News of Note

Canco entered into a contract (“Initial Contract”) with a non-resident corporation (“NR”) for the supply and installation of boilers in Canada. Prior to the completion of the services, and in light of the financial difficulties of NR, Canco and NR entered into “Payment Agreements” under which Canco provided payments to NR, in respect of the contract for service in Canada, performed by the non-resident subcontractors of NR, with such funds placed into dedicated bank accounts and paid to the subcontractors upon the authorization of both NR and Canco.

CRA found that such payments were subject to Reg. 105 withholding, stating:

If NR subcontracts its obligations under the Initial Contract rather than performing them directly and the amounts are ultimately paid by NR to subcontractors, that does not alter the fact that Canco is required to pay NR for services in Canada under the terms of the contracts and the Payment Agreements.

It noted that Weyerhaeuser found that Reg. 105 withholding is required only from those payments “having the character of remuneration for services rendered in Canada,” and that reimbursement of expenses of the subcontractor would not be subject to Reg. 105 withholding - but the payments here did not fit within that exception, i.e., they satisfied Canco’s obligation to NR under a contract for the performance of services in Canada.

Neal Armstrong. Summary of 16 October 2020 Internal T.I. 2019-0823641I7 under Reg. 105(1).

A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan.

Although, in fact, the acquisition occurred before 2017, the Rulings Directorate also addressed what would have happened on a post-2016 acquisition, and concluded that the amount allocated to the actuarial surplus would not have qualified as the cost of a Class 14.1 property, and instead would have been a non-deductible capital expenditure. Its findings towards this conclusion were:

• Having regard for the exclusion for an amount that is not deductible by virtue of a specific provision other than s. 18(1)(b), such amount was excluded by s. 18(1)(e), which prohibited the deduction for a reserve (“described by the courts as something set aside that can be relied upon for future use”) given that “any actuarial surplus in this case can be applied as a contribution holiday to relieve the Purchaser from its future contribution obligations.”
• Furthermore, the exclusion under s. 78(4) would also apply because it prohibits the deduction of an amount for pension benefits which will be paid more than six months after the current taxation year, including (in this context) the use of surplus to cover the employer’s current service costs.
• The exclusion for “an amount that is the cost of … an interest in a trust” also applied since the Purchaser acquired an equitable interest in the Plan, i.e., it could potentially take a contribution holiday, receive a return of contributions on a winding-up of the Plan, and potentially receive the surplus in other circumstances.
• Regarding the specific inclusion in Class 14.1 of “goodwill,” this was defined in TransAlta as “an unidentified intangible asset,” whereas the surplus here instead was specifically identifiable and “[u]nlike goodwill … can be separated from the employer’s business if, as in this case, the plan terms permit surplus to be returned to the employer when the appropriate regulatory procedures are followed.”
• The surplus amount would also not be deemed goodwill under s. 13(35) because of failure of the condition in s. 13(35)(a) (it would represent the cost of a property, e.g., the right to apply actuarial surplus to contribution obligations under a defined benefit pension plan) and failure of the condition in s. 13(35)(c) (it was not otherwise deductible because of s. 18(1)(e) or 78(4)).

Neal Armstrong. Summary of 28 January 2021 Internal T.I. 2019-0817641I7 under s. 18(1)(b) – capital expenditure v. expense – actuarial surplus.

This morning's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their September 2020 release) is now available for your viewing.

An individual, by virtue of being part of a group of class action claimants, was awarded damages in 2004 of $1,200 for each of the seven winter seasons in which she had endured snowmobile noise. In 2010 she received damages pursuant to Article 1619 of the Quebec Civil Code of $8,400 (capital) and $6,148 (interest).

Gagné JCA applied the principle:

[O]ne cannot speak of interest in the strict sense unless the debt is both certain and liquidated. These two qualities arise at the time when the judgment becomes res judicata, that is, when it is not, and is no longer, subject to appeal. As long as the validity and/or the amount of the debt is the subject to debate on appeal, it cannot constitute a debt that is certain and liquidated or, in other words, a capital sum on which interest may accrue.

Accordingly, the damages did not become a liquidated sum until all rights of appeal against the 2004 judgment were abandoned on October 1, 2009. It was only at that point that the 2004 judgment became res judicata.

On the other hand, it did not matter that the precise quantum of the amount payable to that individual was not established until the judgment of the Court Clerk issued on March 3, 2010. In this regard, Gagné JCA stated:

[T]he debt does not have to be due and payable to bear interest. It is sufficient (and here I paraphrase Rand J. in … Farm Security …) that there be a use or retention by one person of a sum of money belonging to or owed to another. This, in my view, is a debt that is certain and liquidated. …

The fact that [the Quebec Attorney General] was unaware of the extent of the members' claims at the time is irrelevant. … [T]he determination of whether an amount received or receivable is interest income must be made from the perspective of the taxpayer.

Neal Armstrong. Summary of Agence du revenu du Québec v. Bernardin, 2021 QCCA 625 under s. 12(1)(c).