News of Note
632738 Alberta – Federal Court of Appeal finds that the determination of the scope of an ambiguously-worded waiver should be made at trial, not under Rule 58
Email this ContentCRA presented the taxpayer with a form of waiver that adequately referenced the issue as being how much partnership income was to be allocated to the taxpayer. Before signing the waiver, the taxpayer introduced some language that described the issue as being one of the application of s. 103 to the income of the taxpayer, not from the partnership X of which the taxpayer was a member, but from partnership Y of which partnership X was the predominant member and the taxpayer was not a direct member. The taxpayer subsequently brought an application for a Rule 58 determination that the reassessment by CRA, to apply s. 103 to it to increase its income from partnership X by $78 million, was not within the scope of the waiver.
In confirming the Tax Court’s finding that the scope of the waiver was not an appropriate issue for a Rule 58 determination and that such issue was best left to a regular trial, Woods JA indicated inter alia that it was not inappropriate of the Tax Court to consider that the Crown should have an opportunity at a trial to introduce evidence of the factual circumstances surrounding the waiver.
Neal Armstrong. Summary of 632738 Alberta Ltd. v. Canada, 2021 FCA 43 under Rule 58(2).
Maskell – Tax Court of Canada suggests that “substantially completed” might refer to 90% or less
The deadline for the taxpayer to have made his GST/HST New Housing Rebate application turned on when his project of substantially renovating a house he had acquired in dilapidated condition was “substantially completed.” Russell J stated:
There is no definition in the Act of the phrase “substantially completed”. Administratively the Minister considers the term "substantially" as denoting at least 90%. There is jurisprudence suggesting it could mean somewhat less than 90%. Giving the Appellant the benefit of any doubt I will consider the term as indicating no less than 90%.
Russell J then found that, even applying the higher 90% threshold favoured by CRA, the taxpayer’s project was substantially completed more than two years before he made his rebate application – so that it was correctly denied.
Neal Armstrong. Summary of Maskell v. The Queen, 2021 TCC 18 under s. 256(3)(a)(iii).
We have translated 10 more CRA Interpretations
We have published a translation of a CRA interpretation released last week, and a further 9 translations of CRA interpretation released in December and November, 2008. Their descriptors and links appear below.
These are additions to our set of 1,419 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 1/3 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 |
|---|---|---|---|
| 2021-03-03 | 2 September 2020 External T.I. 2018-0738271E5 F - Taxable capital gain designation | Income Tax Act - 101-110 - Section 104 - Subsection 104(21.2) | the QSBC character of capital gains can be flowed out through 2 levels of personal trusts |
| 2008-12-12 | 2 December 2008 Internal T.I. 2008-0270981I7 F - Entreprise de prestation de services personnels | Income Tax Act - Section 246 - Subsection 246(1) | s. 246(1) could apply re individual’s personal use of residence held in partnership mostly owned by his Holdco |
| 2008-11-28 | 21 November 2008 External T.I. 2008-0279231E5 F - Revenu de commission | Income Tax Act - Section 9 - Nature of Income | CRA exempting of non-substantial commissions received by brokers for sales to themselves of life insurance or critical illness policies does not extend to other financial products |
| 17 November 2008 Internal T.I. 2008-0293121I7 F - Crédit d'impôt pour déficience mentale ou physique | Income Tax Act - Section 118.3 - Subsection 118.3(1) - Paragraph 118.3(1)(c) | nursing home exclusion could extend to credit claimed under s. 118.2(2)(e) if the individual does not receive highly specialized care | |
| 25 November 2008 External T.I. 2008-0297631E5 F - Déductibilité des intérêts dans une compagnie | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | interest-free loan made by Opco to fund acquisition of its shares did not satisfy any indirect use test | |
| 17 November 2008 Internal T.I. 2008-0299621I7 F - Allocation de retraite | Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | amounts received for lost wages, and pain and suffering, under ss. 53(2)(c) and (e), respectively, of the Canadian Human Rights Act were taxable, and non-taxable | |
| 2008-11-21 | 10 November 2008 External T.I. 2007-0237551E5 F - Vente à tempérament | Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | acquisition and disposition under instalment sale when purchaser obtains possession, the right of use and to collect the fruits |
