News of Note
CRA indicates that a s. 149(1)(n) corp. must construct rather than purchase its low-rental housing projects
Email this ContentS. 149(1)(n) exempts the income of a
limited-dividend housing company (within the meaning of … section 2 of the National Housing Act), all or substantially all of the business of which is the construction, holding or management of low-rental housing projects.
It might seem obvious that “or” means “or,” so that a low-rental housing project that was purchased rather than constructed, could qualify. However, CRA noted that the s. 2 definition of limited-dividend housing company referred to “a company incorporated to construct, hold and manage a ‘low-rental housing project’” and whose articles limited its dividend rate to 5% or less. Thus, a company that purchased rather than constructed the project would not qualify.
CRA also noted that it would appear that a project could qualify as a “low-rental housing project” (also defined in the National Housing Act) if the company rented the project units to a registered charity which, in turn, sublet the units to low-income families - although it would want to consult with the CMHC before concluding on this issue.
Neal Armstrong. Summary of 22 February 2021 External T.I. 2020-0848221E5 under s. 149(1)(n).
Bill C-208 has botched drafting, and will be substantially re-written
Bill C-208 generally provides that an individual selling qualified small business shares or shares of a family farm or fishing corporation to a corporation controlled by the individual’s children or grandchildren who are at least 18 years of age will benefit from capital gains treatment rather than receive a s. 84.1 deemed dividend provided that such purchaser does not dispose of those shares for at least 60 months.
Given that the children or grandchildren are only required to control (rather than have a substantial equity stake in) the purchaser, this lends itself to “high-octane surplus strips” in which individual owners of a small business corporation can use the capital gains exemption to extract cash from the business, while still retaining virtually all of the equity and upside in the business.
Other anomalies include:
- The purported numerical formula limitation on the s. 110.6(2) or (2.1) capital gains deduction (based inter alia on the level of the corporation’s taxable capital employed in Canada) in s. 84.1(2.3)(b) is "meaningless" and has no application because it is stated to apply only for the purposes of s. 84.1(2)(e).
- Furthermore, the math in the formula is wrong – even if it were effective, it would only eliminate the deduction at taxable capital levels of $510 million, not $15 million.
- There is nothing preventing the children or grandchildren from selling their shares of the purchaser within 60 months, or the subject corporation from selling its business.
The June 30, 2021 Finance press release (made one day after the passage of Bill C-208) effectively indicated that, sometime later this year, the Bill C-208 relief will be retroactively repealed and yet-to-be-determined new provisions will take effect on January 1, 2022. Allan Lanthier sets out in some detail what might be approximately expected in the new legislation.
Neal Armstrong. Summary of Allan Lanthier, “Tax relief for family business transfers: A legislative fiasco” – Part I, Canadian Accountant, 8 July 2021 and Part II, Canadian Accountant, 9 July 2021 under s. 84.1(2)(e).
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in September, 2007. Their descriptors and links appear below.
These are additions to our set of 1,622 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 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Centre de traitement de la biomasse – Quebec Court of Appeal finds that a taxpayer made sales of partially processed waste when it paid other processors to complete its processing
A processor of organic sludge was paid by suppliers in the agri-food industry for taking over the sludge, which it then treated and transformed, using electricity, into residual fertilizer material. It in turn paid companies (the "Receivers") to acquire the materials, which they recovered for composting, agricultural land application or as an energy source. It profited by paying significantly less to the Receivers than it received from its sludge suppliers.
Whether it was denied input tax refunds under the Quebec Sales Tax Act for the QST on its electricity purchases turned on whether it used the electricity “to produce movable property … intended for sale” within the meaning of s. 17(aa) of the Quebec Retail Sales Tax Act (“RSTA”) The Court of Quebec had followed C.R.I. Environnement in finding that this exemption did not apply. C.R.I. Environnement on similar facts had found that the goods were not intended for “sale” because Article 1708 of the Civil Code of Quebec defined a sale as “a contract by which a person, the seller, transfers ownership of property to another person, the buyer, for a price in money which the latter obligates himself to pay,” whereas there, there was no monetary consideration received from the persons to whom the goods (the waste) were transferred.
In reversing the decision below, and finding that the exemption applied (so that the ITRs were not denied), Marcotte JCA noted that “sale” was broadly defined in s. 2(9) of the RSTA to include “any other contract whereby, for a price or other consideration, a person delivers or binds himself to deliver, to another, movable property.” After quoting Waddams, The law of contracts, as to the meaning of “consideration” under the common law, she stated:
In this case, by transferring its environmental obligations to the Receivers, the Appellant relieved itself of various environmental obligations or liabilities. In my view, this relief conferred a benefit on the Appellant and … constituted valuable consideration that may be characterized as "any other consideration" within the meaning of section 2(9) of the RSTA.
Neal Armstrong. Summary of Centre de traitement de la biomasse de la Montérégie inc. v. Agence du revenu du Québec, 2021 QCCA 1068 under ETA s. 123(1) – consideration.
