News of Note
Triskelion – Tax Court of Canada leaves open the argument that days cannot be counted twice under the 183-day test for a services PE under the Canada-US Treaty
Email this ContentA U.S.-resident corporation provided 198 days of consulting services in Canada in 2015 and 54 days in 2016 respecting a 12-month Canadian construction project commencing in March 2015. Spiro J found that the taxpayer had a “services” permanent establishment in Canada in 2016 under Art. V(9) of the Canada-U.S. Tax Treaty, which referenced a test that “the services are provided in [Canada] for an aggregate of 183 days or more in any twelve-month period with respect to the [Canadian project]” – so that there was a services PE based on the taxpayer’s Canadian services provided during the 12-month period ending in March 2016.
Spiro J rejected the taxpayer’s argument, that the Minister had “counted 183 of the 198 days during which the Appellant provided consulting services in Canada in 2015” so “that the Minister was entitled to carry over only 15 days from her 2015 computation in determining whether the Appellant had a ‘deemed services PE’ in Canada for its 2016 taxation year,” on the basis of that there was no indication in the record that the taxpayer’s 2015 taxation year had been assessed - and went on to state that “the Court … makes no comment on whether such an argument might prevail on a different evidentiary record.”
Neal Armstrong. Summary of Triskelion Projects International Inc. v. The Queen, 2022 TCC 63 under Treaties – Income Tax Conventions – Art. 5.
Collins Family Trust – Supreme Court of Canada finds that courts cannot exercise their equitable jurisdiction to cure unintended tax consequences
A plan for the tax-free distribution of funds of family companies to family trusts entailed transactions that were intended to cause s. 75(2) to attribute substantial dividends, paid by the family companies to the trusts, to family holding companies so that the s. 112(1) intercorporate dividend deduction applied. However, Sommerer unexpectedly found that s. 75(2) did not apply to sales of property for their FMV (an element of the plan). CRA assessed the trusts on the basis that they had received taxable distributions from the operating companies.
Before allowing the appeal and dismissing the trusts’ petition, and in finding that the principle in Fairmont Hotels and Jean Coutu - that a “court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability” - was not limited to situations of requested rectification and applied as well to the equitable remedy of rescission, Brown J stated:
… Fairmont Hotels and Jean Coutu bar a taxpayer from resorting to equity in order to undo or alter or in any way modify a concluded transaction or its documentation to avoid a tax liability arising from the ordinary operation of a tax statute. … While a court may exercise its equitable jurisdiction to grant relief against mistakes in appropriate cases, it simply cannot do so to achieve the objective of avoiding an unintended tax liability.
Neal Armstrong. Summaries of Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26 under General Concepts – Rectification and Rescission, and s. 220(1).
CRA indicates that a clause suspending the right of the life beneficiary to income on bankruptcy would not satisfy s. 73(1.01)(c)(ii)
One of the requirements to be a qualifying transferee described in s. 73(1.01)(c)(ii) regarding the s. 73(1) rollover is that the trust’s settlor "is entitled to receive all of the income of the trust that arises before the individual’s death.” CRA indicated that this condition would not be satisfied where the trust deed provided for the suspension of the individual’s right to demand distribution of the trust income in the event of the individual’s bankruptcy, even if this clause was never triggered.
Neal Armstrong. Summary of 30 March 2022 External T.I. 2017-0737181E5 F under s. 73(1.01)(c)(ii).
CRA indicates that it will accept that an election is filed with a return even if the return is filed late
An alter ego trust can effectively elect under s. 104(4)(a)(ii.1) to have the 21-year deemed disposition rule apply, rather than having the deemed disposition occur upon the death of the taxpayer who created the trust. CRA indicated, given that this provision requires that the election be made in the trust’s “return of income … for its first taxation year,” that it will accept an election filed under s. 104(4)(a)(ii.1) only if it is made in the trust’s return of income filed for its first taxation year - regardless of whether that return is filed on time or late.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.2 under s. 104(4)(a)(ii.1).
CRA releases the official version of the 2021 APFF Financial Strategies and Instruments Roundtable
After having published its official versions of most of the (regular) 2021 APFF Roundtable questions the previous week, CRA has now published the official version of 11 of the 12 questions comprising the 2021 APFF Financial Strategies and Instruments Roundtable. We did not notice any substantive changes from the preliminary answers given by it in October 2021. At that time, we provided our translations of those answers, but only summaries of the questions. We are now providing full-text translations of the questions as well.
