News of Note
CRA finds that CECRA loans do not disqualify a s. 149(1)(o.2)(ii) corporation nor lead to deregistration of an RPP
Email this ContentS. 149(1)(o.2)(ii)(C) stipulates that a s. 149(1)(o.2)(ii) corporation has “borrowed money solely for the purpose of earning income from real property or an interest [therein].” Reg. 8502(i) provides that a registered pension plan (RPP) shall not borrow money, subject to what CRA correctly describes as “two very narrow exceptions.”
The CECRA program contemplates the making of loans to commercial landlords to partially fund their providing rent relief to qualifying tenants, followed by forgiveness of such loans on December 31, 2020 if the landlord has complied with the program terms. CRA states:
- Participating in the CECRA with respect to commercial property held by a pension real estate corporation will not contravene the borrowing restriction in clause 149(1)(o.2)(ii)(C).
- Although participating in the CECRA by an RPP will contravene the narrower borrowing restriction in paragraph 8502(i), the CRA will exercise its discretion to not revoke the registration of an RPP for failure to comply with this condition.
Neal Armstrong. Summaries of 15 June 2020 External T.I. 2020-0850981E5 under s. 149(1)(o.2)(ii)(C) and Reg. 8502(i).
CRA is not ruling on whether entities are excluded from CEWS access by being public institutions
In indicating that it could not provide a ruling as to whether a registered charity was excluded from being an “eligible entity” for “CEWS” (wage subsidy) purposes by virtue of being a public institution, CRA stated:
[D]ue to the large number of enquiries that our Directorate is receiving in the context of the COVID-19 pandemic, we will not be providing any advance income tax ruling regarding the qualification of a specific entity as a public institution for the purpose of the CEWS.
Neal Armstrong. Summaries of 3 June 2020 External T.I. 2020-0846831E5 under s. 125.7(1) – eligible entity – (c), and s. 149(1)(c).
CRA reiterates that, during COVID-19, unused HCSA credits can be carried forward for up to an additional 6 months
Members of a health care spending account (“HCSA”) may not be able to use the credits allocated to the HCSA before they expire which, in accordance with IT-529, can generally be carried forward only for a period not exceeding 12 months. CRA has provided a second technical interpretation, similarly worded to the first, indicating that, in this context:
[A]n HCSA that qualifies as a PHSP and which has unused credits expiring between March 15 and December 31, 2020, can temporarily permit the carry forward of those unused credits for a reasonable period to allow plan members to access services that were otherwise restricted during the COVID-19 outbreak. A carry-forward period of up to six months would generally be considered reasonable and would not, in and of itself, disqualify the HCSA from being a [private health services plan].
Neal Armstrong. Summary of 2 June 2020 External T.I. 2020-0847081E5 F under s. 248(1) – private health services plan.
Income Tax Severed Letters 17 June 2020
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that an NPO cannot subsidize fees to it members with facility-use fees charged to non-members – but isn’t tainted by potential liquidating distribution to members until used
The Societies Act enacted in B.C. in 2015 contemplated a “member-funded society” that is funded primarily by its members to carry on activities for their benefit, e.g., sports clubs, golf courses and professional associations, and that is permitted to distribute assets to its members if the society winds up. S. 2(2) of the Act provides: “A society must not have, as one of its purposes, the carrying on of a business for profit or gain, but carrying on a business to advance or support the purposes of a society is not prohibited by this subsection.”
The ETA definition of a non-profit organization provides (similarly to the definition in ITA s. 149(1)(l)) that a qualifying NPO must be “organized solely for a purpose other than profit” and that “no part of [its] income is payable to, or otherwise available for the personal benefit of, any … member.” Respecting the first quoted requirement, CRA stated:
Per Policy Statement P-215, an “entity may carry on an income-generating activity and still qualify as a non-profit [organization]. To qualify, the income-generating activity must be carried on, and the resulting income must be used by the entity, to achieve its declared non-profit objectives.” A society would need to ensure that the business is not its purpose, but a means to an end, and is not carried on for profit.
Respecting the last sentence in the above passage, CRA did not explain how a business can be “a means to an end” (i.e., presumably, generating funds for its non-profit objects) while at the same time not being “carried on for profit.”
