News of Note
CRA applies Ensite in determining whether assets are “used in the course of carrying on business”
Email this ContentOne of the requirements for the continuity rule in s. 127.5(4.2) to apply where there has been an acquisition by an eligible entity of assets from a seller with whom the eligible entity did not deal at arm’s length is that (per s. 125.7(4.1)(b)(i)) “immediately prior to the acquisition, the fair market value of the acquired assets constituted … all or substantially all of the fair market value of the property of the seller used in the course of carrying on business.”
CRA indicated that it was appropriate to apply the Ensite test that “[i]f the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.” Accordingly: regarding a situation where the seller (BCo) transferred the “Division Assets” to ACo and retained other assets (the “Other Assets”):
[W]here the Other Assets were employed and risked in BCo’s business such that their withdrawal would have a decidedly destabilizing effect on BCo’s operations, such assets must be considered when ascertaining whether, immediately prior to the acquisition by ACo, the fair market value of the Division Assets constituted all or substantially all of the fair market value of the property of BCo used in the course of carrying on business under subparagraph 125.7(4.1)(b)(i).
Neal Armstrong. Summary of 8 June 2021 External T.I. 2020-0864051E5 under s. 125.7(4.1)(b)(i).
Alexion – Federal Court of Appeal indicates that, post-Vavilov, Courts should no longer “cooper up” administrative decisions under review
The Patented Medicine Prices Review Board found that the appellant (Alexion) had priced a drug (Soliris) excessively given that the list price was higher than the price in one of the seven countries used for comparison purposes. This decision represented a departure from the Board’s guidelines, yet the Board’s reasons for explaining its decision were inadequate (and “obfuscated” on a key point.)
Before quashing the Board’s decision and remitting the matter to it for redetermination, Stratas JA stated:
Before Vavilov, the Supreme Court instructed us to do our best to try to sustain the outcomes reached by administrators. Accordingly, to that end, reviewing courts could pick up an administrator’s pen and write supplemental reasons supporting the administrators’ outcomes. This sometimes put reviewing courts in the invidious and uncomfortable position of acting as a ghostwriter for administrators, coopering up their decisions. …
Vavilov recognizes the shortcomings in the former law and fixes them. It now requires us to ask if there is a sufficient reasoned explanation in support of the Board’s decision. If there is not, the decision is unreasonable and must be quashed.
Neal Armstrong. Summary of Alexion Pharmaceuticals Inc. v. Canada (Attorney General), 2021 FCA 157 under Federal Courts Act, s. 18.1(2).
Income Tax Severed Letters 4 August 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that the s. 87(2)(g.6) and s. 125.7(4.1) continuity rules can be read together
In January 2018, ParentCo acquired all the shares of TargetCo which, until the spin-off described below carried on a single business (the “TargetCo Business”) in Canada. On December 31, 2019, the TargetCo Business was spun-off to a “Newco” subsidiary of ParentCo using conventional s. 55(3)(a) spin-off mechanics, and on January 1, 2020, ParentCo and Newco amalgamated as described in s. 87(1) to form Amalco.
CRA confirmed that the continuity rules in ss. 125.7(4.1) and (4.2) can be applied in conjunction with the continuity rule in s. 87(2)(g.6) (deeming Amalco to be a successor of its predecessors for s. 125.7 purposes provided that one of the main purposes of the amalgamation was not to generate a CEWS or CERS payment). Accordingly, in respect of a particular qualifying period of Amalco, "pursuant to subsection 125.7(4.2) Amalco would be able to include in calculating its qualifying revenue for its prior reference period, the amount of the qualifying revenue of TargetCo for the prior reference period that is reasonably attributable to the TargetCo Business Assets,” given that, by assumption (and as described in greater detail in the letter), the main purpose test and the requirements stipulated in s. 125.7(4.1) in respect of a particular qualifying period would be satisfied.
Neal Armstrong. Summary of 12 April 2021 External T.I. 2020-0863701E5 under s. 125.7(4.1).
