News of Note
Addy – Federal Court of Australia finds that the imposition of flat tax on UK working-holiday visa holders contravened the Treaty non-discrimination Article
Email this ContentThe taxpayer, who was a British citizen aged 23, came to Australia on a “working visa” for a 20-month stint, during which period she was found by Logan J to be resident in Australia on ordinary principles. A citizen and resident of Australia would have largely escaped income taxation on her modest income as a waiter due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.
The taxpayer, although an Australian resident, was by virtue of her citizenship a UK national and not an Australian national under the definition in the Australia-U.K. Treaty. That Treaty's non-discrimination clause (also found in many of the Canadian treaties) read:
Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.
Logan found that this 15% tax contravened this clause given that “Only non-citizens can hold the types of visa that constitute a “working holiday visa.” He stated:
[T]he discrimination between resident derived income from the same source in Australia is based on nationality. It is disguised by the reference to “working holiday maker” but the definition of that term makes it plain that what the disguise covers is nationality. A resident “national” of Australia undertaking the same work as did Ms Addy … would have the benefit of the tax free threshold.
This decision potentially also is of corporate interest given that “nationals” can include companies deriving their status from the domestic law.
Neal Armstrong. Summaries of Addy v Commissioner of Taxation [2019] FCA 1768 under Treaties – Income Tax Conventions – Art. 25 and ITA s. 2(1).
S. 125(5.1)(b) passive income grind can be avoided by winding-up subs
The passive income grind to the small business deduction under s. 125(5.1)(b) potentially can be avoided by promptly winding-up an associated corporation that has realized a passive gain. For example , if Holdco holds Opco and Realtyco, and Realtyco realized a capital gain from selling its land in Year 1, and Realtyco is wound-up before the end of Year 1, then that passive gain will neither affect Opco’s ability to claim the SBD in Year 1 (because s. 125(5.1)(b) operates on a lagged basis) nor in Year 2 (because in Year 2, Realtyco no longer is associated with Opco).
If the passive asset with the accrued gain instead is held by Holdco, Holdco could drop-down that asset to a Newco sub under s. 85(1), with Newco then selling the asset and being promptly wound-up. However, in “this situation…GAAR must be considered” (see e.g., Iberville re using s. 85 to avoid rather than defer tax).
Neal Armstrong. Summary of Martin Lee and Thanusan Raveendran, “Possible Anomaly in the Passive Income SBD Grind?,” Canadian Tax Focus, Vol. 9, No. 4, November 2019, p.1 under s. 125(5.1)(b).
CRA reiterates that the ETA s. 167 is unavailable where a newly-formed Amalco immediately transfers its assets
Two registrants amalgamate to form AmalCo, which immediately thereafter sells all its assets to a registered third party. In finding that no ETA s. 167 election could be made for this sale, CRA indicated that the supplier (AmalCo) did not satisfy the s. 167 requirement that it have “established” the business (this was done by its predecessors, who were deemed separate persons) and by assumption it also did not satisfy the s. 167 requirement that it have “carried on” the business.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.24 under ETA s. 167(1).
CRA is reviewing the Medallion decision
In Medallion, a corporation that acted as a property manager for the rental properties of 10 non-arm’s length owner-corporations in consideration for a percentage of the rents, was found to qualify as the participant in a joint venture, notwithstanding that it had no ownership interest in the properties, so that it had validly elected to be the JV operator. In response to a question as to whether a participant in a joint venture includes a person who contributes solely property management services to the joint venture pursuant to a written joint venture agreement, CRA responded:
We are currently reviewing the extent to which the Medallion decision would affect our position with respect to the issue of who can be considered to be a participant in a joint venture for purposes of section 273 …, and this includes taking into consideration the issue described in the question.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.23 under ETA s. 273(1).
CRA finds that a developer was not entitled to a rebate of its HST costs where it subleased its developed housing lots to a home builder for construction and sale
DeveloperCo which holds land under a 99-year headlease, pays the fees of a third-party contractor (Contractor) to develop the land as housing lots, and subleases the lots to Builder who constructs houses thereon, which are sold to the third party buyers through a sale to them of the subleases. (Polygon, which CRA accepts, effectively found that these sales are taxable, rather than the builder being subject to the self-supply rule under s. 191).
CRA found that because the subleases by DeveloperCo to Builder were exempted under Sched. V, Pt. I, s. 7 rather than s. 6.1 or 6.11, DeveloperCo was not entitled to a rebate under s. 256.1 for the HST charged to it on the development costs borne by it – notwithstanding that the transactions generated fully-taxable revenues from the sublease purchasers. CRA recognized that this result was anomalous, but did not think that the provisions offered up a solution.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.22 under ETA s. 256.1(1).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in June and May, 2011. Their descriptors and links appear below.
These are additions to our set of 999 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Kufsky – Tax Court of Canada finds that a dividend that had not been declared nonetheless was a dividend for tax purposes
In finding that a corporation should be treated as having paid dividends to its shareholder, so that CRA validly assessed the shareholder under s. 160 for a tax debt of the corporation, even though no dividend had been declared, and the only evidence of the payment of a dividend was the cash movements and the corporation’s subsequently-fired accountant issuing T5 slips to the taxpayer, MacPhee J stated:
[A] reported dividend, even if not in compliance with the provincial statute, remains valid for tax purposes … .
