News of Note
CRA is considering whether a GST/HST waiver can be restricted to a specific issue
Email this ContentETA s. 298(7) provides that a person may waive the application of the time limits for being assessed in respect of a “matter” specified in a waiver made by it. CRA is mulling over whether, in the context, for example, of a CRA audit of taxable and exempt supplies made by a registered supplier, it should take the position that, since any assessment made by it would be only for the registrant’s global net tax number, therefore it would not be permissible for the supplier to limit a waiver to whether a particular supply was exempt or taxable – instead, the “matter” at issue must be regarded as the entire net tax calculation for the reporting period.
A similar spurious issue could be (but has not so far been) raised on the income tax side, given that a Part I tax assessment is for a single Part I tax number.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.14 under ETA s. 298(7).
Income Tax Severed Letters 21 April 2021
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Allegro Wireless – Tax Court of Canada finds that software development qualified as SR&ED
Somewhat unusually, the development of software was found to be SR&ED. The taxpayer, which provided a software platform to its clients that permitted their workers to access the client systems through handheld devices, faced significant technological challenges in identifying ways to permit this to occur consistently. D’Arcy J stated:
I have concluded that when the Appellant conducted the projects at issue, it formulated hypotheses specifically aimed at reducing the identified technological uncertainty, followed appropriate procedures on testing, including the formulation, testing, and modification of hypotheses, and maintained a detailed record of the hypotheses tested and results achieved as the work progressed.
It also did not hurt that the projects “were the same or similar to projects in respect of which the Appellant received grants from the National Research Council of Canada.”
Neal Armstrong. Summary of Allegro Wireless Canada Inc. v. The Queen, 2021 TCC 27 under s. 248(1) - SR&ED.
CRA indicates that registrants generally have a right for communications with the ARQ on GST issues to be in English
CRA indicated that, based on the terms of an intergovernmental agreement, a registrant that is headquartered in Quebec and is dealing with the ARQ on a GST issue, generally has the same rights for the communications to be in English as if it were dealing with CRA.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.13 under ETA s. 296(1).
Tiessen Interior Design – Tax Court of Canada applies s. 256(2.1) to prevent a professional firm from multiplying the small business deduction
An incorporated firm of architects and interior designers restructured. Their practice was now carried on by a partnership between “Partnercos” owned by each of the principals. The principals were now exclusively employed by respective Servicecos controlled by them, which provided their services to the respective “paired” Partnerco for fees. These fees were deemed to be business income under s. 129(6). In their tax filings, each Serviceco treated itself as not being required to share the business limit with any other Serviceco - or with any Partnerco other than its paired Partnerco. As a result, the aggregate business limit claimed by the 15 Servicecos for their taxation years ending on January 1, 2013 was $4.6 million. CRA assessed on the basis that the Servicecos and Partnercos were associated with each other under the “one of the main reasons” test in s. 256(2.1), so that this multiplication of the business limit for small business deduction purposes was nullified.
Monaghan J confirmed these assessments (partly in light of a non-privileged presentation and spreadsheet provided at the planning stages by the tax advisor), stating:
Multiplication of the SBD was the reason the Reorganization was proposed and the resulting tax savings presented to the Principals led to the decision to undertake the Reorganization. Most of the reasons advanced by the Appellants for reorganizing were not convincing as main reasons. … They constitute benefits that the Principals enjoyed, to varying degrees, as a result of the Reorganization, but I have no doubt reduction of taxes was one of the main reasons for it.
Neal Armstrong. Summary of Nicole L. Tiessen Interior Design Ltd. v. The Queen, 2021 TCC 29 under s. 256(2.1).
CRA refers to an “ongoing review” of what is a participant in a JV for GST purposes
Medallion expanded the concept of a “participant” beyond CRA’s administrative definition of that term, by characterizing a person who contributed services to the joint venture to be a “participant” in the joint venture. P-106 only includes a person who has contributed property to the joint venture, or a person with no financial interest, who is responsible for the managerial or operational control of the joint venture.
When asked whether it has completed its review of Medallion, CRA stated:
Whether the Court’s decision in Medallion …would apply to another situation would require examination of all the relevant facts and documents. As part of our ongoing review of the policy, we will continue to consider similar cases as they arise.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.12 under ETA s. 273(1).
We have translated 13 more CRA Interpretations
We have published translations of 3 interpretations released by CRA last week from the APFF Roundtable, and a further 10 translations of CRA interpretation released back to July 2008. Their descriptors and links appear below.
