News of Note

Reg. 5907(2.02) can reclassify additions of exempt earnings (or deductions from exempt loss) as additions to taxable earnings. Although this anti-avoidance rule clearly can apply to some intercompany excluded-property transfers that are “avoidance transactions,” on a literal reading its application could be much broader. However, it is suggested that:

On the basis of the legislative history leading up to Bill C-48, it is clear that regulation 5907(2.02) is one of several rules designed to target a specific form of tax avoidance, namely, foreign affiliate surplus-stripping transactions, which involve a disposition of excluded property by a foreign affiliate for the purpose of converting, on a tax-free basis, low-taxed taxable surplus into exempt surplus that can then be repatriated, or otherwise relied on, to minimize Canadian income taxes. A textual, contextual, and purposive interpretation of regu­lation 5907(2.02) supports the view that the rule should apply only in these limited circumstances.

Neal Armstrong. Summary of Gwendolyn Watson, "The Foreign Affiliate Surplus Reclassification Rule", Canadian Tax Journal (Canadian Tax Foundation) (2019) 67:4, 1233-66 under Reg. 5907(2.02).

CRA has taken the position (most recently in 2008-0271381E5 and 2010-0359401C6) that a rebate paid by a life insurance broker out of its commission to the client purchasing the policy is taxable to the client under s. 12(1)(x), stating, for example, in 2008-0271381E5, that:

[B]ecause income from a life insurance policy is taxed under section 12.2 or paragraph 56(1)(j) … an amount received as an inducement to purchase a life insurance policy would be an amount received in the course of earning income from property for the purposes of paragraph 12(1)(x).

Croteau, J.C.Q. referred approvingly to these CRA technical interpretations (and a similar ARQ one), which she described as a view that “the holder of a policy that includes both a life insurance component and a savings component holds property that is a source of income.”

The facts before her were more extreme. An insurance broker, whose licence subsequently was revoked, engaged in a scheme to cheat insurers, resulting in his pocketing commissions from them in excess of the amounts he agreed to pay to his clients. One of these clients was the taxpayer, who received amounts ($90,000) that were well in excess of the premiums he was required to pay under a universal whole life policy before he was able to terminate the premium obligations. The $90,000 was taxable to him under the Quebec equivalent of s. 12(1)(x).

Neal Armstrong. Summary of Scotti v. Agence du revenu du Québec, 2019 QCCQ 7579 under s. 12(1)(x).

Amendments enacted on June 21, 2019 provide three measures intended to provide support to Canadian journalism organizations producing original news content, namely:

• a 25% refundable labour tax credit for salary or wages payable on or after January 1, 2019 in respect of an eligible newsroom employee of a qualified Canadian journalism organization (QCJO) that also qualifies as a qualifying journalism organization (QJO);
• a 15% non-refundable personal income tax credit to allow individuals to claim digital news subscription costs paid to a qualifying organization after 2019 and before 2025; and
• extending eligibility for registration as a qualified donee to registered journalism organizations (RJO), beginning on January 1, 2020.

CRA has published detailed guidance on its interpretation of these measures, especially on the 25% labour tax credit (which is capped at $13,750 per annum per employed journalist), including an attempted articulation of its policy that the journalistic content must be generated “based on journalistic processes and principles, intended for a general audience.” (For this aspect of its positions and practices, it relies on the recommendations of an Independent Advisory Board..) Somewhat as expected, CRA has taken the position that only regular journalist employees can qualify, so that amounts paid by the QJO to freelance employees would not qualify.

CRA notes that the only remedy of an organization which CRA has decided not to accept as a QCJO is to seek judicial review of that decision in the Federal Court.

Many of the concepts used in the RJO definition (or, to be more precise, the “qualifying journalism organization” definition on which it mostly rests) are modeled on the registered charitable organization rules, so that the corresponding CRA policies (e.g., as to what constitutes a permissible related business) have a familiar sound to them.

Summaries of “Guidance on the income tax measures to support journalism” CRA Webpage 23 December 2019 under s. 248(1) - qualified Canadian journalism organization – para. (b), subpara. (a)(v), subpara. (a)(vi), s. 125.6(1) - qualifying journalism organization, qualifying labour expenditure, eligible newsroom employee, s. 125.6(2), s. 12(1)(x), s.118.02(1) - qualifying subscription expense, s.118.02(2), s. 149.1(1) – qualifying journalism organization – para. (b), para. (c).

The ETA defines a university to mean “a recognized degree-granting institution or an organization that operates a college affiliated with, or a research body of, such an institution”. CRA has published a new GST/HST Memorandum which, in addition to discussing various exemptions applicable to supplies made by a university, provides considerable elaboration on how CRA applies this definition. Points made include:

• CRA takes guidance from any applicable provincial Degree Authority Act in considering whether the institution is a “recognized degree-granting institution.”
• An organization is only considered to be operating a college affiliated with a university where there is a formal affiliation agreement that states that the parent organization (the university) agrees to grant degrees to graduates of the affiliated college in exchange for a certain amount of control over the academic standards of, and the courses offered by, the affiliated college.
• A research organization is considered to be a research body “of” the university if it is owned and controlled by the university. The university is considered to “own” the assets for this purpose in various circumstances including if it is entitled to receive those assets on the winding-up of the body. The university is considered to control if it appoints a majority of the members of the governing body (even if such nominees come from other sectors such as the private sector or the federal government).

Neal Armstrong. Summaries of GST/HST Memorandum 20-3 “Universities” December 2019 under ETA s. 123(1) – university, Sched. V, Pt. III, s. 6, s. 7, s. 7.1 and s. 16.