Libicz – Federal Court suggests that a clear representation made by CRA officials within the scope of their authority as to an administrative process they will follow is binding
Not surprisingly, Elliott J found that CRA was not bound to follow a procedure in its Collections Manual that, by the time it actually implemented the action that the taxpayers complained about (merely withdrawing a certificate of taxes owing that CRA had filed under ETA s. 316 rather than permanently canceling it), had been amended by a subsequently-issued internal directive. Of particular interest is the way in which she rejected an argument of the taxpayers that “there was a legitimate expectation that CRA would follow their own policies and procedures as set out in the 2015 Manual.” She stated:
A legitimate expectation arises when a government official makes “clear, unambiguous and unqualified” representations within the scope of their authority to an individual about an administrative process that the government will follow: … Mavi, 2011 SCC 30 … .
Such representations will be considered sufficiently precise for purposes of the doctrine of legitimate expectations if, had they been made in the context of a private law contract, they would be sufficiently certain to be capable of enforcement: Mavi at para 69.
However, in applying this principle, she stated:
I agree with CRA that an internal policy that was rescinded at the time that the certificates were filed is not a representation that is sufficiently precise to constitute a binding contractual obligation. As such, a legitimate expectation did not arise.
Neal Armstrong. Summary of Libicz v Attorney General of Canada, 2021 FC 693 under ETA s. 316(2).
GST/HST Severed Letters February 2021
This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their February 2021 release) is now available for your viewing.
Wall – Federal Court of Appeal confirms that three successive sales of newly-constructed homes over a period of under 5 years were made in the course of a business or adventures
The taxpayer purchased three homes in Vancouver in succession between 2004 and 2009, demolished each one, constructed a new house and sold it less than two years after the purchase date. His position was that he had not sold in the course of a business or an adventure in the nature of trade, but had instead constructed each home for the purpose of personal occupancy, so that his sales were exempt under Sched. V, Pt. I, s. 2 rather than being taxable supplies for GST purposes made as a builder.
In dismissing the appeal, Webb JA noted:
[W]ith the guidance of the Supreme Court of Canada [in MacDonald], Mr. Wall’s “ex-post facto testimony regarding his intentions cannot overwhelm the manifestations of a different purpose objectively ascertainable from the record”. …
Evidence contradicting the taxpayer’s arguments included:
- Each house was listed for sale before the occupancy permit was obtained.
- His incurring more debt with each successive purchase contradicted his testimony that he sold to eliminate debt.
- The maximum period that he could have occupied each property before its sale (even assuming he moved in before obtaining the occupancy permit) was a matter of months rather than years.
Neal Armstrong. Summaries of Wall v The Queen, 2021 FCA 132 under ETA s. 123(1) – builder - (f), s. 191(5) and Sched. V, Pt. I, s. 3.
Income Tax Severed Letters 7 July 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Adélard Soucy – Quebec Court of Appeal finds that a movable structure for warming a soldering operation was not Class 29 property
The taxpayer custom-fabricated pieces of heavy specialized equipment at the northern mining site of one of its mining customers. In order for its soldering work not to fracture (which required that the soldering be carried out at close to room temperature), it needed to house its operation in a pre-assembled movable shelter (an “Econox”), which it placed on a concrete foundation on land at the mining site that it leased at a nominal rent from the mining company. Whether the Econox qualified for Quebec investment tax credit purposes turned on whether it constituted a Class 29 property which, in turn, rested on whether it was a property described in Class 8(a) or (b) rather than Class 1(q).
The Court found that the Econox was a Class 1 property. Focusing on its comments regarding Class 8(a), it stated:
Here, however, the words "a building or other structure, or a part of it" appear to be a far more accurate description of the reality of the Econox than the phrase "a structure that is manufacturing or processing machinery or equipment” [in 8(a)]. One would have to do violence to the words to accept that the terms "machinery" or "equipment" more accurately convey what the Econox actually consists of and what it is actually used for than the terms "a building or other structure". …
After noting that the Court below (which it reversed) had dwelt on there being a close linkage of the Econox to the manufacturing and processing activity because it allowed it to be carried out under ideal thermal conditions, the Court went on to state:
Would one claim that a building inside which welding is done in Montreal in January becomes, by that very fact, "a structure that is manufacturing or processing machinery or equipment "? …. The respondent's Econox serves primarily … to shelter the respondent's operations from the weather … . The intent of the legislature here cannot have been that any structure or building within which machining and processing activities of the type engaged in by the Respondent are conducted ipso facto satisfy the principal requirements to qualify as "qualified property" … .
Neal Armstrong. Summary of Agence du revenu du Québec c. Adélard Soucy (1975) Inc., 2021 QCCA 1050 under Schedule II – Class 8.
CRA finds that CERB and CESB payments are deemed remuneration for source deduction purposes
CRA found that the source deduction requirements (including graduated rates) under Reg. 102(1) applied to Canada emergency response benefit (CERB) and Canada emergency student benefit (CESB) payments. In this regard, it noted:
- The payments are governmental financial assistance under s. 56(1)(r), so that they are deemed “remuneration,” and the payer and payees are deemed to be “employer” and “employee,” under the Reg. 100(1) definitions.
- Although the payees would not be reporting for work, there nonetheless would be a deemed establishment of the deemed employer under Reg. 100(4).
Neal Armstrong. Summaries of 9 July 2020 Internal T.I. 2020-0854701I7 under Reg. 102(1) and Reg. 100(4).