News of Note
CRA considers that a Treaty exemption for income does not preclude being an eligible entity for CEWS purposes
Email this ContentThe definition of “eligible person” in the “CEWS” (wage subsidy) legislation includes (in para. (a)) a corporation “other than a corporation that is exempt from tax under this Part or is a public institution” and includes (in para. (d)) a specific and limited range of persons that are exempt from tax under s. 149(1). CRA considers that, in light inter alia of this structure, the only exempts excluded from being eligible persons are s. 149(1) exempts who are not specifically listed in para. (d) (or partnerships thereof). Accordingly, CRA has concluded:
[A] non-resident corporation that operates an airline, a portion of whose Canadian source income is not included in the computation of its income under Part I of the Act as a result of the operation of paragraph 81(1)(a) and a provision under an income tax convention between Canada and another State is not a corporation “exempt from tax under Part I” under the definition of “eligible entity” in subsection 125.7(1) and therefore would not be prevented from being an “eligible entity” on that basis.
Neal Armstrong. Summary of 8 May 2020 External T.I. 2020-0847791E5 under s. 125.7(1) – eligible entity – para. (a).
Income Tax Severed Letters 13 May 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Roofmart – Federal Court of Appeal states that Hydro-Québec regarding limitations on unnamed person requirements (UPRs) “ought not to be followed”
Roofmart, a large supplier of roofing materials to residential and commercial contractors in Ontario, has unsuccessfully appealed the Federal Court’s granting of an application by the Minister under s. ITA 231.2(3) and ETA s. 289(3) for Roofmart to disclose various particulars for all of its customers who in the past 4 ½ years had made purchases of construction materials from Roofmart exceeding specified dollar thresholds.
In rejecting Roofmart’s reliance on the statement in Hydro-Québec that "[w]hen the group is generic and has no connection to the ITA, and information can be requested outside of the scope of the ITA (such as identifying the business clients of a public utility) there is no longer any limit on the fishing expedition," Rennie JA stated that this “passage is not a legal test but analysis of whether, on the facts of that case, there was an ‘ascertainable group’ and whether the information was required for the purposes of verifying compliance,” and that ”the suggestion in the reasons that the information sought was available through other means and therefore could not be obtained through a UPR [unnamed person requirement] is inconsistent with this Court’s jurisprudence, and ought not to be followed.” He further stated that the “fact that the UPR may target an unspecified or large number of accounts or that a significant amount of financial information may be captured does not affect its validity,” and that “GMREB established that a pending or existing tax audit of a particular individual is not a precondition to the exercise of power under subsection 231.2(3).”
Neal Armstrong. Summaries of Roofmart Ontario Inc. v. Canada (National Revenue), 2020 FCA 85 under s. 231.2(3) and s. 231.2(3)(a).
Double taxation potentially can arise under s. 247(2.1)
There are problems with the operation of s. 247(2.1) even leaving aside the variance, discussed by Marc Roy, between what the provision actually says and what Finance in its Explanatory Notes treats it as saying.
For example, consider the situation of Canco which lends C$100, to a non-arm’s-length non-resident corporation that is not a controlled foreign affiliate through a subsidiary partnership (or through a Canadian trust). Suppose that the loan bears interest at 1%, the prescribed rate under s. 17 is 2% and an arm’s length rate of interest would have been 5%.
It would appear in either the partnership or trust case that there would be double taxation, i.e., there would be an addition to the income of Canco amounting to both 5% and 2% of the loan.
Neal Armstrong Summary of Nathan Boidman and Michael N. Kandev, “Evaluating Canada’s Attempt to Reconcile General Transfer Pricing Rules and Specific Antiabuse Provisions,” Tax Notes International Vol. 98, No. 6, May 11, 2020, p. 699 under s. 247(2.1).
5 more translated CRA interpretations are available
We have published a further 5 translations of CRA interpretations released in September, 2010. Their descriptors and links appear below.
