News of Note
CRA finds that s. 13(7.1) (or s. 53(2)(k)) overrides the application of s. 12(1)(x) re government assistance to construct or repair affordable housing
Email this ContentAco will receive a grant (the “Government Assistance”), described under s. 12(1)(x)(iv), from a Crown corporation for the purpose of creating or repairing affordable housing.
CRA indicated that to the extent that the Government Assistance received by Aco was in respect of the acquisition of depreciable property (or land), s. 13(7.1) (or s. 53(2)(k)) will deem that amount to reduce the capital cost of the depreciable property (or land) – without any inclusion under s. 12(1)(x) pursuant to s.12(1)(x)(vi) and (in contrast with s. 13(7.4) or 53(2.1)) without any election required. The cost of depreciable property for these purposes includes any “capital expenditures (as opposed to current expenses) related to the construction of new affordable housing, or to convert existing buildings into affordable housing.”
To the extent that the Government Assistance was used to fund an expense that was otherwise fully deductible (e.g. landscaping under s. 20(1)(aa), investigation costs under s. 20(1)(dd), disability related modifications to buildings in accordance with s. 20(1)(qq), salary and certain repairs and maintenance under s. 9(1)), Aco could elect under s. 12(2.2) to reduce the expense by that amount (otherwise, there would be a s. 12(1)(x) inclusion – which would not matter because Aco could then deduct the related expense.)
Neal Armstrong. Summaries of 16 February 2024 External T.I. 2023-0984301E5 under s. 13(7.1) and s. 12(2.2).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in September of 2001. Their descriptors and links appear below.
These are additions to our set of 2,916 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 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Onex – Federal Court finds that CRA should consider, in light of the remedial nature of ss. 220(2.1) and (3), that they could be used to accommodate a late election not listed in Reg. 600
In 2014, Bill C-43, which amended the FAPI rules in relation to partnerships, provided that the new rules would apply to taxation years ending after July 12, 2013, unless the taxpayer elected, under Bill C-43, to have the amendments be deemed to have come into force on January 1, 2010. The applicants (“Onex”) concluded that, based on their structure, they had already achieved the purpose of these amendments (as already reflected in returns filed for 2012 and 2013) and did not make the election. In June 2020, CRA reassessed the Onex returns for 2012 and 2013 to add over $190 million in taxable income, on the basis that the retroactive election had not been made. Onex then sought the authorization of the Minister pursuant to s. 220(2.1) to waive the requirement to file the election, in order for Onex to benefit from the amendments for its 2012 and 2013 taxation years or, alternatively, permission to file new returns for those years, under s. 220(3), so as to amend its earlier 2012 and 2013 returns and also make the election contemplated by Bill C-43.
In rejecting the Minister’s submission that the Bill C-43 election provision was not a part of the Act, so that the Minister did not have the discretion under the terms of s. 220(2.1) of the Act to waive the timely filing of an election under those Bill election provisions, Régimbald J noted that s. 42(3) of the Interpretation Act provided that “An amending enactment, as far as, consistent with the tenor thereof, shall be construed as part of the enactment that it amends” and that this submission was also inconsistent with s. 12 of that Act, favouring a remedial interpretation. He also noted that:
[T]he specific terms of subsection 220(2.1) do not specifically limit the Minister’s discretion to the waiving of the filing of “designations” but not of “elections,” nor limit the Minister’s discretion to only accept the waiver of documents that do not require a “decision.”
Regarding the Minister’s position that filing the election was not tied to the filing of a return, as required for s. 220(3) to apply, Régimbald J noted that, substantively, the effect was to amend the T5013 returns of the taxpayer, that per Bonnybrook s. 220(3) extended to documents other than returns and that CRA’s restrictive interpretation in this regard failed to take into account the remedial nature of s. 220(3).
Regarding the CRA position that the implied exclusion rule of statutory interpretation indicated that Parliament did not intend ss. 220(2.1) and 220(3) to be used to allow the late filing of an election that was not listed pursuant to s. 220(3.2) under Reg. 600, Régimbald J indicated that s. “220(3.2) may serve a different purpose and grant an additional and different type of relief to taxpayers, in relation to some specific types of elections” and that CRA had failed to consider this more remedial interpretation.
Regarding the CRA position that, even if it had the discretion under s. 220(3) to accept the filing of a new T5013 return, no extension was appropriate, Régimbald J found that CRA had failed to consider inter alia that its reassessment “would create injustices” given Onex’s representations that “they always intended to benefit from the ultimate tax result now provided by Bill C-43, and that their request was not an attempt at retroactive tax planning” – and that CRA had “failed to explain why, in its view, the ‘harsh consequences’ in this case better reflected Parliament’s intention”.
He set aside the Minister’s decision and remitted it back for reconsideration in light of his reasons.
Neal Armstrong. Summaries of Onex Corp. v. A. G. Canada, 2024 FC 1247 under s. 220(3) and Interpretation Act, s. 42(3).
Delays in getting a s. 116 certificate may necessitate a second CRA comfort letter
Given that CRA generally will not provide a vendor of taxable Canadian property with a clearance certificate before the remittance deadline specified in s. 116(5) (i.e., within 30 days of the month end of the acquisition), the vendor typically obtains a CRA comfort letter, which might state:
We are reviewing the application for a Certificate of Compliance. Please hold in trust, for the Receiver General, the tax withheld for the vendor as required by subsection 116(5) and/or 116(5.3) of the Income Tax Act until we finish our review. We will let you know how much tax is owing.
As long as we receive the payment within the time frame provided, we will not charge penalty and interest under subsections 227(9) and (9.3).
