News of Note
CRA indicates that a unit trust redemption fee would generally be exempted from GST/HST if it was payable by the redeeming unitholder to the trust rather than the fund manager
Email this ContentThe Master Trust Agreements between the manager of various private unit investment trusts and such Funds’ trustee stipulated that redemption charges were payable by the unitholders on redeeming their units. It seemed likely, but unclear, to CRA, based on the limited information provided to it, that such charges were consideration for the service of the Funds in redeeming the units and, therefore, were exempted under para. (d) of the financial services definition as being consideration for the “transfer of ownership” of financial instruments (i.e., it apparently was sufficient that the unitholders ceased to be owners and that it did not matter that there was no new owner of the units).
If, on the other hand, the redemption fees were consideration payable to the Fund manager for its service of “arranging for” the “transfer of ownership” of the units, CRA indicated that this created the possibility that such redemption fees were part of a single supply of taxable management services made by the manager (pursuant to a management agreement between it and the unitholders) for periodic management fees.
Neal Armstrong. Summaries of 3 September 2019 GST/HST Interpretation 173195 under ETA s. 123(1) – financial service – para. (d) and para. (q).
Iris Technologies – Federal Court of Appeal states that CRA’s assessing does not oust Federal Court jurisdiction to review exercises of CRA discretion
During an audit of the appellant (Iris), CRA refused Iris’ requests for immediate payment of its refund claims, suspecting that Iris was participating in a “carousel” scheme (i.e., under which GST/HST is never remitted at the other end of the chain). Iris considered that the requirement in ETA s. 229(1) that net refund claims be paid “with all due dispatch” meant that it should be paid right away rather than awaiting the conclusion of the audit, and appealed the dismissal of its motion in the Federal Court, for an interim mandatory injunction to compel the payment of $62.3 million in GST/HST refunds, to the Court of Appeal.
Rennie JA endorsed the findings in Express Gold that “the obligation to pay a refund with all due dispatch did not displace the Minister’s obligation to verify that the refund is in fact payable under the ETA” and that “’a reasonable interpretation of subsection 299(1) is that the Minister may choose to audit a claim for a net tax refund, in order to determine whether the amount is properly claimed’”.
Respecting the meaning of “with all due dispatch,” he noted:
In what appears to be a relatively complex case, the CRA’s estimate that the audit would take ten months to complete is reasonable. Those ten months have not yet elapsed.
Rennie JA further stated (also similarly to Express Gold):
… I do not wish to be taken as endorsing the Minister’s arguments that the issuing of the notices of assessment deprives the Federal Court of jurisdiction to consider the Minister’s exercise of discretion under the ETA.
…[T]he Federal Court retains jurisdiction to consider the application of administrative law principles and obligations to the exercise of discretion by the Minister in the application of the ETA. Examples of this include allegations of acting for an ulterior purpose or in bad faith, abuse of his or her powers or not proceeding in a reasonable time frame.
Neal Armstrong. Summary of Iris Technologies Inc. v. Canada (National Revenue), 2020 FCA 117 under ETA s. 229(1).
Bayer Canada – CRA is ordered to pare back a s. 231.6(2) requirement for foreign-based information in the absence of any real explanation as to why it needed this much
Bayer Canada, in the course of a transfer-pricing audit, received audit requests for copies of agreements between members of the Bayer group and third parties that were in force during the two years under audit and that satisfied various listed criteria. Bayer Canada resisted. CRA then arranged for the issuance of a requirement pursuant to s. 231.6(2) that was significantly broader in scope than the previous requests, including not having any time limitations, and not containing any qualitative limitations other than that the agreements relate to the purchase or sale of pharmaceuticals.
After referencing the Saipem test of “a rational connection … between the information sought and the administration and enforcement of the ITA,” Fothergill J pared back the terms of the requirement to something roughly comparable to what CRA had previously asked for, and with a further limitation that Bayer Canada was only required to produce Bayer-Group agreements with 21 pharmaceutical companies that had been specifically named by CRA. Before so ordering, he stated:
The CRA has offered no explanation for the dramatic increase in the scope of the information sought in the Requirement. No reasons or rationale may be discerned from the record. The CRA’s failure to explain its abandonment of the pragmatic limits placed on the scope of the preceding requests renders the Requirement unreasonable.