These are additions to our set of 1,169 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ¾ 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 |
|---|---|---|---|
| 2010-09-17 | 25 August 2010 External T.I. 2010-0374231E5 F - Safe income allocation | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | safe income required to be allocated to prefs and new common shares received on a s. 51 exchange even where the redemption amount of the prefs matched the amount of such safe income |
| General Concepts - Fair Market Value - Shares | Compliance Programs Branch now providing advance guidance on valuation methodology | ||
| 2010-09-10 | 17 August 2010 External T.I. 2010-0367371E5 F - Fin d'un usufruit - résidence principale | Income Tax Act - Section 248 - Subsection 248(3) | dissolution of s. 248(3) trust when the usufructuaries renounced their right of usufruct |
| Income Tax Act - Section 54 - Principal Residence - Paragraph (a.1) | usufructuary parents were specified beneficiaries based on their inhabiting the housing unit | ||
| Income Tax Act - 101-110 - Section 107 - Subsection 107(2.01) | deemed s. 248(3) trust that dissolved when the usufructuary parents renounced their, makes a s. 107(2.01) or (2.001) to apply principal residence exemption to dissolution gain | ||
| 12 August 2010 External T.I. 2010-0360171E5 F - Déclaration T-1135 et biens étrangers | Income Tax Act - Section 233.2 - Subsection 233.2(1) - Exempt Trust | exempt foreign trust definition contains strict conditions | |
| Income Tax Act - Section 233.3 - Subsection 233.3(1) - Specified Foreign Property - Paragraph (n) | Swiss vested benefits account was not exempted | ||
| 24 August 2010 External T.I. 2010-0354791E5 F - Commission d'un non-résident - 105(1) RIR | Income Tax Regulations - Regulation 105 - Subsection 105(1) | fee for services performed wholly in UK re sale of Canadian real estate not subject to withholding | |
| 19 August 2010 External T.I. 2009-0344111E5 F - Résidence Société Capital-Risque - Conv Can-France | Treaties - Income Tax Conventions - Article 4 | French venture capital corporation is resident in France (“liable to tax”) notwithstanding that it has elected to be exempt on its portfolio gains |
Mussalli – Federal Court of Australia finds that a partial rent prepayment was a capital expenditure
Two Australian trusts that were to be the franchisees for seven McDonald’s restaurants agreed, at the same time as they agreed to enter into leases of the premises for base rents plus sales-based percentage rents, to make a lump sum “prepayment of rent” so as to reduce the percentage rent payable. With one relatively minor exception, the leases did not provide for any refund of the prepaid rent in the event of early lease termination.
The trusts deducted the rent prepayments over a 10-year period. In finding that the rent prepayments were capital expenditures, so that such deduction was not permitted, Jagot J stated:
[T]he payments … were … a one off, lump sum, non-refundable payment made to secure an enduring advantage (the right to pay the lesser percentage rent) for the term of the [leases] and most likely the term of any renewal of the [leases]. The payments negated or extinguished any obligation to pay the higher percentage rent and did not thereby relate to any future obligation to pay rent. As a matter of substance the payments, although called the prepayment of rent, did not involve the payment of rent at all. …
… What [the trust] acquired through the payments was a business with a different structure, a business in which the percentage rent payable was permanently reduced … .
… The non-refundable nature of the payments suggests that they were not made to secure the right to occupy the premises under the lease and, rather, were capital in nature.
Neal Armstrong. Summary of Mussalli v Commissioner of Taxation [2020] FCA 544 under s. 18(1)(b) – Capital expenditure v. expense – Contract purchases or prepayments.
CRA rules on an RCA trust that permits the retired employee to request an immediate payout on “a material deterioration in the Canadian economy”
CRA ruled that a new supplemental pension plan would qualify as a retirement compensation arrangement and that s. 207.6(7) would apply to the transfer from the old RCA trust to this new one (which would also entail CRA being asked to now hold the existing 50% refundable tax for the account of the new trust).
One of the features of the new plan was that, following the occurrence of a “Specified Event,” the retired “Participant” employee could request that the plan custodian pay out the property in the new RCA Trust and the resulting refundable tax that was generated. “Specified Event” was defined as the occurrence of:
(i) a significant health event or other emergency that … creates an unexpected change in financial circumstances and/or financial need, (ii) a material deterioration in the Canadian economy, (iii) a material change in personal income tax rates …, or (iv) any other event that could not have reasonably been foreseen by the Participant and creates an immediate need by the Participant for the use of funds held by the Trustee under the terms of the New RCA Trust.
In addition, "following material changes in the Canadian economy or the financial needs of the Participant or Participant’s family, [the Participant may] apply in writing to the Custodian to vary the amount of annual benefits."
Neal Armstrong. Summary of 2019 Ruling 2019-0803761R3 under s. 248(1) - retirement compensation arrangement.
Investment limited partnerships with offshore subs or Opco subs should consider making an ETA s. 225.4(6) election in order to potentially access ITCs
Most Canadian resident investment limited partnerships (ILPs) will be considered to be a selected listed financial institution (SLFI) for the 2019 year, thereby giving rise to an obligation to file a SLFI return by June 30, 2020.
