News of Note
Income Tax Severed Letters 4 May 2022
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Rémillard – Federal Court of Appeal finds that the CRA records transmitted to the Federal Court Registry were open to the public absent a specific confidentiality order
The taxpayer sought to challenge, through judicial review, information requests made by CRA to other countries’ tax authorities. After he had requested the certified record contemplated by Federal Court Rules 317 and 318 (containing materials that CRA had considered), he was contacted by a journalist inquiring about the application. The taxpayer immediately obtained a judicial provisional confidentiality order, and launched an application for a declaration that the material communicated in accordance with Rule 318 to the Court Registrar did not form part of the public court file, but was rather akin to documents produced on discovery so as to be subject to an implied undertaking of confidentiality. After agreeing with Pamel J below that such documents were part of the court file and thus accessible to the public under Rule 26 unless a confidentiality order was obtained, Montigny JA went on to reject the taxpayer’s submission (in reliance on Gernhart) that making the certified record public as a matter of course violated section 8 of the Charter, stating:
Anyone engaging the courts in an action … must expect that large parts of his or her private life will become publicly accessible.
… Far from transmitting confidential information without his consent and without informing him, it was rather at Mr. Rémillard's own request that the Minister transmitted the relevant documents to the Court Registry. …
… Mr. Rémillard could have … requested the Court to issue an order to protect the confidentiality of certain information contained in the documents transmitted.
Neal Armstrong. Summaries of Rémillard v. Canada, 2022 CAF 63 under Federal Courts Rules, s. 26(1) and Charter, s. 8.
CRA rules on gross asset butterfly with preliminary safe income dividend to increase ACB to exceed pre-1972 CSOH
CRA ruled on a butterfly split-up of a rental property company ("DC" - which was considered to carry on an active business because it had more than five full-time employees) between two transferee companies (TCs) formed by its two shareholders, being holding companies for the families of two brothers (one of them, deceased). The butterfly spin-off was to be effected on a gross asset basis rather than a net asset basis, i.e., immediately after the spin-off, the gross FMV of each type of property (business assets, and cash and near-cash assets) received by each TC will be equal or approximate (within 1%) 50% of the gross FMV of that type of property of DC immediately before the spin-off. The numbers apparently permitted this result to be accomplished by transferring 3 out of 4 of the rental properties to one TC and the 4th to the other, i.e., there was no necessity to deal in co-ownership interests.
Except for preliminary transactions to transfer registered title to the properties to new nominees, the proposed transactions were essentially to commence with DC increasing the PUC of its common shares by the lesser of (a) the safe income on hand attributable to the common shares at that time and (b) the aggregate of (i) its pre-1972 CSOH and (ii) an amount sufficient to trigger a refund of its RDTOH balance at that time, if any. The stated principal purpose of this step was to increase the ACB of the DC common shares, so as to eliminate the capital gain that would otherwise arise as a result of s. 88(2)(b)(ii) deeming the pre-1972 CSOH amount to be proceeds of disposition rather than a deemed dividend on the winding-up of DC at the completion of the transactions.
The ruling letter also indicates that if there is any significant dividend refund on this step, DC likely will submit a request to the relevant TSO to have a change of taxation year end (i.e., to avoid dividend circularity issues).
Neal Armstrong. Summary of 2021 Ruling 2020-0863171R3 under s. 55(1) – distribution.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in January of 2005. Their descriptors and links appear below.
