News of Note
Westcoast – Tax Court of Canada finds that an employer was not entitled to ITCs for the GST/HST on reimbursed employee health care services
Email this ContentWestcoast reimbursed (through Manulife as its agent) employees who had incurred various health care services – including some which were GST/HST-taxable, namely, acupuncture, massage therapy, naturopathy and homeopathy services. Sommerfeldt J found that the employees were the recipients of these taxable services notwithstanding that there generally was no written contract with the care provider and in some instances, the health care provider was paid directly by Westcoast (through Manulife). Accordingly, it was necessary for Westcoast to be deemed by ETA s. 175 to have itself acquired these services in order to potentially claim an input tax credit for the associated GST/HST.
In this regard, s. 175(1)(b) relevantly required that the employees have consumed or used the services “in relation to activities of [Westcoast]”. In finding that this test was not satisfied, so that there were no ITCs, Sommerfeldt J stated:
I have difficulty in comprehending how an employee of Westcoast could be said, while receiving acupuncture, massage therapy, naturopathy or homeopathy services, to be consuming or using the particular service in the course of his or her employment activities, as distinct from an activity that was personal in nature.
Neal Armstrong. Summaries of Westcoast Energy Inc. v. The Queen, 2020 TCC 116 under ETA s. 175(1)(b), s. 123(1) – recipient and s. 170(1)(b)(ii).
CRA expects a spinner corporation to ensure that sufficient tax basis in its shares is transferred to the shares of a spinco that also is receiving safe-income rich spin assets
In Q.1 of last week’s CTF Roundtable, CRA indicated that it considered a transaction in which there was a spin-off of a subsidiary holding an asset (Subco 2) with a disproportionately high ACB to be abusive, given that the Parentco could subsequently bump the ACB of its assets by winding-up the Spinco under s. 88(1). In Q.3, CRA carried this approach of ferreting out potential basis “misalignments” to a further extreme based on the insight that safe income can be capitalized to become ACB, so that a spin-off of an asset with disproportionately high safe income could also result in such a future misalignment.
CRA provided an example of Holdco having previously acquired Opco for $300, at a time that one of the subsidiaries of Opco (Subco 2, whose shares had a nil ACB) had direct safe income of $200 – and, since then, Subco 2 generated an additional $150 of safe income, for a total of $350. However, this resulted in only $150 of indirect safe income of $150 on Holdco’s shares of Opco, as the $200 of preacquisition safe income was reflected in the ACB to Holdco of the Opco shares.
There is now a s. 55(3)(a) spin-off of Subco 2 to Newco, and to that end, Holdco transfers 1/2 the shares of Opco, having an ACB of $150 and an FMV of $500, to Newco. The spin-off occurs on a rollover basis, so that the direct safe income of $350 in the Subco 2 shares is transferred over to Newco on a consolidated basis, and the indirect safe income of $150 on the Opco shares is transferred over to the Newco shares.
However, CRA indicated that this results in a duplication of ACB - because if the safe income were capitalized after the reorganization and Newco were wound-up, there would be a resulting aggregate ACB of $500 in the shares of Opco and Subco 2 (i.e., the $150 remaining in the shares of Opco after the spin-off, plus capitalizing the direct safe income of $350), which exceeds the normative maximum of $450 (i.e., Holdco’s initial ACB of the Opco shares of $300, plus the post-acquisition safe income of $150). In CRA’s view, this $50 ACB increase is unacceptable, and the solution would be to proceed with a reorganization that results in an alignment of the basis.
Such alignment would be achieved if, instead of transferring Opco shares to Newco with an ACB of $150, Opco shares having an ACB of at least $200 were transferred.
These comments appear to indicate that CRA considers that a spin-off transaction should be preceded by a computation not only of inside and outside basis, but also of direct and indirect safe income – and if these computations show a potential ”misalignment” that could favour the taxpayer after taking into account any potential safe income capitalization transactions, CRA expects there to be preliminary transactions to ensure that there is an appropriate bump in the ACB of the shares of the spinner corporation that are transferred to the spinco.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.3 under s. 55(2.1)(c).
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in December and November, 2009. Their descriptors and links appear below.
These are additions to our set of 1,308 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for November.
CRA affirms that a s. 86 reorg normally requires the filing of articles of amendment
CRA affirmed its longstanding position that in order for there to be a reorganization of capital as required under s. 86(1), there should normally be an amendment to the corporation’s articles.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.14 under s. 86(1).
