News of Note
CRA finds that a taxpayer could not now file returns for statute-barred periods that had been arbitrarily assessed so as to claim additional expenses
Email this ContentACo’s 2011 to 2013 taxation years were arbitrarily assessed under s. 152(7). Eventually, it filed tax returns for those taxation years after the normal reassessment periods for those years, claiming additional deductions.
CRA considered that ACo could not effectively extend the normal reassessment period pursuant to a request by it to extend the s. 150(1) filing deadline for its 2011 to 2013 returns under s. 220(3). In this regard, CRA indicated:
[S]ubsection 164(1.5) indicates Parliament’s intention with respect to when relief from the three-year limitation of subsection 164(1) can be granted. Therefore, if a taxpayer does not meet the conditions for relief under subsection 164(1.5), it is our view that no further relief under subsection 164(1) may be provided under subsection 220(3).
Furthermore, ConocoPhillips (finding that s. 220(2.1) could not be utilized to allow a taxpayer to waive the requirement to file a notice of objection) suggested that “[s]ubsection 220(3), which, like subsection 220(2.1), is a general provision, cannot override the specific provisions contained within the objection regime in the Act.”
The taxpayer’s repeated failure to file returns when requested appeared in CRA’s view to amount to a misrepresentation referred to in s. 152(4)(a)(i). However, CRA indicated that “to allow a taxpayer who has made a misrepresentation to use subparagraph 152(4)(a)(i) to reduce the amount of tax assessed would be inappropriate,” in light of various considerations. These included that the onus on the Minister under s. 152(4)(a)(i) implied that the provision could only “be used by the Minister to increase assessed tax payable and not by a taxpayer to reduce tax payable,” and that it seemed inappropriate that a taxpayer could “open a statute-barred year to obtain a more favourable reassessment because they were (or claim to have been) careless or negligent when they filed their tax return or failed to file a return at all.”
Accordingly, s. 152(4)(a)(i) did not permit the Minister to reassess ACo in these circumstances.
Neal Armstrong. Summaries of 22 August 2022 Internal T.I. 2019-0810061I7 under s. 220(3), s. 152(4)(a)(i), s. 164(1.5) and s. 152(6).
Axelrod – Tax Court of Canada finds that a dentist providing a crown or implant was supplying an exempt health care service rather than a zero-rated artificial tooth
Dr. Axelrod, a dentist, provided dentures, bridges, crowns and implants, which the parties agreed constituted artificial teeth within the meaning of Sched. VI, Pt. II, s. 11, which zero-rated “a supply of artificial teeth.” Dr. Axelrod took the position that when he provided an artificial tooth to a patient, he was thereby making a zero-rated supply. CRA reassessed him on the basis that he was making the supplies of artificial teeth, as acquired by him from the laboratory, to the patients as zero-rated supplies pursuant to Sched. VI, Pt. II, s. 11, and making supplies of health care services (regarding diagnosis, preparation work, such as measuring and taking impressions, and installation) that were exempted pursuant to Sched. V, Pt. II, s. 5. Sommerfeldt J instead found that Dr. Axelrod was making a single supply of exempt services pursuant to Sched. V, Pt. II, s. 5, so that his appeal was dismissed.
Before so finding, Sommerfeldt J first found that Dr. Axelrod was making a single supply to such patients, stating:
It is difficult to imagine that a patient of Dr. Axelrod would have wanted to acquire dentures, a bridge, a crown or an implant without Dr. Axelrod having first done all of the preliminary work necessary to ensure that the particular prosthesis would fit and function properly in the patient’s mouth, and without Dr. Axelrod actually installing the prosthesis in the patient’s mouth. Similarly, all of the dental services rendered by Dr. Axelrod would have made no sense if they had not related to the prosthesis desired by the patient.
He went on to indicate that, to determine the character of the single supply, it was necessary to determine “which element caused the payment of the consideration,” and then stated that in light of the importance of the professional services provided by Dr. Axelrod, “the predominant element of the supply made by Dr. Axelrod to a patient was his professional dental services, and not the prosthesis per se.”
Sommerfeldt J further found that if, contrary to his single-supply analysis, Dr. Axelrod were regarded as making supplies that came within both provisions, “the exempt status of the supplies will preclude Dr. Axelrod’s dental practice (which is a business) from being a commercial activity, by reason of the exception at the end of paragraph (a) of the definition of the term “commercial activity” in subsection 123(1) of the ETA.” In other words, the exclusion from the definition of commercial activity for a business of making exempt supplies had the effect of making the exempting provision (Sched. V, Pt. II, s. 5) paramount over the zero-rating provision (Sched. VI, Pt. II, s. 11) to the extent of any overlap.
Neal Armstrong. Summaries of Axelrod v. The King, 2022 TCC 157 under ETA Sched. VI, Pt. II, s. 11, Sched. V, Pt. II, s. 34 and s. 123(1) – commercial activity.
