News of Note
We have translated 5 more CRA Interpretations
Email this ContentWe have published a further 5 translations of CRA interpretations released in February and January, 2010. Their descriptors and links appear below.
These are additions to our set of 1,278 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the open” week for October.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2010-02-05 | 15 January 2010 External T.I. 2009-0343841E5 F - Application du paragraphe 127(10.22) | Income Tax Act - Section 127 - Subsection 127(10.22) | interposition of Holdco broke a condition for application of s. 127(10.22) |
| 1 February 2010 Internal T.I. 2010-0354671I7 F - Frais de gestion à une fiducie | Income Tax Act - Section 67 | CRA policy of not challenging reasonableness of bonuses paid by CCPC to an individual holding through Holdco does not apply where individual holds through trusts | |
| 21 December 2009 Internal T.I. 2008-0296131I7 F - Fraction à risque | Income Tax Act - Section 96 - Subsection 96(2.2) - Paragraph 96(2.2)(c) | exception from s. 96(2.2)(c) for legitimate business loans from related parties | |
| 14 January 2010 Internal T.I. 2009-0323991I7 F - Débenture échangeable et opération à terme | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(f) | only ½ deduction under s. 20(1)(f)(ii) for premium paid on cash-settling an exchangeable debenture under pre-2010 policy, and no s. 20(1)(f) deduction for cash settlement of forward | |
| Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges | premium was paid on capital account in closing out a cash-settled forward entered into in order to monetize a shareholding | ||
| Income Tax Act - Section 152 - Subsection 152(1) | CRA position of applying changes in published policy prospectively | ||
| Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) | full deduction of amounts only partly, or not, deductible under s. 20(1)(f) would have caught the eye of a wise and prudent person reviewing the return | ||
| 2010-01-29 | 26 January 2010 External T.I. 2009-0344121E5 F - REER, déduction pour cotisations excédentaires | Income Tax Act - Section 146 - Subsection 146(8.2) - Paragraph 146(8.2)(c) | a reference in Part I to a notice of assessment refers to a Part I notice of assessment |
Irish Bank Resolution Corp – England and Wales Court of Appeal effectively finds that the Treaty PE Article has an embedded thin cap rule
HMRC increased the UK branch profits of the Irish taxpayers’ branch banking, or home mortgages, businesses by attributing to their UK permanent establishments notional additional free capital on the basis that if they had operated as distinct and separate enterprises, they would have had a higher amount of free capital and therefore a correspondingly lower amount of borrowed capital – with the result that HMRC disallowed interest which was actually paid to third parties.
The taxpayers unsuccessfully argued that this was contrary to the “comparator provisions” of the PE Article in the UK-Ireland Treaty, which required that there be attributed to a UK permanent establishment “the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment.” They submitted that this rule “requires an assumption to be made not only that the PE is engaged in the same or similar type of business to the one it actually carried on but also that it should be taken to have traded with the same ratio of free to borrowed capital as it actually employed during the relevant accounting period.”
In rejecting this argument (and dismissing the taxpayers’ appeals) Patten LJ stated:
In order to operate the hypothesis of a distinct and separate enterprise dealing at arm's length including with the overseas company of which it is part, it seems to me that it is necessary to compare the way in which the PE financed and accounted for its business with what it would have done had the PE operated as a separate enterprise. Otherwise the comparator provisions … cannot work. To construe the phrase "same or similar conditions" as requiring the PE's actual ratio of free to borrowed capital to be applied would be self-defeating.
He was fortified in his conclusions by passages in the 2008 OECD Commentaries notwithstanding that he was dealing with a 1976 Treaty, stating that the 2008 Commentary would “only be inadmissible if the new material made substantive changes which are inconsistent with the commentaries in existence at the time of the 1976 Convention.”
Neal Armstrong. Summaries of Irish Bank Resolution Corporation Ltd v Revenue and Customs [2020] EWCA Civ 1128 under Treaties – Income Tax Conventions - Art. 7 and General.
CRA rules on qualification of a seniors facility for the 83% GST rebate
One of the requirements for the receipt of the 83% GST rebate by a registered charity operating a nursing home was that (under (a)(iii)(B) of the definition of “facility supply”) “a physician … be at, or be on call to attend at, the … qualifying facility at all times when the individual is at the … qualifying facility.” CRA ruled favourably regarding an arrangement under which:
Where the chronic care residents at the facility have medical problems that require a high level of health care, a physician is present at, or on-call to attend at, the Facility at all times during the resident’s stay.
This seems to imply that the “on call” arrangement was not required for the residents when they did not have “high level” requirements. In addition, there was a doctor (who also had his own family practice) titled the “Medical Director” who was at the facility on a part-time basis.
Neal Armstrong. Summary of 6 July 2020 GST/HST Ruling 123293 under ETA s. 259(1) – facility supply – (a)(iii)(B).
GST/HST Severed Letters July 2020
This Friday's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their July 2019 release) is now available for your viewing.
Godcharles – Court of Quebec finds that a sale of goodwill occurred between parties acting in concert given the role of a dominant player
A retirement home was co-owned by eight individuals and operated by a corporation of which they were the shareholders. The home and operating business were jointly sold for a global purchase price to a limited partnership whose owners apparently were for the most part those individuals, with the allocation of the purchase price not yet determined. This was done at the time of filing their tax returns: all of the appreciation in the sold assets over their costs was treated as being goodwill (sold by the operator) rather than appreciation in the immovable.
