News of Note
CRA indicates that government assistance based partly on payroll levels would not be qualifying revenue if normal accounting practice would be to contra payroll expense
Email this ContentEligible entities received annual governmental financial assistance based, in whole or in part, on their labour expenditures. Were these qualifying revenues for CEWS purposes?
After stating that this was a question of fact, CRA indicated (in light of the “normal accounting practices” rule in s. 125.7(4)) that if the normal accounting practice of the entities was to apply the amounts to reduce their payroll (or other) expenses, they would not be qualifying revenues.
Neal Armstrong. Summary of 7 January 2022 External T.I. 2020-0866751E5 F under s. 125.7(4).
The Joint Committee recommends that the draft bare trust reporting requirement be scrapped
The Joint Committee noted that the required filing under draft s. 150(1.3) of returns for bare trusts will be burdensome including identifying whether a name can be assigned to the arrangement (when none may exist), identifying how to respond to requests for information which may be inapplicable, the need (in the case of a paid preparer) to get a client to sign and return a T183 form and perhaps also obtain a client engagement letter – for perhaps not much benefit (the required reporting will not provide any meaningful information regarding the trust property).
It is recommended that proposed s. 150(1.3) not be enacted and that beneficial ownership information be obtained some other way – for instance, requiring the beneficial owners, when they file tax returns of their own, to provide beneficial ownership information respecting the bare trust arrangements on those returns would be more efficient.
If the answer to this is “no,” then at least CRA might provide a streamlined T3 form specifically for bare trust arrangements, addressing only the Reg. 204.2 information.
Also linked on our Joint Committee page are the Joint Committee submissions on reportable and notifiable transactions and on the tax debt avoidance rules in the February 4, 2022 draft legislation along with a CBA submission focused on privilege issues raised by the reportable and notifiable transactions, and a CPA Canada submission on the uncertain tax treatment rules contained in the same package.
Neal Armstrong. Summary of Joint Committee, "Reporting Requirements for Trusts", 5 April 2022 Joint Committee Submission under s. 150(1.3).
CRA indicates that s. 52(1) applied to give full basis to a member receiving a distribution-in-kind of RPP property
CRA indicated that where surplus from a registered pension plan trust was distributed as an in-kind distribution to a member, the resulting inclusion of the distributed property’s FMV in the member’s income pursuant to s. 56(1)(a)(i) meant that such amount was deemed to be the cost of the property to the individual pursuant to s. 52(1).
Neal Armstrong. Summaries of 22 December 2021 External T.I. 2021-0914081E5 under s. 52(1) and s. 149(1)(o).
Income Tax Severed Letters 6 April 2022
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on the non-application of s. 55(4)
A family company (DC) controlled by father and that engaged in leveraged investing will spin off a portion of its share portfolio to respective transferee corporations (TCs) largely owned by the respective three adult children of father but with father retaining voting control. Largely because all the corporations will be related through the continuing control of father, CRA ruled that the s. 55(3)(a) exception applied, so that there was no need to strictly comply with the butterfly rules. CRA also ruled that s. 55(4) will not apply (which would have applied if it could reasonably be considered that one of the main purposes for father subscribing for special shares of the TCs was to cause them to continue to be related to DC so as to engage the s. 55(3)(a) exception), presumably in light of a representation that father will continue to have high-level involvement in the TCs’ investing activities.
Another aspect related to a family discretionary trust shareholders of DC whose trustees had the authority to appoint beneficiaries out of a wide range of persons including persons dealing at arms’ length with father. A representation was given that no such authority had been exercised - and that the trust has not acquired property from any such potential beneficiary or a person with whom such person does not deal at arm’s length (there’s no harm in giving a rep where no one could figure out what it means?)
Neal Armstrong. Summary of 2021 Ruling 2020-0874961R3 under s. 55(4).
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
Westcoast 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).