Leonard – Federal Court of Appeal finds that a mortgage securing a loan cannot be treated as a property separate from that loan
The taxpayer acquired, from a US bank, a mortgage loan of a US debtor who was in default, for a purchase price of around $1.3 million. Two years later, after the completion of foreclosure proceedings, the taxpayer purchased the property, as the only bidder under the resulting auction, for $500,000.
The Tax Court had found that 99.9% of the amount paid by the taxpayer to acquire the mortgage and debt should be allocated to the mortgage, and only 0.1% to the debt., and concluded that the first amount could be deducted by the taxpayer in computing his income for 2011 as a result of the cancellation in 2011 of the mortgage.
In reversing this finding, Webb JA indicated that the Tax Court had “erred in treating the mortgage as a separate property for the purposes of the Act.” In this regard, he noted that Royal Trust Co. v. New Brunswick (Secretary Treasurer), [1925] S.C.R. 94 had “confirmed that a mortgage cannot effectively be separated from the debt it secures.”
Neal Armstrong. Summaries of Leonard v. Canada, 2022 FCA 195 under s. 20(1)(p)(ii) and s. 10(1.01).
CRA confirms that rents deemed to be active business income by s. 129(6) are not included in the recipient’s AAII
CRA confirmed that rents paid by an operating CCPC to an associated CCPC owning the property, such that those rents were deemed to be from an active business of the recipient, would not be included in the recipient’s adjusted aggregate investment income (“AAII”) as defined in s. 125(7).
Neal Armstrong. Summary of 11 October 2022 External T.I. 2020-0856421E5 under s. 125(7) – AAII – para. (c).
Income Tax Severed Letters 14 December 2022
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that per diem damages received by a construction-services recipient for construction delays were free of HST
The City’s construction agreements contained a liquidated damages clause, which required the contractor to compensate the City when work was not completed within specified timelines through the payment of “Damages” at a specified per diem rate per calendar day of the delay. The Damages were to be paid by the City reducing its payments for amounts that were invoiced to it by the contractor.
CRA ruled that GST/HST did not apply to the Damages amounts given that they were compensation for damages rather than consideration for any supply by the City, and given that s. 182(1) (which can apply to damages received by a supplier from the recipient, but not generally to damages flowing the other way) did not apply.
Thus, it did not matter that the Damages were computed on a per diem, rather than lump sum, basis and that, in a broad sense, they were an adjustment to a taxable sale price.
It might have been more tax efficient for the City to have instead required the contractor to adjust the sale price charged to it, so that the City could reduce its net HST outlay pursuant to the s. 232 rebate mechanism.
Neal Armstrong. Summary of 26 July 2022 GST/HST Ruling 232189 under ETA s. 182(1).
Abedipour – Tax Court of Canada finds that a house construction not being an adventure in the nature of trade was corroborated by its custom design features
Whether the taxpayers were required to charge HST on the sale of their newly-constructed home turned, under para. (f) of the ETA “builder” definition, on whether such sale occurred “in the course of a business or an adventure or concern in the nature of trade.” In addition to accepting their explanation of changed personal circumstances for the sale, Spiro J. noted that their professed intention of holding for the long term as their home was corroborated by their idiosyncratic choices in customizing the home’s details:
… Rather than installing multiple televisions, the Appellants installed multiple fireplaces. This strongly suggests that they built the home only for themselves.
… [T]he Appellants left nothing for a potential purchaser to customize. … The fact that the Appellants finished everything to their own personal taste strongly suggests that they built the home only for themselves. The fact that it took the Appellants six months to sell the property after several price reductions supports this conclusion as do the extensive renovations performed by the buyers.
Neal Armstrong. Summary of Abedipour v. The King, 2022 TCC 155 under ETA s. 123(1) – builder – para. (f).
CRA finds that the GST/HST self-supply rule for a MURC did not apply where it was used as a place of “lodging” rather than a place of residence
A farmer constructed a 600 square-feet bunkhouse (with 2 bedrooms, a kitchen and bathroom) to provide accommodation to two temporary foreign workers for each annual 10-week harvest period. CRA found that self-supply rule in s. 191(3) did not apply since the bunkhouse was first occupied as a place of lodging, rather than as a “place of residence” as required by s. 191(3)(b)(i). In this regard, CRA stated that the workers likely would regard their stay as a “transient” one and, due to the cramped accommodation, would not “view it as a place where a person is … intended to settle into or maintain an ordinary mode of living.”
Even though the units were places of lodging rather than places of residence, CRA nonetheless considered the bunkhouse to qualify as a residential complex and as a multiple unit residential complex.
The supplies to the workers of the accommodation would be exempted under Sched. V, Pt. V, s. 6. There also was relatively “minimal” use of the bunkhouse in commercial activities while the temporary workers were not there. Accordingly, having regard to the rule in s. 141(4) - that if substantially all (90% or more) of the intended consumption or use of property or service is for activities that are not commercial activities, then the consumption or use is deemed to be in those activities that are not commercial activities - it appeared likely that the farmer could not claim any input tax credits for the construction costs.
