News of Note
CRA finds that s. 129(6) deemed business income arises during taxation year of associated payer rather than payee
Email this ContentCorporation B, which carried on an active business, paid rent to Corporation A. As a result of an acquisition of its control, Corporation B ceased to be associated with Corporation A and had a fresh taxation year commence on March 28, 2018.
CRA found that “any taxation year” in s. 129(6) referred to taxation years of Corporation B rather than Corporation A, so that s. 129(6) only deemed Corporation A to have active business income from the rents generated by it during the short Corporation B taxation year ending on March 27, 2018 rather than for all of Corporation A’s calendar taxation year.
Neal Armstrong. Summary of 6 June 2019 External T.I. 2019-0795751E5 under s. 129(6).
Income Tax Severed Letters 17 July 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Polubiec – Tax Court of Canada comments on the harshness of the s. 163(1) penalty
A retired investment dealer had, over a number of years, failed to report around 15 items of dividend or other investment income (some of them, somewhat over $10,000), which he claimed resulted from a failure of an investment dealer (“BMONB”) to send him T5 or other reporting slips for those items (although such forms had been received by CRA). In addition, in his 2014 return he had not reported approximately $700,000 which he had withdrawn from his RRSP. He claimed that he had been advised by a BMONB employee that reporting this amount was not required as it had been subject to 30% withholding on such withdrawal.
Sommerfeldt J found that the taxpayer had failed to establish a due diligence defence for any of the above failures, so that it was unnecessary to determine which of these failures were the ones for which there was a need to establish due diligence. However, he went on to provide an obiter invitation to the Minister to reduce the s. 163(1) penalty, noting the magnitude of the penalty in relation to the taxpayer’s current means, and further noting numerous previous judicial statements along lines that the s. 163(1) penalty was “harsh, particularly where source deductions have been withheld” and “can be disproportionate in nature,” and that “the scope of the due-diligence defence is quite limited, as it does not apply to unreasonable mistakes of fact made in good faith, to mistakes of law made in good faith, or to reasonable mistakes of law.”
Neal Armstrong. Summary of Polubiec v. The Queen, 2019 TCC 146 under s. 163(1).
CRA indicates that tax paid in error does not figure into the SAM formula for SLFIs
The special attribution method formula in ETA s. 225.2(2), as modified by the Selected Listed Financial Institution Attribution Method (GST/HST) Regulations, requires a SLFI to apply a weighted average provincial HST rate (determined based on the relative provincial weightings of its stakeholders) to the net federal GST “payable” by it under A of the formula to arrive at the level of provincial HST that normatively should have been payable by it, and to then compare this normative provincial HST to the actual provincial HST “payable” by it (under element F of the formula) to determine whether it is entitled to a refund or is obligated to make a top-up payment – subject to the making of special adjustments under element G of the formula, and subject to further elaboration for Quebec.
CRA indicated that the s. 123(1) definition of tax “is interpreted by it to include only amounts of tax that are actually payable under Part IX, such as tax under subsections 165(1) and (2),” so that “an amount paid in error as or on account of tax is not tax for GST/HST purposes.” Thus, in its view, such tax paid in error does not go into elements A and F of the formula, nor is a refund of the tax paid in error deducted under G of the formula as a refund of “tax under” e.g. ETA s. 165(1).
Neal Armstrong. Summaries of 19 January 2019 Interpretation 165888 under Selected Listed Financial Institution Attribution Method (GST/HST) Regulations, s. 46(1) - G2 - s. (iii) and s. 263.01(1).
6 more translated CRA interpretations are available [corrected]
We have published a CRA interpretation released last week and a further 5 translations of CRA interpretations released in November, 2011. Their descriptors and links appear below.
These are additions to our set of 909 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 2/3 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA finds that a fee-sharing arrangement that gave a small share of revenues generated by him to a contract dentist was GST/HST exempt
A professional dentistry corporation (“PC”) agrees with a dentist acting as independent contractor (Mr. D) that all patients treated at PC’s clinic by Mr. D are patients of PC, that PC will do all the invoicing, and that PC will pay to Mr. D 40% of the revenues generated from treatments performed by him (net of specified expenses including the payroll of contributing dental hygienists).
In finding that the 60% retained by the Recipient was not consideration for a taxable supply made by it, CRA stated
The terms of the contract clearly established that during the term of the contract, all patients treated by the [Mr. D] were patients of [PC] and that, consequently, all invoicing was to be done by [PC]. The contract terms did not include any clause for the supply of property or administrative services. Thus, the contract terms do not permit a conclusion that the portion of the net revenues retained by [PC] represented consideration for a supply.
