News of Note
Income Tax Severed Letters 29 December 2021
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA determines the Ontario corporate FTC regarding non-business income tax paid in different countries by prorating the federal FTC based on each country’s relative investment income
Canco earns $100 of investment income in each of foreign Country A and Country B, and incurs a Canadian source loss of $100, so that its net income and taxable income is $100 and its Canadian federal income tax otherwise payable (“FTOP”) at the 15% federal tax rate is $15. The “non-business-income tax” (“NBIT”) paid in each country on such investment income is $10. Canco’s Ontario allocation factor is 1, and the Ontario corporate tax rate is 11.5%.
Canco’s provincial foreign tax credit for each such country turns principally on the determination under s. 34(2) of the Taxation Act, 2007 (“TAO”) of any excess of (A) the NBIT paid to each country, of $10, over (B) the amount deductible by Canco “in respect of the foreign investment income for the year” under ITA s. 126(1).
CRA considered that it would be reasonable to determine the quoted amount on a pro rata basis in proportion to the foreign investment income earned in each country (i.e., half and half, or $7.50 and $7.50) – so that the provincial FTC for each country would be $2.50 (being the Ontario domestic factor of 1, multiplied by the excess of $10 of the NBIT paid to each country over $7.50).
Neal Armstrong. Summary of 17 August 2021 External T.I. 2020-0842981E5 under Taxation Act, 2007, s. 34(2).
CRA denies that a manager can earn a management fee directly from an investment limited partnership rather than its GP
Before discussing the somewhat new rules in ETA ss. 272.1(3)(b) and (8), generally deeming the general partner of an investment limited partnership to be making monthly or other periodic taxable supplies to the ILP for consideration equaling the FMV of its services, CRA seemed to indicate that a similar result would obtain under the more general test in 272.1(1) (regarding whether the partner is relevantly acting qua partner). If the income of the partnership allocated to the GP was disproportionate to the capital that it had invested in the ILP, CRA generally would infer that in substance the “draws” received by it were compensation for its services rather than a return on its partnership capital. (This seems to ignore the proposition that non-equity partners can still receive draws qua partner in recognition of their contribution of services qua partner.)
Regarding the application of ss. 272.1(3)(b) and (8), CRA seemed to indicate, subject to the caveat below, that management fees that the ILP has agreed to pay to the manager should be treated as being payable by the GP to the manager, and by the ILP to the GP (i.e., an inferred double supply) – based on its confidently-expressed views that the manager’s appointment “does not negate the general partner’s responsibilities and fiduciary duties to the limited partnership” and that “the general partner is the only person with authority to implement any advice provided by a third party manager.”
The caveat is that the deemed supply is based on the FMV of the services rendered by the GP rather than the actual quantum of the draws received.
Regarding the determination of such FMV:
- it “should take into consideration the industry standard for the management of investments in comparable situations” which
- “includes management fees and performance fees”.
- these “will usually be described in the limited partnership agreement, the offering memorandum provided to investors and/or the management agreement.”
- “The fees vary depending on various factors, such as the size of the investment and whether the investments require passive or active management.”
Neal Armstrong. Summaries of 27 July 2021 GST/HST Interpretation 197267a under ETA s. 272.1(1), s. 272.1(3)(b) and s. 123(1) - investment limited partnership.
GST/HST Severed Letters August/September 2021
CRA provides a listing of expenses typically not incurred as agent
Expenses incurred by a supplier of taxable services as agent for its client are not subject to GST/HST when it is reimbursed for those amounts by the client, whereas expenses incurred by it as principal are subject to GST/HST if it is able to add those amounts (including any GST/HST on those expenses for which it is not entitled to ITCs, e.g., 50% of restaurant bills) to its invoice for its taxable services. CRA provided the following list of expenses which are generally not incurred as agent for the client:
- office supplies, if they are associated with the service being performed by the supplier for the client
- air travel
- local transportation, such as a taxi
- parking
- hotel or other accommodation
- per diem amounts, such as meals
- car rentals and gasoline
- an automobile allowance, where the supplier’s personal vehicle is used in the performance of the service
Before discussing the 50% denial of ITCs for food, beverage and entertainment expenses, CRA indicated:
Generally, a client who is a registrant can claim an ITC for the GST/HST paid or payable on the out-of-pocket expenses incurred by a supplier as agent of the client … to the extent that the supplier’s services and the supply acquired by the supplier are consumed, used or supplied in the course of the client’s commercial activities.
This suggests that CRA may not generally require the supplier to provide the invoices for the expenses, that it incurred as agent, to the client.
Neal Armstrong. Summaries of GI-197 “Out-of-Pocket Expenses” 17 December 2021 under ETA s. 123(1) - supply, and s. 236(1).