Respecting the second quoted requirement, CRA stated:
[I]f the facility of a member-funded society is used by non-members and the income resulting from the non-members’ fees is used to subsidize the members’ fees … income of the entity is considered to be payable to, or otherwise available for the personal benefit of, its members and the entity would not qualify as [an NPO].
However, CRA indicated that the potential for the society to distribute its property to its members does not adversely affect its NPO status prior to the decision to wind up.
CRA stated that a supply of memberships in the society for a fee would not be exempted under Sched. V, Pt. VI, s. 17 where such memberships are “in professional associations that give the right to practice a profession or to use a title … as these benefits exceed the allowable benefits listed in paragraphs (a) to (f)” of s. 17.
Neal Armstrong. Summaries of 21 August 2019 GST/HST Interpretation 195314 under ETA s. 123(1) – NPO and Sched. V, Pt. VI, s. 17.
Greenfield Mining – Court of Quebec implicitly finds that ETA s. 231 trumps s. 232
Greenfield sued a junior Quebec mining company (“CRI”) for unpaid fees of around $15 million and, after 30 months of unfruitful legal proceedings and incurring over $1 million in legal fees, settled its action by agreeing to receive $7 million in instalments over a two-year period.
Greenfield then wrote down the receivable on its books accordingly, and claimed a credit under the Quebec equivalent of ETA s. 231 based on that write-down amount - which the ARQ was prepared to grant until it took the view that Greenfield should have issued a credit note to CRI for the reduction in the fee amount which, once done, would have given the ARQ the right under the Quebec equivalent of ETA s. 232(3)(c) to receive a refund of the applicable portion of the input tax refunds that had been claimed by CRI.
Zaor JCQ found that (as per the Rich test) Greenfield had made “an honest and reasonable” assessment that it would not recover anything more than the $7 million, and that this finding was sufficient to allow Greenfield’s appeal, so that she did not have to consider the s. 232 credit note rules - and noted that “the Court cannot order CRI to repay excess amounts claimed as inputs”.
Neal Armstrong. Summary of Greenfield Mining Services Inc. v. Agence du revenu du Québec (500-80-035666-172, Court of Quebec, 10 June 2020) under ETA s. 231(1).
Our translations of CRA interpretations go back 10 years
We have published a further 5 translations of CRA interpretations released in July and June 2010. Their descriptors and links appear below.
These are additions to our set of 1,198 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 |
|---|---|---|---|
| 2010-07-02 | 17 May 2010 External T.I. 2009-0346011E5 F - Immeuble - Convention Canada - Portugal | Treaties - Income Tax Conventions - Article 25 | no discrimination in Canada taxing a Canadian resident on a Portuguese real estate gain exempted from Portuguese tax |
| Income Tax Act - Section 54 - Principal Residence - Paragraph (a) | Portuguese home of Canadian resident could qualify for the principal residence exemption | ||
| 21 May 2010 External T.I. 2009-0352221E5 F - Bien de remplacement- résidence principale | Income Tax Act - Section 44 - Subsection 44(5) - Paragraph 44(5)(a.1) | replacement property rules re involuntary disposition of secondary residence in country could apply to replacement property in city | |
| 14 May 2010 External T.I. 2009-0323151E5 F - Cross Border Stock Option | Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) - Subparagraph 128.1(1)(b)(iv) | individual fully taxable on s. 7 benefit without carve-out for portion that had accrued prior to immigration to Canada | |
| 23 June 2010 External T.I. 2010-0365581E5 F - Règles d'attribution de l'article 74.2 | Income Tax Act - Section 74.5 - Subsection 74.5(1) - Paragraph 74.5(1)(c) | s. 74.2(1) inapplicable to transfer at FMV of property to a discretionary family trust, with capital gain on property subsequently distributed to spouse of transferor | |
| Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2)(a)(i) is satisfied where a person transferring to a trust holds a capital interest in that trust | ||
| 2010-06-25 | 16 June 2010 External T.I. 2009-0344861E5 F - Actifs de la Catégorie 16 | Income Tax Regulations - Schedules - Schedule II - Class 16 - Paragraph (e) | pick-up trucks leased out on short-term basis but also used as described in (e)(ii) of automobile are in Class 16 - otherwise, Class 10 |
Straightforward debt transactions can raise difficult questions
There often will be a punitively asymmetrical result where an intermediary in a back-to-back loan arrangement receives and pays a loan prepayment penalty. For example, if a non- financial institution had incurred a liability to fund the acquisition of a debt receivable, and the early repayment of the debt receivable to the intermediary and the use of those proceeds by the intermediary to repay, in turn, its liability triggered the receipt and payment by it of a penalty, it generally would include the full amount of the penalty in its current income, but might not be able to claim an offsetting deduction—and might instead be limited to claiming the penalty paid by it as a cost of disposition in computing its gain or loss arising from the disposition of the debt receivable.