In typical circumstances, unless an election is made under ETA s. 225.4(6) for s. 225.4(3) not to apply:
- ETA s. 225.4(3)(a) effectively deems non-resident unitholders of an ILP to be resident in Alberta for purposes of computing the blended rate of provincial tax to which the ILP is subject under the SLFI rules; and
- s. 225.4(3)(d) provides that the ILP is not entitled to claim input tax credits for an input that is not an “exclusive input” (e.g., for a supply of a management service that is “acquired” by the ILP for the purpose of both making a zero-rated financial-service supply to a non-resident subsidiary under Sched. VI, Pt. IX, s. 1, and for making exempt supplies of financial distributions to resident unitholders)
It is suggested that since “an ILP may undertake certain activities which allow it to claim ITCs, including making zero-rated supplies of financial services to non‑residents or, pursuant to proposed amendments to section 186 of the ETA, holding shares or debt in related corporations whose property (all or substantially all) was last acquired for use exclusively in a commercial activity,” consideration should be given to making the s. 225.4(6) election, so as to access or increase ITC claims (i.e., oust the second rule above).
Neal Armstrong. Summaries of PwC, Tax Insights: Investment limited partnerships ─ GST/HST & QST filing obligations, Issue 2020-27, May 04, 2020 under ETA s. 123(1) – ILP and s. 225.4(6).
CRA announces that it will accept the deferral of payments under a Bankruptcy proposal until September 1, 2020
S. 60(1.1) of the Bankruptcy and Insolvency Act effectively provides that unless Her Majesty consents, any court-approved proposal must provide for the payment of listed categories of amounts including those that could be subject to a demand under ITA s. 224(1.2) (i.e., source deductions). BIA s. 62.1(b)(ii) provides for waiver by the creditors of default in the performance of a proposal.
After acknowledging the COVID-19 outbreak, CRA announced:
The CRA is proposing a solution to assist taxpayers and LITs [Licensed Insolvency Trustees] in circumstances where the CRA is the majority creditor and the debtor is experiencing financial hardship.
For proposals filed under Division 1 of the … BIA … the CRA is offering a waiver of the default pursuant to section 62.1 of the BIA and granting a deferral of payments to the estate up to September 1, 2020. This will also apply to any amounts subject to section 60(1.1) of the BIA as per our existing Administrative Agreement policy with LITs.
For consumer proposals under the BIA, the CRA offers the acceptance of an amended proposal that calls for a deferral of payments up to September 1, 2020.
Neal Armstrong. Summaries of Pending Default of a Proposal under the BIA where the Canada Revenue Agency is a majority creditor: April 23, 2020 OSB Webpage under BIA s. 62.1(b)(ii) and ITA s. 224(1.2).
Toronto-Dominion Bank – Federal Court of Appeal finds that the deemed trust for unremitted GST defeated the Bank’s security interest on a voluntary sale of the mortgaged home
TD Bank made a mortgage loan to an individual who, unbeknownst to it, had unremitted GST collections. A year later, the individual sold his home and repaid the Bank in full. The Bank found out about the unremitted GST two years later when it received a payment demand from CRA.
Dawson JA agreed with Grammond J below that the Bank was required to pay the demanded amount by virtue of the deemed trust for the unremitted GST following the proceeds of the sale into the Bank’s hands by virtue of ETA s. 222(3). She recognized that First Vancouver had found that this deemed trust did not apply to “bona fide purchasers for value” of the tax debtor’s property (so that the trust attached to the sales proceeds rather than following the sold property) – but found that this exception did not apply to the payment of the sales proceeds to the Bank as a secured creditor. The Bank’s mortgage was not excluded as a “prescribed security interest” from the deemed trust rule because it was registered after the deemed trust arose in the tax debtor’s hands.
Respecting the implications of this decision, she stated:
[S]ecured lenders … may identify higher risk borrowers (which might include persons operating sole proprietorships), require borrowers to give evidence of tax compliance, or require borrowers to provide authorization to allow the lender to verify with the Canada Revenue Agency whether there are outstanding GST liabilities then known to the Agency.
She noted that ITA s. 227(4.1) was similar, except that the ITA deemed trust did not disappear in CCAA or bankruptcy proceedings.
Neal Armstrong. Summary of Canada v. Toronto-Dominion Bank, 2020 FCA 80 under ETA s. 222(3).