News of Note
S. 125.7(4)(b) CEWS consolidation rule may produce odd results where there is a multinational group or where there are year-over-year changes in the affiliated group
Email this ContentS. 125.7(4)(b) provides that each member of an affiliated group of eligible entities may jointly elect so as to result in each entity using the consolidated revenues as a proxy for stand-alone qualifying revenue when calculating its eligibility for the CEWS (wage subsidy).
It is suggested that on a literal interpretation of this rule, all companies in a multinational group would be required to participate in the joint election, and that a “CEWS claimant would need to take account of the qualifying revenue of all of the corporations worldwide in order to determine whether the decrease-in-revenue threshold is met.”
A second interpretive oddity is what to do where, say, four entities meet the definition of an affiliated group in March 2020, but one of the entities was newly incorporated in 2020.
[W]ould the affiliated group be composed of the four entities, which would then calculate revenue on a consolidated basis and compare it to the consolidated revenue of the three entities that existed during the comparative [2019] period? Or would the newly incorporated entity be excluded from this calculation?
David Carolin and Manu Kakkar, “The Canada Emergency Wage Subsidy: Affiliated Group Issues,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 1 under s. 125.7(4)(b).
Restaurant Le Relais – Quebec Court of Appeal finds that the mere erroneous exercise of audit discretion did not ground damages against the ARQ/CRA
The Tax Court had been critical of the ARQ auditor for using an arbitrary alternative method for determining the sales of a Quebec restaurant company for GST/QST purposes, and allowed its appeal. The company then brought an action against the ARQ and CRA for damages.
Bélanger JCA found that the prescription period for this damages action did not start running until the Tax Court judgment, since it was only at that point that “the injury actually manifested itself” - so that the company’s action was not time-barred. However, she found that the ARQ/CRA should not be liable for damages for the improper exercise of the ARQ auditor’s discretion in choosing an inappropriate audit method, stating:
It is therefore not in all cases where discretion has not been properly exercised that the government authority can be held liable for damages. It is the abusive or unreasonable exercise of discretion, marked by bad faith or amounting to gross negligence, carelessness or serious recklessness, that may lead to holding the State liable, as contrasted to the erroneous exercise of the discretion.
Neal Armstrong. Summary of Restaurant Le Relais de Saint-Jean Inc. v. Agence du revenu du Québec, 2020 QCCA 823 under General Concepts – Negligence, fiduciary duty and fault.
Sanctuary – Court of Quebec finds that the acquisition of a secondary residence just outside Quebec was insufficient to change the taxpayer’s Quebec residence
The taxpayer, who testified that “he never developed a strong sense of belonging to Quebec” and that “his best friend … lived in Ontario,” purchased a house in Lancaster, Ontario (90 km from Montreal) in late 2012. After it was rendered habitable, he and his wife spent occasional weekends there, but continued to work full time in Montreal and to live there most of the time.
Davignon JCQ confirmed the ARQ view that the taxpayer continued to reside in Quebec for his 2012 taxation year.
Neal Armstrong. Summary of Sanctuary v. Agence du revenu du Québec, 2020 QCCQ 1903 under s. 2(1).
CRA indicates that a cooperative that provided trailer park sites together with sewerage and water services was likely making a single supply of exempt real estate
Following the refusal of the landowner of a mobile home park to upgrade the system for handling wastewater, the residents created a cooperative, which acquired the mobile home park, built an authorized sewerage system and, in exchange for rent, supplied the residents on a bundled-together basis with a site in the mobile home park, along with sewerage services, unbottled water and management services.
CRA indicated that it “seems reasonable in the circumstances” that this would be a single supply of the sites that was exempted under ETA Sched. V, Pt. I, s. 7(b), respecting the rental of sites in a “residential trailer park.” Although not mentioned, this single-supply result is strongly supported by Hidden Valley.
