News of Note

Comments of the Joint Committee on draft s. 247(2.1) (which is a revised version of former draft s. 247(1.1) and whose general premise is that s. 247(2) applies in priority to all other provisions of the Act) included:

• If s. 247(2) was intended to apply to a contribution of capital made by a Canadian parent to a non-resident subsidiary, or to a gift by a Canadian-resident individual to a non-resident relation, this would result in the need to comply with transfer pricing documentation requirements (which would, for example, be impossible for gifts) and the potential application of transfer pricing penalties. On the other hand, if the transfer pricing rules should be “read down” to avoid such a result, there would be a resulting unexpected and undefined narrowing of the transfer pricing rules’ scope.
• If s. 247(2) was intended to apply before the rollover rules (e.g., s. 85(1)(e.2)) would this mean, for example, that the non-resident transferor would be deemed to have received more shares, thereby ousting s. 85(1)(e.2) to any other adverse consequences – or if s. 247(2) deemed there to be additional boot, would this mean that the safe harbor from s. 85(1)(e.2) no longer was available?
• S. 17(1) would be rendered redundant as between non-arm’s length parties even though such non-arm’s length circumstances were “front and centre” in the design of the s. 17(1) rules – and any “safe harbour” contained in s. 17 or other specific rules may be rendered moot by the prior application of s. 247(2).

Neal Armstrong. Summary of 5 November 2019 Joint Committee letter entitled “Transfer Pricing Amendments” under s. 247(2.1).

This morning's release of 11 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their May 2019 release) is now available for your viewing.

In order to be Class 43 depreciable property, oil processing equipment of the taxpayer had to qualify as property acquired by the taxpayer to be used directly or indirectly by it in Canada primarily in processing goods for sale - and a similar test applied in determining whether the equipment was “qualified property” for investment tax credit purposes. In the case of some of the equipment, its initially contemplated use (which in fact occurred) was to purify oil for 10 months at the Bruce nuclear power station. This did not qualify as processing “for sale” because the oil in question at all times was oil of the customer rather than being sold to it. Nonetheless, the use test of processing for “sale” was satisfied because the taxpayer’s intention on completion of this contract was to use the equipment for purifying (i.e., processing) dirty oil that it acquired for the purpose of sale in its purified form.

The ITC “qualified property” test (which was easier to work with, because it had an explicit purpose test) was also satisfied.

In finding that safety equipment did not qualify, Sommerfeldt J stated:

While safety is a commendable and essential objective of any oil processing business, safety equipment is used for the purpose of promoting and ensuring safety, rather than for the purpose of processing oil for sale.

Neal Armstrong. Summary of Stark International Inc. v. The Queen, 2019 TCC 248 under Sched. II, Class 29.

ONEnergy found that a company that had already sold all its business could claim input tax credits for the GST/HST on its legal fees in successfully suing its executives for having paid themselves inflated bonuses and option termination payments out of the sales proceeds. In this regard, Webb JA found that ETA s. 141.1(3), which provides for an ITC where the service (or property) is acquired in connection with the disposition or termination of a commercial activity, is more specific than s. 141.01(2), so that a person will not lose its entitlement to claim an ITC solely because it was not making any taxable supplies at the time the service (or property) was acquired.

CRA implicitly accepted ONEnergy (including making a brief reference to “either” s. 141.1(3) or 141.01(2) being satisfied), but stated that the “Domestic Compliance Programs Branch may find that the conditions of subsection 141.1(3) are not met in particular situations where the specific facts are different than those in ONEnergy.”

Neal Armstrong. Summaries of 28 February 2019 CBA Roundtable, Q.16 under ETA s. 141.1(3)(a).