Daville Transport – Tax Court of Canada provides for an apportionment of trans-border supplies of fuel and maintenance services for GST/HST purposes [corrected link]
The taxpayer (DTI) used its trucks, and independent contractors as drivers (to whom it paid a per-trip fee), to transport freight in Canada and the U.S DTI was found by Russell J to bear the costs of the diesel fuel for the trips through the use by the drivers on its behalf of cards (enabling the participating Shell or other station to receive payment out of a prepaid balance made by DTI) and to bear the costs of maintenance of the trucks. He further found that charges made by DTI at the end of each trip to the drivers of $0.76 per mile for fuel, and $0.08 per mile for vehicular maintenance, were consideration for an on-supply by DTI to the drivers of fuel and maintenance services.
After finding that such fuel and diesel supplies were not zero-rated supplies by DTI of “freight transportation service” (which instead were being supplied by the drivers), Russell J found that, given that 69% of the fuel purchases were acquired by DTI at service stations outside Canada and immediately on-supplied to the drivers, it followed (under s. 142(2)(a)) that there was no GST/HST on 69% of the fuel immediately on-supplied by DTI to the drivers.
Regarding the application of s. 142(2)(g) to the maintenance services supplied by DTI to the drivers, Russell J found that, since the evidence was that “95% of DTI’s maintenance/repair expenses was for maintenance/repair provided, i.e., supplied in the U.S.” to it, it followed the 95% on the on-supplies of repair services to the drivers were not “made in Canada” and, thus, not subject to GST/HST. Accordingly, 95% of the maintenance on-supplies of DTI were made by it outside Canada, and were not subject to GST/HST.
S. 142(2)(g) only deems a supply of a service (subject to carve-outs) to be made outside Canada if the service is “to be performed wholly outside Canada.” Implicitly, this case considered it to be inappropriate to regard DTI as making a single supply of maintenance services to a driver who drives both inside and outside Canada, so that the Canadian portion of that single supply taints the service - and instead regarded the U.S. and Canadian services as separate supplies. This is consistent with the Intrawest approach.
Neal Armstrong. Summaries of Daville Transport Inc. v. The Queen, 2021 TCC 47 under Sched VI, Pt. VII, s. 1(1) – freight transportation service, s. 142(2)(a) and s. 142(2)(g).
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in July and June, 2007. Their descriptors and links appear below.
These are additions to our set of 1,652 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 14 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for August.
Canada North – Supreme Court of Canada finds that a CCAA court can order a super-charge that has priority over a s. 227(4.1) deemed trust
The Crown challenged an order of the Alberta judge in CCAA proceedings regarding the Canada North group of companies that “priming charges” pursuant to s. 11 of the CCAA for counsel fees, costs of the monitor and financing charges of an interim lender would rank in priority to all other security interests and charges, arguing that this priority was contrary to s. 227(4.1). The Crown argued that (1) s. 227(4.1) created a proprietary interest in the debtors’ assets and a court could not attach a super-priority charge to assets that were not the debtors’ property, and (2) in any event, s. 227(4.1) created a security interest that had statutory priority over all other security interests, including super-priority charges.
Before rejecting both arguments in detail, Côté J, writing for herself and two other Justices, stated:
In all cases where a supervising court is faced with a deemed trust, the court must assess the nature of the interest established by the empowering enactment, and not simply rely on the title of deemed trust. In this case, when the relevant provisions of the ITA are examined in their entirety, it is clear that the ITA does not establish a proprietary interest because Her Majesty’s claim does not attach to any specific asset. Further, there is no conflict between the CCAA order and the ITA, as the deemed trust created by the ITA has priority only over a defined set of security interests. A super-priority charge ordered under s. 11 of the CCAA does not fall within that definition.
In elaborating on her first ground, she noted that, in addition to the “indeterminacy” of which specific assets were covered by the deemed trust, “the fact that assets subject to the deemed trust are indeterminate makes the trustee’s role effectively impossible to play”, so that there was no trust under Quebec Civil Law concepts. Similar considerations indicated that s. 227(4.1) did not create a trust that accorded with common law concepts.