We instead consider that the underlying character of the terms of the contract entailed a division amongst the parties of the [exempt] fees paid for health services rendered to patients.
Neal Armstrong. Summary of 20 February 2019 Interpretation 175346 F under ETA – s. 123(1) – supply.
CRA rules on using s. 107.4 transfers to split up ETFs
In connection with an arm’s length acquisition transaction, apparently of the business of managing exchange-listed mutual fund trusts, holders of Series D or O Units of some of such funds (the Participating Public Funds) wish to become investors in corresponding “New Funds” and thereby continue to have their investments managed by the previous managers, rather than remaining as investors in the Participating Public Funds and having their investments managed by the new managers.
CRA provided s. 107.4 rollover rulings respecting a transfer of a proportionate part of each security holding of each Participating Public Fund (based on the percentage of the NAV of the Participating Public Fund attributable to the units of the Series D or O Unitholders) to the corresponding New Fund (held by the Series D or O Unitholders) for no consideration, with the Series D or O Units in the Participating Public Fund being cancelled for no consideration.
Neal Armstrong. Summaries of 2018 Ruling 2018-0778961R3 under s. 107.4(1) and s. 107.4(2.1).
CRA indicates that Canadian land was not Treaty-exempt even where it did not generate income
CRA indicated that a non-resident individual residing in Hong Kong for the purposes of the Canada-Hong Kong Convention who disposed of Canadian land was not exempted under the Convention on the taxable capital gain notwithstanding that the property did not generate any income, stating:
[T]he reference to Article 6, "Income from Immovable Property", in Article 13, paragraph 1, of the Convention does not have the effect of reducing the scope of that paragraph.
Neal Armstrong. Summary of 4 June 2019 Internal T.I. 2018-0783441I7 F under Treaties Income Tax Conventions – Art. 13.
CRA indicates that where there is a direct shipment of goods to a customer of a customer, that generally will determine the province of the supply
A supplier, who prepares printed material for a customer (the “Recipient”), delivers the printed matter either by using a Canada Post mail drop, where the printed matter will then be delivered by Canada Post to the Recipient’s customers or proposed customers, or directly to an address (typically a customer’s address) specified by the Recipient. CRA stated:
The CRA’s position has been that where a registered supplier supplies goods on a delivered at destination basis and the terms for the sale of the goods dictate that the supplier must deliver the goods to a destination specified by the recipient, the delivery of the goods will generally be considered to be part of a single supply.
In CRA’s view, it generally would be inappropriate to bifurcate the supply of the goods into a delivery supply and a supply of the goods, and it would generally be necessary to track where each mail drop was being sent in order to determine the provincial place of supply of the goods (the printed material) delivered using the Canada Post mail drop.
Neal Armstrong. Summary of 14 March 2019 Interpretation 152843 under ETA Sched. IX, Pt. II, s. 1.
Fortyseven Park Street – Court of Appeal of England and Wales finds that users of time shares in complex with boutique-hotel level of service were using hotel or similar accommodation
The applicable VAT Directive and the similarly-worded UK VAT legislation provided that an otherwise-exempt supply by way of “leasing or letting of immovable property” was unavailable for “the provision of accommodation … in the hotel sector or in sectors with a similar function.” This exclusion applied to what essentially was a time share arrangement for a property in Mayfair, London that had been converted to 49 residences. The numerous “purchasers,” in consideration for a lump sum, each acquired the right, after making a reservation, to use a residence of the particular quality level (1 to 5) for which they had paid, for up to 21 days a year during the term of approximately 50 years (plus for a further 14 nights on payment of a modest charge). Members, when in occupation, had access to the amenities of a boutique hotel, e.g., concierge, internet room, daily housekeeping.
Newey JA found that the exclusion applied notwithstanding the long-term nature of the rights acquired, stating:
The fact that Membership gives "the flexibility to enjoy short stays of a stated maximum amount each year, in an environment similar to a hotel and with the services which can be expected in a hotel" … was surely something that the FTT [below] could properly take into account in arriving at its assessment.
This decision might be of some assistance in considering what is a hotel for purposes of the ETA definition of residential complex.
Neal Armstrong. Summary of Revenue and Customs v Fortyseven Park Street Ltd, [2019] EWCA Civ 849 under ETA s. 123(1) – residential complex.