It is unclear whether a specific tracing or blended aggregate approach (i.e., based on a buildup of the applicable relevant spot rates for historical transactions) should be used in determining the s. 39(2) gain or loss on partial repayments of foreign-currency denominated debt,
The computation of the exit tax under s. 219.1(1) includes a deduction for the “amount” of the debt of the emigrating corporation. Given the broad definition of “amount” in s. 248(1), this appears to refer to the debt’s fair market value rather than principal amount. This is reinforced by considering the example of an emigrating corporation with matching intercorporate debt receivable and payable, both of which have a FMV lower than their principal amounts – so that if the debt receivable but not the debt payable was taken into account at its FMV, a net deduction would arise to shelter other net asset values.
Neal Armstrong. Summaries of Jim Samuel and Byron Beswick “Selected Issues in Transactions Involving Debt,” 2019 Conference Report (Canadian Tax Foundation), 18:1 – 27 under s. 20(1)(f), s. 20(14)(a). s. 18(9.1), s. 39(2) and s. 219.1(1).
CRA finds that a provincial requirement for certain jobs to be held by members of an NPO satisfied the ETA “professional status recognized by statute” requirement
ETA Sched. V, Pt. V, s. 18 exempts “a supply of a membership made by an organization membership in which is required to maintain a professional status recognized by statute” (except where the organization has elected out of such treatment). CRA found that Regulations in three of the provinces limiting certain jobs within a particular industry to a person who was a professional registered with a particular non-profit organization was sufficient to render the supply of memberships by that organization to such professionals exempt under s. 18.
Neal Armstrong. Summary of 8 August 2019 GST/HST Ruling 188320 under ETA Sched. V, Pt. V, s. 18.
Joint Committee suggests more detailed scoping of the CRA’s COVID-19 relieving positions on international transactions
The Joint Committee has suggested that CRA’s Guidance on international income tax issues raised by the COVID-19 crisis, which provided relief from the crossing of status or characterization thresholds due to COVID Travel Restrictions, should be expanded:
- Although the Guidance focused on whether a foreign corporation will be resident in Canada due to participation in board meetings from Canada, similar relief could be applied elsewhere, e.g., regarding whether a foreign affiliate (FA) qualifies as resident in a “designated treaty country” (“DTC”) - so that, for example, where directors cannot attend a board meeting in person solely because of Travel Restrictions, this will not negatively impact the treatment of active income earned by FA as exempt surplus.
- Although the Guidance addresses having a Canadian permanent establishment as a result of the Travel Restrictions, it does not address the related inadvertent PE issue of income from an active business being deemed to be foreign accrual property income where it is carried on through a PE in a “non-qualifying country.”
- Furthermore, whether income from an active business carried on by an FA resident in a DTC will be included in its exempt earnings will often depend on whether that income is attributable to business activities carried on in a DTC, which could be affected by the stranding of employees in a non-DTC.
- Another FAPI issue: one of the exceptions to the “investment business” definition looks to whether the activities of the foreign affiliate are regulated under the laws of “each country in which the business is carried on through a permanent establishment in that country”.
- The Guidance, which speaks to relief for the impact of Travel Restrictions regarding whether a non-resident will have a PE under the 183-day test in the services PE provision, could also provide relief under the 12-month period referenced in the building site and installation or drilling rig provisions.
- The Guidance provided administrative relief for employees who exceeded the 183-day threshold in the Canada-U.S. Treaty, but should also address the 45-day and 90-day periods applicable in determining whether an individual resident in a treaty country is a "qualifying non-resident employee" under s. 153(6).
Neal Armstrong. Summaries of Joint Committee, “Guidance on International Income Tax Issues raised by the COVID-19,” 11 June 2020 Joint Committee Submission under Reg. 5907(1) – exempt earnings – (d). s. 95(1) – FAPI, Treaties – Income Tax Conventions – Art. 5, s. 153(6).