News of Note
Income Tax Severed Letters 26 December 2023
Email this ContentThis afternoon's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that the onus is on it to determine the “reasonable and realistic” allocation of an outbound royalty between the exempt and taxable portions
Royalties were payable by Canco to a non-resident for the right to use copyright and trademarks in connection with the design, manufacturing and sale of products in countries in a particular region.
The Directorate indicated that since the royalties paid were royalties under general principles, they were subject to withholding under s. 212(1)(d) unless exempted under s. 212(1)(d)(vi) or (x).
Regarding what portion of each royalty payment should be treated as exempted under s. 212(1)(d)(vi), CRA cited inter alia Farmparts for the proposition that the onus would on it to determine the portion of the royalty payments that were exempted from Part XIII tax. However (similarly to 2022-0926461C6), it would not be bound by the allocation between (exempt) copyright royalty and (taxable) trademark royalty specified in the licence agreement if that allocation was not “reasonable and realistic” having regard inter alia to the commercial realities of the situation.
Regarding what portion of each royalty payment should be treated as exempted under s. 212(1)(d)(x) as an amount deductible in computing the income of Canco from a business carried on in the foreign country, CRA noted that “[o]rdinarily, such an allocation can be made on the basis of the factual relationship between the deductible royalty payment and the gross income arising from each of the parts of the business that is carried on in a particular country.”
Neal Armstrong. Summaries of 18 February 2022 Internal T.I. 2020-0836351I7 under s. 212(1)(d), s. 212(1)(d)(vi), s. 212(1)(d)(x) and s. 4(1)(b).
CRA applies Gerbro in interpreting s. 94.1
After referring to earlier positions and Gerbro as to the meaning of "portfolio investment" in s. 91.1(1)(b), CRA stated:
[T]he term “portfolio investment” must be given a broad meaning and is not limited to passive investments. In paragraph 94.1(1)(b), the word “portfolio” modifies the word “investment” to specify that the investment in particular assets by the investor is one in which the investor does not have an active role in the management of the item invested in.
CRA also noted that tax attributes to the taxpayer, such as interest deductions, foreign tax credits, or a loss pool, would not necessarily preclude the application of s. 94.1(1) based the “one of the main reasons” test.
Neal Armstrong. Summary of 24 August 2023 Internal T.I. 2019-0810391I7 under s. 94.1(1).
Income Tax Severed Letters 20 December 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA provides relief from imputed interest on small short-term loans made to employees
CRA has modified its webpage on Loans and Employee Debt to indicate that employees generally will not be required to recognize a taxable benefit from an interest-free (or low-interest) loan received from their employer where:
- the total amount of all loans received is $10,000 or less per calendar year;
- the term of the loan(s) is 60 days or less; and
- the loan is not received by virtue of shareholdings of the employee or others with a specified connection.
Neal Armstrong. Summary of CRA Webpage, “Loans and Employee Debt” 14 November 2023 under s. 80.4(1).
Federal Court of Appeal finds that a Federal Court proceeding should not have been completely closed to the public
Stratas JA found no reversible error in the Federal Court’s dismissal of the appellant’s application for judicial review of the Minister’s refusal to remit tax under the Financial Administration Act. Before so concluding, he observed that the Federal Court had closed its whole hearing to the public because the parties intended to make submissions about an earlier remission case including disclosure of confidential tax information. Stratas JA stated:
The default is that court proceedings are open. Any secrecy must be necessary, justified and minimized … .
… In the Federal Court, the submissions containing confidential information were only a small part of the hearing. At most, it should have closed only a small part of its hearing.
Neal Armstrong. Summaries of Ontario Addiction Treatment Centres v. Canada (Attorney General), 2023 FCA 236 under Federal Court Rule 151(2) and Financial Administration Act s. 23(2).
CRA finds that a rescission fee paid to the vendor of a B.C. residential property generally is not subject to GST
S. 42(1) of the Property Law Act (B.C.) provides that a purchaser of residential real property generally may rescind the contract of purchase and sale for the property by serving written notice of rescission on the seller within three days after the date that the acceptance of the offer was signed. S. 6 requires the rescinding purchaser to promptly pay to the seller an amount equal to 0.25% of the purchase price.
CRA indicated that the fee would not be subject to GST under ETA s. 182 except where the sale had been for a taxable supply of real property by a registrant (e.g., a sale by a builder). It also reiterated its position that generally damages payments not within s. 182 are not consideration for taxable supplies.
Neal Armstrong. Summary of 18 April 2023 GST/HST Interpretation 245056 under ETA s. 182(1).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released during July of 2002. Their descriptors and links appear below.
These are additions to our set of 2,668 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
2437299 Ontario – Tax Court of Canada finds that major renovations that did not largely “gut” the buildings were not “substantial renovations”
Russell J found that the appellant had not substantially renovated two Ontario properties, so that their sale was not made by it as a “builder” and were not subject to HST under ETA Sched. V, Pt. I, s. 2.
In determining whether there was substantial renovation of each property, both parties accepted the use of the second of the three methods referred to in GST/HST Technical Information Bulletin B-092 for measuring “substantial” (with 90% appearing in B-092 as the minimum percentage for a property to be considered as having been “substantially renovated”). That method was comparing the total area of renovated floor and wall spaces to the building’s total area of floor and wall spaces.
In applying this method, Russell J accepted that:
“[F]looring” in the definition must mean “sub-flooring” as distinguished from whatever flooring was installed covering over the sub-flooring. … Putting down a new carpet, or new laminate wood flooring … [is not] sufficiently significant to contribute to whether a building might be said to have been “gutted.”
He went on to find in light of these findings (including that the buildings had not been “gutted”) and a further finding that some of the rooms in the buildings had been left largely untouched, that neither building had been substantially renovated.
Neal Armstrong. Summary of 2437299 Ontario Inc. v. The King, 2023 TCC 165 under ETA s. 123(1) – substantial renovation.
CRA finds that s. 39(1.1) extends to individuals’ FX bank deposits
CRA reversed its position in 2017-0712621C6 F that s. 39(1.1) was essentially restricted to bills and coins and did not extend to dispositions of foreign currencies held on deposit at a financial institution by an individual. After noting that, in addition to a more technical meaning, “currency” also could refer “simply to ‘money’ that is used in a country, with the definition of ‘money’ including sums in a bank account,” CRA stated:
[I]n the context of subsection 39(1.1), the phrase “dispositions of currency other than Canadian currency” includes situations where foreign currency funds in a chequing or current deposit account, which entitles the depositor to withdraw the currency on deposit at any time, are converted into another currency or used to make a purchase or a payment.
Neal Armstrong. Summary of 27 October 2023 Internal T.I. 2020-0868031I7 under s. 39(1.1).