CRA extends the COVID $500 safe harbor re employer reimbursement of home office computers to other home office items
In 2020-0845431C6, CRA stated that, in the COVID-19 context, it is willing to treat the reimbursement of not exceeding $500 for the purchase of personal computer equipment that is mainly for the benefit of the employer as not being taxable.
CRA has now indicated that, although there are no current plans to increase the $500 threshold, it will be extended to office furniture or other home office items and will not be limited to computers.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.13 under s. 6(1)(a).
CRA will assess the COVID impact on APAs on a case-by-case basis
What is the COVID-19 impact on: previously negotiated advance pricing arrangements (“APAs”); mutual agreement procedures (“MAPs”) that are currently being negotiated; and benchmarking analyses that are used to establish transfer pricing policies and prepare transfer pricing compliance documentation?
After noting that advance pricing arrangements (“APAs”) are generally undertaken on the base assumption that the future will be a reflection of the past, CRA indicated that although COVID-19 changes in business conditions might pose a challenge, CRA does not consider that there is any need for a formal general policy, and those circumstances will merely inform the APAs on a case-by-case basis. Regarding APAs that are currently being negotiated, there might be a need to use some limits or critical assumptions to point to a certain return within the range.
As for MAPs currently being negotiated, CRA does not expect an impact as long as those MAPs deal with pre-pandemic years.
Transfer-pricing benchmarking studies will continue to be based on the information gathered by CRA.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.12 under s. 247(2).
CRA confirms that a 1% prescribed-rate loan can effectively replace a 2% loan if the latter loan is repaid with sales proceeds
An individual, who used a loan ("Loan 1") bearing interest at the prescribed rate (2%) to purchase securities for $100,000, now wishes to refinance the loan at 1%. Accordingly, half the securities (which have doubled in value) are sold for $100,000, which is used to repay Loan 1, and $100,000 is borrowed at the new prescribed rate of 1% ("Loan 2") to purchase new investments.
CRA confirmed that the attribution rules in ss. 74.1 and 74.2 will cease to apply after the repayment of Loan 1, and that the s. 74.5(2) exception from the attribution rules could apply to Loan 2 if the usual conditions were met.
S. 74.1(3) - which CRA described as ensuring that the attribution rules continue to apply where a new loan is used, e.g., to repay an existing loan that was used to acquire property - would not “technically” apply, because the proceeds from Loan 2 were not used to repay Loan 1.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.11 under s. 74.1(3).
CRA confirms that a refreeze does not reduce the quantum of any imputed interest under s. 74.4(2)
CRA confirmed that where an individual exchanges preferred shares received in the course of a previous estate freeze for newly-issued preferred shares with a redemption amount equal to the current (lower) equity value of the underlying corporation:
- If s. 74.4(2) applied to the original estate freeze (e.g., the distribution restriction in s. 74.4(4) was not complied with), the preferred shares received on the refreeze will be excluded consideration that do not reduce the “outstanding amount” (as determined under s. 74.4(3)) on which the deemed interest benefit is computed under s. 74.4(2).
- If the refrozen preferred shares are redeemed for cash consideration, that consideration will reduce the outstanding amount, but only to the extent of the fair market value of those shares. However, the corporate attribution rules would cease to apply, for example, when the children were no longer minors.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.10 under s. 74.4(3). See also Demner and McIsaac.
GST/HST Severed Letters August 2020
This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their August 2020 release) is now available for your viewing.
CRA indicates that a UK LLP is a corporation in light [inter alia?] of its separate legal personality
Under the UK’s Limited Liability Partnerships Act 2000, a limited liability partnership (“UK LLP”) is treated in the UK as a separate legal entity, but the profits of its business are taxed as if the business were carried on by partners in partnership, rather than by a body corporate
CRA orally indicated that it would consider the UK LLP to be a corporation under its two-step approach, in light of the LLP’s separate legal personality.
There presumably is more to the CRA’s position than this – otherwise it would contradict its position that an ordinary Delaware LP (as contrasted to an LLP or LLLP) is a partnership for ITA purposes notwithstanding that such “a limited partnership is a separate legal entity:” 14 August 2008 External T.I. 2004-0104691E5. Also note that Scottish partnerships have been found to be partnerships under a two-step approach despite their separate legal personality (see Anson, [2013] EWCA Civ 63, at para. 64, rev'd on other grounds).
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.9 under s. 248(1) – corporation.