News of Note
Income Tax Severed Letters 9 September 2020
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that landlords should apply ETA 232 to CECRA rent reductions
After describing the CECRA (COVID rent assistance) program, CRA noted:
- The forgivable loan made by CMHC is an exempt supply – no GST/HST is payable to the CMHC.
- The landlord should issue a credit note for the rent reduction in conformity with s. 232 so that, inter alia, it will not be required to remit GST/HST on the pre-reduction amounts.
Further points made by CRA (unrelated to CECRA):
- services of osteopathic manual practitioner (other than an osteopathic physician) are not exempted from GST/HST
- the new 20% B.C. sales tax on certain vapour products is not a “prescribed provincial levy,” so that GST is levied not only on the sale price but also on that sales tax
- after noting that it prevailed in Patterson Dental, CRA stated:
The CRA’s existing policy regarding the application of the GST/HST to drugs that are mixed substances or solutions is consistent with the decisions of the Courts.
Neal Armstrong. Summaries of Excise and GST/HST News - No. 108 September 2020 under ETA s. 123(1) – financial service - (c), s. 232(3)(a), Sched. V. Pt. II, s. 1 – practitioner, s. 154(2)(b), and Sched. VI, Pt. I, s. 2(e).
Valovic – Tax Court of Canada finds that shareholders’ services were not consideration for dividends received by them for s. 160 purposes
An electrician and his spouse provided their services as electrician and administrator to their equally-owned corporation, and received dividends and salary. In rejecting their submission that, for s. 160 purposes, the annual dividends were paid for equivalent consideration, being a portion of their services, Monaghan J noted that decisions of the FCA/TCC “accepted and endorsed the view expressed in Neuman that dividends relate to shareholding and rejected the argument that there was consideration for the dividends.”
Neal Armstrong. Summary of Valovic v. The Queen, 2020 TCC 101 under s. 160(1)(e)(i).
Reference re S. 6 of the Time Limits and Other Periods Act – Federal Court of Appeal finds that s. 6 did not trench on orders made under the Federal Courts Rules
In a letter dated September 1, 2020 addressed to the Federal Court, the Attorney General stated his position that s. 6 of the Time Limits and Other Periods Act (COVID-19), which suspended retroactively all “time limits…established by or under an Act of Parliament” during the March 13-September 13 period, ousted all “orders and directives issued” by the Courts concerning time limits or setting deadlines. The reaction of Noël C.J. was instantaneous. On September 3, he issued the following direction pursuant to Rule 54:
The Court directs that the Attorney General’s position concerning the interpretation and effect of section 6, in so far as it extends to the time limits under the Rules and orders made thereunder, is incorrect in law and should not be followed. The Federal Courts Rules, S.O.R./98-106 and this Court’s Practice Directions, judgments, orders and directions remain in full force and effect.
He explained:
Were it otherwise, confusion and potential harm—surely not desired by Parliament—would result. For example, orders requiring a proceeding to be prosecuted urgently on shortened time limits to further the public interest and to avert some harm or prejudice would be invalidated with retroactive effect. …
Beyond this, construing section 6 as allowing Parliament to unilaterally interfere with the management and governance of ongoing proceedings would invade a core judicial function … . Where possible—and it is possible here—section 6 should be given a meaning that is respectful of judicial independence and obeys constitutional imperatives.
Presumably, the Tax Court will take a similar view that s. 6 does not prevent it from controlling its own proceedings.
Respecting the scope of s. 6, Noël C.J. noted that it did extend the time periods for starting proceedings in the Federal Court, for example s. 27(2) of the Federal Courts Act (the time limit for bringing appeals) and ss. 18.1(2) and 28 thereof (the time limit for bringing an application for judicial review).
Neal Armstrong. Summary of Reference re Section 6 of the Time Limits and Other Periods Act (COVID-19) (CA), 2020 FCA 137 under Time Limits and Other Periods Act (COVID-19), s. 6.
Larkin – Tax Court of Canada permits a geologist with no current income to deduct various expenses documented only in spreadsheets
A retirement-age geologist with decades of successful experience as a prospector, entrepreneur and inventor, worked on a number of unsuccessful projects in and around his 2011 taxation year, e.g., seeking to apply novel techniques for exploiting graphite or nickel projects, and unsuccessfully bidding on an oil sands property and then a kerogen property, without generating any business revenue in his 2011 year.
Masse DJ nonetheless found that the taxpayer was carrying on business, stating:
… He certainly could demonstrate better business practices and I note that his record keeping leaves much to be desired but I still conclude that he conducted his activities with a level of commerciality sufficient to constitute a business. …. His ventures have seen prior successes and he … is continuing to pursue similar opportunities in hopes of repeating his prior success.
Although the taxpayer’s expenses were only documented in his spreadsheets (he did not provide any invoices, receipts etc.), Masse DJ allowed a significant portion of the claimed expenses – but disallowed others, for example, only allowing the expenses of the taxpayer’s cell phone but not his two land lines (stating that “it is more reasonable to dedicate one telephone … for business use.”)
Neal Armstrong. Summary of Larkin v. The Queen, 2020 TCC 98 under s. 3 – business source/reasonable expectation of profit.
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in February, 2010. Their descriptors and links appear below.
