News of Note
CRA indicates that a deduction for services donated to an NPO could be offset by imputed barter income
Email this ContentCRA addressed the situation of a non-profit organization (the “NPO”) soliciting in-kind contributions of goods and services from local suppliers, e.g., landscaping services from a landscaper, with the supplier agreeing because it believed that it would benefit from word of mouth advertising and promotion that would result in increased revenues. CRA stated:
[I]f a self-employed landscaper barters landscaping services to a local non-profit organization in exchange for advertising and promotion for their business, the landscaper would be required to include in income the value of the services provided to the non-profit organization. The landscaper would then claim a deduction for advertising and promotion used in the business for the same amount as the total value of the services given up. Additionally, the landscaper could also generally deduct costs of materials, etc., incurred in providing the landscaping services.
Neal Armstrong. Summary of 6 January 2020 External T.I. 2019-0800941E5 under s. 9 – computation of profit.
Income Tax Severed Letters 5 February 2020
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Prince – Federal Court of Appeal confirms that a CRA proposal letter is not a judicially-reviewable “decision”
Rennie JA confirmed the decision of Annis J that a CRA “proposal” letter to the taxpayer setting out proposed reassessments for his 2007 to 2016 taxation years and giving him 30 days to provide additional information and representations was not a “decision” that the Federal Court had the jurisdiction to review under the Federal Courts Act. Furthermore, CRA had subsequently reassessed the years in issue and, under ss. 152(8) and 169, such “reassessments [were] valid and binding until set aside by the Tax Court” – so that it was not relevant that, prior to the proposal letter and such reassessments, the taxpayer had requested an internal review of the Minister’s decision not to admit most of the years in question to the voluntary disclosure program.
That previous VDP request was effectively a request for potential relief from penalties and interest, and in this regard Rennie JA noted that CRA had the discretion under s. 220(3.1) to waive such amounts, with such exercise of discretion being “subject to public law scrutiny and remedies in the Federal Court” – so that there was nothing untoward about the taxpayer’s unsuccessful VDP application having been rendered completely moot.
Neal Armstrong. Summaries of Prince v. MNR, 2020 FCA 32 under Federal Courts Act, s. 18.1(3) and ITA s. 152(8).
CRA may bifurcate what otherwise might be a single supply of flight training time into a GST/HST taxable and exempt component
CRA indicates that the supply of solo and dual flight time by a flight school to would-be pilots can qualify as exempt vocational training only to the extent that such flight time does not exceed the minimum times set by federal regulation for the provision of licences and ratings – and that the purchase of hours in excess of this minimum is taxable.
This is an unusual example of CRA purporting to bifurcate what otherwise might be a single supply of a service into two components. Such bifurcation arguably could be justified by Intrawest.
Neal Armstrong. Summaries of GST/HST Memorandum 20-4 “Vocational Schools and Courses” December 2019 under ETA Sched. V, Pt. III, s. 1 – vocational school, s. 6 and s. 8.
Univar – Tax Court of Canada faults the Crown for arguing for adherence to the Tariff of costs
Univar lost it appeal of a s. 212.1-related GAAR assessment in the Tax Court but succeeded in having that decision reversed by the Federal Court of Appeal. Boyle J awarded costs against the Crown of $300,000, or approximately ½ of Univar’s tax counsel’s fees. In addition to more mundane factors such as the significant amount at stake ($40M), and the volume and complexity of the case, he rejected the Crown’s argument that a subsequent Budget amendment (announced after the case was heard) detracted from the significance of the GAAR issue at stake, and also indicated that a further factor tending to increase his cost award was “the Crown’s stubborn clinghold to the Tariff amount [of $6,500], and its incorrect view that this Court needs to identify a principled reason to depart from the Tariff.”
Neal Armstrong. Summary of Univar Holdco Canada ULC v. The Queen, 2020 TCC 15 under Rule 147(3).
5 more translated CRA interpretations are available
We have published a further 5 translations of CRA interpretations released in March, 2011 (all of them, from the 2010 APFF Roundtable). Their descriptors and links appear below.
These are additions to our set of 1,078 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for February.
FAPI earned by foreign sub of a CCPC will be double-counted under the s. 125(5.1)(b) passive-income grind
The reduction of the US federal corporate tax rate from 35% to 21% (assuming no substantial state income tax) may now necessitate a determination of whether central management and control of an FA is exercised in Canada. If a US-incorporated foreign affiliate nonetheless is centrally managed and controlled in Canada, its net earnings from an active business will be added to its taxable surplus rather than its exempt surplus. On a full distribution of the FA's after-tax earnings of $79 out of taxable surplus, Canco would be required to use the deductions under both ss. 113(1)(b) and (c) to shelter the dividend inclusion and, even so, there would be $20 of unsheltered income that was recognized by Canco.