These are additions to our set of 2,022 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 1/3 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 |
|---|---|---|---|
| 2005-01-28 | 5 January 2005 External T.I. 2004-0085571E5 F - Art. XXIV de la Convention Canada-France | Treaties - Income Tax Conventions - Article 25 | Art. 24(1) of Canada-France Convention would provide the principal residence exemption to a Canadian citizen if France accorded the exemption to a French national residing in Canada |
| 6 January 2005 External T.I. 2004-0088791E5 F - Paragraphe 4803(2) du Règlement | Income Tax Regulations - Regulation 4803 - Subsection 4803(2) | Reg. 4803(2) satisfied if any of its paragraphs is satisfied | |
| 2005-01-21 | 19 January 2005 External T.I. 2004-0091601E5 F - Incitatif versé - taux d'intérêt réduit | Income Tax Act - Section 53 - Subsection 53(2.1) | ss. 13(7.4) and 53(2.1) elections unavailable re acquired rental property for cashback received from mortgage lender to offset high interest rate |
| Income Tax Act - Section 12 - Subsection 12(2.2) | s. 12(2.2) election available to reduce mortgage interest, re cashback received from mortgage lender, to reduce extra interest incurred in two initial years | ||
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(v) | s. 12(1)(x) applies (subject to s. 12(2.2) election) to lump-sum mortgage interest rebate except to the extent the amount was reported as s. 9 income | ||
| 11 January 2005 External T.I. 2004-0091981E5 F - Revenu de placements:Indiens inscrits | Other Legislation/Constitution - Federal - Indian Act - Section 87 | interest income of status Indians on loans to on-reserve businesses carrying on their business activities off-reserve were not exempted | |
| 10 January 2005 Internal T.I. 2004-0091251I7 F - Définition d'automobile | Income Tax Act - Section 248 - Subsection 248(1) - Automobile - Paragraph (e) - Subparagraph (e)(iii) | exclusion applies even where the occupant is self-employed rather than an employee of the business that owns (or leases) the truck | |
| 2005-01-14 | 13 January 2005 External T.I. 2004-0097911E5 F - Crédit d'impôt pour études | Income Tax Act - Section 118.6 - Subsection 118.6(1) - Qualifying Educational Program | education credit unavailable where the course consisted of discrete 4-day sessions separated by a month or more – but tuition credit may be available |
| 13 January 2005 External T.I. 2004-0101701E5 F - Bien substitué | Income Tax Act - Section 248 - Subsection 248(5) - Paragraph 248(5)(b) | substituted property definition in s. 248(5)(b) does not apply for the purposes of s. 7(1.1) | |
| Statutory Interpretation - Interpretation/Definition Provisions | deeming provision only engaged when the referenced term is used | ||
| Income Tax Act - Section 7 - Subsection 7(1.1) | s. 248(5)(b) inapplicable to s. 7(1.1) | ||
| 13 January 2005 External T.I. 2004-0103281E5 F - dons et avantages | Income Tax Act - Section 248 - Subsection 248(32) | value of advantage should be based on FMV and ignore sales tax and tips |
CRA discusses the “lowest total principal amount” limitation on the CERS subsidy for owners’ mortgage interest
The Canada emergency “rent” subsidy (CERS) has generally extended to owners of qualifying property used in their operating businesses respecting their mortgage interest expense. One of the numerical limitations noted in A- s. (b)(i)(A) of the qualifying rent expense definition generally limits the eligible interest for these purposes to that on the lowest total principal amount secured by one or more mortgages (provided the mortgage has an amortization period) on the qualifying property at any time after it was acquired by the eligible entity (provided that such total does not exceed the qualifying property’s cost amount). Regarding the “lowest total principal amount,” CRA noted that if, for example, in a prior period, there had been a refinancing that significantly increased the aggregate, the lowest aggregate likely would be in this prior period, with a likely resulting reduction in the eligible amount of interest paid in the subsequent qualifying period being tested. CRA also noted that the requirement for an amortizing period signified that a mortgage without an amortization period would be excluded from the total.
CRA indicated that the cost amount of a building (and thus this further limitation under the formula) would reduce over time with CCA claimed.
Neal Armstrong. Summaries of 16 July 2021 Internal T.I. 2020-0872521I7 under s. 125.7(1) - qualifying rent expense A - s. (b)(i)(A) and (B).
CRA notes that a resident who has been overcharged GST/HST by a NR supplier registered under the new digital economy measures can request the NR to issue a s. 232 refund
There is a general requirement under ETA s. 211.14(1) for a non-resident to register and charge GST/HST to unregistered recipients on most supplies of services or intangible personal property where a de minimis dollar threshold is exceeded. What if GST/HST is so collected in error (i.e., it was apparent that the recipient was registered)?
S. 211.17 indicates that the recipient is generally not allowed to claim an input tax credit, rebate, refund or remission in respect of any GST/HST that is required to be collected by a person that is registered under the above regime. However, CRA indicates that a number of avenues are available, of which the only one it mentions is that the recipient may approach the non-resident to seek a refund of the over-charged GST/HST, in which case the normal s. 232 refund rules would apply (i.e., presumably the non-resident would be entitled to what effectively is an offsetting ITC for the GST/HST refunded by it in the reporting period in which it issues a credit note to the resident registered recipient, assuming that the GST/HST indeed was not collectible because the recipient could evidence its registration).
CRA does not discuss whether the registered recipient could request a refund for tax paid in error under s. 261 if the non-resident refused to refund the tax. Note that the s. 211.17 prohibition applies to rebates etc. of tax which was required to be collected – so that a s. 261 rebate might not be available if the recipient indeed was registered - but failed at the time to provide satisfactory evidence of such registration to the non-resident. Also note that “satisfactory” means “satisfactory to the Minister,” so that there is potential ambiguity as to when the s. 211.17 prohibition will apply. This point also is not discussed.
Neal Armstrong. Summary of GST/HST Notice 322, Recovery of the GST/HST Under the Digital Economy Measures, April 2022 under ETA s. 211.17(2)(a)(i).