These are additions to our set of 1,262 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/2 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 September.
CRA increases the presumptively reasonable overtime or travel meal allowance from $17 to $23
CRA today announced that it:
has increased the amount that employers can use to determine whether an overtime meal or allowance, or the meal portion of a travel allowance is taxable, from $17 to $23. The CRA has also increased the rate at which transport employees and other individuals can claim meal expenses, using the simplified method (a flat rate per person), from $17 to $23 per meal. These increases are effective immediately and retroactive to January 1, 2020.
Neal Armstrong. Summary of “Canada Revenue Agency increases flat rate amount for meal claims, and reasonable amount for meal benefits and allowances” 3 September 2020 CRA Press Release under s. 6(1)(b)(vii).
Mamdani Family Trust – Tax Court of Canada finds that a taxable dividend was to be valued at its pre-tax amount for s. 160 purposes
An inter vivos family trust received over $3.5 million in taxable dividends from a wholly-owned Canadian private corporation (“Global”) at times that Global had unpaid income tax liabilities. The Trust unsuccessfully submitted that “the amount of income tax payable by the transferee” should be taken into account for the purposes of valuing the amount of such dividends for s. 160(1)(e)(i) purposes.
Sommerfeldt J indicated that he was bound to reject this argument by Gilbert, which had found that, for s. 160(1) purposes, where the transferred property is a dividend, the amount transferred is “the amount that the Minister could have seized in the hands of the corporation had the transfer not been effected” and that the tax consequences of the dividend to the transferee were irrelevant. He went on to indicate that, even in the absence of Gilbert, he would not have been convinced by the evidence of the taxpayer’s valuation expert given inter alia that “if a corporation has declared a dividend, the dividend belongs to the holder of the share on which the dividend was declared, such that the corporation is not in a position to sell that dividend to someone else” – so that the usual test of what the property could sell for was simply inapplicable.
Neal Armstrong. Summary of Mamdani Family Trust v. The Queen, 2020 TCC 93 under s. 160(1)(e)(i).
CRA clarifies that solely future-looking employee incentive plans can still result in annual SDA assessments
In a companion I7 memo to 2020-0850281I7 discussed in the previous post, the Directorate made a number of comments to clarify that prior statements did not indicate “that solely forward-looking or future-orientated incentive plans with certain characteristics are not salary deferral arrangements (‘SDAs’)”:
- Prior statements “made strictly in the context of ATR-45 SAR Plans” should not be “misconstrued as implying that a right to receive an amount after the end of a particular year is not created until the units of any given incentive plan are exercisable… .”
- A determination at any year end as to whether the rights of a plan participant give rise to a SDA turns on whether (i) the employee has a right to a deferred amount (which may be the case even for an ATR-45 SAR plan); and (ii) the tax-deferral purpose test referenced in the SDA definition is met (which generally is not considered to be the case for an ATR-45 SAR plan, and is a question of fact for other plans).
- Respecting (i), “it is possible for a right to a deferred amount to arise under an incentive plan even before the units of that plan are exercisable” – and the “fact that the value of the units of an incentive plan is subject to change prior to the occurrence of a triggering event does not … in and of itself, give rise to an indeterminable amount before the occurrence of the triggering event” so as to preclude a preliminary deferred amount being determined at a year end before the triggering event.
- “The fact that units in other types of incentive plans have no intrinsic value when granted is not a sufficient basis to conclude that the plan is not a SDA at inception, nor to conclude that the plan need not be tested on an annual basis.”
Neal Armstrong. Summary of 10 July 2020 Internal T.I. 2020-0841961I7 under s. 248(1) – SDA.
CRA will no longer issue SDA rulings on formula-based incentive plans for employees
CRA got cold feet about ruling that formula-based incentive plans are not salary deferral arrangements after considering, and rejecting, a proposed plan under whose units’ value on their redemption date would be based on changes in EmployerCo’s retained earnings between the grant and redemption date plus dividends paid over the same period – so that the units’ value would have increased over the duration of the vesting period even if EmployerCo’s net earnings remained stable over the period (as had been the case in prior years).
The Directorate explained that it has now developed a concern “that the financial metrics that underlie formula-based appreciation plans may be susceptible to manipulation … [which] can be used to obfuscate the fact that a formula-based appreciation plan’s underlying purpose is to defer tax,” and in that regard has announced: that it:
will no longer consider any ruling requests pertaining to whether any given formula-based appreciation plan is a SDA, unless:
i) the plan is of a type described in ATR-45 …; or
ii) the ruling request pertains to whether one of the enumerated exceptions listed in the definition of SDA apply to the plan.
… [S]hare appreciation rights (“SAR”) plans … described in ATR-45 … [have] the following characteristics:
- The unit has no intrinsic value at the date of grant;
- The value of a unit is not guaranteed and may have a negative value after the date of grant; and
- The value of each unit at any particular time is determined by subtracting the FMV of a share of the employer at the date of grant from the FMV of a share of the employer at that particular time.
… [O]ur decision to no longer consider ruling requests for formula-based appreciation plans does not mean that the CRA now considers all such plans to be SDAs.
Neal Armstrong. Summary of 10 July 2020 Internal T.I. 2020-0850281I7 under s. 248(1) – SDA.