The sale clearly would have been a non-arm’s length transaction but for the fact that a corporation (“9084”) owned by one of the individuals (“Godcharles”) purchased all the shares of the operator from the other shareholders two days before the retirement home business sale. Without attaching any apparent significance to the purchaser being a limited partnership rather than a co-ownership, Quenneville, J.C.Q found that the sale transaction of the retirement home and the related goodwill was one between persons who were acting in concert (and, thus, not dealing at arm’s length), given inter alia that the sale of the others’ shares to 9118 was agreed to by them without knowing the price that would be paid and, more generally, that the evidence showed “that Mr. Godcharles was the sole director of all aspects of the transaction, from the purchase of the land in 2002 to the sale in 2006, with all the other plaintiffs seemingly absent from the entire negotiation.”
As this (partial) roadblock to the ARQ applying the Quebec equivalent of s. 69(1)(b) to the sale was removed, Quenneville, J.C.Q largely confirmed the ARQ assessments of the individuals for missing capital gains and recapture of depreciation in their returns (and Godcharles for receiving an ordinary dividend rather than a capital dividend from the operator). In particular, she accepted the valuation of the three-year old home by the ARQ valuator using the cost method (i.e., the costs of construction, plus a promoter’s notional profit of 5%, plus net GST/QST of 9.495%, minus notional depreciation of 4% and plus the land appreciation), with that reducing the residual amount to be allocated to the goodwill.
Neal Armstrong. Summaries of Godcharles v. Agence du revenu du Québec, 2020 QCCQ 2219 under s. 251(1)(c) and General Concepts – fair market value – real estate.
CRA indicates that there is no requirement to distribute income on a TFSA overcontribution where there has been 1% monthly tax but no advantage tax
CRA confirmed that the only adverse consequence of a TFSA over-contribution is the 1% monthly tax under s. 207.02 on the highest “excess TFSA amount” for each month (subject to such penalty tax being waived under s. 207.06(1)) – unless there is a “deliberate over-contribution,” which CRA indicated referred “to a TFSA contribution knowingly made by an individual in excess of their TFSA contribution limit, generally with a view to generating a rate of return sufficient to outweigh the cost of the 1% tax.” Although it would be a mistake to give the precise wording of a Technical Interpretation the same weight as that of a Folio, it is interesting that this constitutes a restrictive (i.e., favourable) interpretation of the statutory definition of a “deliberate over-contribution.”
CRA also confirmed that there is no requirement to remove any income or capital gains that are attributable to an excess TFSA amount, except where the 1% tax is waived or in the deliberate over-contribution situation.
Neal Armstrong. Summary of 14 July 2020 External T.I. 2020-0843071E5 under s. 207.01(1) - deliberate over-contribution.
CRA confirms that s. 60.03 permits transferring pension income to the higher-income spouse
CRA indicated that the lower-income spouse, whose fees payable to a retirement home were based on his or her net income for ITA purposes, could in accordance with s. 60.03 transfer 1/2 of the eligible pension income of such individual to the higher-income spouse.
Neal Armstrong. Summary of 29 April 2020 External T.I. 2020-0845211E5 under s. 60.03(2).
Income Tax Severed Letters 23 September 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hansen – Tax Court of Canada finds that CRA could not open up years where an individual annually purchased, occupied, improved and sold a home
An individual in the concrete pouring or foundation repair business sold five homes in succession over a six-year period after having occupied and improved them. D’Auray J found that the first three sales were statute-barred given that the taxpayer had relied on advice from his accountant that he was eligible for the principal residence exemption. For the two latter sales that were within the normal reassessment period, the gains were on income account given that he dealt with those houses “in a business-like way: he selected newly built homes that would be easier to sell, leveraged his construction industry experience to make improvements that would attract future buyers and picked homes in desirable markets.”
No gross negligence penalty was applicable, again, given his reliance on his accountant’s advice. D’Auray J also in passing noted the presumption in Mensah that the benefit of the doubt in s. 163(2) penalty matters should be given to the taxpayer.
Neal Armstrong. Summaries of Hansen v. The Queen, 2020 TCC 102 under s. 152(4)(a)(i), s. 9 – capital gain v. profit – real estate, and s. 163(2).
CRA finds that Reg. 5901(2)(b)(ii)(A) does not taint a siloed dividend paid by FA to Canco1 even though another Canco holds other FA shares through an LP
Canco1 owns 100% of the Class A shares, and a limited partnership (LP) with partners (including Canco 2) at arm’s length with Canco1 owns 100% of the Class B shares, of a foreign affiliate (FA) respecting Canco1 and 2. FA pays a dividend to Canco1 on the Class A shares. Could Canco1 elect under Reg. 5901(2)(b) to have the dividend received by it treated as paid out of pre-acquisition surplus of FA (i.e., treated as an ACB reduction)?
Although there was textual ambiguity on the point, CRA found (with some assistance from the Explanatory Notes) that the Reg. 5901(2)(b)(ii)(A) requirement, that no member of LP (i.e., Canco 2) be a corporation that is otherwise eligible to elect under Reg. 5901(2)(b)(i), was only applicable where such LP in fact was receiving a dividend that otherwise could be elected upon to reduce the ACB of shares.
However, the Reg. 5901(2)(b)(ii)(A) tainting of a dividend by FA to Canco1(and Canco 2) would apply if FA had only one class of shares and a dividend was paid on a pro rata basis to both Canco1 and LP.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.7 under Reg. 5901(2)(b)(ii).