The only authority cited for this statement was 2753-1359 Québec dealing with a payment that apparently was not argued to be something other than a dividend; and this statement also might seem at odds with the well-accepted view (codified in s. 8.1 of the Interpretation Act) that tax law attaches consequences to the transactions that occurred as a matter of provincial (or corporate) law. However, the proposition - that a payment can be a dividend under the corporate law even if none of the usual formalities are observed - very well may be correct. See e.g., Cangro Resources (“dividend” was to be given its “accepted ordinary meaning” – that is, of a pro rata distribution to all shareholders, other than a formal reduction of paid-up capital or liquidating distribution.”)
The Kufsky proposition that a dividend declaration is unnecessary also suggests that there may be no need to rectify a badly-drafted dividend resolution.
Neal Armstrong. Summary of Kufsky v. The Queen, 2019 TCC 254 under s. 160(1).
Numerous difficulties remain in applying the FA system to partnerships
Observations on the application (or non-application) of the foreign affiliate (FA) system to partnerships include:
- The s. 93 regime (for converting capital gains into dividends) does not apply to any gain realized by a corporation resident in Canada (CRIC), or an FA of a CRIC, respecting a disposition of a partnership interest in a partnership that holds FA shares. If an actual dividend must be paid in order for a CRIC to benefit from any underlying FA surplus, this might have foreign withholding tax consequences. However, the loss denial rules in s. 93 do apply where a partnership interest is sold. The reason for this apparently inequitable treatment is not clear.
- The “partnership postamble” to the s. 95(1) definition of “excluded property” (EP) attempts to provide for a CRIC’s investment in assets “through” a partnership producing an equivalent excluded property result as if there had been a direct investment. However, in circumstances where the postamble wording is too narrow to accomplish this, there are good arguments that para. (a) of the EP definition (which refers to property of the FA that is “used or held by the [FA] principally for the purpose of gaining or producing income from an active business carried on by it”) can apply to an FA’s partnership interest. Under partnership law in common-law provinces (and somewhat similarly in Quebec), all members of a partnership are considered to be carrying on any activity carried on by the partnership.
- Para. (c) of the EP definition refers to property of the FA “all or substantially all of the income from which is … income from an active business.” Respecting an earlier version of para. (c), concerns were expressed that where a partnership of which a foreign affiliate is a member disposes of capital property used principally for the purpose of gaining or producing income from an active business, the property does not qualify as excluded property, given the requirement that the EP must be property “of” the FA. However, it is now accepted that this likely is not a concern, given inter alia that pursuant to Canadian common-law partnership principles, each member is considered to have an undivided interest in the property of the partnership.
- Where FA2 borrows from a sister FA Finco to fund FA Opco “through” a subsidiary Holdco partnership of FA2, s. 95(2)(y) may be broad enough to render s. 95(2)(a)(ii)(D) applicable so as to deem the interest on the loan to be active business income to FA Finco.
The sticking point in the analysis may be whether paragraph 95(2)(y) is broad enough to deem FA 2 to own its proportionate share of the FA Opco shares for the purpose of satisfying the requirement, set out in subclause 95(2)(a)(ii)(D)(III), that the FA Opco shares be “excluded property of” FA 2. In the context of the recent amendments that are clearly aimed at ensuring that the FA regime in general, and paragraph 95(2)(a) in particular, applies appropriately to FA structures involving partnerships, there are excellent arguments that paragraph 95(2)(y) is broad enough to accommodate this structure, on the appropriate facts.
Neal Armstrong. Summaries of Tina Korovilas and Drew Morier, “Non-Corporate Vehicles in the Foreign Affiliate Context,” Canadian Tax Foundation, 2018 Conference Report, 20:1 – 114 under s. 96, s. 104(1), Reg. 5907(11.2)(b), s. 90(1), s. 93.1(2)(a), s. 93.1(2)(d)(i), Reg. 5901(2)(b)(ii), s. 93(1.3), s. 95(1) – excluded property – para. (e), para. (a), para. (c), s. 95(2)(y), s. 95(2)(z), s. 95(2)(a)(ii)(B)(II), s. 95(2)(a)(ii)(D) and s. 94(1) – exempt foreign trust – (h)(ii)(C)(I).
CRA assessments under a GST/HST voluntary disclosure by a supplier permit a s. 225(4)(c) extension of the period for its customer to claim an ITC
A Notice of Assessment is issued by CRA once a GST/HST voluntary disclosure is finalized. This permits a supplier who has disclosed a failure to charge GST/HST on a taxable supply made more than four years prior to such assessment to disclose such assessment to its customer, so that s. 225(4)(c) can operate to extend the normal four-year period for the customer to claim an input tax credit for GST/HST that is now charged to it and paid by it on the supply from the assessed supplier.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.21 under s. 225(4)(c).
CRA uses information collected on an NR73 as its principal tool in assessing individuals’ residency
Some pension plans provide that after two years of non-residence of the annuitant, the funds in a locked-in retirement account, locked-in RRSP or life income funds cease to be locked-in and can be withdrawn without limitation through a transfer to a non-locked-in retirement vehicle such as an RRSP or RRIF. When asked to confirm non-residence status in this context, CRA indicated it will not simplify its normal procedures for reviewing residency. It stated:
[T]he CRA must conduct a detailed review of all facts and circumstances specific to the individual's situation, which will generally have been brought to its attention by Form NR73. These include residency links with Canada and the duration, purpose, intent and continuity of Canadian and international travel.
Neal Armstrong. Summaries of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.11 under s. 2(1).