News of Note
We have translated 8 more CRA interpretations
Email this ContentWe have published a further 8 translations of CRA interpretations mostly released in August of 2004. Their descriptors and links appear below.
These are additions to our set of 2,151 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 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
PC Bank – Tax Court finds that loyalty points were redeemed by a credit card issuer in the course of its financial services business so that no ITCs were available
The PC Bank case, which was released with the CIBC case, addressed two additional issues.
The first issue dealt with loyalty points that PC Bank essentially was paid by Loblaw to issue to PC Bank credit cardholders (based on their purchases at Loblaws’ stores), with PC Bank then being obligated to redeem those points in the hands of Loblaws when the points were used by the cardholders at Loblaws’ stores. Hogan J found that PC Bank could not claim input tax credits based on the amount of points redemption payments made by it to Loblaws, because it did not satisfy the requirement in ETA s. 181(5) that such amounts be paid “in the course of a commercial activity” of PC Bank. Hogan J (who was dismissive of the relevance of some taxable amounts charged by PC Bank to Loblaws in connection with the redemptions) stated:
PC Bank issued the PCB Points to generate revenue from its PC MasterCard portfolio. PC Bank earned significant revenue from interchange fees that pales in comparison to the minimal revenue it received from Loblaws. …
There is a direct link between the PCB Points that are issued in conjunction with an exempt financial service supplied by PC Bank to Cardholders and an expense that is paid when the PCB Points are redeemed by Cardholders.
Second, Hogan J characterized supplies made to PC Bank by a supplier and its successor as follows:
The main service offered by FDR/TSYS was the automated management and authorization of credit in real time, on behalf of PC Bank, based on the parameters and protocols established by PC Bank. These protocols included measures designed to detect credit fraud and to ensure that the terms and conditions under which PC Bank wishes to grant a credit card loan to a Cardholder are satisfied. All of this is done to avoid loan losses for PC Bank.
In finding that such supplies were excluded from being financial services by para. (r.3) of the financial services definition, Hogan J stated (at paras. 141):
The language of paragraph (r.3) indicates that “managing credit” is broader in scope than what may be commonly understood by that expression. …
Neal Armstrong. Summaries of President's Choice Bank v. The Queen, 2022 TCC 84 under ETA, s. 181(5), and s. 123(1) financial service – para. (r.3) and para. (t).
CIBC – Tax Court of Canada finds that the predominant element supplied by PC Bank to CIBC was a right to access Loblaw customers, engaging the (r.5) HST financial service exclusion
A subsidiary ("PC Bank") of Loblaw (“LCL”) had agreed with CIBC for CIBC to provide retail banking services under LCL's President's Choice trademark. Hogan J found that the predominant element of the supply made by PC Bank to CIBC was the provision of a “bundle of rights” consisting mainly of the right to solicit LCL’s clients in LCL’s stores, the right to use trademarks, and the right to issue points under the LCL Loyalty Program, and that “the Bundle of Rights … enabled CIBC to sell financial products and services” by “allow[ing] CIBC to tap into LCL’s loyal and extensive customer base.”
Given that para. (r.5) of the financial service definition provided an exclusion from financial service for “property … that is delivered or made available to” CIBC “in conjunction with” CIBC selling financial products of PC Bank, the supply made by PC Bank to CIBC was taxable.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. The Queen, 2022 TCC 83 under ETA s. 123(1) – financial service, para. (r.5), para. (r.4).
CRA elaborates that a limited partnership selling shares on an earnout basis cannot utilize the cost-recovery method
CRA provided a more elaborate version of its position (also stated at the 2021 APFF Roundtable) regarding whether use of the cost-recovery method for a share earnout satisfies the conditions of IT-426R, para. 2:
[T]he conditions for the application of the cost recovery method described in paragraph 2 … were not designed to apply to limited partnerships. Therefore, neither a partnership nor the partners of a partnership … may use the cost recovery method [as described in IT-426R, para. 2, regarding earn-outs].
