News of Note
CRA indicates that a corporate charity cannot establish RESPs
Email this ContentCRA indicated that an incorporated registered charity could not establish RESPs for needy children given that only an individuals and a “public primary caregiver” (which it was not) can qualify as an “RESP subscriber.”
Neal Armstrong. Summary of 1 September 2020 External T.I. 2019-0832221E5 under s. 146.1(1) – subscriber – (a).
Income Tax Severed Letters 30 December 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on using a Newco as a holding tank for the transfer of losses in order to avoid a direct loss shift transaction with a public company
A published ruling letter concerns a Lossco holding all of the voting common shares of a profitable public company (Opco) that has publicly-traded non-voting shares outstanding. Opco does not wish to engage in loss-shifting transactions that would entail it incurring an interest-bearing loan. Instead, Lossco engages in transactions to shift losses to a newly-incorporated subsidiary (ACo), with Aco then being transferred under s. 85(1) to Opco, and wound-up under s. 88(1.1) into Opco.
Regarding the mechanics of the loss shift, the interest on the loan by Lossco to ACo, as well as the dividends on the corresponding preferred shares held by Aco in a Newco subsidiary of Lossco, are allowed to accumulate until the time of unwinding the structure, at which point Lossco makes a cash capital contribution to Newco to fund the payment of such dividend arrears whose payment, in turn, funds the payment of the interest owing by Aco – but the loss shifting transactions otherwise are unwound on a cashless basis.
This ruling letter is very similar to 2012-0472291R3.
Neal Armstrong. Summary of 2020 Ruling 2019-0835141R3 under s. 111(1)(a).
Dow Chemical – Tax Court of Canada finds that it has jurisdiction to review whether a CRA denial of a downward s. 247(10) adjustment was “correct in fact and law”
In reassessing the taxpayer under s. 247(2), the Minister did not allow a requested “downward” adjustment under s. 247(10) (to increase the interest expense on a loan from a Swiss affiliate by $3.26 million) because of a limitation period in the Canada-Switzerland Tax Treaty. A Rule 58 question was put to the Tax Court, which was essentially whether it was the Tax Court that had jurisdiction regarding the taxpayer’s challenge to this denial, or whether the only recourse was to the Federal Court for judicial review of the Minister’s decision to disallow.
Monaghan J found that the Tax Court had jurisdiction over the reassessment, including as it related to the denial of the downward adjustment. True, a decision under s. 247(10) is one for the Minister to make and, in that sense, it is a discretionary (although it is non-discretionary in that it must be made.) However, “that decision must be made judicially, i.e., in accordance with proper legal principles.” This situation was similar to the line of cases finding that the Exchequer Court could review whether the Minister’s exercise of a right under the Income War Tax Act to disallow (through a corresponding assessment) expenses that the Minister determined to be unreasonable was “well-founded in fact and law.”
If the Tax Court determines that the Minister’s determination under s. 247(10) was not “correct in fact and law,” the resulting assessment can, for example, be sent back to the Minister for redetermination.
Monaghan J stated:
… The Tax Court will address all challenges to the correctness of the assessment made after the transfer pricing provisions have been applied, including whether the conditions for their application are met, the amount of any adjustments, the liability for penalties and whether the Minister exercised her discretion properly. Once the Tax Court decides to allow an appeal of an assessment on the basis that the Minister did not act properly in exercising her discretion, the powers available to it under section 171 provide it with the relevant remedies.
Neal Armstrong. Summaries of Dow Chemical Canada ULC v. The Queen, 2020 TCC 139 under s. 247(10) and s. 247(11).
CRA states that Hong Kong COVID-prompted cash payments to all permanent residents are not income from a source
Following months’ long protests and the COVID outbreak, the Hong Kong government announced that it would disburse HK$10,000 to each Hong Kong permanent resident aged 18 or above. The Directorate stated:
[T]he amount received from the Hong Kong Government under the Scheme by a Canadian resident individual, will likely not constitute income from a source, and therefore, will not be taxable under the Act.
Neal Armstrong. Summary of 31 August 2020 Internal T.I. 2020-0851071I7 under s. 3(a).
We have translated 4 more CRA Interpretations
We have published a translation of a CRA interpretation released last week and a further 3 translations of CRA interpretation released in July and June, 2009. Their descriptors and links appear below.