These are additions to our set of 1,496 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 3/4 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Nonis – Tax Court of Canada finds that a U.S. resident avoided Canadian tax on employment income from a Canadian employer when he ceased performing active duties
The taxpayer, Mr. Nonis, who was a U.S. resident, had been employed as the general manager of the Toronto Maple Leafs pursuant to an employment contract entered into in 2013. For his 2013 and 2014 taxation years, Mr. Nonis included in his Canadian returns a pro-rated portion of his employment remuneration based on the number of days spent in Canada performing services to earn such income, and this was accepted by CRA. On April 12, 2015, his employer notified him that no further active services were required of him in order to fulfill his contract, and Mr. Nonis returned permanently to the U.S. However, under his contract, he continued to be entitled to remuneration for a number of years thereafter. In filing his returns for 2015 and 2016, Mr. Nonis used the same proration formula based on his days of service in Canada: 37 days for 2015; and zero days for 2016. The Minister reassessed Mr. Nonis on the basis of using the days of service that had been accepted for 2013 and 2014.
After finding that Mr. Nonis continued to be an employee after his “termination” (albeit, with virtually non-existent duties), Bocock applied the principle that, under “paragraph 4(1)(b) of the Act, if a taxpayer works partly in Canada and partly in another country in the same taxation year, the taxpayer’s taxable Canadian income for the year is the amount earned while working physically in Canada” – so that Mr. Nonis’ reporting based on the 37 and 0 days of service in Canada was correct.
The Crown advanced s. 115(2)(c.1). Bocock found that s. 115(2)(c.1)(i) essentially dealt with signing bonuses received by non-residents regarding pending Canadian employment, and that s. 115(2)(c.1)(ii), which refers to “remuneration … for services to be performed in Canada” was there to prevent avoidance “where a signing bonus is represented as something else.”
Mr. Nonis’ appeal was allowed.
Neal Armstrong. Summary of Nonis v. The Queen, 2021 TCC 31 under s. 115(2)(c.1)(ii).
CRA indicates that the purchase of future contingent royalty payments is subject to GST/HST
Similarly to Ruling 162056, CRA found that the purchase in Canada by a financial institution of the rights of a research company to royalties that the latter expected to receive (but with no guarantee) pursuant to a Royalty Agreement with a drug manufacturer represented the purchase of contingent rights rather than of existing receivables, so that such sale would be subject to GST/HST rather than being an exempt supply of a “debt security.” However, if there were guaranteed minimum payments for the purchased future receivables, they would qualify as debt securities, so that their sale would instead be an exempt financial service.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.11 under ETA s. 123(1) – debt security.
CRA finds that s. 104(13), unlike s. 104(19), can apply contemporaneously with a trust dividend distribution, and that ss. 186(2) and 251(1)(b) can apply synergistically
A personal trust wholly-owns Opco, which also has a December 31 year end, and has a corporate beneficiary ("Holdco") with a September 30 taxation year end. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to the Trust, which immediately on-pays that amount to Holdco.
CRA reiterated previous positions (most recently, in 2018-0757591I7 F and 2020-0839891C6) that a s. 104(19) designation by a trust cannot be effective until the trust’s year end. Accordingly, if by the effective time of the deemed dividend payment as a result of the designation (December 31, 20X1), the above trust had disposed of Opco to a third party, whether Opco was connected for Pt. IV tax purposes would be tested at that time, so that there would be no exemption from Pt. IV tax under s. 186(1)(a).
However, a similar timing issue would not arise if, for some reason, Holdco ceased, after the receipt by it of the $5,000 from the Trust (September 20, 20X1) and before the trust year end (December 31, 20X1), to be a trust beneficiary, but with Opco continuing to be connected on December 31, 20X1 with Holdco pursuant to s. 186(4)(a) by virtue of common control as described in s. 186(2). CRA stated:
[A] taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13),”
[S]ince Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.
The question addressed by CRA was premised on Opco initially being connected with Holdco under ss. 186(4)(a) and 186(2) on the basis that Holdco was controlled by a person (X) who did not deal at arm's length with the person who controlled Opco. CRA indicated that there would be no effect on Holdco's liability for Pt. IV tax if Holdco, while continuing as a beneficiary of the trust, ceased to be controlled by X. The reason: the trust and Holdco were deemed not to deal with each other at arm's length by virtue of s. 251(1)(b), so that (under the control test in s. 186(2)) more than 50% of the fully-voting Opco shares belonged to a person (the Trust), which did not deal at arm's length with Holdco.
Neal Armstrong. Summaries of 7 October 2020 APFF Roundtable Q. 17, 2020-0845821C6 F under s. 104(19), s. 104(24) and s. 186(2).