| 6 November 2008 Internal T.I. 2008-0292561I7 F - DAPE multiple | Income Tax Act - Section 125 - Subsection 125(7) - Personal Services Business | PSBs where 4 brothers and an executive provided all the management services to a jointly owned construction company through their respective managementcos | |
| Income Tax Act - Section 256 - Subsection 256(2.1) | application of s. 256(2.1) to SBD multiplication where 4 brothers provided their management services to Opco through their respective managementcos | ||
| 12 November 2008 External T.I. 2008-0295731E5 F - Supplément remboursable pour frais médicaux | Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) | statutory reference to sources of income from businesses did not require netting business loss from 1st partnership against business income from 2nd partnership | |
| Income Tax Act - Section 122.51 - Subsection 122.51(1) - Eligible Individual - Paragraph (c) - Subparagraph (c))ii) | reference to sources of income from business did not require netting partnership business loss against business income from 2nd partnership | ||
| 2008-11-07 | 3 November 2008 External T.I. 2008-0289701E5 F - Paiement fait à la succession d'un employé | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | lump sum paid by employer to estate of employee, compensating for insurance proceeds that the estate could have claimed, was non-taxable under surrogatum principle |
Engineering Analysis Centre – Supreme Court of India finds that consideration for software paid by Indian resellers was not royalties for Canadian (and other) Treaty purposes
The OECD Commentary on the royalty article (Art. 12) states inter alia that “where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software),” such payments generally “would be dealt with as business profits in accordance with Article 7” rather than as royalties under Art. 12 – and that this would be so “regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the distributor having the right to reproduce the software).”
Nariman J considered a multitude of appeals, principally involving consideration paid to non-residents (who were respective Treaty residents in 18 different countries including Canada) by: Indian end-users for the purchase of software (for example, a non-exclusive licence to use Samsung software on the end-user’s Samsung mobile device, with a prohibition against making the software available to any other person); or Indian (or non-Indian) distributors for resale to Indian end-users or other Indian distributors.
Although India (as an OECD non-member) had expressed a reservation, regarding the above and other germane Commentary passages, “that some of the payments referred to may constitute royalties,” Nariman J nonetheless found that Indian assessees could:
place reliance upon the OECD Commentary for provisions of the OECD Model Tax Convention, which are used without any substantial change by bilateral DTAAs, in the absence of judgments of municipal courts clarifying the same, or in the event of conflicting municipal decisions.
Accordingly, none of the numerous payments in issue were subject to Indian withholding tax.
Neal Armstrong. Summary of Engineering Analysis Centre of Excellence Private Limited v. The Commissioner of Income Tax & Anr., Civil Appeal Nos. 8733-8734 of 2018, 2 March 2021(Supreme Court of India) under Treaties – Income Tax Conventions – Art. 12.
The QSBC character of capital gains can be flowed out through a 2 levels of personal trusts
2019-0818301I7 F (an August 13, 2020 internal technical interpretation) 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. Thus, such individuals could access the capital gains deduction.
The Rulings Directorate has now published an external technical interpretation repeating the same analysis, without any notable changes.
Neal Armstrong. Summary of 2 September 2020 External T.I. 2018-0738271E5 F under s. 104(21.2).
CRA adopts a cautiously-worded interpretation of what constitutes additional rent for purposes of the CERS definition of qualifying rent expense
The availability of the Canada emergency rent subsidy (“CERS”) turns, in part, on the application of the definition of a “qualifying rent expense,” whose definition includes:
amounts required to be paid under a net lease by the eligible entity either to the lessor or a third party, as … base rent …[or] regular instalments of operating expenses, such as insurance, utilities and common area maintenance expenses, customarily charged to the lessee under a net lease [emphasis added]
CRA interprets this definition as meaning, that “if a net lease requires a tenant to pay utilities as part of regular instalments of operating expenses customarily charged to the tenant, this payment is a qualifying rent expense” and “this could include payments for utilities made to a third party, such as an energy distributor, provided the other requirements in the definition are satisfied.” However, “where a lease states only that a tenant is responsible for a certain cost … this would generally not constitute a qualifying rent expense.”