These are additions to our set of 1,354 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. Next week is the “open” week for January.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2020-12-23 | 3 November 2020 External T.I. 2020-0848881E5 F - SSUC/CEWS - rémunération admissible | Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration - Paragraph (c) | eligible remuneration is not reduced where the eligible entity on-charges a portion of its employees' time to an affiliate |
| 2009-07-03 | 25 June 2009 Internal T.I. 2009-0328171I7 F - Pénalité pour omission - 163(1) | Income Tax Act - Section 163 - Subsection 163(1) | s. 163(1) cannot apply where the previous year’s failure was in claiming bogus expenses rather than failing to report revenues |
| 2009-06-26 | 11 May 2009 External T.I. 2008-0276761E5 F - Class 43.1 and 43.2 | Income Tax Regulations - Schedules - Schedule II - Class 43.1 | wood waste fuelled heat production system and ground source heat pump likely could qualify |
| Income Tax Regulations - Regulation 1104 - Subsection 1104(13) - Eligible Waste Fuel | wood pellets are wood waste | ||
| 12 June 2009 Internal T.I. 2008-0294921I7 F - Montant reçu à l'égard d'un surplus actuariel | Income Tax Act - Section 9 - Nature of Income | lump sum paid to asset vendor for actuarial surplus in transferred pension plan was s. 9 income under Ikea expense-adjustment principle | |
| Income Tax Act - Section 248 - Subsection 248(1) - Superannuation or Pension Benefit | transfer of a pension plan assets and liabilities to the asset purchaser with regulatory approval entailed a plan “modification” rendering actuarial surplus compensation taxable |
CRA may consider that gratuitous COVID-alleviation payments to a contractual counterparty are excluded from the latter’s qualifying revenues
The operator of a mine (the “Operator”) suspended operations at its mine for COVID-19 reasons, but made gratuitous payments (the “Payments”) to third-party contractors (the “Contractors”) to cover a portion of their payroll costs, in order that the Contractors could maintain their work force pending resumption of operations. Unless the Payments were considered qualifying revenue, the Contractors would qualify for the CEWS – but if they receive it, the Operator will reduce future amounts paid by a corresponding amount.
Will the Contractors be required to include the Payments in computing their qualifying revenue?
After repeating its position in Q.6-2 on its FAQ page as to the scope of the CRA policy for excluding “extraordinary items” from qualifying revenues, CRA – before stating that it was a question of fact whether the Payments were extraordinary - stated:
Relevant considerations in the current situation could include whether the Contractor had received payments in the past upon the temporary suspension of operations at the mine, whether the Contractor was entitled to receive compensation upon a suspension of operations at the mine under its contract with the Operator and the degree of control the Contractor had with respect to the Payments and Payment Adjustments.
This seems to indicate that if, indeed, the Payments were made gratuitously on a one-off basis because of COVID, they would be excluded as extraordinary items.
CRA indicated that it needed more details to assess whether the anti-avoidance rule in 125.7(6)(a) could be relevant in determining any impact on the qualifying revenues of the subsequent Payment adjustments.
Finally, CRA indicated that the “returned” amount adjustment in para. (c) of the “eligible remuneration” definition would not cause the eligible remuneration of the Contractors’ employees to be reduced by the Payments.
Neal Armstrong. Summaries of 15 July 2020 External T.I. 2020-0847141E5 under s. 125.7 -qualifying revenue.
CRA finds that the eligible remuneration for an eligible entity’s employees is not reduced for CEWS purposes where it on-charges a portion of their time to an affiliate
Para. (c) of “eligible remuneration” definition in the CEWS (wage subsidy) rules provides that eligible remuneration excludes any amount that can reasonably be expected to be paid or returned, directly or indirectly, in any manner whatever, to the eligible entity or to a person or partnership not dealing at arm's length with it. Regarding the situation where a corporation (Aco) invoices a non-arm’s length corporation (Bco) for its payroll costs of employees who performed tasks for Bco, CRA stated that this arrangement would not reduce the eligible remuneration to Aco of such employees:
[T]he invoicing of an amount, whether or not marked up, reflecting the cost of salaries and benefits of employees of one entity who performed work for another entity, is not a returned amount falling within paragraph (c) of the definition of "eligible remuneration".
Neal Armstrong. Summary of 3 November 2020 External T.I. 2020-0848881E5 F under s. 125.7(1) – eligible remuneration – (c).
Income Tax Severed Letters 23 December 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Deyab – Federal Court of Appeal confirms neglect (and, thus, no statute-barring) for failing to document corporate withdrawals – but not gross negligence
The taxpayer was assessed for approximately $2.4 million in shareholder benefits respecting amounts received by him over five years from his small engineering-consulting company (“M.D. Consulting”), which he asserted were repayments of amounts he had advanced to it.
In affirming the Tax Court’s finding that CRA could reassess those years beyond the normal reassessment period, Webb JA first found that the Crown had made out a prima facie case that the withdrawals were income to the taxpayer, and that this then permitted “the drawing of an adverse inference against [the taxpayer] for failing to call his accountant or bookkeeper, or presenting a properly completed shareholders’ loan account reconciliation” – hence, there had been a misrepresentation. Furthermore, such “misrepresentation was attributable to the neglect or carelessness of [the taxpayer] in not properly maintaining a shareholders’ loan account that perhaps could have justified the payment of the amounts to him as repayment of his shareholder’s loan.”
However, Webb JA reversed the imposition of a gross negligence penalty, stating:
[The taxpayer’s] failure to maintain proper records that might have established that M.D. Consulting was repaying amounts payable to him (if such amounts had been properly recorded) does not establish that his failure to include the amounts withdrawn in his income demonstrated “a high degree of negligence tantamount to intentional acting” or that he was indifferent as to whether he complied with the Act.
Neal Armstrong. Summaries of Deyab v. Canada, 2020 FCA 222 under s. 152(4)(a)(i), s. 163(2) and General Concepts – Evidence.