News of Note
CRA rules that the GST/HST exemption for building permits does not extend to charges for extra inspections or reviews or overtime
Email this ContentThe granting by a municipality of a building permit is exempted under ETA Sched. V, Pt. VI, s. 20(c), which references inter alia the supply of a permit and of processing an application therefor. CRA noted that ETA s. 146 renders governmental testing or inspection services taxable unless specifically exempted, and ruled that the exemption for a building permit did not extend to additional charges for additional inspections of the building work or additional reviews of plans or changed plans or additional charges for overtime building inspections.
Neal Armstrong. Summaries of 3 April 2019 GST/HST Ruling 188947 under ETA Sched. V, Pt. VI, s. 20(c) and s. 20(1)(c)(ii).
CRA applies a functional approach to determining the ownership of the “capital” of a non-share corporation
In response to an inquiry on the Crown corporation branch of the definition of a public institution in s. 125.7(1) of the CEWS rules, CRA first paraphrased the rules in ss. 149(1)(d) to (d.6) as well as referring to the deeming rule in s. 149(1.1), and then indicated that, in determining the ownership of the “capital” of a non-share corporation for these purposes, it would consider the following factors:
• the identity of members,
• the structure of the corporation,
• who exercises control over the financing, operation and direction of the corporation,
• who has the right to elect or change the board of directors or to reverse its decision,
• who can contribute capital and receive a distribution of capital,
• details regarding asset distribution on winding-up or dissolution and
• whether a person other than her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the corporation.
Neal Armstrong. Summary of 1 May 2020 External T.I. 2020-0846931E5 under s. 125.7(1) – public institution - (a).
Income Tax Severed Letters 10 June 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on a SERP that maintains the 18% RRSP contribution amount above the RRSP dollar limit
A Canadian public corporation had a group RRSP arrangement under which it approximately matched contributions of employees (“Members”) to the group RRSP. It was now proposed that an unfunded supplemental employee retirement plan (SERP) be created under which the corporation annually will notionally credit to an account for each Member an additional amount equal to 18% of the employment earnings of the Member in excess of those earnings engaging the RRSP dollar limit (subject to an overall cap on the corporation’s contributions, including under the group RRSP, of 15% of the Member’s employment earnings (or 10% in the case of non-executive employees).) The amount credited to the Member’s is notionally increased each year based on 5-year Canada bond yields; and on termination of employment, the Member can determine whether to receive payments based on the amount in the account over 10 years, or as a lump sum.
CRA ruled that there will be no recognition of income by the Member until the times of the payouts (e.g., the SERP is not a salary deferral arrangement), and that there can be a corresponding deduction on payout to the corporation.
Neal Armstrong. Summary of 2019 Ruling 2019-0817751R3 under s. 248(1) – salary deferral arrangement.
CRA provides additional administrative guidance on the CEWS subsidy
CRA has expanded its Q&A on the “CEWS” wage subsidy. Some of the additional or expanded points include:
- CRA states in Q.6-1 that qualifying revenue can include interest or dividend income “arise[ing] in the course of an eligible employer’s ordinary activities in Canada in the particular period [and that] is not an extraordinary item or on account of capital.” (This may suggest that a reduction in interest revenue because of the deployment of excess cash could generate the wage subsidy.)
- In Q.6-2, CRA indicates that COVID-19 – related government assistance would normally be excluded from qualifying revenue on the basis that it is an extraordinary item.
- In Q.9-1, CRA indicates that even though the qualifying revenue of an eligible employer does not include the portion of consolidated revenue that does not arise “in the course of ordinary activities in Canada,” the eligible employer “can however include the portion of the consolidated revenue that arises in the course of ordinary activities in Canada whether or not the ultimate sale to third parties occurs in Canada.”
- In Q.10-2, CRA confirmed that where entities in an affiliated group elect under s. 125.7(4)(b) to determine their (Canadian) qualifying revenues on a consolidated basis “all eligible employers in the affiliated group must consolidate for the purpose of calculating qualifying revenue” so that it “is not possible to have only some of those eligible employers in the affiliated group elect to consolidate.”
- In Q.12-1, CRA indicates that an election under s. 127.5(4)(a) of members of a group of eligible entities to determine their qualifying revenue separately rather than on a consolidated basis is not binding on subsequent qualifying periods.
- The “CEWS” wage subsidy is reduced by the full amount of the 10% temporary wage subsidy claimed rather than the amount of the latter that is actually collected through available reductions in source deduction remittances. CRA has added Q.13-1 showing that the CEWS wage subsidy will be restored if the amount of the temporary wage claim is reduced to the amount that can be so collected, i.e., this issue is only a trap for the unwary.
Neal Armstrong. Additional or revised summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020 under s. 125.7(1) – qualifying revenue, s. 127.5(4)(a), s. 125.7(4)(b), s. 125.7(2) – B.
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week, and a further 5 translations of CRA interpretations released in July 2010. Their descriptors and links appear below.
These are additions to our set of 1,193 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.