CRA went on to indicate that, if there were a separate supply of the sewerage services, they would not be exempted under Sched. V, Pt. VI, s. 22 or 21, given that it was a private concern that would be making such supplies. However, this private concern issue did not preclude the exemption in Sched. V, Pt. VI, s. 23 for supplies of unbottled water from being available – and, in fact, the cooperative could be designated as a municipality for purposes of obtaining rebates for its water –delivery GST/HST costs given that “supplies of unbottled water are considered to be standard municipal services.”
Neal Armstrong. Summaries of 7 August 2019 GST/HST Interpretation 197932 under ETA Sched. V, Pt. I, s. 7(b), Sched. V, Pt. VI, s. 22, s. 21 and s. 23, and ETA s. 259(1) – municipality.
CRA confirms that Pension Benefit Guaranty Corp.’s taking over a US pension plan does not affect its s. 233.2 exempt trust status
One of the exceptions from “specified foreign property,” which resident individuals generally are required to report on Form T1135, is for an exempt trust, which generally include a trust (that is tax-exempt in its country of residence) for a foreign pension plan maintained primarily for the benefit of non-resident individuals. CRA confirmed that there is no adverse impact on this exclusion for a Canadian beneficiary where, following an asset insufficiency in a US qualified pension plan, the Pension Benefit Guaranty Corporation, as replacement trustee, commences paying the plan benefits to the members (the majority of whom reside in the US).
Neal Armstrong. Summary of 4 June 2020 External T.I. 2018-0753611E5 under s. 233.2(1) – exempt foreign trust – (b).
CRA establishes 3 conditions for there to be an extraordinary item for CEWS purposes
Before concluding (in the context of provincial support payments to childcare centres to assist them during the COVID-19 pandemic) that it would “generally consider emergency government assistance … directly related to COVID-19 to be an extraordinary item,” so that such assistance would generally be excluded as an extraordinary item from “qualifying revenue” for CEWS (wage subsidy) purposes, CRA stated:
Generally, we would expect extraordinary items to meet all three of the following characteristics:
a) Not be expected to occur regularly or frequently within several years
Grants or other government assistance that an entity is eligible to receive on a regular or reoccurring basis would not meet this criteria.
b) Not typical of the normal activities or risks inherent in the normal operations of the entity …
c) Primarily out of the control of owners or management … .
Neal Armstrong. Summary of 6 May 2020 Internal T.I. 2020-0846711I7 under s. 125.7(1) – qualifying revenue – (c).
Income Tax Severed Letters 24 June 2020
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Sangha – Federal Court rejects a CRA decision for failure to contain “a coherent assessment of the relevant law and significant facts and submissions”
Mr. Sangha entered the 2017 taxation year having made excess contributions to his TFSA, but then withdrew all the funds two months before received a CRA letter (the “June 2017 Letter”) informing him of his excess 2016 TFSA contributions and warning that if he continued to make excess contributions “in the future”, he could be subject to a monthly 1% penalty tax. However, Mr. Sangha contributed $35,000 to his TFSA in September 2017 (allegedly reflecting a misunderstanding that he was not required to wait until January 2018 to make this contribution), and maintained the resulting excess contribution for almost a year.
CRA assessed penalty tax, including on the excess monthly balances in 2017 prior to the June 2017 Letter. In response to the second request of Mr. Sangha for a penalty waiver pursuant to s. 207.06(1), the delegate’s decision relevantly only referred to the fact that Mr. Sangha had over-contributed following the warning.
Before allowing the application and returning the matter for reconsideration by another delegate, Walker J found that the letter thus had failed to address material issues including (i) the fact that the assessments effectively were retroactive to before the second overcontribution notwithstanding the wording of the June 2017 Letter (which given the emphasis of Mr. Sangha on this issue in his review application, was by itself “a determinative error”), and (ii) Mr. Sangha’s submission that the timing of his second overcontribution was a “reasonable error” (i.e., ignoring an issue specifically raised in s. 207.06(1).)
She concluded, applying Vavilov:
I find that the Decision does not reflect a coherent assessment of the relevant law and significant facts and submissions from the record and that the Minister’s refusal to exercise their discretion was not intelligible or justified.