Q.2 (regarding the treatment of a gift in Quebec of a part interest in an insurance policy to a charity) still has only the preliminary answer.
For your convenience, the Table below links to the translated questions and to our summaries thereof.
CRA indicates that the s. 104(21.2) formula requires proportionate allocations of QSBCS gains
We have uploaded a copy of the questions posed at today’s 2022 STEP Roundtable and summaries of the CRA responses.
In response to Q.1, CRA indicated that the effect of the formula in s. 104(21.2) is to require a proportionate allocation of gains of a discretionary personal trust from the disposition of qualified small business corporation shares so that, for example, if it realized capital gains in the year from both public company shares and QSBC shares, it would be precluded under the formula from allocating a disproportionate share of its capital gains distributions for the year to one of its beneficiaries (who had unused capital gains deduction room) as a distribution of QSBCS gains, and from allocating a disproportionate share of its “ordinary” capital gains distributions to the other beneficiary, who no longer had access to the deduction.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.1 under s. 104(21.2).
Income Tax Severed Letters 15 June 2022
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA addresses the GST creditability of a receivable that is written off when it arises
A supplier after debiting accounts receivable and crediting revenue for an amount it has invoiced, immediately reverses this entry because, for example, the recipient has declared force majeure but the supplier continues to invoice to protect its legal rights but, on the other hand, is advised by its auditors that it cannot recognize the revenue even though it has a more-likely-than-not legal option that it could successfully sue.
The supplier would be required to add the GST/HST amount invoiced to its net tax under s. 225(1) – but could it claim an offsetting bad deduction under s. 231(1)?
In its response, CRA did not make anything out of the fact that the receivable essentially was not recognized as revenue in the first instance – rather than being recognized and then promptly written off, and instead stated:
[I]t does not appear that the conditions of subsection 231(1) would be met. For example, it is not clear that all reasonable steps have been taken to obtain payment and that it has become evident that the debt has become a bad debt.
Accordingly, it may not be problematic under s. 231 for a debt to become bad essentially at the outset.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.8 under ETA s. 231(1).
Lubavitch Foundation – Federal Court of Appeal finds that there is no reasonable apprehension of bias where an appeals officer only had minor involvement in a prior taxpayer audit
The principal argument of a charitable organization in challenging the proposed revocation of its registration was that there was a reasonable apprehension of bias arising from the involvement of Mr. Racine, a Directorate employee, in the first audit and his assignment as the appeals officer in the appeal from the Notice of Intention to Revoke that was issued as a consequence of the second audit. In rejecting this submission, Gleason JA stated that “the involvement of Mr. Racine in the first audit was minimal” and that “Mr. Racine cannot be said to have sat in appeal from a decision he made.”
In going on to dismiss the appeal, Gleason JA noted that there was significant support in the record for various of the grounds for revocation, including the organization’s participation in a donation scheme under which it indirectly returned to a donor approximately 80-90% of the $3.5 million for which he had been receipted.
Neal Armstrong. Summary of Colel Chabad Lubavitch Foundation of Israel v. Canada (National Revenue), 2022 FCA 108 under s. 172(3)(a.1).
CFI Funding Trust – Tax Court of Canada finds that GST/HST supporting documentation can be originated by the recipient and be in electronic form
A securitization trust (“CFI”) used a concurrent lease structure under which it became the concurrent (head) lessee of automobiles from automobile dealer and sublessor of the automobiles to the dealership customers, and financed the automobile dealers by prepaying rents under the head leases. Before finding that CFI had satisfied the documentary requirements for claiming ITCs for the HST on the rent prepayments, and in rejecting the Crown position that various CFI spreadsheets did not satisfy its alleged requirement that “a supporting document … must originate from or be signed by the [supplier]”, Hogan J stated:
[T]he broad term “form” was used in subsection 169(4) of the Act and section 2 of the Regulations because Parliament was mindful of the benefits of paperless record keeping. …
[I]nformation stored on a registrant’s computer server qualifies as supporting documentation. …
[T]he Regulations do not set out a general requirement for the supporting documentation to be issued or signed by the supplier. The definition of “supporting documentation” only requires the document to be issued or signed by the supplier where the documentation does not fit within one of the document types outlined in paragraphs (a) to (g) [of the “includes” definition of “supporting documentation”] or fall within the meaning of “form” as set out in the preamble to the definition.
Neal Armstrong. Summary of CFI Funding Trust v. The Queen, 2022 TCC 60 under Input Tax Credit Information (GST/HST) Regulations – supporting documentation.