News of Note
CRA indicates that a corporate taxpayer can reset its first taxation year end after it has filed its first return and before it has been assessed
Email this ContentAfter indicating that where a taxation year has already been assessed on the basis of a fiscal period end (“FPE”), the Act does not have any provision that allows a reassessment to change the FPE, the Directorate went on to state:
[W]here a corporation has filed its first income tax return, but an assessment is still to be made, the provisions of the Act do not appear to prevent the corporation from sending an amended tax return with a new FPE.
Neal Armstrong. Summary of 24 December 2020 Internal T.I. 2020-0874951I7 under s. 249.1(1).
CRA will follow Zomaron on the same facts (re GST/HST exemption for signing up merchants for credit card processing)
Zomaron was a registered independent sales organization (ISO) for Visa (and an “MSP” for Master Card) network purposes, who obtained the agreement of merchants to use the processing services of credit card processors, subject to the approval of the merchants’ applications by such processors. Lyons J found that “the essence for what the Processor is paying Zomaron for is to ‘arrange for’ merchants to use the Processor’s card payment services,” so that those fees were for a GST/HST exempt financial service.
CRA stated that it “will only apply the Zomaron decision to supplies made by an ISO/MSP if the same fact situation exists.” In its description of the decision, CRA emphasized that “during negotiations Zomaron had considerable latitude and autonomy to set pricing, rates and fees” and that “Zomaron delivered to the … processor fully negotiated merchants” requiring the processor’s card payment processing services – so that presumably absence of these elements might cause CRA to consider that the fees were instead for taxable promotional services.
Neal Armstrong. Summary of Excise and GST/HST News - No. 109 under “Zomaron Inc. v The Queen – Application to independent sales organizations and member service providers ,“ June 28, 2021 under ETA s. 123(1) – financial service – para. (l).
CRA indicates that it will use “discretion” in its first 12 months of administering the new GST/HST e-commerce rules
After discussing the legislative proposals, to generally take effect on July 1. 2021, regarding cross-border digital products and cross-border services (which it described as extending to “traditional services such as legal and accounting services … [supplied] to consumers in Canada”), goods supplied through fulfillment warehouses in Canada, and platform-based short-term accommodation, CRA stated:
Where the affected businesses and platform operators show that they have taken reasonable measures to comply but are unable to meet their new obligations for operational reasons, the CRA will take a practical approach to compliance and exercise discretion in administering these measures during a 12-month transition period, starting July 1, 2021.
Neal Armstrong. Summary of Excise and GST/HST News - No. 109, under “GST/HST measures relating to the digital economy,” June 28, 2021 under ETA [draft] s. 211.12(2).
CRA finds that CEWS received by an NPO does not qualify as government funding for GST/HST PSB rebate purposes
A non-profit organization (NPO) generally is entitled to GST/HST public service body rebates if the percentage of its “government funding” (defined in s. 2 the Public Service Body Rebate (GST/HST) Regulations) is at least 40%.
CRA noted that the s. 2 definition excludes a “refund, rebate or remission of, or credit in respect of, taxes” and also references a purpose of “financially assisting the particular person in carrying out the purposes of the particular person,” and further indicated that the purpose of the Canada emergency wage subsidy (“CEWS”) program was to “re-hire workers previously laid off as a result of COVID-19, help prevent further job losses, and better position businesses to resume normal operations following the crisis.” CRA concluded that the CEWS was not government funding under the definition, given that it “is a refund in respect of income taxes imposed under the ITA” and it “is not paid for the purpose of financially assisting the NPO in carrying out the purposes of the NPO. “
CRA applied a somewhat similar analysis to find that the 10% temporary wage subsidy for employers program also did not count as government funding.
Neal Armstrong. Summary of 22 December 2020 GST/HST Interpretation 209955 under Public Service Body Rebate (GST/HST) Regulations, s. 2.
GST/HST Severed Letters January 2021
This morning's release of four severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their January 2021 release) is now available for your viewing.
Income Tax Severed Letters 30 June 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Cristofaro – Quebec Court of Appeal applies Oceanspan to find that a non-resident with no sources of income in Quebec could not transfer a tax credit to a Quebec taxpayer
In 2003-0026827, CRA applied Oceanspan to find that a non-resident student who has no Canadian sources of income is precluded from transferring her unutilized tuition credits to her resident father under ITA s. 118.9 because:
an individual who is not resident in Canada and who has no Canadian source income would not be entitled to the tuition and education tax credits. The individual is not liable to pay tax in Canada, and therefore has no need to utilize the provisions permitting the tax credits.
Here, a similar approach was followed in finding that an Ontario-resident, who paid Quebec income taxes because a portion of his professional firm’s practice was in Quebec, could not be transferred a tuition credit (under the Quebec equivalent of s. 118.9) by his daughter studying in Scotland, who was resident in Ontario and had no Quebec sources of income. In addition to referring to Oceanspan as “particularly illuminating,” the Court quoted with approval the reasoning of Monaghan J in Marino (finding that U.S. tuition generated by a student while not a Canadian resident and without a source of income under s. 2(3) could not be carried forward to when he became a Canadian resident).
Neal Armstrong. Summary of Agence du revenu du Québec v. Cristofaro, 2021 QCCA 1025 under s. 118.9.
