News of Note

Subject to exceptions, s. 26(3) of the Provincial Sales Tax Act (B.C.) deems the purchase price of a “taxable component” (namely “tangible personal property, software or a taxable service that would be subject to tax under this Act if purchased separately from other property or services”) to equal the fair market value of the taxable component. The BC Ministry of Finance has revised its Bulletin on Bundled Sales and Services to indicate that:

If, for a single price, you lease a taxable good together with an exempt good or real property, you must charge PST on the fair market value of the lease of the taxable good. …

It provides an example of a lease of a restaurant building with affixed machinery (beer tap equipment) and various furniture for a rent of $15,000 per month. Although a building lease is exempt, PST is required to be charged on what would be the FMV of a lease of the beer tap equipment and the furniture (of $2,500 and $1,000 per month, respectively). However, this requirement to bifurcate does not apply if “the right to use the goods is merely incidental to an agreement for the right to use real property.”

The concept of “incidental” is defined quite narrowly in PST 315.

Neal Armstrong. Summary of Bulletin PST 316 "Bundled Sales and Leases" under Other Legislation – BC – Provincial Sales Tax Act – s. 26(3).

CRA ruled that the gifting by a non-resident of Canada, who was a resident of a redacted country for purposes of Art. 4(1) of the Treaty with that country, would be exempted under Art. 13(6) of that Treaty on the gain realized by him on gifting to his non-resident children all the shares of a wholly-owned single-purpose non-resident holding company through which he held vacant land in Canada. The land was held for investment purposes and the holding company had no business. CRA also ruled that there would be no s. 116 withholding obligation provided that the children (who were all minors) filed the required notifications under s. 116(5.02), so that the Holdco shares would constitute treaty-exempt property under s. 116(6.1).

Apparently the Treaty in question did not include shares of a company - that was not a resident of Canada but held Canadian real estate - in its definition of real or immovable property.

Neal Armstrong. Summary of 2020 Ruling 2019-0801011R3 under Treaties – Income Tax Conventions – Art. 13 and s. 116(5.02).

A Canadian resident (and US citizen) had an agreement with the Canadian Competent Authority under Art. XXIX(5) of the Canada-US Treaty, by virtue of which he included his share of the S Corporation’s income as FAPI, claimed a s. 126 credit for the US taxes on that income, and added such FAPI to the ACB of his shares. However, before he received any dividend, he revoked the S Corp’s status as a fiscally transparent entity for US purposes, so that the Agreement thereupon terminated. The S Corp then paid a dividend to him of income that previously had been included in his income as FAPI (and now was included in his income under s. 90(1).)

The Directorate indicated that where the S Corp was a CFA of the individual, he could take a s. 91(5) deduction of the dividend paid after the Agreement invalidation, with a corresponding reduction to the ACB of his shares.

However, where the S Corp was not a FA at the time of the dividend, no s. 91(5) deduction would be available (but with no corresponding ACB reduction) because in such absence of FA status, Reg. 5900(3) would not deem the dividend to come out of taxable surplus.

The Directorate noted that it could be argued that s. 248(28) would apply to exclude the dividend from his income given that “both the dividend and FAPI arise from the same source, namely the shares of S Corporation.” However, the Directorate preferred the double inclusion alternative:

[T]he better view … is that the dividend income and FAPI inclusion are not the same amount …

[T]he dividend income is a cash distribution on the shares of S Corporation while the FAPI is a notional allocation of the income of S Corporation deemed to be FAPI on its shares of S Corporation … [so that] the dividend income and FAPI are separate amounts of a different nature … [which] would preclude the application of subsection 248(28).

Neal Armstrong. Summary of 18 July 2018 Internal T.I. 2018-0766441I7 under s. 91(5) and s. 248(28).

Among the updates in 2021 to its Q&A page on CEWS:

• CRA indicates that the companies in a group can continue to have one group entity handle the payroll matters (e.g., source deductions, and presumably also T4 reporting) – in one payroll account with CRA in its name - for employees that it pays as agent for other group companies even where the other group companies were required to open up their own payroll accounts with CRA to make CEWS claims.
• CRA provides an example concerning a TSX-listed corporation whose executive compensation disclosed on Form 51-102F6 (pursuant to National Instrument 51-102) increased from $4,500,000 in 2019 to $8,000,000 in 2021 and which claimed wage subsidies totaling $4,000,000 in periods 17 to 20. It is required to repay the executive compensation repayment amount of $3,500,000 ($8,000,000 - $4,500,000) in accordance with an ordering rule, whereby later wage subsidy amounts are required to be repaid first, until the total equals the eligible employer’s executive compensation repayment amount.
• CRA now provides the registry listing the over 408,000 corporations that have applied for the CEWS, including around 90,000 numbered companies. This doubtless is diverting CRA audit resources.

Neal Armstrong. Updated summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021 under s. 153(1)(a), s. 125.7(1) – qualifying revenue, executive compensation repayment amount and s. 241(3.5).