News of Note
K E Entertainments – U.K. Supreme Court finds that correcting computations of consideration for supplies did not decrease consideration for VAT purposes
Email this ContentA UK bingo club operator was subject to VAT, not on its gross sales proceeds for access to its sessions of games, but only on the net sum retained after deduction of winnings. HMRC issued a notice stating that bingo promoters who (like the taxpayer) had been calculating this net sum on a game-by-game rather than session-by-session basis, could make a claim for having overpaid VAT, which the taxpayer did. (A game-by-game calculation produced more tax because a negative net take on a game could not be deducted from the positive net take on other games.) However, it was precluded by statute from going back more than three years with its refund claims – but there was no such time limitation where a repayment of VAT was claimed based on there being “a decrease in consideration for a supply.” The taxpayer unsuccessfully argued that its change in calculating the consideration for its supplies involved a “decrease in consideration,” so that it could go back more than three years. Lord Legatt stated:
What is required … is a change in the consideration actually received by the supplier. … All that has happened is that the taxpayer has had second thoughts about how the consideration received at the time of the supply should be analysed for tax purposes.
A similar issue could arise under ETA s. 232, which provides for a potential GST/HST reduction where, after GST/HST has been charged on the consideration for a supply, “for any reason, the consideration … is subsequently reduced.”
Lord Legatt also found that it was “clear that there can be only one correct method of calculating the taxable element of fees charged to customers for playing cash bingo and … this was the session by session method and not the game by game method” (stating that there was no reason “for going behind the pricing policy adopted by the taxpayer and treating the fee charged to participate in a session of bingo as if it were a bundle of separate fees charged for the rights to play separate games”). He was pleased to find that there was only one correct method, stating:
In matters of taxation consistency of approach is of critical importance. If the same exercise of apportionment may lawfully be carried out in more than one way, the result is likely to be that different taxpayers whose situations are identical will lawfully pay different amounts of tax. That offends the principle of equal treatment. It is also capable of distorting competition between businesses.
Neal Armstrong. Summaries of The Advocate General (representing Revenue and Customs) v K E Entertainments Ltd (Scotland) [2020] UKSC 28 under ETA s. 232(2), s. 123(1), s. 141.01(5) and Statutory Interpretation - Equal Treatment.
Treaty-exempt non-resident employers may be entitled to CEWS assistance for non-resident employees only intermittently in Canada
It is suggested that, on a literal reading, a U.S. resident that was not subject to Canadian income tax by virtue of not having a permanent establishment here and that employed U.S. employees mostly in the U.S. but also on an intermittent basis (say several days a quarter) in Canada, so that it had a Canadian payroll remittance account, and that had the requisite decline in qualifying revenue, could potentially claim a CEWS wage subsidy for the full amount of its U.S. employees’ salaries during the qualifying period. Granted, amounts paid at any time by an employer to an employee at a time that the employer is a "qualifying non-resident employer" and the employee is a "qualifying non-resident employee" are excluded from “eligible remuneration” for CEWS purposes. However:
If NR Co chooses not to file an application pursuant to paragraph 153(7)(a) to be classified as a qualifying non-resident employer, or is not eligible to be considered a qualifying non-resident employer for some other reason (for example, failing to comply with the requirements of the certified non-resident employer program), it would be liable to withhold, but it would be eligible for the CEWS.
Neal Armstrong. Summary of Alex Ghani, Stan Shadrin, and Boris Volfovsky, “How Does the Canada Emergency Wage Subsidy Apply to Non-Resident Employers?,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 4 under s. 125.7(1) - eligible remuneration.
CRA rules on loss shift from public Lossco to its SFI Profitco sub through creation, drop-down and wind-up of new Lossco
CRA provided standard rulings (including provincial GAAR rulings) on proposed transactions for the transfer of losses from a public Lossco to its direct subsidiary Profitco, which was a specified financial institution. The mechanics entailed Lossco incorporating a “NewLossco” and a “Newco”, and then using proceeds of a daylight loan to fund NewLossco with an interest-bearing loan, with NewLossco subscribing for prefs of Newco and Newco making a non-interest-bearing loan back to Lossco. The dividends on the prefs were to be annually funded by Lossco pursuant to a “capital support agreement.”
