News of Note
Hamilton – Tax Court of Canada finds that an overtime meal allowance qualified under s. 6(1)(b)(vii), but that a nearby location could not be used as a proxy under s. 6(6)(b)(i)
Email this ContentThe taxpayer, when working at a remote site for his employer (e.g., providing repair services at a pulp and paper mill) was given a choice of either a living-out allowance of $135.00 daily or a daily meal allowance of $62.50 together with a room (the taxpayer chose the former), and was also provided with an additional overtime meal allowance of $40 which was paid to an employee once he had completed 10 hours of work that day while at the work site.
Campbell J found that the overtime allowance qualified as an exempt “travel” allowance under s. 6(1)(b)(vii), notwithstanding that it was paid regardless of whether an employee was travelling and working remotely, given that in the taxpayer’s circumstances, it in fact was paid in the performance of his employment duties while travelling away from the municipality where he would ordinarily work and away from the employer’s work establishment, and given evidence that the food and room costs in the remote locations were quite high.
The employer also provided the taxpayer with a per‑kilometer allowance based on the distance between a predetermined location (the city hall for Burnaby, where employees such as the taxpayer were based) and the remote work site. In finding that this travel allowance respecting the remote work location could not be excluded from taxable income under s. 6(6)(b)(i), Campbell J stated:
I cannot extend the term “principal place of residence” [in s. 6(6)(b)(i)] to include a pick-up point that is designated by the employer and from which all employees depart. The provision is clear in its intent.
Maybe not so clear. It might be acceptable to base a travel allowance under s. 6(6)(b)(i) based on an approximation or estimate of the number of kilometres between the employee’s principal residence and the remote work site. If so, it is not clear that it should make any difference to base the allowance on a precise measure of the distance between the work site and a location that approximates that of the principal residence.
Neal Armstrong. Summaries of Hamilton v. The Queen, 2020 TCC 23 under s. 6(1)(b)(vii) and s. 6(6)(b)(i).
Tudora – Tax Court of Canada references the principle of judicial comity in following a previous Tax Court decision on the same donation program
After already finding against a taxpayer who had participated in a donation program that had previously been found by Pizzitelli J in Mariano to not work, MacPhee J indicated that this conclusion was confirmed by the principle of judicial comity, which he described as follows:
[U]nder the principles of stare decisis, judges of one Court are not bound by decisions of members of their own Court, but in accordance with the principles of judicial comity, judges should follow the decisions of their colleagues unless there is a cogent reason to depart from a prior decision.
Neal Armstrong. Summaries of Tudora v. The Queen, 2020 TCC 11 under s. 118.1(1) – total charitable gifts and General Concepts – Judicial Comity.
CRA indicates that the s. 86.1(2)(c)(i) U.S.-residence test references central management and control
A U.S. public corporation ('Parentco"), which had two actively-traded classes of common shares, whose respective performance tracked two businesses, wished to spin-off one of the two businesses to the holders of the related tracking shares (the “Original Shares”) as a tax-free distribution for Code purposes. It did so by transferring that business to a newly-incorporated U.S. subsidiary (Splitco) in consideration for Splitco common shares, and then distributing those shares on the Original Shares (with the Original Shares ultimately being cancelled).
In finding that the requirements of ss. 86.1(2)(a) to 86.1(2)(c) for an eligible distribution were met, the Directorate stated, respecting the test in s. 86.1(2)(c)(i) that Parentco and Splitco reside in the U.S. rather than Canada:
The common law principles of central management and control of a corporation must be used in determining the residence of Parentco and Splitco.
It is implicit in this interpretation that the Directorate accepted that the tracking shares were common shares.
Neal Armstrong. Summary of 14 January 2020 Internal T.I. 2018-0785991I7 F under s. 86.1(2).
CRA indicates that a deduction for services donated to an NPO could be offset by imputed barter income
CRA addressed the situation of a non-profit organization (the “NPO”) soliciting in-kind contributions of goods and services from local suppliers, e.g., landscaping services from a landscaper, with the supplier agreeing because it believed that it would benefit from word of mouth advertising and promotion that would result in increased revenues. CRA stated:
[I]f a self-employed landscaper barters landscaping services to a local non-profit organization in exchange for advertising and promotion for their business, the landscaper would be required to include in income the value of the services provided to the non-profit organization. The landscaper would then claim a deduction for advertising and promotion used in the business for the same amount as the total value of the services given up. Additionally, the landscaper could also generally deduct costs of materials, etc., incurred in providing the landscaping services.
Neal Armstrong. Summary of 6 January 2020 External T.I. 2019-0800941E5 under s. 9 – computation of profit.
Income Tax Severed Letters 5 February 2020
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Prince – Federal Court of Appeal confirms that a CRA proposal letter is not a judicially-reviewable “decision”
Rennie JA confirmed the decision of Annis J that a CRA “proposal” letter to the taxpayer setting out proposed reassessments for his 2007 to 2016 taxation years and giving him 30 days to provide additional information and representations was not a “decision” that the Federal Court had the jurisdiction to review under the Federal Courts Act. Furthermore, CRA had subsequently reassessed the years in issue and, under ss. 152(8) and 169, such “reassessments [were] valid and binding until set aside by the Tax Court” – so that it was not relevant that, prior to the proposal letter and such reassessments, the taxpayer had requested an internal review of the Minister’s decision not to admit most of the years in question to the voluntary disclosure program.