The particular context was a limited partnership with both resident and non-resident partners selling a somewhat small (under 5%) shareholding of a US target company on terms that included an earnout. Although CRA considered that other requirements of IT-426R, para. 2 would not be satisfied in this situation, it made a helpful comment to the effect that the requirement of subpara. 2(c) – that “[i]t is reasonable to assume that the earnout feature relates to underlying goodwill the value of which cannot reasonably be expected to be agreed upon by the vendor and purchaser at the date of the sale” — can be satisfied where (as here) “a particular vendor is not directly involved in the negotiations for the sale of shares.”
Neal Armstrong. Summaries of 17 May 2022 External T.I. 2021-0884651E5 under s. 12(1)(g), s. 96(1)(a) and Reg. 229(1).
Income Tax Severed Letters 20 July 2022
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Duhamel – Tax Court of Canada finds that earnings from winning poker tournaments were not the result of a serious and systematic approach, and were tax-free
In 2010, 2011 and 2012, the net winnings of the taxpayer from participating in in-person poker tournaments were $4.87 million, $0.38 million and $0.11 million, respectively. In particular, he was the winner at the no-limit Texas Hold ‘Em tournament at the World Series of Poker held in Las Vegas in November 2010, winning a multi-million dollar purse at the age of 23. In finding that such earnings were not from a business or other source and, therefore, were not taxable, Lafleur J stated:
[T]he Court finds … that Mr. Duhamel did not employ any system or strategy to manage or mitigate the risks associated with his poker business. … Mr. Duhamel was not acting as a serious businessman in his poker activities.
[T]here was no evidence that Mr. Duhamel had any systematic and serious means of winning tournaments. Mr. Duhamel does not employ any method of gathering information about his gambling opponents. …
… Mr. Duhamel partied very often and sometimes arrived at the various tournaments in a "morning after" state. …
Neal Armstrong. Summary of Duhamel v. The Queen, 2022 CCI 66 under s. 3(a) – business source.
CRA indicates that the s. 110(1)(d) deduction can now apply to stock option benefits realized on death
On death, an individual holding stock option rights is deemed pursuant to s. 7(1)(e) to have disposed of them immediately before death for their value. Although 2009-0327221I7 and 2011-0423441E5 indicated that the 50% deduction under s. 110(1)(d) is not permitted to a deceased taxpayer, s. 110(1)(d) was since amended to make specific reference to s. 7(1)(e).
CRA indicated that, as a result of this amendment, the deduction is now available to a deceased taxpayer in circumstances where s. 7(1)(e) applies, provided that all of the conditions of s. 110(1)(d) are met.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.17 under s. 110(1)(d).
CRA indicates that the classification of civil law foundation is determined on a case-by-case basis
CRA indicated that it will apply its usual two-step approach to foreign entity classification in determining whether a foundation created under the laws of a country where civil law applies is treated as a trust under the Act – and since this is done on a case-by-case, it is not making any blanket pronouncement that such foundations are trusts for such purposes. It will consider detailed ruling requests in this regard.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.16 under s. 104(1).
We have translated 9 more CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 8 translations of CRA interpretations released in August of 2004. Their descriptors and links appear below.
These are additions to our set of 2,143 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 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Hunt – Tax Court of Canada finds that the advantage tax is a tax, not a penalty
S. 207.05 imposes the 100% advantage tax on the controlling individual of a registered plan, and s. 207.06 authorizes the Minister to waive such tax having regard to listed criteria. The following Rule 58 question was posed to Bocock J:
Is the charge imposed by either or both of sections 207.05 and 207.06 of the Act in law a penalty or a tax?
Bocock J appeared to accept that the relevant context for this question was that “[i]f section 207.05 were a penalty, a due diligence defence applies, and a successful defence renders non-qualified income free of tax,” i.e., if the provision imposed a penalty there would be a due diligence defence rather than any relief being confined to that potentially provided under s. 207.06. However, he went on to find that the provisions did not impose a penalty given inter alia that the “tax” was labelled as such and given that although “a tax may have characteristics so clearly coercive and disproportionate that one concludes it is a penalty … this case does not meet that standard.”
He also found that the discretion accorded to the Minister under in s. 207.06 (being a constrained rather than unfettered discretion) did not have the effect of improperly delegating to the Minister a tax-rate setting discretion contrary to s. 53 of the Constitution Act, 1867.
Neal Armstrong. Summaries of Hunt v. The Queen, 2022 TCC 672022 TCC 67 under s. 207.05(2) and Constitution Act, 1867, s. 53.