News of Note
Lemay Co – Federal Court finds that the taxpayer had a reasonable argument that s. 125.7(5)(a) did not preclude it from making an amended increased CEWS claim
Email this ContentOn audit, CRA determined that Lemay had made Canada Emergency Wage Subsidy (CEWS) claims for periods 6, 7 and 13 to 15 that were excessive to the extent of $311,204 but had underclaimed for periods 8 to 12. CRA proposed to assess the $311,204 but refused Lemay’s request that it exercise its discretion pursuant to s. 125.7(16) to allow increased CEWS claims for periods 8 to 12 of $1,715,341. Later, CRA rejected a further Lemay submission that CRA could accept its additional refund claims by virtue of ss. 164(1)(b) and 152(3.4) – on the basis inter alia that s. 125.7(5)(a) limited the amount of the CEWS subsidy to the amount initially claimed by the taxpayer. Lemay brought an application for judicial review of this decision, and the A.G. brought this motion to strike the application on the basis inter alia that the interpretation advanced had no chance of success. In rejecting such claim, Régimbald J stated:
[I]t is not clear, in light of sections 125.7(5), 152(3.4) and 164(1)(b), considered together and which are the subject of the application for judicial review, that the ITA does not allow the Minister to accept an amended prescribed form as requested by the plaintiff. …
[T]he defendant has therefore not discharged its burden of demonstrating that it is clear and obvious that the interpretation proposed by Lemay has no reasonable chance of acceptance ….
Neal Armstrong. Summaries of Lemay Co Inc. v. Attorney General of Canada, 2024 CF 995 under s. 125.7(5)(a) and s. 125.7(16).
GST/HST Severed Letters January-February 2024
PepsiCo – Full Federal Court of Australia finds that concentrate purchases by an Australian soft drink bottler could not be recharacterized as trademark royalties for withholding tax purposes
A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (the “Bottler”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to the Bottler, for bottling and sale, and granted the Bottler the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (the “Seller“) to the Bottler. There was a similar arrangement for the licensed bottling and sale by the Bottler of Gatorade pursuant to an EBA with another U.S. company in the Pepsi group (“SVC”).
Perram and Jackman JJ found that, since as a matter of contractual interpretation, all of the amounts paid by the Bottler to the Seller were consideration for the sold concentrate, none of such payments could be treated as a trademark royalty that was subject to Australian withholding tax. Furthermore, none of the concentrate selling price was owed to either US company, so that such payments were not derived by a non-resident of Australia. Accordingly, the Commissioner’s assessment of Australian withholding tax on a portion of the consideration was reversed. These conclusions arose under the domestic withholding tax provision, so that no reference was required to the terms of the Australia-US tax treaty.
Neal Armstrong. Summaries of PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86 under Treaties – Income Tax Conventions – Art. 12.
GST/HST Severed Letters December 2023
This afternoon's release of 25 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their December 2023 release) is now available for your viewing.
Income Tax Severed Letters 26 June 2024
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms no change to its administrative practice of not charging interest or penalties for insufficient instalment payments by trusts
CRA indicated that its release of two new forms - the T3 INNS3, Trust Instalment Voucher and the T3AO, Trust Amount Owing Remittance Voucher – does not signify any change to its current administrative practice of not charging interest or penalties for insufficient instalment payments by trusts.
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.14 under s. 156(1).
CRA indicates that a Canadian payer must withhold on rent paid to a s. 94 deemed resident trust
Regarding the application of Part XIII to a non-resident trust that is deemed to be resident in Canada pursuant to s. 94 and which owns a Canadian rental property, CRA indicated that such trust is not subject to Part XIII tax on amounts paid or credited to it, but is not considered to be resident in Canada for the purposes of determining the liability of a person other than the trust to withhold and remit under s. 215 – so that there is still a requirement for the Canadian tenant(s) to withhold and remit Part XIII tax on the rent paid by them. Per s. 94(3)(g), to the extent that the amount on which the Part XIII tax is paid has been included in computing the trust’s income, the withholding amount is deemed to have been paid on account of the trust tax under Part I for the particular taxation year.
