News of Note
CRA indicates that CEWS amounts must generally be included in income under s. 9 or 12(1)(x) by the end of the CEWS periods in question even if not claimed until much later
Email this ContentS. 125.7(3) essentially feeds into s. 12(1)(x) by deeming “CEWS” wage subsidies to be government assistance received immediately before the end of the period (of approximately one month) in question. Notwithstanding that, CRA considers it to be quite possible that the assistance will be income under s. 9 rather than s. 12(1)(x). As for the timing of that income inclusion (under either s. 9 or 12(1)(x),) CRA indicated that the CEWS amounts must be included in the taxation year in which the periods fall even if the claims are not made (and received) until after the tax return has been filed for that taxation year. (This will require an amendment to the originally-filed return to be made.)
The one exception to this is illustrated by the example of a June 30, 2020 taxation year of the eligible entity, where the end of period 4 falls on July 4, 2020 (i.e., a few days after the taxation year end). In that case, if s. 12(1)(x) rather than s. 9 is considered to govern, there is a deemed receipt of government assistance on that date, so that the s. 12(1)(x) inclusion will fall into the subsequent taxation year.
Neal Armstrong. Summary of 6 November 2020 Internal T.I. 2020-0865661I7 under s. 125.7(3).
Income Tax Severed Letters 13 January 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that bonuses generally can be prorated weekly for CEWS claim purposes, and now is getting its CEWS Registry running
The CEWS (wage subsidy) is generally computed on a weekly basis. In a November 23, 2020 revision to its CEWS Q&A webpage, CRA has confirmed that, in the case of a year end bonus “it would generally be reasonable to consider that the annual bonus was earned [evenly] throughout the fiscal period to which it relates” (both regarding the current and comparison period).
More complex allocation issues may apply to commissions. CRA states:
For example, if a car salesperson, who is remunerated by commission when a car is sold as provided in the employment contract, sells two cars in a given week in a claim period, it could be reasonable to consider that those commissions are paid “in respect of the week” in which those two sales occurred.
However, “wages in lieu of termination notice are not considered to have been paid in respect of a week, and therefore are not eligible for the wage subsidy.”
Last, but probably not least, CRA now has its “CEWS Registry” page working somewhat, i.e., particular corporations can be searched but “The ‘View full list of employers’ functionality is temporarily unavailable.” The Registry page states that "To protect the privacy of individuals, only corporations will be disclosed," and employees are told: “If you have reason to believe a CEWS applicant is misusing the subsidy, you can report suspicious activities to the CRA by submitting a lead to the Leads Program.”
Neal Armstrong. Additional summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 21 December 2020 under s. 125.7(4)(b), 125.7(1) – baseline remuneration, eligible remuneration, s. 125.7(4)(d) and s. 241(3.5).
London Clubs – UK Supreme Court finds that gaming profits from bets staked did not include chips and vouchers distributed free of charge for promotional reasons
It was held that non-negotiable chips and free bet vouchers provided free of charge by casino operators to selected gamblers to encourage them to gamble were not to be included in computing the casinos’ “bankers’ profit” from bets “staked” and, thus, were excluded from gaming duties. Although this finding is not relevant for HST purposes given that ETA s. 187(1) has effectively been overridden by s. 7(7) of the Games of Chance (GST/HST) Regulations, the decision includes an extensive description of the different attributes of such chips and vouchers. This may shed light on the sort of thing described in s. 7(7) regarding “a right to play or participate in a game of chance given away free of charge by the distributor [e.g., the casino operator].”
Neal Armstrong. Summary of Commissioners for Her Majesty’s Revenue and Customs (Appellant) v London Clubs Management Ltd (Respondent) [2020] UKSC 49 under Games of Chance (GST/HST) Regulations, s. 7(7)A-A3(ii).
CRA rules that a registered charity running an Ontario school was eligible for PSB rebates at the enhanced “school authority” rates
A registered charity that that operated an Ontario elementary or secondary school was ruled to be entitled to the 68% federal rebate and 93% Ontario rebate regarding non-creditable HST paid by it on its acquisitions of property or services for consumption, use, or supply in the activities engaged in by it in the course of operating the school given inter alia that the definition of “selected public service body” includes a school authority that is established and operated otherwise than for profit. The non-creditable HST on its other purchases generated rebates at the federal 50% and provincial 82% rate.
Neal Armstrong. Summary of 25 May 2020 GST/HST Ruling 125678r under ETA s. 259(3).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretation released in June 2009. Their descriptors and links appear below.