Where active business income earned by a controlled foreign affiliate that is an LLC in Year 1 is distributed to its member in a subsequent year, this results in an effective tax rate (in the case of a B.C. resident) of 66.87%. This high effective tax rate results from the member being entitled to a deduction only under s. 20(12) respecting the US tax. If there is no timing mismatch, then the ETR improves to 57.67%.
Where there is a Canadian-controlled private corporation, the optimal structure for the earning of aggregate investment income entails the AII being earned by a C corp. that is a CFA of the CCPC. The all-in ETR is 50.75%, which compares favourably to the ETR for AII earned by a CCPC directly of 54.99%.
S. 125(5.1)(b) provides an additional restriction on the business limit of a CCPC based on the passive income (a.k.a., AAII) of it and associated corporations. A CFA usually will be associated with the CCPC, in which case, the AAII of the CFA will be taken into account for these purposes. However, such income, by virtue of being foreign accrual property income, also will be AAII of the CCPC itself (without any “FAT” deduction under s. 91(4).)
Therefore, FAPI earned by a CFA that is associated with the Canadian corporate taxpayer may be counted twice toward the new passive income restriction.
Neal Armstrong. Summaries of Tim Barrett and Kevin Duxbury, “Corporate Integration: Outbound Structuring in the United States After Tax Reform,” 2018 Conference Report (Canadian Tax Foundation), 18:1-76 under s. 113(1)(c), s. 20(11), s. 20(12), Reg. 5907(1) – net earnings, s. 91(4), s. 91(5), s. 129(1), s. 120.4(1) – split income – (a)(i), s. 129(4) – NERDTOH, s. 125(5.1)(b).
Lilyfield –a dissolved corporation’s appeal to the Tax Court was a nullity notwithstanding a prior Tax Court approval of an application to appeal
Similarly to the corresponding provision of the OBCA considered in 1455257 Ontario, s. 219(2)(a) of the Corporations Act of Manitoba provides that a proceeding commenced by a corporation before its dissolution can be continued as if it had not been dissolved. A taxpayer, before its dissolution for failure to file returns, had brought an application (to which its proposed Notice of Appeal was attached) to extend the time for launching its appeal, with that Notice being filed immediately after the granting of the application, which occurred after the corporation was dissolved.
MacPhee J found that the filing of the extension application was insufficient to consider that the proceeding (the appeal) had been launched before the dissolution – and essentially followed 1455257 Ontario in finding that the Manitoba statute “does not allow a dissolved corporation to initiate a civil procedure.”
Neal Armstrong. Summary of Lilyfield Development Inc. v. The Queen, 2020 TCC 16 under s. 169(1).
McCartie – Federal Court of Appeal agrees that it was inappropriate to make a Rule 58 reference where the evidentiary record needed to be established by witnesses
The unrepresented taxpayer appealed the determination by the Tax Court that four questions that he had sought to have determined under Rule 58, including whether evidence relied on by CRA in assessing him had been obtained in violation of his Charter rights, were not appropriate for determination under that Rule. In dismissing the appeal, Rivoalen J.A. noted that the questions would require the calling of witnesses to establish the evidentiary record, so that it was reasonable for Bocock J to consider that the objective under the Rule, that the answers provided “may dispose of all or part of the proceeding or result in a substantially shorter hearing or a substantial saving of costs,” would not be met.
Neal Armstrong. Summary of McCartie v. Canada, 2020 FCA 18 under Rule 58(2).
CRA indicates that a functional currency reporter realized a capital gain when a Cdn. dollar refund claim appreciated until receipt
Canco, which had elected to use a functional currency, claimed a refund (made in Canadian dollars as required by s. 261(11)) by filing an amended return for a year (apparently for the carryback of a loss to that year). As a result of the subsequent appreciation of the Canadian dollar as compared to the rate applicable to the particular year, it realized an FX gain (relative to the qualifying currency) when it received the refund in Canadian dollars. Was this gain ordinary income, a capital gain or a nothing?
After noting that “where a loss from a subsequent taxation year is carried back to a particular taxation year, the revised income taxes payable and any resulting refund are computed using the exchange rates applicable to that particular year, regardless of the exchange rate in the subsequent year,” CRA indicated that this situation was essentially dealt with in Folio S5-F2-C1, which addresses the reverse situation of FX gains in Canadian dollars on foreign tax refunds or payments – so that, here, the FX gain was a capital gain to be computed based on the FX rate change between that appliable to the previous year and that at the time of receipt. The response was quite vague as to how to compute the FX rate applicable to the previous year (the ILBD didn't seem to be asking for detailed guidance on this point).
Neal Armstrong. Summary of 31 July 2018 Internal T.I. 2016-0649631I7 under s. 261(5)(c).