News of Note
Income Tax Severed Letters 5 May 2021
Email this ContentThis morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Blue Bridge – Federal Court of Appeal finds that CRA was not responsible for analyzing whether information requested by France could be used contrary to the French Treaty
Art. 26(1) of the Canada-France Convention provides for exchanges of “such information as is foreseeably relevant … to the administration or enforcement of the domestic laws concerning taxes of every kind … imposed on behalf of the Contracting States, insofar as the taxation thereunder is not contrary to the Convention.”
CRA issued requests for information (RFIs) to the appellant (“Blue Bridge”), which was the trustee of some trusts, as a result of a request made by the French tax authorities pursuant to Art. 26 for various particulars regarding the trusts, including the identity of the beneficiaries and financial information.
Blue Bridge argued that it was the Minister’s responsibility to ensure that the “taxation … not contrary to the Convention” condition in Art. 26 was met before transmitting the requested information to France, whereas here, France was seeking to impose tax under a French wealth-tax statute which attributed all foreign trust assets to a French settlor or beneficiary in order to subject them to the tax, which in its view raised the possibility of the information being used to levy tax contrary to the Convention.
In rejecting this argument, Rivoalen JA determined that the Federal Court did not have expert evidence of French law so as to be able to conclusively address this argument, and that this argument was based on facts that had not been verified, and could not be verified at this stage, by the Minister. She stated:
The judge rightly concluded that a requirement for thorough research and analysis of the facts and the law of the requesting State would impede the proper and effective operation of the Convention’s provisions … .
She concluded that the Federal Court had not erred in finding that the requirements for issuing a compliance order under ITA s. 231.7(1) had been met.
Neal Armstrong. Summary of Société de fiducie Blue Bridge Inc. v. Canada (National Revenue), 2021 CAF 62 under Treaties – Income Tax Conventions – Art. 27.
Gervais Auto – Quebec Court of Appeal finds that 10% interest on unsecured loans from shareholders was not unreasonable
The taxpayer financed its inventory of used automobiles held for resale through unsecured loans from the family Holdcos that were its shareholders. When the ARQ reviewed the deductibility of the loan interest of 10% p.a., the taxpayer provided a very brief letter from Desjardins stating that for an unsecured “cash flow” loan the interest rate in 2015 would fall in the range of 9% to 12%, and then a more detailed letter from its accountants (Deloitte) that, based on Moody’s metrics, concluded that an interest rate for such loans should fall in the range of 7.89% to 12.39%. The ARQ reassessed to deny the claimed interest in excess of 7.89%, having regard to the Quebec equivalent of ITA s. 67 (TA s. 420).
Before reversing the decision below to confirm these reassessments, the Court of Appeal stated (at para. 13, TaxInterpretations translation):
The appellant was not required to make out a prima facie case that the 7.89% rate was unreasonable but, rather, that the assumption, on which the respondent relied in assessing it, that the 10% interest rate deducted from its income for the taxation years in issue was not "reasonable in the circumstances," … was prima facie … unsound.
Since the 10% rate actually used fell within what the above evidence indicated was a reasonable range, such a prima facie case had been established – so that the onus shifted to the ARQ, which had “failed to demonstrate by a preponderance of the evidence that the 10% interest rate was unreasonable within the meaning of TA section 420.”
Neal Armstrong. Summaries of Gervais Auto Inc. v. Agence du revenu du Québec, 2021 QCCA 459 under s. 20(1)(c) and General Concepts – Onus.
Our translations of CRA Interpretations go back over 13 years
We have published a further 10 translations of CRA interpretation released in May and April, 2008. Their descriptors and links appear below.
These are additions to our set of 1,516 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 13 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 May.
Zeifmans LLP – Federal Court finds that an RFI issued to an accounting firm re named clients could extend to unnamed offshore entities if the latter were not being audited
An accounting firm (Zeifmans) unsuccessfully argued that the Minister should have sought prior judicial authorization under s. 231.2(3) of a requirement to provide information (RFI) issued in the course of a CRA audit of three related resident individuals (the “Named Persons”) who were Zeifman clients. The RFI (which was issued after various attempts by CRA to obtain the information directly from the Named Persons and from the records of Canadian banks) set out a long and detailed list of required information and documents in relation to the Named Persons and all “entities owned, operated, controlled or otherwise connected to [such] individuals” (the “Unnamed Persons.”)
In responding to this argument, Walker J first stated the principle:
If a Canadian taxpayer organizes their affairs through corporate or other entities, the CRA is entitled to obtain information related to those entities for the purpose of auditing and verifying the taxpayer’s compliance with the ITA. If the entities’ books and records are placed in the possession of third parties, the Minister is entitled to require the third party to provide the information requested if the unnamed persons are not subject to audit. The information is required to verify the compliance of the taxpayer being audited and no application for judicial authorization is required … . [emphasis added]
In rejecting the argument, she then stated:
There is no evidence in the record that the Unnamed Persons are a current investigation target. I find that the possibility that one or more of the Unnamed Persons may be subject to audit in the future is not sufficient to require judicial authorization for the RFI and the Minister’s reliance on subsection 231.2(1) was justified.
In also rejecting an argument that the RFI had not been issued to a “person” as required by s. 231.2(1) because it was issued to a partnership (Zeifmans), she stated that “the effect of subsection 244(20) is that the RFI was addressed to each partner for purposes of the ITA.”
Neal Armstrong. Summaries of Zeifmans LLP v. Canada (National Revenue), 2021 FC 363 under s. 231.2(1) and s. 244(20).