For example, if the tenant under a net lease of premises in a shopping mall is required under the lease to pay its proportionate share of the HVAC, electricity, water, property taxes and insurance costs for the shopping centre, initially borne by the landlord, such tenant payments would qualify. However, “if the net lease stated that the tenants were responsible for their own electricity, the amount paid by Tenant for electricity would not be a qualifying rent expense, whether it is paid to Landlord or to a third party, such as an energy distributor.”
This interpretation seems to be drawing some sort of subtle, but largely unarticulated, distinction, between net leases that indicate that the tenant’s “own” expenses are its responsibility, and net leases that require particular expenses to be paid by the tenant directly to a third party. The definition seems to indicate that if the recurring item in question, for example, property taxes, is “customarily” charged as additional rent under a net lease, it will be included even if the net lease states that the tenant will be responsible for the direct payment of that item to the third party.
Neal Armstrong. Summary of 23 February 2021 External T.I. 2020-0873491E5 under s. 125.7(1) – qualifying rent expense.
Income Tax Severed Letters 3 March 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on split-up butterfly that avoids Pt IV tax circularity by a subsequent wind-up of the distributing corporation
CRA has provided rulings on a simple butterfly for the split-up of a CCPC distributing corporation (DC) with cash, and investment assets, between the respective newly-incorporated transferee corporations (the TCs) for three siblings and their respective family trusts. DC has ERDTOH and NERDTOH balances.
After the creation of cross-shareholdings between DC and the three TCs using the usual plumbing, and the redemption for notes of the prefs held by DC in each TC, the shares held by the TCs in DC are not redeemed, as this would result in Part IV tax circularity issues. Instead, the TCs close off their first taxation years and then, on the following day or so, the TC notes are distributed by DC to the respective TCs on a s. 88(2) winding up of DC.
DC is not to be dissolved until it has received and distributed, on a pro rata basis, the dividend refund.
The standard rulings included that the extinguishing of the notes by operation of law on their distribution to the debtors (the TCs) does not engage s. 80.
Neal Armstrong. Summary of 2020 Ruling 2018-0772291R3 F under s. 55(1) – distribution.
Goldman – Tax Court of Canada finds that s. 160(1) did not apply to a transfer to an individual qua trustee of a valid oral trust
The taxpayer was designated as the beneficiary of her mother’s RRSP, but was orally told by her mother that this was occurring on the condition that she was to use those proceeds to pay various bills and estate-related expenses and divide the remainder equally with her two sisters.
Graham J found that, on this basis, the taxpayer had received the net proceeds of the RRSP under a trust. This trust was a separate person from its trustee (the taxpayer), so that such transfer gave rise to a s. 160(1) liability only to that trust rather than to the taxpayer. CRA could have assessed the taxpayer regarding this s. 160(1) liability under s. 159(3) (the taxpayer had not applied for a s. 159(2) certificate before distributing the trust funds). However, CRA had failed to do so. Thus, before getting to the next point, she had no liability under s. 160(1).
That point was that there was an indirect transfer from her mother to her for s. 160(1) purposes respecting the transfer to her of her share of the residue of the trust and regarding her appropriation of other trust funds including the payment out of such funds of legal fees relating to this tax dispute. However, s. 160(1) did not apply to her charging executor’s fees and paying them out of the trust funds.
Neal Armstrong. Summaries of Goldman v. The Queen, 2021 TCC 13 under s. 160(1), s. 104(2), s. 159(3) and Rule 49(1).
We have translated 9 more CRA Interpretations
We have published a further 9 translations of CRA interpretation released in February and January, 2009. Their descriptors and links appear below.
These are additions to our set of 1,409 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 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 March.