Neal Armstrong. Summaries of 22 March 2022 GST/HST Interpretation 238955 under ETA s. 191(3), s. 123(1) – residential complex and s. 141(4).
We have translated 6 more CRA interpretations
We have published a further 6 translations of CRA interpretations released in January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,299 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 ¾ 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 |
|---|---|---|---|
| 2004-01-09 |
16 December 2003 Internal T.I. 2003-0046167 F - Section 50- Shares of Insolvent Corporation50(1) Also released under document number 2003-00461670.
|
Income Tax Act - Section 50 - Subsection 50(1) - Paragraph 50(1)(b) - Subparagraph 50(1)(b)(iii) | corporation not insolvent if affiliates intend to pay its creditors, and its shares have value if it has non-capital losses |
| Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | sale of Lossco with no assets but non-capital losses for nil consideration to another subsidiary generated a gain under s. 69(1)(b) | ||
| General Concepts - Fair Market Value - Shares | shares of corporation that had ceased business and had no assets but had non-capital losses had a significant value | ||
|
8 December 2003 Internal T.I. 2003-0042537 F - CIEE & SRAS Also released under document number 2003-00425370.
|
Income Tax Act - Section 122.3 - Subsection 122.3(1) | lay-off due to SARS did not qualify as an absence | |
| 2004-01-02 |
22 December 2003 External T.I. 2003-0000125 F - TITRE DE CREANCE INDEXE Also released under document number 2003-00001250.
|
Income Tax Regulations - Regulation 7001 - Subsection 7001(1) | detailed illustration |
| Income Tax Act - Section 248 - Subsection 248(1) - Indexed Debt Obligation | stripped indexed coupons were indexed debt obligations but would not give rise to excluded payments | ||
| Income Tax Regulations - Regulation 7001 - Subsection 7001(7) - Excluded Payment | stripped indexed coupons did not give rise to excluded payments because no single fixed rate | ||
| Income Tax Regulations - Regulation 201 - Subsection 201(4.1) | reporting of inflation adjustments on indexed bonds | ||
| Income Tax Act - Section 20 - Subsection 20(14) | application of s. 20(14) to indexed debt obligation | ||
|
11 December 2003 External T.I. 2003-0015975 F - calcul du gain/perte sur disposition Also released under document number 2003-00159750.
|
Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) | portion of share sales proceeds required under a Bankruptcy Act proposal to be paid to the unsecured creditors, not a disposition expense | |
|
16 December 2003 External T.I. 2003-0027245 F - MCIA-ACQUIS. D'UNE PERSONNE LIEE Also released under document number 2003-00272450.
|
Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital - Element A - Element A.1 | subsequent arm’s length acquisition does not vitiate application of A.1 | |
|
22 December 2003 External T.I. 2003-0053005 F - transfert d'un reer a un ferr Also released under document number 2003-00530050.
|
Income Tax Act - Section 146 - Subsection 146(16) - Paragraph 146(16)(b) | shares may not be transferred from maturing RRSP to RRIF if they will not provide the annuity to make the minimum payments |
CRA reverses its longstanding according of the copyright exemption to broadcasting (and perhaps other performance) royalties
2011-0404511C6 confirmed CRA’s longstanding position in IT-303SR, so that the exception in s. 212(1)(d)(vi) applied to all payments for copyright in respect of a literary, dramatic, musical or artistic work, unless that payment was for a right referred to in s. 212(5). This would indicate that payments made, for example, by a Canadian broadcaster to acquire the rights from a non-resident to broadcast live sport or artistic events in Canada (“broadcast rights payments”) would fall within s. 212(1)(d)(vi), unless the s. 212(5) exception applied.
However, 2012 ESA decision drew a clear distinction between the right to perform in public and the right to produce or reproduce a copyrighted work. Does this change the CRA view?
CRA noted that the ESA decision dealt with rights under s. 3(f) of the Copyright Act, namely, the according to the copyright holder of the sole right to, “in the case of any literary, dramatic, musical or artistic work, to communicate the work to the public by telecommunication.” There, the Supreme Court found that the enumerated rights in s. 3 essentially protect three basic rights: the right to perform, the right to produce, and the right to reproduce, a work; and found that the communication right under s. 3(f) came within the performance aspect of copyright, and not that of production or reproduction.
CRA indicated that, accordingly the ESA decision established that broadcasting relate to the performance of a work, not to its production or reproduction. The 2011 CRA position therefore ceased to be correct and, as a result, CRA was thereafter required to assess broadcast rights payments as being subject to tax under s. 212(1)(d).
This statement by its logic could very well apply to other performance royalty payments, such as royalties paid to the holder of the copyright to a Broadway theatrical production to mount the production in Canada. Using this as an example, it would be quite inappropriate to treat the longstanding CRA published policy as having been changed retroactively from 2012, given that the statutory reference to a royalty in respect of a copyright in respect of the production (or reproduction) of dramatic, musical or artistic work readily describes the theatrical production situation.
Similar language to that in s. 212(1)(d)(vi) also appears in various Treaties.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.13 under s. 212(1)(d)(vi).