Neal Armstrong. Summaries of 4 June 2024 STEP Roundtable, Q.13 under s. 94(3)(a)(viii) and s. 94(3)(a)(ii).
CRA finds that s. 13(7)(e)(ii) applies to a cross-border non-arm’s length gift of a foreign building
A resident individual received a gift of (or alternatively, an inheritance of) a foreign rental property from a non-resident relative. The building component had a cost to the non-resident of $1.0 million and a current FMV of $1.4 million.
Regarding the gift, CRA noted that although s. 69(1)(c) deemed the building’s cost to the resident to be its FMV of $1.4 million, the ½ step-up rule in s. 13(7)(e)(ii) reduced its capital cost to $1.2 million, so that the starting UCC of the building would also be that amount.
S. 13(7)(e)(ii) does not apply where the transfer is as a consequence of the death of the transferor. Accordingly, the cost to the resident of the building on its inheritance would be the full $1.4 million.
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.12 under s. 13(7)(e)(ii).
CRA explains the credit for US estate taxes under Art XXIX-B(6)(a) of the Canada-US treaty
A Canadian resident who was not a U.S. citizen was subject on death to U.S. estate tax on U.S. situs property, namely, US real property and shares of a U.S. public corporation – and also realized a gain pursuant to ITA s. 70(5). Could the executor claim a credit in Canada respecting the U.S. estate tax paid where:
(i) the value of the deceased’s entire gross estate was equal to, or lower than, U.S. $1.2 million; or
(ii) such value exceeded U.S. $1.2 million?
CRA indicated that in the first scenario, the executor could claim a tax credit in accordance with Art XXIX-B(6)(a)(i) of the Canada-US treaty for the US estate tax paid on the US realty against the Canadian federal tax otherwise payable on the gain from the deemed disposition of the US realty. In particular, such gain was deemed to arise in the US, so that Art XXIX-B(6)(a)(i) could be accessed. Not so for the gain on the US shares.
Regarding the second scenario, the executor could claim a credit also in relation to the gain from the deemed disposition of the US shares against the Canadian capital gains tax, given that Art XXIX-B(6)(a)(ii) referenced any income, profits or gains of the individual from property situated in the U.S. - and the postamble to Art. XXIX-B(6) stated that property is situated within the U.S. if it is so treated for U.S. estate tax purposes.
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.11 under Treaties – Income Tax Conventions – Art. 29B.
KM Strike – Federal Court of Canada finds potential merit in taxpayers’ position that being victims of fraud of their own officer could open up old taxation years
In 2023, three companies requested that CRA reassess their 2012 to 2019 returns on the basis that the capital gains reported by one of the companies (Strike) had been overstated due to fraud perpetrated by an officer of Strike and (in the case of the other two companies) on the basis that the management fees charged by them to Strike had been overstated due to Strike’s falsified records. Other than Strike’s income tax return for the 2017 taxation year, CRA (in the “Decisions”) rejected those requests on the basis that the applicants had exceeded the relevant limitation period under (as applicable) either ITA s. 152 or ETA s. 298.
After some unanswered letters to CRA, on May 24, 2024, the applicants filed these motions for extensions of time to file applications for judicial review of the Decisions.
Before granting the applications, Southcott J noted that the Crown had an "arguable position" that the above provisions required that the reassessment be based on misrepresentation or fraud that was that of the taxpayer. He also noted that the evidence did not demonstrate a reasonable explanation for the delay in commencing an application for judicial review. However, he nonetheless granted the applications given that the applicants’ arguments appeared to have some merit. He stated that he found “compelling the Applicants’ position … that CRA appears to have considered the relevant statutory authority to have been sufficient to authorize a reassessment of Strike’s income tax return for the 2017 taxation year (a year in which the Applicants submit the reassessment was favourable to CRA).“
Neal Armstrong. Summary of KM Strike Management Inc v. Canada (Attorney General), 2024 FC 947 under Federal Courts Act, s. 18.1(2).