These are additions to our set of 1,363 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2009-06-19 | 12 June 2009 Internal T.I. 2009-0324511I7 F - Déductibilité des primes payées | Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit | substantial commissions generated to broker on policies where he paid the premiums were taxable given their substantial amount |
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) | premiums paid by broker on policies on which the insureds were family members were non-deductible notwithstanding that the related commissions earned by him were taxable | ||
| 4 May 2009 External T.I. 2008-0299841E5 F - Garantie pour l'impôt de départ | Income Tax Act - Section 220 - Subsection 220(4.5) | posting of security for departure tax can generate refund of instalments paid in excess of regular tax | |
| Income Tax Act - Section 164 - Subsection 164(7) | refund of instalments paid in excess of Part I tax for year ignoring s. 128.1(4) departure tax permitted where s. 220(4.5) security posted for such departure tax | ||
| 8 June 2009 External T.I. 2009-0314301E5 F - Société d'État provinciale, production T2 | Income Tax Act - Section 150 - Subsection 150(1) - Paragraph 150(1)(a) | provincial Crown corporations not required to file T2 returns and forms | |
| 2009-06-12 | 27 May 2009 External T.I. 2008-0303971E5 F - Transfer of a life insurance policy | Income Tax Act - Section 148 - Subsection 148(7) | gain under s. 148(7) on drop down of policy (with CSV exceeding its ACB) by individual to his corp. |
| 3 June 2009 External T.I. 2009-0310231E5 F - Exonération des gains en capital | Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(d) | 24-month test in para. (b) of QSBCS definition met where during part of 24-month period, mooted QSBCS were held through a general partnership |
Various pitfalls can attend inbound and outbound acquisitions
The foreign affiliate dumping (FAD) rules were intended to target two types of transactions:
- debt dumping (for example, Canadian Opco borrows to acquire preferred shares of a non-resident Opco subsidiary of its non-resident parent and receives (s. 113(1)(a)) exempt dividends on those shares)
- surplus stripping (for example, Canadian Opco, with distributable cash but whose shares have low paid-up capital (PUC), purchases (or subscribes for) such preferred shares)
However, their scope is wider. For example, they apply where the Canadian subsidiary (CRIC) uses cash on hand to invest in common shares of a wholly owned non-resident Opco for use in its foreign active business – even though there is no debt dumping or surplus stripping involved.
Similarly, it is unclear why it is necessary to meet all of the requirements of the s. 212.3(16) “closely connected business exception” where there is no debt dumping or surplus stripping. For example, where a Canadian public corporation with no operations in Canada becomes a CRIC on being acquired for cash by a foreign multinational, it cannot satisfy that exception because it does not carry on business itself - even if its executives have sole decision-making authority respecting the foreign Opcos. If a “bump and run” transaction could not be structured, this has caused potential foreign acquirors to abandon Canadian acquisitions.
The structure resulting where a Canadian public corporation, that has no operations in Canada, is acquired by a Canadian Acquisitionco as described in s. 212.3(10)(f), is undesirable since the PUC of the shares of Canadian Acquisitionco is reduced to nil pursuant to ss. 212.3(2) and (7), so that any investment (other than by way of PLOI) made in a foreign Opco by the Canadian public corporation or Canadian Acquisitionco would result in a cross-border deemed dividend. Accordingly, the FAD rules encourage a bump-and-run transaction, which provides no benefit to Canada.
Where a non-resident acquisition target is a holding company that has numerous operating subsidiaries that have made substantial upstream loans to it, an element of circularity can arise in determining whether the shares of such operating subsidiaries and, thus, the shares of the holding company, are excluded property.
Due to an upward cascading effect in a multi-tier structure of FAs, a non-resident target with non-excluded property of only 3% on a consolidated basis nonetheless might not have its shares qualify as excluded property. It may be possible to engage in purification transactions to achieve excluded property status.
In this regard, it would be more appropriate for the drafting of s. 17(8) to not require excluded property status “always and forever” and to instead provide for its application during the period in which the shares being financed are excluded property.
Reg. 5907(2.01) to some extent accommodates “pack and sale” transactions (respecting a drop down of a business unit to a foreign Newco followed by an arm’s length sale of the Newco) by rendering Reg. 5907(5.1) inoperative to transactions occurring on a rollover basis under the foreign tax law (so that exempt surplus may be generated) if certain conditions are met, one of which is that the only consideration received in respect of the particular drop-down disposition is shares of the capital stock of another FA of the taxpayer. Thus, the assumption of liabilities on the drop-down transaction would exclude access to Reg. 5907(2.01). See 2014-0550451E5.
