News of Note
CRA may consider that gratuitous COVID-alleviation payments to a contractual counterparty are excluded from the latter’s qualifying revenues
Email this ContentThe 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.
Fazal – Tax Court of Canada apparently finds that an individual’s dissolution of a proprietorship terminated her GST/HST registrant status
An individual carried on a proprietorship, which was registered for GST/HST purposes, and shortly thereafter incorporated that proprietorship, with the corporation receiving a fresh GST/HST registration. The business was unsuccessful, and the corporation was dissolved, and she began to carry on a fresh and quite separate business, as a proprietorship. Although in the initial three years, her annual sales came under the small supplier threshold of $30,000, CRA nonetheless ultimately assessed those years on the basis that she (personally) was still registered. (Under ETA s. 166, a small supplier must not be a registrant in order to be excluded.)
Fournier DJ vacated those assessments. Although his reasoning is somewhat unclear, it appears that he considered that because the previous proprietorship was dissolved, therefore she was no longer a registrant because the proprietorship respecting which she had registered no longer existed. This was a bit like him according a proprietorship separate person status for these purposes. He also suggested that CRA exercise “clemency” respecting a year in which she exceeded the $30,000 threshold by only $250.
Neal Armstrong. Summary of Fazal v. The Queen, 2020 TCC 137 under ETA s. 148(1).
We have translated 6 more CRA Interpretations
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretation released in July, 2009. Their descriptors and links appear below.
These are additions to our set of 1,350 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
3412229 Canada – Federal Court confirms various exemptions from Access to Information claimed by CRA
The applicants, who were awarded damages in Ludmer regarding CRA’s conduct of its audit of their investments in an off-shore company and who had been denied full access to 8,041 out of 38,090 pages of documents that had been identified as covered by their requests under s. 6 of the Access to Information Act (“ATIA”), sought judicial review under s. 41 of the ATIA of CRA’s decision to exempt various of such documents from disclosure. In the course of dismissing their application for expanded disclosure, Bell J made a number of comments on the scope of various provisions in the ATIA exempting CRA from disclosure obligations:
- Regarding the prohibition in ATIA s. 13 against disclosure of any record obtained in confidence from a foreign government, any information obtained by the CRA pursuant to the Tax Information Exchange Agreement with Bermuda was to be treated as confidential, not just information that CRA could demonstrate had been communicated in confidence.
- The prohibition in ATIA s. 16(1)(b) of disclosure of “information relating to investigative techniques or plans for specific lawful investigations” applied to preclude disclosure of “audit techniques used by the CRA to identify or guide its auditors in applying s. 94.1 … or a risk assessment tool used to evaluate and manage the risks of an ongoing audit.”
- The names of Bermuda individuals with whom CRA had spoken were protected “personal information” under ATIA s. 19.
- Bell J agreed with a previous judicial statement that “most internal [government] documents that analyse a problem, starting with an initial identification of a problem, then canvassing a range of solutions, and ending with specific recommendations for change, are likely to be caught within [the disclosure prohibition in] paragraph (a) or (b) of subsection 21(1)”.
- He also applied the finding in Slattery that the prohibition in ATIA s. 24(1) against the disclosure of personal information is mandatory.
Neal Armstrong. Summaries of 3412229 Canada Inc. v. Canada (Revenue Agency), 2020 FC 1156 under ATIA s. 13(1)(a), s. 16(1)(b), s. 19(1), s. 21(1) and s. 24(1).
CRA indicates that the principal place of performance test for the employee home office deduction need only be satisfied during COVID for part of the year
In its revised webpage dealing with home office expenses for employees, CRA indicates that employees can opt, for their 2020 year, to use a “flat rate method” for computing their s. 8(13) home office deduction in lieu of using the regular “detailed” method. Under this temporary method, they can claim $2 per day worked from home because of COVID (subject to a 4 week minimum) up to $400 maximum (i.e., 200 working days). The principal advantages are simplicity: no need to calculate the size of the work space or keep supporting documents, and no need for the employer to complete Form T2200S or Form T2200. In addition, multiple employed individuals living in the same home (e.g., two spouses and their stay-at-home child) can each claim the $400.
CRA also provides guidance on the application of the “detailed” s. 8(13) deduction method in the COVID context. S. 8(13)(a)(i) in most circumstances requires that the mooted home office be “the place where the individual principally performs the duties of the … employment.” CRA informs the employee that such individual will meet this test if:
- you worked from home in 2020 due to the COVID-19 pandemic or your employer required you to work from home
- you worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020
In other words, the “principally” test does not have to be satisfied over the whole year (e.g., for over 50% of the working days in the year) and instead need only be satisfied for a continuous 4-week period. This might also inform the meaning of “the individual’s principal place of business” in s. 18(12)(a)(i), although CRA does not extend its commentary to that provision.
CRA further indicates that it will accept an electronic signature on the Form T2200S and Form T2200 (but only for the 2020 taxation year), and that it “has expanded the list of eligible expenses that can be claimed to include home internet access fees” (presumably, including after 2020).
No one is expecting the pandemic to end on January 1, so that CRA doubtless will be asked whether various of these positions will apply in 2021.
Neal Armstrong. Summary of CRA webpage on “Home office expenses for employees” (Date modified: 2020-12-15) under s. 8(13).
CRA finds that the QSBC character of capital gains, including previous years’ reserves, can be flowed out in a 2-tier trust structure
Q.17 of the 2020 STEP Roundtable (2020-0837001C6) reversed 2016-0667361E5 and found that (with the proper designations at both levels under ss. 104(21) and (21.2),) taxable capital gains realized by a lower-tier personal trust from the disposition of qualified small business corporation (QSBC) shares could retain their character as such when distributed to personal trusts that were its beneficiaries which, in turn and in the same year, distributed those gains to their individual beneficiaries.
The Rulings Directorate has now published the internal technical interpretation on which Q.17 is based. The facts are somewhat more elaborate. (The capital gains were recognized over two years as a result of the lower-tier trust claiming a capital gains reserve, and the upper-tier trusts also realized other capital gains which also were distributed.) However, the answers were substantially the same.
Neal Armstrong. Summary of 13 August 2020 Internal T.I. 2019-0818301I7 F under s. 104(21.2).
Income Tax Severed Letters 16 December 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.