7958501 Canada Inc. – Court of Quebec finds that software whose development was deducted under s. 37 could be stepped up on a related-party transfer notwithstanding s. 13(7)(e)
A private company (“SherWeb”), which provided the use of software developed by it to paying subscribers, transferred its software and other IP to a newly-formed sister company (“501”) at a gain for creditor-proofing reasons (with the IP licensed back to it for continued use in its software services business). Although 501 treated the acquired IP as depreciable property, it considered that Taxation Act s. 99 (equivalent to ITA s. 13(7)(e)) did not apply to reduce the capital cost to it of the acquired IP because, in SherWeb’s hands, the IP had been eligible capital property rather than depreciable property.
Boutin JCQ found that the contrary position of the ARQ foundered on the Quebec equivalent of Reg. 1102(1)(d) (which excludes, from depreciable property, any property that was acquired by expenditures in respect of which the taxpayer was allowed a deduction under s. 37), stating that “SherWeb has consistently claimed the salaries of its employees, first and foremost those of its programmers, as its main expense, and has claimed SR&ED credits year after year.”
Although he considered this to be a largely sufficient ground, he went on to refer to the definition of eligible capital property (which, similarly to the federal definition, relevantly required in effect that the amount to which the taxpayer is entitled for the property’s disposition is “not included in computing the taxpayer's income or any gain or loss of the taxpayer from the disposition of a capital property” - and found that this condition had been met as SherWeb had not reported any disposition of a capital property, and had instead correctly treated the costs of developing its software (its employees’ salaries) as “a recurring and current expense in and of themselves.”
Neal Armstrong. Summary of 7958501 Canada Inc. v. Agence du revenu du Québec (500-80-034604-174, Court of Quebec, 4 June 2020) under s. 13(7)(e).
CRA indicates that unused HCSA credits can be carried forward for up to an additional 6 months during COVID-19
Due to the curtailment of services during the COVID-19 pandemic, plan members of a health care spending account (“HCSA”) may not be able to use the credits allocated to the HCSA before they expire, so that they will be forfeited. The terms of the HCSA would in most cases comply with IT-529, which provides that an HCSA can permit the carry-forward of either unused credits or eligible medical expenses (but not both) for a period not exceeding 12 months without generally disqualifying the HCSA from being a private health services plan, for purposes of the exemption in s. 6(1)(a)(i).
CRA has announced:
In these extraordinary circumstances, a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15 and December 31, 2020, could temporarily permit the carry forward of those unused credits for a reasonable period to allow 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 PHSP.
Summary of 25 May 2020 External T.I. 2020-0846751E5 under s. 248(1) - private health services plan.
Joint Committee articulates its understanding of reasonable limitations on CRA’s discretion to extend reassessment periods during COVID-19
S. 7 of the Time Limits and Other Periods Act (COVID-19) (the “Proposals”) would grant the Minister the exceptional power inter alia to order the suspension or extension of a time limit, or any other period, that is established under any ITA or ETA listed in the Schedule. The Joint Committee suggests that there are provisions missing from the Schedule, and suggests that it contain more generic language to cover what is being aimed at.
One set of provisions that are already listed are ITA ss. 152(3.1) and (4) and ETA ss. 298(1) and (2), setting out permitted (re)assessment periods. Based on informal discussions with CRA officials, it is understood that the “Minister would likely exercise the authorities provided under s. 7 of the Proposals in a manner that would not displace acquired rights by reopening administrative proceedings which had achieved finality before the announcement of the Proposals, nor in a manner that could be duplicative or inordinately disruptive of certainty in proceedings and the rule of law, or not justified by the need to avoid unfair or undesirable effects of the COVID-19 crisis.” The following observations of the Joint Committee give shape to that understanding:
- Where such reassessment periods had already expired before the announcement of the Proposals, any such order would not permit an assessment without the taxpayer’s consent.
- For audits that had not been materially disrupted by COVID-19, no order would extend such a reassessment period.
- Any order(s) would not result in a total prolongation exceeding six months.
- Any such order would not suspend or extend any such reassessment period which would otherwise expire within a reasonable amount of time after September 13, 2020.
Neal Armstrong. Summary of "COVID-19 Measures", 1 June 2020 Joint Committee Submission under s. 180(1), s. 152(3.1) and ETA s. 298(1)(a).
Watson – Full Federal Court of Australia finds that expenses incurred in administering a litigation settlement fund were not deductible from the related interest income
A trust for distributing $300M in class action damages to the class claimants earned $8.4M in interest income on the funds and incurred $4.3M in various expenses in assessing the claims of the various claimants before distributing the damages. The costs related to the derivation of the interest income were minimal. The Australian taxing act provided:
You can deduct from your assessable income any loss or outgoing to the extent that:
- it is incurred in gaining or producing your assessable income; or
- it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
In finding that such expenses were not deductible because there was no business and that such expenses were capital expenditures, the Full Federal Court of Australia stated:
[T]he taxpayer, in administering the Fund, was not turning his talent to account for money but was administering a court-approved scheme for the distribution of a settlement sum agreed upon by parties to a class action. ...
Properly analysed, the costs of administering the scheme were costs incurred in the course of effecting the distribution of the settlement sum to claimants entitled to share in the settlement sum, and thus costs incurred on capital account. The requirement that the settlement sum be held in interest-bearing accounts pending distribution as part of the Distribution Scheme does not give the costs of administering the scheme the character of revenue outgoings.
Neal Armstrong. Summary of Watson as trustee for the Murrindindi Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 under s. 18(1)(b) – capital expenditure v. expense – oversight or investment management.