News of Note
CRA confirms that contributed surplus will cease to be recognized for thin cap purposes if the contributor ceases to be a specified non-resident shareholder
Email this ContentWe have published our summaries (provided in more abbreviated form than prior years) of the oral responses given by CRA at the May 15, 2019 IFA Roundtable together with the written questions posed. Next up, we will summarize the oral responses of Ted Cook and Stephanie Smith to some of the questions posed to them at the IFA Finance Roundtable.
Q.1 of the CRA Roundtable confirmed the 1995 CRA position that, in order for contributed surplus to be recognized for thin cap purposes, the contributor must still be a specified non-resident shareholder at the time the equity amount computation is made for the year, i.e., at the end of that year. CRA further indicated that, in order to be included in the determination of the monthly average under s. (a)(ii) of the “equity amount” definition, the contributed surplus must also have been contributed by a specified non-resident shareholder by the beginning of the month for which that contributed surplus amount is taken into account in that computation.
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.1 under s. 18(5) – equity amount – s. (a)(ii).
6 more translated CRA interpretations are available
We have published translations of 6 CRA interpretations released in March and February, 2012. Their descriptors and links appear below.
These are additions to our set of 861 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 ¼ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CIBC World Markets – Federal Court of Appeal finds that a non-resident PE had deemed separate person status sufficient to enjoy zero-rating notwithstanding an ETA s. 150 election
Administrative services provided by the appellant (“WMI”) to its parent (“CIBC”) respecting activities carried on by CIBC through its non-resident branches were treated by CRA as not being zero-rated under ETA Sched. V, Pt. VII, s. 2 because of an ETA s. 150(1) election made between the two companies, which deemed “every supply” between them to be an exempt financial supply (so that WMI’s related inputs did not generate input tax credits). The Crown argued that ETA s. 132(3), which merely deemed CIBC to be a non-resident person in respect of “activities” carried on by it through its non-resident permanent establishments, was inadequate to the task of deeming those PEs to be separate persons for s. 150 purposes.
Noël C.J. approached this issue from the perspective that:
Applying subsection 150(1) to deemed exported supplies under subsection 132(3) would defeat the tax neutrality which this provision is designed to achieve by imposing a less favourable and more onerous tax treatment on financial institutions that operate abroad through foreign branches rather than foreign subsidiaries.
Essentially, he thought the “activities” language in s. 132(3) indeed was adequate because the GST (a “transactional tax”) is therefore essentially only about activities, including those engaged here in the debate as to whether s. 132(3) or s. 150(1) applied in relation to them. The fact that other ETA provisions raised by the Crown had more exacting separate-person language only demonstrated that they were addressing more difficult issues that required the full bench press.
By the way, on Monday evening we will provide abbreviated summaries of all the CRA responses at Wednesday’s IFA CRA Roundtable.
Neal Armstrong. Summaries of CIBC World Markets Inc. v. Canada, 2019 FCA 147 under ETA s. 132(3), s. 123(1) - “closely related group”, s. 132(4), s. 150(2) and Statutory Interpretation - Ordinary Meaning.
Joint Committee suggests issues for consideration in drafting the new employee stock option restriction rules
The Joint Committee has provided comments on the 2019 Budget proposals to align Canada’s employee stock option rules with those in the U.S. through applying a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment for employees of large, long-established, mature firms (i.e., the s. 110(1)(d) deduction). Heads of commentary included:
- The need for an adequate consultation period and subsequent transition period
- The desirability of clarity as to the distinction between “large, long-established, mature firms” and “rapidly growing Canadian businesses” while at the same time having the distinction be grounded in the policy objective (and notes as to the somewhat intractable nature of this distinction).
- The need for a methodology for distinguishing between options that are within the $200,000 annual cap and those that are not where only a portion of the employee’s options are exercised.