That previous VDP request was effectively a request for potential relief from penalties and interest, and in this regard Rennie JA noted that CRA had the discretion under s. 220(3.1) to waive such amounts, with such exercise of discretion being “subject to public law scrutiny and remedies in the Federal Court” – so that there was nothing untoward about the taxpayer’s unsuccessful VDP application having been rendered completely moot.
Neal Armstrong. Summaries of Prince v. MNR, 2020 FCA 32 under Federal Courts Act, s. 18.1(3) and ITA s. 152(8).
CRA may bifurcate what otherwise might be a single supply of flight training time into a GST/HST taxable and exempt component
CRA indicates that the supply of solo and dual flight time by a flight school to would-be pilots can qualify as exempt vocational training only to the extent that such flight time does not exceed the minimum times set by federal regulation for the provision of licences and ratings – and that the purchase of hours in excess of this minimum is taxable.
This is an unusual example of CRA purporting to bifurcate what otherwise might be a single supply of a service into two components. Such bifurcation arguably could be justified by Intrawest.
Neal Armstrong. Summaries of GST/HST Memorandum 20-4 “Vocational Schools and Courses” December 2019 under ETA Sched. V, Pt. III, s. 1 – vocational school, s. 6 and s. 8.
Univar – Tax Court of Canada faults the Crown for arguing for adherence to the Tariff of costs
Univar lost it appeal of a s. 212.1-related GAAR assessment in the Tax Court but succeeded in having that decision reversed by the Federal Court of Appeal. Boyle J awarded costs against the Crown of $300,000, or approximately ½ of Univar’s tax counsel’s fees. In addition to more mundane factors such as the significant amount at stake ($40M), and the volume and complexity of the case, he rejected the Crown’s argument that a subsequent Budget amendment (announced after the case was heard) detracted from the significance of the GAAR issue at stake, and also indicated that a further factor tending to increase his cost award was “the Crown’s stubborn clinghold to the Tariff amount [of $6,500], and its incorrect view that this Court needs to identify a principled reason to depart from the Tariff.”
Neal Armstrong. Summary of Univar Holdco Canada ULC v. The Queen, 2020 TCC 15 under Rule 147(3).
5 more translated CRA interpretations are available
We have published a further 5 translations of CRA interpretations released in March, 2011 (all of them, from the 2010 APFF Roundtable). Their descriptors and links appear below.
These are additions to our set of 1,078 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ 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 February.
FAPI earned by foreign sub of a CCPC will be double-counted under the s. 125(5.1)(b) passive-income grind
The reduction of the US federal corporate tax rate from 35% to 21% (assuming no substantial state income tax) may now necessitate a determination of whether central management and control of an FA is exercised in Canada. If a US-incorporated foreign affiliate nonetheless is centrally managed and controlled in Canada, its net earnings from an active business will be added to its taxable surplus rather than its exempt surplus. On a full distribution of the FA's after-tax earnings of $79 out of taxable surplus, Canco would be required to use the deductions under both ss. 113(1)(b) and (c) to shelter the dividend inclusion and, even so, there would be $20 of unsheltered income that was recognized by Canco.
Where active business income earned by a controlled foreign affiliate that is an LLC in Year 1 is distributed to its member in a subsequent year, this results in an effective tax rate (in the case of a B.C. resident) of 66.87%. This high effective tax rate results from the member being entitled to a deduction only under s. 20(12) respecting the US tax. If there is no timing mismatch, then the ETR improves to 57.67%.
Where there is a Canadian-controlled private corporation, the optimal structure for the earning of aggregate investment income entails the AII being earned by a C corp. that is a CFA of the CCPC. The all-in ETR is 50.75%, which compares favourably to the ETR for AII earned by a CCPC directly of 54.99%.
S. 125(5.1)(b) provides an additional restriction on the business limit of a CCPC based on the passive income (a.k.a., AAII) of it and associated corporations. A CFA usually will be associated with the CCPC, in which case, the AAII of the CFA will be taken into account for these purposes. However, such income, by virtue of being foreign accrual property income, also will be AAII of the CCPC itself (without any “FAT” deduction under s. 91(4).)
Therefore, FAPI earned by a CFA that is associated with the Canadian corporate taxpayer may be counted twice toward the new passive income restriction.
Neal Armstrong. Summaries of Tim Barrett and Kevin Duxbury, “Corporate Integration: Outbound Structuring in the United States After Tax Reform,” 2018 Conference Report (Canadian Tax Foundation), 18:1-76 under s. 113(1)(c), s. 20(11), s. 20(12), Reg. 5907(1) – net earnings, s. 91(4), s. 91(5), s. 129(1), s. 120.4(1) – split income – (a)(i), s. 129(4) – NERDTOH, s. 125(5.1)(b).