The certificate also might not be received by the balance-due date for the taxation year of the vendor in which the disposition occurred (usually, the end of February of the following year). If so, the non-resident vendor might typically request the purchaser to remit the requisite portion of the s. 116 escrow funds to CRA as an instalment of the purchaser’s liability under s. 116(5).
However, a cautious purchaser might be concerned that such a partial remittance would be contrary to the comfort letter, whose wording does not contemplate any remittances until a CRA request. This would generally result in the vendor being required to obtain, before the balance-due day, written confirmation from the CRA that a partial remittance by the purchaser of the s. 116 escrow tax will be applied as an instalment of the purchaser’s s. 116(5) liability.
Neal Armstrong. Summary of Wade Ritchie and Anu Nijhawan, “Section 116 Withholding Tax in Escrow: How Does a Vendor Pay Its Tax on Its Balance-Due Day?” International Tax Highlights, Vol. 3, No. 2, May 2024, p. 20 under s. 116(5).
CRA discusses the withholding tax rules applicable to a Canadian corporation that is a deemed U.S. resident under the anti-inversion rules
Regarding a corporation (the “Inverted Payer Corporation”) incorporated under the laws of Canada that is subject to the “anti-inversion rules” in IRC §7874(b) (so that it is resident in the U.S. for IRC purposes), the Directorate indicated that under the “tie-breaker” rule in Art. IV(3) of the Canada-U.S. Convention (the “Convention”), the Inverted Payer Corporation is resident for Convention purposes in Canada because it had been incorporated there, so that s. 250(5) would not apply to deem it to be a non-resident. Accordingly:
- Dividend payments made by the Inverted Payer Corporation to a U.S. resident would be subject to Part XIII tax and to potential treaty-rate reductions in accordance with the normal rules (and dividend payments made to other non-residents also would be subject to Part XIII tax subject to any applicable treaty reduction).
- No Part XIII tax would apply to dividends paid by it to Canadian residents (including to any other such Inverted Payer Corporation).
- Dividends paid by it to a Canadian resident would be Canadian-source income, so that the resident would not be entitled any foreign tax credit for the U.S. withholding tax on such dividends if it does not have other sources of U.S. non-business income.
- Although Art. X(5) of the Convention bars the U.S. from taxing such dividends, IRC §7874(f) provides that the anti-inversion rules apply despite U.S. treaty obligations, and a U.S. court would respect this treaty override.
Neal Armstrong. Summary of 6 February 2024 Internal T.I. 2022-0936261I7 under Treaties – Art. 4.
CRA indicates that the Ensite test is applicable in determining whether goodwill is an “active asset”
The adjusted aggregate investment income (AAII) of a CCPC, which is relevant to calculating its business limit, excludes taxable capital gains from the disposition of an “active asset,” which is relevantly defined in s. 125(7) as:
property that is
(a) used at that time principally in an active business carried on primarily in Canada by the particular corporation or by a Canadian-controlled private corporation that is related to the particular corporation … .
Would intangible assets of an active business carried on by a corporation, such as goodwill, customer list, licenses, franchises and quotas, be “active assets” as defined in s. 125(7)? After referring to Ensite, CRA stated:
In our view, where a business relies on such intangible assets to fulfill a requirement which had to be met in order to do business, are integral to the overall operations of the business, and selling or otherwise disposing of that property would have a “decidedly destabilizing” effect on the business operations, then it would be reasonable to conclude that those intangible assets were used in the active business.
Accordingly, such intangible assets could be active assets.
Neal Armstrong. Summary of 2 May 2024 External T.I. 2024-1003831E5 under s. 125(7) – active asset.
Income Tax Severed Letters 6 August 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA declines to provide guidance on whether hosting advertising on a non-resident website entails the performance of any service in Canada
A non-resident supplies digital products or services though digital platforms and websites and also sells advertising on its website through a Canadian agent.
If the non-resident was registered under the regular GST/HST registration regime, then it would be required to charge GST/HST if it was making supplies in Canada. In the case of the advertising service, CRA simply noted, without more, that pursuant to ETA s. 142(1)(g), a “supply of a service is deemed to be made in Canada where the service is, or is to be, performed in whole or in part in Canada” – perhaps recognizing that the non-resident might not be regarded as “performing” any services in Canada through its website. On the other hand, regarding any supply of copyright or other intangible personal property (IPP), CRA noted that s.142(1)(c) provides that a supply of IPP is deemed to be made in Canada if the property may be used in whole or in part in Canada, and stated that the “expression ‘may be used’ is interpreted to mean ‘allowed to be used’ – so that “a supply of IPP could be considered to be made in Canada even if it is not actually used in Canada.” Thus, the IPP supply generally would be made in Canada.
If the non-resident instead was a specified non-resident supplier registered under the simplified GST/HST registration regime, a supply made by it to a specified Canadian recipient (i.e., generally, a non-registrant with a Canadian address), would be deemed to be made in Canada pursuant to s. 211.14 (irrespective of the place-of-supply rules in s. 142) so that such supply would generally be taxable under s. 165.
Neal Armstrong. Summaries of 19 December 2023 GST/HST Interpretation 230511 under ETA s. 142(1)(g). s. 142(1)(c) and s. 211.14(1).
CRA confirms that retiring allowances can be paid in instalments over an extended period of years
CRA confirmed that a retiring allowance can be paid in instalments over a number of years (without any limitation on the length of the chosen term), in which case the retiring allowance is taxable to the individual only as received.
Neal Armstrong. Summary of 26 June 2024 External T.I. 2023-0961541E5 under s. 248(1) – retiring allowance.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in September of 2001. Their descriptors and links appear below.
These are additions to our set of 2,910 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 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).