- Confirmation that, where the employee is subject to the proposed restriction (i.e., is fully taxable on the benefit), an employer deduction will be available at the same time irrespective of other ITA provisions such as ss. 7(3)(b) and 143.3.
- Moreover, there also should be full contemporaneous employer deductibility for phantom stock units, performance share units and deferred share units regardless of whether such compensation is ultimately paid in cash or in kind.
- Confirmation that the proposed rules do not apply to the s. 110(1)(d.1) deduction.
- The desirability of rectifying the prescribed share definition (as described in the Committee’s November 15, 2016 submission) at the same time as the introduction of the new rules.
Neal Armstrong. Summaries of Joint Committee submission, “Employee Stock Option Changes Announced in 2019 Federal Budget,” 14 May 2019 under s. 110(1)(d) and s. 7(3)(b).
Income Tax Severed Letters 15 May 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Exxonmobil Canada – Tax Court of Canada declines to impute notional income to an essential income-generating activity
A participant in the Hibernia joint venture treated its share of the costs of the initial well in one of the oil reservoirs as SR&ED on the grounds that the well provided experimental validation of the predictions made using an improved systematic and logical methodology (the “reservoir connectivity analysis,” or “RCA”) for evaluating how a reservoir is connected. In rejecting this claim, Owen J stated:
[C]ommon sense and commercial reality dictate that the primary purpose of any such well (even the first one) is not to validate the RCA methodology but rather to obtain data regarding oil in the southern extension.
His conclusion was reinforced by a specific exclusion in the SR&ED definition for drilling for petroleum.
Crude pumped from an undersea oil reservoir up to the “Hibernia Platform” above the ocean surface was, for safety and environmental reasons, not pumped directly from the platform to oil tankers but was instead pumped from the platform through underwater flow lines to an “offshore loading system” (“OLS”) two kilometers away, which was used to load the crude onto the tankers for sale and shipment to refineries.
Reg. 1204(3)(a) excluded “income … derived from transporting … petroleum” from production profits for resource allowance purposes. CRA reassessed to reduce the amount of a participant's production profits for such purposes by the expenses of the OLS (effectively treating those expenses as equalling income from transporting the crude, and then deducting the same amounts as an expense applicable to such transporting income).
In rejecting this adjustment, Owen J stated:
[T]he word “derived” means that the income or loss must exist not because the transporting/transmitting of the petroleum from a natural accumulation of petroleum was necessary in order to sell the petroleum but because the transporting/transmitting of the petroleum in and of itself generated income or a loss. …
[T]he income realized by the joint venture owners from the sale of the crude was derived solely from the market value of the crude. The OLS had no impact one way or the other on the amount of income realized by the joint venture owners from the sale of the Hibernia crude and did not in and of itself generate any income or loss for the joint venture owners.
Although the resource allowance is kaput, the word “derived” is still with us, and it is noteworthy that Owen J adopted a somewhat narrow view of the concept of “deriving” income (cf. Westar – “the authority has established that 'derived from' is a term of wide import"). The unsuccessful CRA approach of imputing income to a portion of a business is vaguely reminiscent of Cudd Pressure (rejecting imputed rent).
Neal Armstrong. Summaries of Exxonmobil Canada Ltd. v. The Queen, 2019 TCC 108 under s. 248(1) - SR&ED and Reg. 1204(3)(a).
Pierre – Court of Quebec finds that a couple had a fraught but “conjugal” relationship
In Quebec they are referred to as “de facto spouses” rather than “common-law partners” but otherwise the federal and Quebec definitions are quite similar. Both reference the concept of cohabiting “in a conjugal relationship,” and both provide that they cease to be common-law partners/spouses if (to use the Quebec language) they have ceased “cohabiting … for a period of at least 90 days … because of a breakdown of their conjugal relationship.” (The federal definition refers to “living separate and apart” rather than to ceasing to cohabit.)
