News of Note
Income Tax Severed Letters 31 March 2021
Email this ContentThis morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Davis Dentistry Professional Corp. – Tax Court of Canada finds that orthodontic practices make two supplies of services and devices
A professional corporation’s orthodontics practice claimed input tax credits on the basis of an administrative arrangement of CRA with the Canadian Dental Association under which orthodontists filed their GST returns using 35% of the patient’s total treatment cost as an estimate of the consideration for the supply of the orthodontic appliance (which was zero-rated), with only the balance treated as exempt - and with a requirement, when the annual results became available at year end, to reconcile their 35% ITC estimate with their actual taxable supplies. However, in the view of CRA, the corporation did not comply with the requirement under this policy to “identify the consideration for the zero-rated supply of the appliance separately from the consideration for the exempt supply of services” (the agreement with the patient stated that “[o]ur orthodontic fee includes a portion, up to 35%, relating to the value of orthodontic appliances,” but the invoices contained no allocation between the services and device. Accordingly, CRA disallowed the corporation’s input tax credit claims – effectively on the basis that there was a single supply of exempt orthodontic services.
In allowing the corporation’s appeal, Wong J stated (at para. 41):
The statute makes it clear (and Parliamentary intent confirms) that a conventional orthodontic practice consists of exempt supplies of services and zero-rated supplies of appliances. It is unnecessary to use the common law test for determining single versus multiple supplies or to consider whether the supply of an appliance is incidental to the supply of orthodontic treatment because the statute has directly addressed the tax status of both.
Accordingly, she confirmed the corporation’s position that it made both exempt and zero-rated supplies to its patients on a 65/35 basis, so that the zero-rated supplies generated ITCs. She did not discuss Brian Hurd, where Campbell J found that an incorporated orthodontic practice was making a single supply of exempt orthodontic health services rather than (as argued by it) two supplies comprised of a zero-rated supply of medical equipment (the orthodontic appliance) and of exempt orthodontic services (e.g., adjustment and maintenance services).
CRA also justified its ITC disallowance on the basis that the invoices rendered to the patients did not comply with the Input Tax Credit Information (GST/HST) Regulations. (This position was odd, because these Regulations apply to invoices received from a supplier (i.e., to input invoices), and are not directly relevant to the ITC position of a supplier rendering invoices (i.e., output invoices)). In any event, Wong J found that the corporation’s invoices complied with these Regulations. In particular:
- they showed the tax on the taxable supplies included because they showed nil (overall) tax (s. 3(c)), and they therefore also included the (nil) amount of tax for each supply (s. 3(b)); and
- they included the total amount paid for the supplies (s. 3(a)).
Neal Armstrong. Summary of Dr. Kevin L. Davis Dentistry Professional Corporation v. The Queen, 2021 TCC 25 under Sched. VI, Pt. II, s. 11.1, s. 169(5) and Input Tax Credit Information (GST/HST) Regulations, s. 3(b).
Damis Properties – Tax Court of Canada finds that s. 160 and GAAR did not apply to a sale of companies holding cash sales proceeds to a purchaser who purported to eliminate the tax liability
Five corporate taxpayers sought to increase their after-tax return from the sale by their farm partnerships of the farm by transferring their partnership interests under s. 85(1) to newly-formed subsidiaries, to which the partnerships then allocated the gains realized from the farm sale, then selling their subsidiaries to a purchaser (WTC) with a mystery plan for eliminating the tax liabilities of each subsidiary. (It emerged much later that this plan was simply to make CCA claims on software transferred post-closing into the purchased subsidiaries - which Owen J found did not satisfy the income - producing purpose test in Reg. 1102(1)(c).) The sale price for the shares allowed the taxpayers to effectively share in a portion of the purported elimination of the tax liabilities. WTC then used the applicable portion of the cash proceeds from the sale still resting in the subsidiaries (the “Property”) to pay the purchase price.
Ten years later, CRA assessed the taxpayers under s. 160(1).
Owen, J agreed that the transactions entailed an indirect transfer of property from the subsidiaries to the taxpayers, stating that “the participation of WTC in the indirect transfer of the Property does not alter the basic fact that the Property that was originally in the subsidiaries ended up in the hands of the Appellants.” However, he found that at the relevant time (which he concluded was the time at which the indirect Property-transfer steps were completed, namely, the payment of the cash purchase price by WTC), the taxpayers were dealing at arm’s length with the respective subsidiaries.
At that time, the taxpayer was deemed by s. 256(9) to have no longer had legal control of the subsidiary from the beginning of that day – and the taxpayer also was dealing with the subsidiary at arm’s length as a factual matter at that time, given that a WTC nominee had taken charge as director and officer of the subsidiary two days’ previously, as requested by it for its commercial (albeit, ineffectual) purposes.
S. 160(1) also was inapplicable on the basis that (having regard to s. 160(1)(e)) the taxpayers received the fair market value of their shares. In this regard, Owen J stated:
[I]n my view the words “consideration given for the property”, when read in the context of the entire subsection, can only mean consideration given by the transferee for the property regardless of who receives that consideration. …
Owen J then turned to the Crown’s GAAR position, which was that there was an abusive avoidance of s. 160, having regard to the proposition that s. 160 would have applied to the taxpayers if they had instead received the Property as a dividend on their shares. In rejecting this alternate transaction, Owen J stated:
The role of the subsidiaries as single purpose corporations created to be sold to WTC precluded a dividend of any kind as that would be offside the terms of the sale for which the subsidiaries were expressly created is a transfer of property without consideration.