In elaborating on her second ground, she indicated that there was an implication from the relatively narrow breadth of the definition of security interest in s. 224(1.3) (referenced in s. 227(4.1),) and also from the fact that s, 227(4.2) provided that “a security interest does not include a prescribed security interest” (which showed that in fact Parliament did not contemplate that the deemed trust had much life beyond what was included in the definition of security interest), that the s. 227(4.1) deemed trust was subject to the priority of the priming charges.
She also stated:
[C]ourts should still recognize the distinct nature of Her Majesty’s interest and ensure that they grant a charge with priority over the deemed trust only when necessary. …
In the concurring reasons of Karakatsanis J (writing for herself and another Justice), she agreed that s. 227(4.1) does not satisfy the requirements for a trust, and seemed to emphasize the importance of giving breadth to the discretion of a CCAA judge under s. 11 of the CCAA in order to “further the remedial objectives of the CCAA” and given that at the end of the day the final CCAA order should provide for payment of the source deduction amounts.
Neal Armstrong. Summaries of Canada v. Canada North Group Inc., 2021 SCC 30 under s. 224(4.1), General Concepts – Ownership, Statutory Interpretation – Interpretive/Definition Provisions and Interpretation Act, s. 8.1.
Ménard – Court of Quebec applies the kiddie tax to a trust’s distribution of a capital gain, realized on a crystallization transaction, to a minor beneficiary
In 2012, a discretionary family trust engaged in a capital gains crystallization transaction in which it disposed of shares, having a modest ACB, of a small business corporation wholly-owned by the trust in consideration for shares of a new class of the same corporation, and then allocated and distributed the capital gain to its beneficiaries, one of whom was a minor. The ARQ applied the equivalent of ITA s. 120.4(5) to include twice the amount of the taxable capital gain in the minor’s income as a dividend, subject to a high rate of tax.
The statutory language relevantly required that an “amount can reasonably be considered to be attributable to a taxable capital gain … of a trust from a disposition of shares … that are transferred, either directly or indirectly … to a person with whom the specified individual does not deal at arm's length… .”
Taxpayer’s counsel argued that this language required that there be two distinct transactions – first, a disposition, and second, a transfer – whereas here the disposition and the transfer instead were one and the same transaction. In rejecting this argument and dismissing the appeal, Bourgeois. J.C.Q. stated that “a disposition transaction necessarily includes the notion of transfer.”
He also noted that comments in Gwartz indicated that had the similar transactions in that case occurred after the implementation of s. 120.4(5), they would have been caught, and that the Finance Explanatory Notes were “also eloquent” that the purpose was “to restrict income splitting opportunities in respect of capital gains realized (through a trust) for the benefit of a minor.”
Neal Armstrong. Summary of Ménard v. Agence du revenu du Québec, 2021 QCCQ 3891 under s. 120.4(5).
Income Tax Severed Letters 28 July 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on the conversion of a defined benefit to a defined contribution SERP
CRA ruled on the conversion of two supplementary executive retirement plans (being unfunded plans) for the Company’s CEO and for its VPs, from defined benefit plans to defined contribution plans.
The revised terms contemplate that In respect of each month of service for which the member is making the maximum contributions under the Company registered pension plan (RPP), the Company will make notional contributions to the member’s account in an amount equaling the excess of 10% of the member’s targetcd compensation for such month (including 1/12 of the targeted year-end bonus) over the amount of the Company contributions made for such month to the member’s RPP, except that if such amounts for the year prove to exceed 18% of the actual compensation of the member for the year over the RPP limit of the member for that year, the employer will pay, as soon as possible, the excess in a lump sum to the member (or, if the member has died, to the member’s spouse).
The notional contributions in respect of a member will be credited with notional investment returns on a pooled investment fund available to the RPP.
If a SERP member ceases service for any reason other than death, the employer will pay the SERP benefit in 10 annual instalments, unless the member has elected for a fewer number of instalments or to have the balance in the member’s account paid as one lump sum.
If the member dies before benefit payments have commenced, the balance in the member’s account will be paid to the surviving spouse, or to a designated beneficiary.
Rulings included that these would not be salary deferral arrangements and that s. 5(1), 6(1)(a) or 12(4) would not apply to the member.
Neal Armstrong. Summary of 2021 Ruling 2020-0858321R3 under s. 248(1) – SDA.