This decision can be seen as an application of the Vavilov test that (as articulated by Fothergill J) the administrative decision under review must “exhibit the requisite degree of justification, intelligibility and transparency.”
Neal Armstrong. Summary of Bayer Inc. v. Attorney General of Canada, 2020 FC 750 under s. 231.6(5)(c).
Income Tax Severed Letters 8 July 2020
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Iberville Developments – Federal Court of Appeal confirms that the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)
A corporate taxpayer having shopping centres with a cost amount and fair market value of $14M and $130M, respectively, contributes the properties under s. 97(2) to a newly-formed LP in consideration for boot of $14M and units with a FMV of $116M. This is a barter exchange so that on general principles, the cost of the units is $116M. S. 97(2)(b) provides that “immediately after” the disposition of the property to the LP, the elected amount of $14M minus the boot of $14M “shall be added” to the ACB of the partnership interest, so that such interest’s ACB is now increased by that amount (which, on these numbers, is nil). The shopping centres are shortly thereafter sold to third parties at a gain (reflecting their low rollover basis), with such gain (mostly, capital gain) allocated to the partners (mostly, to the taxpayer). Subsequently, the partnership is wound up, and the taxpayer realizes a capital loss of around $116M.
Noël CJ agreed with Boyle J below that transactions only somewhat more complex than this did not produce a double adjustment to the ACB of the units under general cost principles and under s. 97(2)(b), as described above. After noting that such a double increase would represent “an absurd result,” Noël CJ stated:
[T]he appellant’s partnership interest had already been acquired when the shopping centres were transferred, thereby eliminating any possibility that, in addition to the subsection 97(2) adjustment, the partnership interest could be increased under section 54 by the “cost”, i.e. the fair market value, of the transferred property … .
In other words, the taxpayer only had a 100% partnership interest both before and after the drop-down transactions (“the Act tracks the partnership interest as a whole rather than as individual units”), so that there was no cost for an increased partnership interest on the drop-downs (there was no such increase), and the only cost base adjustment to be made on the s. 97(2) drop-downs were under s. 97(2)(b).
What if no s. 97(2) election is made? He stated:
Upon transferring capital property to a partnership under subsection 97(1), a partner triggers the application of subparagraph 53(1)(e)(iv) which provides that the adjusted cost base of a partner’s partnership interest is increased by an amount commensurate with its contribution. The fact that the partner receives units in exchange for the properties is not relevant to the computation of the adjusted cost base of its partnership interest as Subdivisions C (capital gains) and J (partners and partnerships) do not recognize the issuance of new units in a partnership as a tax event or changes in the relative interest in a partnership as the acquisition of distinct property.
Thus, it would appear that the issuance of partnership units on a drop-down is irrelevant to the ACB of the partnership interest, whether the drop-down occurs on a non-rollover basis under s. 97(1) or a rollover basis under s. 97(2).
Neal Armstrong. Summary of Iberville Developments Limited v. Canada, 2020 FCA 115 under s. 97(1) and s. 97(2)(b).
GST/HST Severed Letters September-November 2019
This afternoon's release of six severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their September, October, and November 2019 releases) is now available for your viewing.
McMahon v Grant Thornton – Scottish Court of Session (Outer House) finds that an accounting firm was not liable for not suggesting exit tax planning before it was too late
A Scottish entrepreneur (Mr McMahon, or the “pursuer”) sued his accounting firm on the basis that it had failed to advise him to transfer some of his shares of a car dealership company to his wife at least one year before his sale of those shares, so as to enhance access to the UK “entrepreneursʼ relief” (providing a capital gains exemption). The engagement letter with the accounting firm, which was for tax compliance services, stated:
We cannot accept a duty to monitor and unilaterally suggest tax planning advice on specific matters. Advice on the tax implications of such specific matters will be given once you have referred it to us.
Lord Doherty stated that this clause did not have the effect of excluding the raising of tax planning ideas that were “reasonably incidental” to the work included within the tax compliance work retainer. However, he found:
[U]ntil the sale was unexpectedly proposed the pursuer had made it very clear to the defender over a number of years that he had no interest in discussing an exit strategy, and that he had no intention of selling his shares in the business.