Once this triangular loss-shifting arrangement was unwound (on a cashless basis), NewLossco would be dripped down into Profitco under s. 85(1), and wound up into Profitco. A representation is made that:
The Proposed Transactions are not being undertaken to refresh non-capital losses or facilitate the use of such losses in a taxation year after the taxation year in which the losses would have otherwise expired in the hands of Lossco.
The representations respecting the amounts involved not being commercially unrealistic did not seem to be especially stringent.
Neal Armstrong. Summary of 2020 Ruling 2019-0819971R3 under s. 111(1)(a).
Private Opcos should examine the passive income of their shareholders from a CEWS perspective
An affiliated group of eligible entities may all elect under s. 125.7(4)(b) for their qualifying revenue for CEWS (wage subsidy) purposes to be determined on a consolidated basis. The definition of an “eligible entity” is broader than that of a ”qualifying entity,” so that an individual controlling an Opco could jointly elect with the Opco even though the individual did not have a payroll remittance number. This could be helpful to Opco if, for example, the individual sustained a significant decrease in interest income during the testing period.
However, since the joint election must be made with all group members, the qualifying revenue of each one should be examined – for example, the passive income of the individual’s spouse.
Neal Armstrong. Summary of Martin Lee and Thanusan Raveendran “Affiliation Election for CEWS: Private Corporation Applications,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 3 under s. 125.7(4)(b).
The likely CRA policy is that COVID-19 assistance should not reduce costs for transfer-pricing purposes
TPM-17 states that where a Canadian taxpayer receives government assistance and participates in a cross-border controlled transaction, it should not share any part of that assistance with non-arm's-length non-resident persons. For example, if the policy of a Canco performing research and development in Canada for its foreign parent is to charge the parent the total cost of this work plus a 10% markup, it would appear that COVID-19 government assistance received by it should (per TPM-17) not reduce its costs for the purposes of computing this 110% charge, so that the assistance generally would increase its Canadian taxable income.
It is suggested:
Where a Canadian taxpayer plans to directly or indirectly share all or part of the COVID-19 government assistance with a non-arm's-length non-resident person by way of reducing its allocable cost or markup, it should perform an in-depth economic analysis to develop support for this approach. In other words, it should have documentation that shows that the prices charged reflect arm's-length prices … .
Neal Armstrong. Summary of Nakul Kohli, “Sharing COVID-19 Assistance with Foreign Entities Through Transfer Pricing,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 5 under s. 247(2)(a).
CRA indicates that a scheme to circumvent TOSI application to the reinvested earnings of a professional practice “technically” worked
2019-0819431E5 dealt with what appeared to be a scheme to get around the fact that shares of a professional corporation could not be “excluded shares” for purposes of the split-income (TOSI) rules (and also that spouses often are prohibited from holding voting shares of a professional corporation, as effectively required by para. (b) of the “excluded share” definition) even with respect to the investment income derived by the professional corporation from reinvestment of its earnings from the practice. A professional corporation (PC1) whose non-voting equity was held equally by a physician (Dr. A) and Spouse A (who had no involvement in the practice) applied its earnings to build up a large investment portfolio, which CRA noted very well might be an investment business. However: on December 30 of Year 1, PC1 ceased carrying on its medical services business; on December 31, Spouse A acquired 50% of Dr. A’s voting shares; and on January 1 of Year 2, Dr. A commenced carrying on the medical services business in a newly- incorporated professional corporation (PC2) with the same ownership as PC1 had prior to December 30.
CRA had found that the TOSI rules applied to dividends paid to Spouse A at the end of Year 1, but that they did not technically apply to dividends paid to Spouse A in Year 2 given that: (i) PC1 was no longer a professional or services business, and in the previous year (Year 1) it had derived less than 90% of its revenue from the medical practice (para. (a) of the excluded shares definition); (ii) Spouse A satisfied the 10% of votes-and-value test in para. (b) of that definition; and (iii) the test under para. (c) was by its terms to be applied to the results of the previous year (Year 1) and “all or substantially all of the income of PC1 is derived directly or indirectly from one or more related businesses (i.e., the medical services business and the investment business) in Year 1, and PC1 is still carrying on these businesses in Year 1.”
