News of Note
An employer is more exposed to CPP and EI assessments than for income tax source deduction assessments
Email this ContentTwo differences between an employer’s income tax, and CPP and EI, withholding or remittance obligations:
- If the employer misses the 90-day deadline to file an appeal to the Tax Court from an income tax assessment, it can file an application for a one-year extension under ITA s. 167(5) – whereas there is no such potential extension under the EI Act or CPP Act.
- The Minister may assess employers for failing to deduct or withhold and remit source deductions for EI premiums and for CPP contributions - but cannot assess an employer for income tax source deductions for resident employees if it has failed to withhold them.
Neal Armstrong. Summaries of Gergely Hegedus and Keith Hennel, “Employer Source Deductions: No Ordinary Tax Debts,” Canadian Tax Focus, Vol. 9, No. 4, November 2019, p.5 under s. 167(5) and s. 153(1)(a).
Income Tax Severed Letters 20 November 2019
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA appears to indicate that obtaining a clearance certificate does not relieve an executor of personal liability for estate GST/HST obligations
After noting that:
- s. 267.1(2) generally creates personal liability of a trustee (including the executor of an estate) for the GST/HST obligations resulting from the trustee’s acting as a trustee of the trust (or estate)
- s. 270 provides that a representative such as an executor should not distribute property under the representative's control before obtaining a clearance certificate certifying that all amounts, that are, or can reasonably be expected to become, payable or remittable under Part IX in respect of the reporting period during which the distribution is made, or any previous reporting period, have been paid (or acceptable security therefor provided)
- failure to obtain the certificate renders the representative personally liable for the payment or remittance of those amounts to the extent of the value of the property or money distributed.
CRA stated:
That being said, the fact that a clearance certificate is issued to a representative of an estate, does not free the estate from any outstanding obligations under Part IX and as such, the trustee would still be liable to satisfy these obligations pursuant to subsection 267.1(2).
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.32 under ETA s. 270(4).
Denis – Court of Quebec does not accept the CRA view that a triplex is a single property for tax purposes
The taxpayer sold a triplex in 2011 at a gain, which he reported as being fully exempt under the Quebec principal residence exemption. The basement unit, which represented 54% of the triplex, had been occupied by him for use as his residence and a home office since his purchase of the triplex in 2002. The two upper units had been rented out by him to third parties until 2007, and he provided unconvincing evidence that thereafter they should be regarded as having been used as part of his principal residence.
In confirming the ARQ’s reassessment made on the basis that only 54% of the taxpayer’s gain was eligible for the principal residence exemption, Breault JCQ stated:
[I]n order for two housing dwellings or units in the same immovable to be considered a single housing unit for the purposes of TA section 274 (or ITA 54), they must be sufficiently integrated, one with the other, such that the owner can benefit from full enjoyment of the entirety. …
[N]o transformation or modification of much significance was made to the Triplex in order for the three units to be linked in some manner to each other.
This decision likely is inconsistent with the CRA view (e.g., in 2011-0417471E5 and 2016-0651791C6 – both referred to by Breault JCQ) that a duplex or triplex is a single property for tax purposes.
Respecting an unsuccessful argument of the taxpayer that his rental of one of the upper units to his friend for 14 months in 2008-2009 at his alleged cost should be ignored, Breault JCQ stated:
It is sufficient to note that the unit or property generated revenue to conclude that it was used for the purposes of producing rental income.
The taxpayer made an alternative argument that the upper units, viewed now as separate properties from the basement unit, had undergone a change of use for purposes of the Quebec equivalent of ITA s. 45(1) in 2007, so that their cost had been stepped up to their fair market value on that date. Breault JCQ noted not only that such a change of use had not been established, but that it was inappropriate for the taxpayer to now seek to benefit from a deemed gain and step-up that he had not declared in his 2007 return.
Neal Armstrong. Summary of Denis v. Agence du revenu du Québec, 2019 QCCQ 6708 under s. 54 – principal residence.
Wolf – Federal Court of Appeal questions Tax Court view that an individual could derive business revenues through an LLC
A U.S. engineer provided services to Bombardier in Canada over a 188-day period (straddling the 2011 and 2012 years). The only issue as to whether he had a services permanent establishment in Canada under the Canada-U.S. Treaty was whether he satisfied the test in Art. V, 9(a) of the Treaty that “more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in [Canada] by that individual.”
The taxpayer derived most of his income through a New York LLC. The Tax Court had found that the U.S.-source revenues received by the taxpayer as an LLC member qualified as active business revenues from the same enterprise as that for the earning of engineering fees from Bombardier, on the basis that such revenues were generated by the earlier design work of the taxpayer and another individual, and that the LLC was merely a passive vehicle for the allocation of the resulting profits. However, notwithstanding this favourable finding, the taxpayer was found by the Tax Court not to have established that he did not have a services PE given an evidentiary failing: the figures that he had provided to the Tax Court for the active business revenues generated through the LLC were for calendar 2012, whereas the 50% Treaty test was to be applied to the 188 day period straddling the two years – and there was no evidence of what the U.S.-source business revenues were for that precise period.