In addition, the amount of the capital gains relief had only recently been substantially increased, so as to make spousal transfer planning worthwhile.
Lord Doherty indicated that, once the sale was proposed, he was “not persuaded that the pursuer would have run the risk of delaying the sale in order to implement the idea” of waiting a year so that planning could have been implemented to enhance the entrepreneurs’ relief. The action against the accounting firm was dismissed.
Neal Armstrong. Summary of McMahon v Grant Thornton UK LLP [2020] CSOH 50 (Court of Session (Outer House)) under General Concepts – Negligence.
Phantom s. 74.4(2) income from the original freeze can continue following a refreeze
Taxpayers may treat the pandemic as an opportunity to engage in a “refreeze” transaction, i.e., resetting the redemption amount of freeze preferred shares to accord with the corporation’s current reduced value. In addition to the more obvious valuation issue, a more technical point to be mindful of is that if the initial freeze transaction was subject to the attribution rule in s. 74.4(2), the resulting deemed interest benefit will not be reduced on the refreeze transaction.
Further, if the refrozen preferred shares are redeemed, the "outstanding amount" will apparently be reduced only to the extent of the value of the refrozen shares. Thus, the freezor may technically be deemed to continue receiving "phantom" interest income, even after all outstanding preferred shares are redeemed.
Neal Armstrong. Summary of Alexander Demner and Nicholas McIsaac, “Freezes and Refreezes: Opportunities and Risks in the Era of Self-Isolation,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 5 under s. 74.4(3).
See also Manu Kakkar, Alex Ghani, Boris Volfovsky, "Corporate Attribution: Refreeze May Cause Unsolvable Corporate Attribution Problem", Tax for the Owner-Manager, Vol. 18, No. 3, July 2018, p.6.
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in June and May, 2010. Their descriptors and links appear below.
These are additions to our set of 1,214 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. You are currently in the “open” week for July.
K E Entertainments – U.K. Supreme Court finds that correcting computations of consideration for supplies did not decrease consideration for VAT purposes
A UK bingo club operator was subject to VAT, not on its gross sales proceeds for access to its sessions of games, but only on the net sum retained after deduction of winnings. HMRC issued a notice stating that bingo promoters who (like the taxpayer) had been calculating this net sum on a game-by-game rather than session-by-session basis, could make a claim for having overpaid VAT, which the taxpayer did. (A game-by-game calculation produced more tax because a negative net take on a game could not be deducted from the positive net take on other games.) However, it was precluded by statute from going back more than three years with its refund claims – but there was no such time limitation where a repayment of VAT was claimed based on there being “a decrease in consideration for a supply.” The taxpayer unsuccessfully argued that its change in calculating the consideration for its supplies involved a “decrease in consideration,” so that it could go back more than three years. Lord Legatt stated:
What is required … is a change in the consideration actually received by the supplier. … All that has happened is that the taxpayer has had second thoughts about how the consideration received at the time of the supply should be analysed for tax purposes.
A similar issue could arise under ETA s. 232, which provides for a potential GST/HST reduction where, after GST/HST has been charged on the consideration for a supply, “for any reason, the consideration … is subsequently reduced.”
Lord Legatt also found that it was “clear that there can be only one correct method of calculating the taxable element of fees charged to customers for playing cash bingo and … this was the session by session method and not the game by game method” (stating that there was no reason “for going behind the pricing policy adopted by the taxpayer and treating the fee charged to participate in a session of bingo as if it were a bundle of separate fees charged for the rights to play separate games”). He was pleased to find that there was only one correct method, stating:
In matters of taxation consistency of approach is of critical importance. If the same exercise of apportionment may lawfully be carried out in more than one way, the result is likely to be that different taxpayers whose situations are identical will lawfully pay different amounts of tax. That offends the principle of equal treatment. It is also capable of distorting competition between businesses.
Neal Armstrong. Summaries of The Advocate General (representing Revenue and Customs) v K E Entertainments Ltd (Scotland) [2020] UKSC 28 under ETA s. 232(2), s. 123(1), s. 141.01(5) and Statutory Interpretation - Equal Treatment.