Neal Armstrong. Summary of Sangha v. Canada (Attorney General), 2020 FC 712 under s. 207.06(1).
Northview Apartment REIT intends to effect a tax-deferred spin-off using the s. 107.4 rollover [corrected]
It is proposed that the unitholders of Northview Apartment REIT receive mostly cash from Starlight and KingSett funds for their REIT units. However, the purchasing funds will not end up with all the assets of the REIT. The two purchasers will acquire a portion of the assets after they have been suitably packaged into partnerships, with the REIT intending to push out the resulting capital gains (presumably with an eye on avoiding issues under s. 132(5.3)) using the capital gains refund mechanism.
Furthermore, some of the real estate will have first been packaged into a “High Yield Fund,” that is intended to qualify as a REIT and that effectively will be distributed to those unitholders who are interested in receiving units of that fund in lieu of full cash proceeds for their units. This will be accomplished by the REIT settling the new unit trust (the High Yield Fund) with $1,000 in cash, distributing $1,000 of cash to the REIT unitholders, selling its units of the High Yield Fund to the REIT unitholders for $1,000 in cash, and then effecting a s. 107.4 transfer of a holding LP for the real estate in question from it to the High Yield Fund. Those unitholders who have elected to receive only cash then will have their High Yield Fund units redeemed for $7.06875 per unit, in addition to having their REIT units redeemed for $29.18125 per unit. Those who want to retain the High Yield Fund units will not have those units redeemed, so that they only receive cash for their REIT units – and in effect receive their High Yield Fund units on a tax-deferred basis.
The High Yield Fund will need cash to accomplish the above. It is expected to complete the Offering, of up to $430,000,000 of units concurrently with the completion of the (Alberta) Arrangement.
Full Pt. XIII.2 tax will be withheld from the redemption proceeds paid to non-resident unitholders.
Neal Armstrong. Summary of Northview Apartment REIT Circular under Mergers & Acquisitions – REIT/Income Fund /LP Acquisitions – LP Acquisitions of Trusts.
We have translated over 1200 CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in June 2010. Their descriptors and links appear below.
These are additions to our set of 1,204 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.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2020-06-17 | 2 June 2020 External T.I. 2020-0847081E5 F - Compte de frais médicaux – période de report | Income Tax Act - Section 248 - Subsection 248(1) - Private Health Services Plan | during COVID-19, unused HCSA credits can be carried forward for up to an additional 6 months |
| 2010-06-25 | 11 June 2010 External T.I. 2010-0354881E5 F - Traitement fiscal de la FNACC | Income Tax Act - Section 20 - Subsection 20(16) | ceasing to use a class of depreciable property to generate income results in a terminal loss under ss. 45(1)(a) and 20(16) |
| Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) | application of s. 45(1)(a) to film production that ceased to generate income, resulting in a terminal loss under s. 20(16) | ||
| 2 June 2010 External T.I. 2010-0354951E5 F - Bien de remplacement-disp. involontaire | Income Tax Act - Section 44 - Subsection 44(5) - Paragraph 44(5)(a.1) | rental building did not qualify as a replacement property to an expropriated parking lot because of different physical attributes | |
| 2010-06-18 | 7 June 2010 External T.I. 2009-0331731E5 F - CII et crédit de taxe sur le capital du Québec | Income Tax Act - Section 13 - Subsection 13(7.2) | Quebec ITCs or capital tax credits reduce the LP’s UCC at end of its October 31 fiscal period following the calendar year in which its partners claimed those credits |
| 4 June 2010 External T.I. 2009-0324801E5 F - catégorie 43 | Income Tax Regulations - Schedules - Schedule II - Class 43 | potential inclusion of moulds and cranes, but not forklift truck | |
| 9 June 2010 External T.I. 2009-0342081E5 F - Associé déterminé | Income Tax Act - Section 248 - Subsection 248(1) - Specified Member | trust member of partnership can be actively engaged through the activities of its trustee | |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(1) | s. 104(1) imputes the activities of the trustee to the trust for “specified member” purposes |