Neal Armstrong. Summaries of Raj Juneja and Pierre Bourgeois, “International Tax Issues that Get in the Way of Doing Business", 2019 Conference Report (Canadian Tax Foundation), 36:1 – 42 under s. 212.3(1), s. 212.3(16), s. 212.3(10)(f), s. 251(5)(b), s. 18(5) – specified right, Reg. 105(1), s. 95(2)(a)(ii), s. 95(1) – excluded property – (b) and Reg. 5907(2.01).
CRA will not provide relief where there are COVID-related delays in meeting the deadline of realizing a loss for s. 164(6) carryback within an estate’s first taxation year
In order for the s. 164(6) carryback of a capital loss by an estate to the terminal year to be available, the executors must dispose of the capital property in question within the first taxation year of the estate. Could CRA allow more time for the disposition given that there may be COVID-related or other delays in the probate process? CRA responded that the extensions accorded under the COVID-19 Time Limits Act did not apply here, and stated:
[W]hile we understand that delays in the probate process may delay the timing of the disposition of the properties of an estate, the CRA is unable to extend the time limit for the dispositions in subsection 164(6) … beyond the first taxation year of the graduated rate estate.
Neal Armstrong. Summary of 16 October 2020 External T.I. 2020-0865071E5 under s. 164(6).
CRA indicates that taxpayers can delay flow-through share reporting under the look-back rule in reliance on the COVID-related proposed amendments
COVID-related proposed amendments (principally ss. 66(12.6001), 66(12.731) and 211.91(2.1)) released on December 16, 2020 generally related to a one-year extension of the timelines to spend flow-through share proceeds and make related filings. Should taxpayers file their returns based on such “Proposed Amendments”? For example, where flow-through shares were issued in 2019 under the look-back rule , can the Form T101C (reporting any Part XII.6 taxes payable) be filed before March 2022 rather than March 2021?
CRA first noted its previously-stated position:
It is the CRA’s longstanding practice to ask taxpayers to file on the basis of proposed legislation. … However, where proposed legislation results in an increase in benefits … the CRA’s past practice has generally been to wait until the measure has been enacted. …
Generally speaking, the CRA will not reassess if the initial assessment was correct in law. As a result, a taxpayer’s request to amend their tax records to reflect proposed legislation will be denied.
It then stated:
Based on the foregoing, taxpayers may file their tax returns, including any Form T101C, based on the Proposed Amendments.
Neal Armstrong. Summary of 23 December 2020 External T.I. 2020-0874621E5 under s. 211.91(2.1).
Pomeroy – Federal Court of Appeal allows the Crown to adduce fresh evidence after a TCC motion even with something of a failure to have introduced this before the TCC
The Tax Court dismissed the Crown’s motion to amend its reply to the taxpayer’s notice of appeal to add an allegation that a loan in issue was a sham, on the grounds that such addition would be unfair as the taxpayer’s principal (Mr Pomeroy) had now died. The Crown now moved under Rule 351 for leave to present fresh evidence, namely, the entirety of the transcript of Mr. Pomeroy’s 2018 discovery, on the basis that it would demonstrate that Mr. Pomeroy had little knowledge of the transactions in question, and therefore he could not have given evidence of importance.
The principal sticking point to allowing this new evidence was the first of the four tests enunciated in Coady (2019 FCA 102), namely, that “the party seeking to adduce fresh evidence [must] establish that the evidence: (1) could not have been adduced at trial with the exercise of due diligence.”
Regarding the failure to satisfy this test, Locke JA noted that the Crown did not become aware of the relevance of the additional evidence until six days before the hearing of the Tax Court motion, at which point there was no established procedure for introducing such evidence – but nonetheless found that he was “not convinced that the appellant could not have sought, and possibly obtained, leave to put the evidence before the Tax Court.”
In nonetheless allowing the new evidence, he stated:
… I am conscious that the motion before the Tax Court was an interlocutory matter, and the respondent’s opportunity to adduce this evidence was limited because of the absence of a clear procedural mechanism for doing so. Leave might have been sought at, or shortly before, the hearing before the Tax Court to adduce the New Evidence, but such a request would have been irregular and might well have been unsuccessful.
On balance, and having regard for the limited opportunity the respondent had for putting forward the New Evidence before the Tax Court, I find that the interests of justice require that the Court exercise its discretion to admit the New Evidence.
Neal Armstrong. Summary of Canada v. Pomeroy Acquireco Ltd., 2020 FCA 221 under Rule 351.