CRA indicates that whether the conversion of a term to a permanent life policy entails an acquisition for s. 248(35)(b) purposes turns on whether this goes “to the root of the policy”
S. 248(35)(b) indicates that, for donation credit or deduction purposes, the fair market value of a gift of property is deemed to be the lesser of the property’s actual FMV and its ACB, if the gift was made (otherwise than as a consequence of death) less than three years (or, in some circumstances, 10 years) of its acquisition. When asked whether, for purposes of counting out the three (or 10) year period, a gifted life insurance policy would be considered to have been acquired when it was initially issued as a term life insurance policy or at the time it was converted from a term policy to a permanent life insurance policy pursuant to the provisions of the policy, CRA indicated that this was a mixed question of fact and law that would require a review of all the policy’s provisions “to determine whether the changes are so fundamental as to go to the root of the policy.”
CRA further indicated that this question was not affected by s. 148(10)(d) (which deems there to be no disposition or acquisition of a policy as a result only of the exercise of any provision (other than a conversion into an annuity contract) of the policy), as this provision applies only for purposes of s. 148. However, it could be relevant to determining the policy’s adjusted cost basis.
Neal Armstrong. Summary of 8 November 2021 External T.I. 2021-0882391E5 under s. 248(35)(b).
Income Tax Severed Letters 22 December 2021
This morning's release of three severed letter from the Income Tax Rulings Directorate is now available for your viewing.
Wenikajtys Estate – Tax Court of Canada notes that the 36-month GRE rule is anomalous where the estate was precluded from receiving pension income within the 36 months
The estate of an individual who died in January 2014 was entitled to receive a lump sum from a municipal pension plan. However, later in 2014, a Quebec Act required that 20% of such amount be held back until it was determined whether the pension plan members should bear the costs of a reorganization of the pension plans for Quebec municipal employees. In June 2018, it was determined that such costs would not be borne by them, and the 20% holdback was released to the estate.
After finding that the estate could not benefit from graduated rates on this last payment of income because it no longer satisfied the 36-month test in the definition of a graduated rate estate, Boyle J went on to note that if the estate applied for a remission order, then hopefully the Minister would agree with the executor and with him “that the application of the 36-month rule in this case seems to lead to an unfair and unreasonable result, and that the public interest that led to the adoption of that rule does not apply in this case” so that remission could be recommended.
Neal Armstrong. Summary of Wenikajtys (Succession) v. The Queen, 2021 CCI 93 under s. 248(1) - graduated rate estate – (a).
Godcharles – Quebec Court of Appeal applies s. 68 to reallocate between a retirement home’s business operations sold by one vendor and the home sold by the other vendors
A group of unrelated individuals were the co-owners of a seniors’ residence, which was leased by them to the corporate operator of the residence (“9118”), whose shares they owned in the same proportions as the residence. In order to access the capital gains exemption on a sale of the residence business to an arm’s-length purchaser (“SECA”), all the individuals, other than the one with the largest (35%) interest (NG), sold their shares of the operator to a holding company of NG for a sale price stated to be the (unspecified) FMV of the shares. Two days later, the residence and the operating business were sold by the individuals and 9118 to SECA for a purchase price that was not allocated between the residence sold by the individuals and the operating assets (essentially, the goodwill) sold by 9118. However, when the vendors filed their returns, they treated all of the asset appreciation that had occurred as relating to the goodwill.
Morissette, JCA affirmed the finding below that the sale of the shares of 9118 by the other individuals to NG’s holding company (9084) was a transaction between persons not dealing with each other at arms’ length, given the dominant role of NG in establishing the terms of the transaction. However, he agreed with the taxpayers that this had no significance, given that the Quebec equivalent of s. 69(1)(b) only addressed situations where shares or other property was sold at less, rather than more, than its FMV.
What mattered instead was the finding below that a substantial portion of the proceeds should be reallocated to the sale of the real estate (the residence) under TA s. 421(a) (equivalent to ITA s. 68(a)), with resulting recapture of depreciation and (non-exempted) capital gains to the individuals. Although there were two vendors (9118 selling the goodwill, and the co-owners selling the residence), s. 421(a) nonetheless could apply, as “its precise conditions are met” in this situation.
The Court of Quebec had accepted the valuation of the real property (which had reached full occupancy three years’ previously) by the ARQ valuator using the cost method (i.e., the costs of construction, plus a promoter’s notional profit of 5%, plus net GST/QST of 9.495%, minus depreciation of 4% and plus the land appreciation since purchase), with there being a consequential reduction in the residual amount to be allocated to the goodwill.
Neal Armstrong. Summaries of Godcharles v. Agence du revenu du Québec, 2021 QCCA 1843 under s. 68(a), s. 69(1)(b)(i), s. 251(1)(c) and General Concepts – FMV – real estate.
We have published 10 more translations of CRA interpretations
We have published a further 10 translations of CRA interpretation released in February and January, 2006. Their descriptors and links appear below.
These are additions to our set of 1,859 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 15 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.