Magren Holdings - Tax Court of Canada finds that transitory acquisitions and redemptions of income fund units were shams
The appellants, were private companies controlled by a resident individual (Grenon), whose RRSP held 58% of the units of a publicly traded income fund (“FMO”). They engaged in a series of transactions that were intended to result in the realization by them of substantial capital gains (resulting in additions to their capital dividend accounts (CDAs), that were immediately distributed by them), followed by the realization of largely offsetting capital losses later that day.
In very general terms, significant elements of the series of transactions included:
- Grenon’s RRSP transferring its units of FMO to a newly-formed unit trust (“TOM”) -in exchange for units of TOM representing close to 100% of the issued and outstanding TOM units.
- The appellants acquiring such FMO units from TOM in consideration for issuing $161M in promissory notes.
- Various transaction being engaged in “beneath” FMO that resulted in capital gains being realized on the indirect transfer of subsidiary entities to a new unit trust (“New FIF”) that was intended to be the replacement public vehicle for FMO and those gains being allocated to, or otherwise realized by, FMO.
- The public transferring their units of FMO to New FIF in exchange for units of New FIF.
- After various steps to clean up the structure, FMO distributing essentially all its assets (being units of New FIF) to the appellants, and treating this as a distribution of the capital gains realized by it in 3 above. (These were the capital gain referred to above that were treated as CDA additions to be distributed.)
- The units of FMO being repurchased by FMO for nominal consideration. The appellants had full (FMV) cost for their FMO units when acquired in step 2, and the capital gains distributions did not reduce the ACB of their units by virtue of s. 53(2)(h)(i.1)(A) and (B)((I). Accordingly, such repurchases resulted in the realization of largely offsetting capital losses (and, in light of the intervening distribution of the transitory increase to their CDAs, also resulted in negative CDAs.)
In finding that the appellants had not acquired the FMO units in step 2 above (which continued to be beneficially owned by the RRSP) and, therefore, did not realize a capital loss in step 6 above, Smith J stated:
Since it was intended … that the FMO units allegedly acquired from TOM on December 23, 2005 would be repurchased for cancellation on December 28, 2005 resulting in the alleged capital losses, I find as a fact that the Appellants had “absolutely no discretion” … as to the disposal of those units. The only role of the Appellants was to hold legal title to the units for a few days. …
[I]t cannot be said that the Appellants enjoyed “the three key attributes of ownership, namely, risk, use and possession” … .
In the course of going on to find that the acquisitions and repurchases also were shams, he stated, inter alia:
[I]t cannot be said that the alleged transaction by which FMO repurchased its units for cancellation resulted in ‘real’ capital losses. These were mere paper transactions ... allegedly supported by demand promissory notes that the Appellants would never be called upon to honour and that were issued and cancelled on December 28, 2005.
I agree with the Respondent, relying on Triad Gestco ... “that the Appellants did not enjoy a ‘real’ economic gain nor a real economic loss”.
He further found that because the s. 184(3) election to convert excess capital dividends into ordinary dividends
is intended to allow corporations “to correct their mistake and avoid the special tax provided under Part III” but it is not intended that the provision will apply where “the initial CDA was sham (sic), and those claiming the benefit of Part III are the authors of the sham”
such elections were invalid.
Finally, in finding, in the alternative, that GAAR would apply to deny the CDA additions, he stated:
It can be said that the “object, spirit and purpose” of the CDA regime is to ensure that it mirrors the tax treatment of capital gains for an individual and that the Minister can only seek to tax gains that give rise to ‘real’ economic gains. By the same token, only one half of the ‘real’ economic gains realized by a corporation can be added to the CDA.
Neal Armstrong. Summaries of Magren Holdings Ltd. v. The Queen, 2021 TCC 42 under s. 185(3), s. 185(1), General Concepts – Ownership, General Concepts – Sham, s. 184(3) and s. 245(4).
We have translated over 1600 CRA Interpretations
We have published a further 10 translations of CRA interpretation released in November, 2007, as well as an interpretation released last week. Their descriptors and links appear below.
These are additions to our set of 1,602 full-text translations of French-language severed letters (mostly, Roundtable items and Technical Interpretations) of the Income Tax Rulings Directorate, which covers all of the last 13 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for July.
CRA indicates that a s. 104(27) designation cannot be made for a pension amount received after a trust ceased to be a GRE
CRA stated that where an estate receives a lump sum from a pension plan of the deceased beyond the 36-month period in which it could qualify as a graduated rate estate (“GRE”), CRA would have no discretion to extend the 36-month period.
If the executor is unable to distribute the income under s. 56(1)(a)(i) to the sole beneficiary before the end of the year of receipt, that income could be included in the sole beneficiary’s income under ss. 104(13) and (24) if the beneficiary was entitled to enforce payment of the lump-sum benefit. This income would be treated as property income rather than pension income in the beneficiary’s hands because the trust could only designate under s. 104(27) a pension benefit as pension income of its beneficiary if the benefit was received while it was still a GRE.
Neal Armstrong. Summaries of 15 June 2021 STEP Roundtable, Q.14 under s. 248(1) – GRE, s. 104(24) and s. 104(27).