed before the Tax Court on the issue [now] raised by the Appellants” so that this argument could not now be raised, and dismissed the taxpayers’ appeal.
Neal Armstrong. Summary of Nicole L. Tiessen Interior Design Ltd. v. Canada, 2022 FCA 53 under Federal Courts Act, s. 27(1.3).
CRA provides a detailed listing of what is para. (f) CEE
CRA has provided a detailed chart listing various categories of expenditure which generally qualify as Canadian exploration expense (CEE) under para. (f) of the definition as well as noting various exclusions.
In addition to the more obvious early-stage activities, CRA also includes, as qualifying activities, various items that are made with the hope of getting to the bankable feasibility study stage, but without being there yet- such as resource estimation and deposit delineation, deposit modelling and updating resource estimates, testing of rock stability, of mineral resource dilution (re waste rock) and of metallurgy (re difficulty of separating pay material) including grinding tests , metallurgical separation testing on core or bulk samples (to determine recoverable percentage of minerals), but not if for determining an optimal method of separation , and bulk sampling (in reasonable sizes) for determining the effective grade (after dilution), and performing grinding tests and tests as to whether any separation process (e.g. flotation or solvent extraction) allows minimum quality specifications (provided it is not for determining the optimal processing method).
CRA indicates that pre-feasibility and feasibility studies generally do not so qualify, but give rise to deductions under s. 9, and that the costs of various of other types of studies such as those of mine design, evaluation of transportation from the mine to the processing plant and of different technically feasible options for processing, process engineering studies and estimates of capital and operating costs are also deductible under s. 9 if incurred before making a decision to bring the mine into production. This latter point is consistent with Rio Tinto and Bowater.
Neal Armstrong. Summaries of 9 February 2022 Internal T.I. 2020-0873931I7 under s. 66.1(6) – CEE - (f), s. 66.2(5) – CDE - (e) and s. 18(1)(b) – capital expenditure v. expense –current expense v. capital acquisition.
Income Tax Severed Letters 30 March 2022
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
PwC – Federal Court of Australia finds that privilege applied to communications made or received by a multi-disciplinary partnership for the “dominant purpose” of legal advice
PwC Australia was a multi-disciplinary partnership. The engagement partner for the JBS Australia group was a lawyer, and the client-servicing team also included non-lawyers.
The Commissioner of Taxation issued notices to produce documents to that engagement partner and some of the group companies, as to which legal professional privilege was claimed over approximately 44,000 documents, with the Commissioner disputing such claims over approximately 15,500 documents.
Moshinsky J indicated that he was satisfied that a lawyer-client relationship existed between the engagement partner (along with some of the other PwC lawyers) and the client group, so that is was necessary to consider, on a document-by-document basis, whether the sample documents provided to him were subject to legal professional privilege, which turned in each case on whether they were “communications made for the dominant purpose of giving or receiving legal advice.”
Paragraphs 37 to 932 of his 934-paragraph decision are currently redacted, and he will release a less redacted decision after reviewing submissions on what should continue to be redacted.
Neal Armstrong. Summary of Commissioner of Taxation v PricewaterhouseCoopers, [2022] FCA 278 under s. 232(1) – solicitor-client privilege.
Fortier – Federal Court finds a violation of procedural fairness where the taxpayer was not given a chance to respond
A CRA agent reviewed an individual’s application for CERB benefits, then contracted the individual’s former employer directly, and was told that he had left employment because his contract had reached its termination date, rather than for COVID reasons. That agent’s denial of claimed benefits without contacting the individual “violated the principles of procedural fairness,” i.e., the individual was not provided with “a full and fair chance to respond.” St-Louis J directed that the matter be reconsidered by another agent.
Neal Armstrong. Summary of Fortier v. Canada (Procureur général), 2022 CF 374 under s. 220(3.1).
Shaker – Federal Court finds that a trustee of a real estate trust does not hold any “interest in real property” that can be charged by CRA
CRA obtained an interim order to charge the interest of Mr. Shaker, as one of the trustees of a trust (the “VSI Trust”) for a Toronto property (Blue Jays Way), for a personal tax debt. In finding that such charge was not authorized under Rule 458(1)(a)(i), which referenced a judgment debtor’s “interest in real property,” i.e., in finding that the quoted words did not extend to Mr. Shaker’s legal interest in the Blue Jays Way property as trustee, and before ordering the interim charge to be discharged, Walker J stated:
Trust property is not available to the creditors of a trustee where the debt in question is the trustee’s personal debt … . [T[he Tax Debt is not a debt of the VSI Trust and the trust property, the Blue Jays Way Property, is not available to the CRA to satisfy Mr. Shaker’s debt. To conclude otherwise would improperly and adversely impact the interests of the third-party beneficiaries of the VSI Trust. …
… Canada North Group stat[ed] “[p]roperty held in trust cannot be said to belong to the trustee because ‘in equity, it belongs to another person’ (Henfrey [[1989] 2 S.C.R. 24]], at p. 31)”. It follows that a trustee cannot use trust property to satisfy a personal debt.
Neal Armstrong. Summaries of Canada (National Revenue) v. Shaker, 2022 FC 407, 2022 FC 408 under Federal Court Rule 458(1)(a)(i) and General Concepts - Ownership.