He concluded that there was no tax benefit.
He also found that there was no avoidance transaction, stating that the taxpayers “undertook the Transactions to effect the sale of their shares in the subsidiaries to WTC on a tax efficient basis” and that there was “no evidence to suggest that in 2006 the Appellants considered the application of section 160 and took steps to avoid the application of that provision.”
Finally, there was no abuse, as to which he stated:
[S]ubsection 160(1) was not frustrated or circumvented. The subsection applied exactly as intended.
S. 160 instead applied to the transfer of the Property from the subsidiaries to WTC.
Neal Armstrong. Summaries of Damis Properties Inc. v. The Queen, 2021 TCC 24 under s. 160(1), Reg. 1102(1)(c), s. 245(1) – tax benefit, s. 245(3) and General Concepts – Onus.
CRA indicates that where a drop shipment sale is not completed and the goods are bought back by the non-resident, the 1st sale can be rendered GST/HST taxable
A non-resident that does not carry on business in Canada acquired goods from a registered supplier in Canada, who retained physical possession of the goods after the acquisition. Although the non-resident had intended to export the goods for sale outside Canada, it was unable to find a buyer, and it instead sells them back to the resident supplier.
CRA indicated that a subsequent sale by the supplier of the goods generally will cause the original sale by it to the non-resident to be rendered taxable under s. 179(1)(d) unless one of the s. 179 relieving provisions applies, e.g., the new sale was an export sale described in s. 179(4).
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.3 under s. 179(1)(d).
CRA indicates that it will only grant a request in a objection to confirm a GST/HST assessment without consideration in exceptional circumstances
ETA s. 301(4) provides "where, in a notice of objection, a person who wishes to appeal directly to the Tax Court requests the Minister not to reconsider the assessment objected to, the Minister may confirm the assessment without reconsideration.” When CRA receives such a request to confirm without reconsideration, it will do so only “in those exceptional circumstances where the Agency wishes to resolve a controversial issue in court” and is satisfied that this is a file for which it is suitable to go directly to court.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.2 under ETA s. 301(4).
CRA finds that the transfer of non-resident ownership of an aircraft subjected the Canadian lessee to further GST the next time it imported the aircraft
We have uploaded summaries of questions posed to CRA at the February 27, 2020 CBA Commodity Tax Roundtable together with the full text of the CRA responses.
A commercial aircraft, which was owned by a non-registered, non-resident was leased to a registered Canadian-resident corporation (the “Lessee”) for use in its international transportation business, was originally delivered to Lessee outside of Canada, with Lessee then paying GST on its importation. Ownership of the aircraft is then transferred outside Canada to a non-registered non-resident purchaser while the aircraft is situate outside Canada, whereupon the lease is novated. The aircraft is delivered to Lessee under the novated lease when it is physically situated outside of Canada, following which the Lessee brings the aircraft into Canada in connection with its international transportation business.
CRA confirmed that GST would be payable under Division III of the ETA on this importation of the aircraft, i.e., the effect of the novation was that the lessee was required to pay Division III tax a second time.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.1 under Non-Taxable Imported Goods (GST/HST) Regulations, s. 3(n)(i)(A).
CRA rules on the utilization of the Canadian branch losses of a US affiliate through its continuance to Canada and amalgamation with Profitco
A US parent indirectly holds a profitable Canadian corporation (Canco1), and a US subsidiary (USco1) that has been carrying on a branch business in Canada at a loss. In order that Canco1 can access the non-capital losses of USco1, USco1 will be continued twice: the first time, perhaps into another US jurisdiction that has better continuance provisions; and the second time, into a provincial jurisdiction, where it (for US tax reasons) will initially be a ULC, but then will convert to a regular business corporation. USco1 will then be continued under the CBCA, in order that it can amalgamate with Canco1, which is a CBCA corporation.
Rulings included that USco1 will continue to be the same corporation following the continuances and that, in light inter alia of s. 87(2.1), the non-capital losses of USco1 will be available to be utilized by Amalco (which will continue to carry on the USco1 business).
Neal Armstrong. Summary of 2020 Ruling 2019-0819871R3 under s. 87(2.1).
Greenhouse Gas Reference – Supreme Court finds that the federal greenhouse gas (GHG) charges are valid under the POGG power and are not taxes
The majority of the Supreme Court found that the fuel charge and excess emissions charges imposed under the Greenhouse Gas Pollution Pricing Act, Part 5 (the “GGPPA”) of the Budget Implementation Act, 2018, No. 1 are constitutionally valid on the basis of coming within the national concern branch of the federal peace, order and good government (POGG) power. It also noted in passing that the levies were not disguised taxation given that the “GGPPA as a whole is directed to establishing minimum national standards of GHG price stringency to reduce GHG emissions, not to the generation of revenue.”
Neal Armstrong. Summary of Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11 under Constitution Act, 1867, s. 91.
CRA indicates that payment by a flow-through share issuer of fees for investor procurement services of an arm’s length promoter would not taint the shares as prescribed shares
CRA indicated that the payment of a fee by a flow-through share issuer to the promoter equalling the FMV of its services in finding individual purchasers for the shares and related services generally would not cause such shares to be prescribed shares.
Neal Armstrong. Summary of 9 December 2020 External T.I. 2020-0852321E5 under Reg. 6202.1(1)(b).
Income Tax Severed Letters 24 March 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.