Webb JA seriously doubted the Tax Court finding that the taxpayer’s revenues from the LLC could be considered to be derived from the same enterprise, stating that “any enterprise of … LLC, as a separate person for Canadian tax purposes, would not be the enterprise of Lawrence Wolf.” However, this point was not argued – and the taxpayer’s appeal was dismissed anyway as there was no reversible error in the Tax Court’s finding that the taxpayer had not adduced evidence as to the US revenues of the LLC for the straddle period.
Neal Armstrong. Summary of Wolf v. Canada, 2019 FCA 283 under Treaties – Income Tax Conventions – Art. 5.
CRA finds that the services of a managing general agent for an insurer are subject to GST/HST
A managing general agent (“MGA”) provides services to an insurer consisting of the recruitment, training, advising and monitoring of independent licensed insurance agents, including reviewing insurance applications prepared by them for completeness. CRA concluded that “the predominant nature of the supply made by the [MGA] is a management and promotional service,” so that it was taxable rather than an “arranging for” financial service.
Neal Armstrong. Summary of 6 May 2019 GST/HST Interpretation 194986 under ETA s.123(1) – financial service – (r.4).
There are now over 1000 of our full-text translations of CRA Interpretations
We have published a further 6 translations of CRA interpretations released in May 2011. Their descriptors and links appear below.
These are additions to our set of 1,005 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA rules on butterfly split-up of rental property into co-ownership arrangement
CRA provided the usual butterfly and other rulings on a butterfly split-up of a DC holding rental property between two transferee corporations (the TCs) for two unrelated families, with undivided interests in the real estate being transferred to each TC in consideration for the assumption of liabilities (in such proportions as to ensure satisfaction of the pro rata distribution requirement) and for voting preferred shares, which were promptly redeemed for notes. There was no business property, and the cash or near-cash assets (including a demand non-interest-bearing loan receivable from a corporation jointly controlled by the two families) was expected to be exceeded by the current liabilities, so that effectively there was to be just one type of property to distribute.
DC was then to be wound-up into its two shareholders (the TCs) and its sole assets at that time – the two redemption notes owing by the two TCs – distributed to that TC so that the note was extinguished. Apparently, in order to avoid circularity issues, the winding-up dividend (effected through such note distribution) was to occur in a subsequent calendar year (i.e., at the beginning of 2020?). When DC receives a dividend refund for this winding-up dividend, there will be a further dividend “under the terms of the agreement governing the winding-up of DC” declared and paid by it to the two TCs.
By the way, a new term to roll off the tongue: NERDTOH (“non-eligible refundable dividend tax on hand”).
Neal Armstrong. Summary of 2019 Ruling 2018-0758411R3 under s. 55(1) – distribution.
CRA states that the passing of legal title directly from the developer to the builder’s individual purchaser does not oust the Ontario new housing rebate
ETA s. 254(4)(a) and the Ontario equivalent require that in order for a taxable supply by a builder of a new house or condo unit to generate the new housing rebate, there must inter alia be a “sale” of the home to the purchaser. “Sale” is defined in ETA s. 123(1) as “any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer the ownership of the property.”
CRA considers that in this context, “the word ‘ownership’ generally refers to the legal ownership (that is, ‘titled’ ownership in the case of the underlying real property), rather than equitable ownership of the property.” That’s the bad news.
However, CRA commented favourably on a situation where legal title bypassed the builder. A developer, which was the full legal owner of land, agreed with a builder that the builder would both build new homes and condo units on the land and agree to sell those houses or units to the individual purchasers. At closing (and registration of the condo units), beneficial ownership of the built lots or units would be transferred from the developer to the builder and, moments later (on the “Subsequent Closing”), from the builder to the individual purchaser. However, at the direction of the builder, registered title was transferred directly from the developer to the individual purchaser.
After indicating that “one could argue that the Developer holds legal ownership for the benefit of the Builder and is required to transfer legal ownership … to any third party at the Builder’s request (for example, to the Home Buyer …)” CRA stated:
[P]rovided that legal ownership is transferred from the Developer, at the Builder’s direction at Subsequent Closing, to the Home Buyer who is the particular individual with whom the Builder has entered into the Home Buyer Agreement, the CRA will … regard the Builder as having transferred ownership of the House or Unit … to the Home Buyer … .
Therefore … provided that all of the other conditions … are met, the Builder may pay or credit the Rebate to the Home Buyer.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.27 under ETA s. 254(4)(a).
CRA, changing course, states that recognition by statute can include recognition by regulation
ETA Sched V, Pt. VI, s. 18, generally provides a GST/HST exemption for “a supply of a membership made by an organization membership in which is required to maintain a professional status recognized by statute.” This is similar to ITA s. 8(1)(i)(i), which provides for the deductibility of “annual professional membership dues the payment of which was necessary to maintain a professional status recognized by statute.”
After the Excise and GST/HST Rulings Directorate queried the view in 2014-0530691E5 that:
a professional status would generally have to be acknowledged in the statute itself to satisfy the “recognized by statute” condition in subparagraph 8(1)(i)(i) … .
the Income Tax Rulings Directorate changed course and concluded:
[F]or purposes of the meaning of the phrase “professional status recognized by statute” … applying a textual, contextual and purposive analysis, a “professional status” can be “recognized by a statute” for purposes of subparagraph 8(1)(i)(i) … even if it is only recognized in the supporting regulations of an act.
Neal Armstrong. Summary of 8 August 2019 Internal T.I. 2019-0804641I7 under s. 8(1)(i)(i).