In a follow-up technical interpretation, CRA has now re-addressed Year 3 where, respecting the application of para. (c), it had previously stated that because “…any dividend paid by PC1 to Spouse A would be considered to be derived directly or indirectly from a 'related business' carried on by PC2 (and not PC1) in Year 2 and subsequent years,” the shares of PC1 held by Spouse A would not qualify as “excluded shares.”
CRA now acknowledges:
In the event that the income of PC1 for Year 2 and any subsequent year is income earned solely from its investment business, such income would not be considered to be derived directly or indirectly from the medical services business now carried on by PC2. This would be the case even though the historical retained earnings of PC1 that are used in PC1’s investment business were originally derived from its former medical services business. Accordingly, in those circumstances, we would consider all the conditions of the “excluded share” definition to be technically met for those years.
CRA went on to indicate that the transactions “appeared to be undertaken primarily to ensure that the shares of PC1 held by Spouse A would meet the definition of ‘excluded shares’,” and that GAAR could be engaged.
Neal Armstrong. Summary of 8 April 2020 External T.I. 2020-0839581E5 - "Excluded Shares" under s. 120.4(1) – excluded shares - (c).
CRA is not extending the June 30, 2020 deadline for GST/HST remittances and waiving late-return penalties
CRA has made an addition dated June 29, 2020 to its Webpage on Deferral of GST/HST Tax Remittances, which states:
There will not be an extension of the relief that was announced by the CRA on March 27, 2020 which allowed all businesses to defer, until June 30, 2020, any GST/HST payments or remittances that became owing on or after March 27, 2020, and before July 2020.
Businesses must therefore make these payments and remittances and file these returns by June 30, 2020. Interest will begin to apply to outstanding remittances and payments, and penalties will begin to apply to outstanding returns, effective July 1, 2020.
Businesses that are continuing to experience difficulty in making a GST/HST remittance or payment or filing a GST/HST return can contact the CRA to make a request for the cancellation or waiver of penalties and interest … .
CRA also added a section on electronic signatures, including a statement that:
[T]he CRA will be accepting electronic signatures for GST/HST documents submitted online. In particular, effective July 6, 2020, businesses will be able to use a new electronic service to submit a GST/HST document with an electronic signature.
Neal Armstrong. Summary of FAQ - Deferral of GST/HST Tax Remittances: CRA and COVID-19 20 (CRA Webpage dated 29 June 2020) under ETA s. 281.1(1).
Income Tax Severed Letters 30 June 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Cameco – Federal Court of Appeal rejects an expansive interpretation of the recharacterization rule in ss. 247(2)(b) and (d)
Cameco arranged its affairs so that long-term contracts for the purchase of uranium - that turned out to have a quite advantageous (i.e., lower-than-market) purchase price - were entered into by a Lux subsidiary, and then assigned to a Swiss sub at a time that the uranium market price was still depressed. The Crown argued that Cameco would not have entered into the transactions that it did with its two subs, with an arm’s length person, so that Cameco effectively should be treated under s. 247(2)(d) as the bargain purchaser, with the profits generated in Switzerland thus reallocated to Cameco.
Webb JA found that this submission departed from the text of s. 247(2)(b)(i), which effectively referred to transactions that would not have been entered into by any arm’s length persons (what he referred to as a “hypothetical persons” test, as contrasted to the above “subjective test” of the Crown), and noted that the effect of the Crown’s submission was that whenever a “corporation in Canada wants to carry on business in a foreign country through a foreign subsidiary, the condition in subparagraph 247(2)(b)(i) … would be satisfied” i.e., it therefore “would not sell its rights to carry on such business to an arm's length party.” He also noted that the OECD Guidelines indicated that “except in exceptional circumstances, transfer pricing arrangements should be examined based on the transactions undertaken by the parties,” i.e., except in exceptional circumstances, the term-adjustment rule in s. 247(2)(c) rather than the recharacterization rule in s. 247(2)(d), is applicable.
The Crown’s appeal was dismissed.
Neal Armstrong. Summaries of Canada v. Cameco Corporation , 2020 FCA 112 under s. 247(2)(b) and Statutory Interpretation - Marginal Notes.
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in June 2010. Their descriptors and links appear below.
These are additions to our set of 1,209 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for July.