River Cree Resort – Tax Court of Canada finds that the predominant supply made by the cash provider to an ATM owner was a taxable supply
The owner and operator of a casino resort (the Appellant) agreed with owner of ATMs (“Access”) which, in turn, had access to the Interac payment network of a network operator, that it would make various locations on its resort available for the siting of Access’ ATMS, load those ATMs with cash and provide the utilities, security, routine maintenance and customer support necessary to operate the ATMs. Cardholders who accessed such ATMs agreed to pay a per-transaction “surcharge fee” of under $4.00. The cash of the Appellant disbursed out of the ATMs was reimbursed to it with funds ultimately derived from the card issuer.
Graham J apparently was tempted to find that the Appellant was making two supplies to Access, one of which was an exempt supply of agreeing to provide the cash to the ATM users. However, he found that the parties’ pleadings effectively required him to treat the Appellant as making a single compound supply to Access. He concluded that such single supply was a taxable supply, stating:
… I find that [the cardholders] … paid the surcharge fee to Access for arranging for the transfer of money, not to the Appellant for transferring the money. …
Access benefited from having the Appellant transfer the money. It also benefited from having Access load the cassettes with cash. … However, it is clear to me that what Access most wanted was the exclusive right to place and operate ATMs at the Resort and to process all transactions arising therefrom. This was the predominant element of the supply it received … . …
[T]he predominant element of the single compound supply made in the Subsequent Periods was the exclusive right to place and operate ATMs at the Resort and to process all transactions arising therefrom.
The arrangements for earlier reporting periods differed in that the Appellant lent the cash to Access, who loaded it for its own account to the ATMs, rather than the Appellant being the cash provider at the ATMs. Given the reduced significance of the financial services (only loans) provided by the Appellant, the single supply made by it to Access was a fortiori a taxable supply.
Neal Armstrong. Summary of River Cree Resort Limited Partnership v. The Queen, 2022 TCC 45 under ETA s. 123(1) – financial service – (a).
Income Tax Severed Letters 27 April 2022
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Dow ULC – Federal Court of Appeal finds that the Tax Court cannot reverse a CRA opinion that a requested s. 247(10) downward adjustment is inappropriate
In reassessing the taxpayer under s. 247(2), the Minister did not allow a requested “downward” adjustment under s. 247(10) (to increase the interest expense on a loan from a Swiss affiliate by $3.26 million) because of a limitation period in the Canada-Switzerland Tax Treaty. A Rule 58 question was put to the Tax Court, which was essentially whether it was the Tax Court that had jurisdiction regarding the taxpayer’s challenge to this denial, or whether the only recourse was to the Federal Court for judicial review of the Minister’s decision to disallow.
In reversing the decision below, and indicating that the s. 247(10) adverse opinion was a Federal Court matter, Webb JA noted:
- S. 247(10) explicitly requires that a downward adjustment can only occur with a favourable opinion of the Minister that such an adjustment was appropriate (and here there was none).
- The jurisdiction accorded to the Tax Court under ITA s. 171(1) is only to vacate or vary an assessment or refer it back to the Minister, whereas a s. 247(10) opinion is not an assessment (although it will affect an assessment.)
He then stated:
Even if the Tax Court could review the opinion without quashing it, since the existing opinion would remain in place (and therefore there would not be an opinion of the Minister that it would be appropriate to make the downward adjustment), on what basis could the assessment be referred back to the Minister? Without the opinion of the Minister that it is appropriate to make the downward adjustment, the assessment (which does not reflect this downward adjustment) is correct.
Neal Armstrong. Summaries of Canada v. Dow Chemical Canada ULC, 2022 FCA 70 under s. 247(10), s. 247(11), s. 169(1) and Federal Courts Act, s. 18.5.
CRA rules on a pipeline transaction implemented after a discretionary inter vivos trust voluntarily realizes capital gains on its 21st anniversary
Two discretionary inter vivos trusts, with an individual (“Father”) and his child (“Child”) as the beneficiaries (both resident in Canada) and which had been settled by Father’s parent, held shares of a portfolio investment company and its holding company. In order to respect the wishes of the settlor, the trustees determined that most of the capital and accumulated income of the two trusts would be retained rather than distributed on the 21st anniversaries of the trusts’ formation. Accordingly, the two trusts realized capital gains pursuant to s. 104(4)(b)(ii) on that anniversary.
The trusts were then to engage in pipeline transactions in which the two companies’ shares were to be transferred to a ULC Newco in consideration mostly for notes, and then convert those notes to high-PUC shares of the ULC – and only after a number of years, might ULC be amalgamated with the two companies (which would have been continued to the same jurisdiction as the ULC). The ULC will not make substantial distributions for quite some time otherwise than to fund the taxes payable by the two trusts under s. 104(4).
Neal Armstrong. Summary of 2020 Ruling 2020-0848081R3 F under s. 84(2).