Edwards, JCQ found that a couple continued to live conjugally at the commencement of the 90-day period before a taxation year end, notwithstanding considerable tensions, given that they continued to live under the same roof, presented a united front to their daughter who lived with them, shared the domestic chores (although she did more) and presented as a couple on major social occasions. As for sex:
[T]he jurisprudence has determined that, after a certain number of years of existence as a couple, the absence of such relations does not prevent the court from characterizing their relationship as marital or as conjugal.
Neal Armstrong. Summary of Pierre v. Agence du revenu du Québec, 2019 QCCQ 2137 under s. 248(1) – common-law partner.
CRA indicates that medical escort services can be exempted but not zero-rated
A company provided medical repatriation services, which involved arranging to transport an individual (the patient) from a foreign hospital to a health care facility in the individual’s home country. This would include transport between the medical facilities and airports via ground transportation (ambulance, taxi, or limo), and commercial airline transportation in the company of a medical escort (registered nurses, physicians and advanced cardiac life support trained paramedics). The company charged a daily rate for the medical escort and a fee for the medical equipment required by the patient.
CRA found that the company was making a single supply under the single supply doctrine, and that such supply did not qualify as a zero-rated “ambulance” service. However, it could qualify as an exempt nursing supply under Sched. V, Pt, II, s. 6 or an exempt physician supply under Sched. V, Pt, II, s. 5, depending on who accompanied the patient – whereas if the attendants were paramedics it would not be exempted.
It is unclear to what extent CRA was accepting that a single supply can be exempted if it has significant elements from two separately enumerated exempt items (nurses and physicians) - and that if these exempt elements were present, the exemption would not be tainted by the presence of paramedics.
Neal Armstrong. Summaries of 27 April 2018 Ruling 185888 under ETA Sched VI, Pt, VII, s. 15, Sched. V, Pt, II, s. 6, Sched. V, Pt, II, s. 5 and s. 123(1) - supply.
6 more translated CRA interpretations are available
We have published translations of 2 CRA interpretations released last week and a further 4 released in March 2012. Their descriptors and links appear below.
These are additions to our set of 855 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Unidisc – Court of Quebec effectively agrees with CRA's view that master recordings are tangible rather than intangible property
Unidisc bought master recordings of music (“masters”), i.e., the magnetic tapes containing the original recordings of the songs or other music for the purpose of having them reproduced in order to make and sell song compilations in CD or electronic form.
The CRA position (e.g., in 2007-0240691I7) appears to be that masters are Class 8(j) tangible capital property. However, the ARQ reassessed Unidisc on the basis that the masters instead were eligible capital property (now Class 14.1). It apparently was thrown off track by the agreements for the purchase of masters, which included an assignment of all the vendors’ rights such as intellectual property rights, copyright and the right to use, reproduce or license the masters.
Gouin, J.C.Q. found that such vendors did not have the copyright of the song writers, performers and publishers to assign and that the only rights under the Copyright Act (“CA”) that were assigned to Unidisc were the more limited rights (albeit, still expressed in misleadingly broad terms) described in s. 18 thereof. Accordingly, whenever Unidisc wished to sell compilations, it was still necessary for it to pay royalties to the song creators and publishers.
In allowing Unidisc’s appeal on the basis that the masters were Class 8 depreciable property, she stated:
The quality of the sound recording had nothing to do with the rights protected under section 3, 13 and 15, or even 18, of the CA. In fact, the quality of the sound recording had everything to do with the quality of the physical medium … .
The evidence at trial demonstrated that the allocation of 100% of the price to the physical medium must be allowed. Unidisc acquired the best sound recording for the purpose of generating revenues from making copies.
The distinction between tangible and intangible property also can be significant for GST/HST purposes, e.g., under the place-of-supply rules – and also for the Part XIII distinction between royalties and purchases of goods.
Neal Armstrong. Summary of Unidisc Musique Inc.v. Agence du revenu du Québec, 2019 QCCQ 1818 under Schedule II – Class 8(j).