CRA indicates that Fraser International (re a university not needing to grant degrees regarding a college that is to be affiliated for GST/HST) will be followed on materially similar facts
Fraser International held that a private college was “affiliated” with a university, and hence itself qualified as a “university”, even though the parent organization (Simon Fraser University) did not grant degrees to graduates of that college. When it was pointed out that this was contrary to the CRA position in its recently-released Memorandum 20-3 (which required such degree-granting), CRA stated that this was an oversight, it was in the course of revising the relevant portion of the Memorandum and that “[i]n the interim, where the facts in a case are materially similar to the facts in Fraser, the CRA will consider the organization to be a university for GST/HST purposes.”
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.22 under ETA s. 123(1) – university.
CRA is examining whether a server used in cryptocurrency mining is a PE
P-208R essentially encapsulates an OECD view that a server in which core functions of a non-resident entity are carried out can constitute a permanent establishment of that entity. CRA stated:
The CRA currently has a couple of ruling requests that involve cryptocurrency mining, and is currently reviewing whether a non-resident miner with servers in Canada would be considered to have a permanent establishment in Canada by virtue of the mining activities that are carried on through those servers.
Although this response was given in a GST/HST context, the same issue would arise regarding the application of income tax conventions.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.21 under ETA s. 123(1) – permanent establishment.
CRA declines to expand an exception from Reg. 105 withholding for reimbursing expenses of non-resident subcontractors
Canco entered into a contract (“Initial Contract”) with a non-resident corporation (“NR”) for the supply and installation of boilers in Canada. Prior to the completion of the services, and in light of the financial difficulties of NR, Canco and NR entered into “Payment Agreements” under which Canco provided payments to NR, in respect of the contract for service in Canada, performed by the non-resident subcontractors of NR, with such funds placed into dedicated bank accounts and paid to the subcontractors upon the authorization of both NR and Canco.
CRA found that such payments were subject to Reg. 105 withholding, stating:
If NR subcontracts its obligations under the Initial Contract rather than performing them directly and the amounts are ultimately paid by NR to subcontractors, that does not alter the fact that Canco is required to pay NR for services in Canada under the terms of the contracts and the Payment Agreements.
It noted that Weyerhaeuser found that Reg. 105 withholding is required only from those payments “having the character of remuneration for services rendered in Canada,” and that reimbursement of expenses of the subcontractor would not be subject to Reg. 105 withholding - but the payments here did not fit within that exception, i.e., they satisfied Canco’s obligation to NR under a contract for the performance of services in Canada.
Neal Armstrong. Summary of 16 October 2020 Internal T.I. 2019-0823641I7 under Reg. 105(1).
CRA indicates that a nominee potentially could qualify as an operator for purposes of the GST JV election if it also has a “marginal” beneficial ownership interest
Until CRA announced that it would start challenging such arrangements, it was somewhat common for nominee corporations to be designated as operators under an ETA s. 273 JV election for a real estate co-ownership. Can the CRA position be addressed by providing that the nominee will also have a marginal interest (e.g. 0.001%) in the joint venture?
CRA responded that although it is “a question of fact whether such an arrangement is a joint venture at law,” a “corporation with a marginal financial contribution to a joint venture in exchange for a co-ownership interest and proportionate share of profit (or losses) as well as other necessary attributes may be a ‘participant’ as defined in paragraph (a) of … P-106 … .
It went on to indicate that the earning by the corporation of “its own income brings into question whether the corporation is a nominee corporation; in other words, whether the nominee corporation is a trustee of a bare trust.” (This latter point presumably is pointing only to the need for clear documentation that the nominee is holding, except as to the marginal interest, as nominee and agent.)
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.20 under ETA s. 273(1).
CRA finds that the purchase price of a business allocated to the actuarial surplus for a defined benefit plan was a non-deductible capital expenditure
A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan.
Although, in fact, the acquisition occurred before 2017, the Rulings Directorate also addressed what would have happened on a post-2016 acquisition, and concluded that the amount allocated to the actuarial surplus would not have qualified as the cost of a Class 14.1 property, and instead would have been a non-deductible capital expenditure. Its findings towards this conclusion were:
- Having regard for the exclusion for an amount that is not deductible by virtue of a specific provision other than s. 18(1)(b), such amount was excluded by s. 18(1)(e), which prohibited the deduction for a reserve (“described by the courts as something set aside that can be relied upon for future use”) given that “any actuarial surplus in this case can be applied as a contribution holiday to relieve the Purchaser from its future contribution obligations.”
- Furthermore, the exclusion under s. 78(4) would also apply because it prohibits the deduction of an amount for pension benefits which will be paid more than six months after the current taxation year, including (in this context) the use of surplus to cover the employer’s current service costs.
- The exclusion for “an amount that is the cost of … an interest in a trust” also applied since the Purchaser acquired an equitable interest in the Plan, i.e., it could potentially take a contribution holiday, receive a return of contributions on a winding-up of the Plan, and potentially receive the surplus in other circumstances.
- Regarding the specific inclusion in Class 14.1 of “goodwill,” this was defined in TransAlta as “an unidentified intangible asset,” whereas the surplus here instead was specifically identifiable and “[u]nlike goodwill … can be separated from the employer’s business if, as in this case, the plan terms permit surplus to be returned to the employer when the appropriate regulatory procedures are followed.”
- The surplus amount would also not be deemed goodwill under s. 13(35) because of failure of the condition in s. 13(35)(a) (it would represent the cost of a property, e.g., the right to apply actuarial surplus to contribution obligations under a defined benefit pension plan) and failure of the condition in s. 13(35)(c) (it was not otherwise deductible because of s. 18(1)(e) or 78(4)).
Neal Armstrong. Summary of 28 January 2021 Internal T.I. 2019-0817641I7 under s. 18(1)(b) – capital expenditure v. expense – actuarial surplus.