News of Note
CRA accepts Applewood (re GST/HST exemption for car dealers who promote, sell and process credit insurance provided to their customers)
Email this ContentThe car dealer in Applewood entered into a “Dealer Agreement” with a distributor of credit insurance products under which it was agreed that it would “up sell” the insurance products and assist the car customers in explaining the coverage and in applying for the insurance in consideration for a commission of over 50% of the insurance premium. Pizzitelli J applied the single supply doctrine in finding that the predominant element of what was being supplied by the dealer was an exempt supply of arranging for the insurance – and that the exclusion in (r.4) of the definition of an exempt financial services for promotional and various administrative services did not apply.
CRA has stated that it will apply Applewood “in the same fact situation” as well as where the car dealer deals directly with the insurer (rather than with the distributor), if “the car dealer performs the activities referred to in the Applewood decision.” CRA went on to state:
Within the context of the insurance industry, the Applewood decision does not have an impact on the CRA’s position with respect to the services provided by managing general agents and similar entities performing management and administrative services for insurers. Supplies of these management and administrative services are taxable.
Neal Armstrong. Summary of Excise and GST/HST News - No. 106 June 2019 under ETA – s. 123(1) – financial service – para. (l).
CRA indicates that subjecting dividend income paid to a preferred beneficiary to TOSI accords with tax policy – but that it’s easy to avoid the designation
As noted re Q.13, CRA considers that the exclusion from para. (c) of the “split income” definition of amounts included in a preferred beneficiary’s income does not apply where a s. 104(19) designation is made respecting the preferred beneficiary income amount, so that the amount is included under subpara. (a)(i) of the split income definition. There is thus, in CRA’s view, the absence of a legislative exclusion from the tax on split income for such dividend amounts.
This seems anomalous and arguably is contrary to the Savage principle (that a specific exclusion implies the same exclusion from a more general charging provision). However, CRA noted that it has received confirmation in discussions with Finance that its interpretation accords with tax policy.
In order to avoid making the s. 104(19) designation when preparing a T3 slip, the amount should simply be included in Box 26 (“other income”).
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.14 under s. 120.4(1) – split income – s. (a)(i).
CRA indicates that dividend income flowed through to a preferred beneficiary can be TOSI
Para. (c) of the “split income” definition refers to amounts included in a beneficiary’s income under s. 104(13), but not under s. 104(14) as a result of a preferred beneficiary election.
CRA noted however that s. (a)(i) of the split income definition provides for the inclusion of taxable dividends received by the specified individual in respect of the shares of the corporation (other than listed or mutual fund shares). Thus, if the income allocated to a preferred beneficiary is also subject to a s. 104(19) designation, the designated amount will be included in the beneficiary’s split income, unless one of the TOSI exceptions applies.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.13 under s. 120.4(1) – split income – para. (c).
Satoma has not changed the CRA view that trusts must report income that is attributed to the settlor under s. 75(2)
CRA acknowledged that, in Satoma, Noël CJ. noted that express exclusions in most of the attribution provisions (e.g., s. 74.1) of the attributed income in the hands of the income transferor were inserted for greater certainty, and that the same dividend cannot be received by two persons at once – with the implication that income attributed to a trust contributor under s. 75(2) is not income of the trust even in the absence of such a specific exclusion.
However, CRA indicated that these comments were not specifically directed at the T3 return, which is a return of information (in addition to a return of income) affecting the taxation of persons with some connection to the trust. Reg. 204 imposes a requirement to file a T3 return where the trustee has control of, or receives, income, gains, or profits in the trustee’s fiduciary capacity – even if the Trust computes nil income, e.g., because of the application of s. 75(2). The trust must still report the income on its T3 return and issue a T3 slip reporting the amount as that of the contributor of the property.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.12 under Reg. 204(1).
CRA indicates that a GRE likely cannot be continued indefinitely as a QDT
An estate that qualified as a graduated rate estate (GRE) was not able to convert some of the estate property into cash until late in the third year after the death of the deceased. During the 36 month GRE period, the residuary estate beneficiary becomes disabled. Can the estate continue indefinitely and elect to be treated as a qualified disability trust each year such that graduated tax rates will continue to apply?
CRA indicated, likely “no” since once the estate administration was completed (or should have been completed), there would be no estate income (as the beneficial ownership of its property had passed to the residuary beneficiary) – or if the estate somehow were viewed as still earning income, such income would be payable to the beneficiary and, therefore, be income of the beneficiary under ss. 101(24) and 104(13) rather than of the estate.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.11 under s. 122(3) – qualified disability trust – s. (a)(i).
Lounsbury – Tax Court of Canada finds that substantial completion had occurred by the time of the interim occupancy certificate
The taxpayer and her husband built a house, which was near Lake Huron and a 2 ½ hour drive away from their Brampton rental apartment and full-time employment, doing a large portion of the work themselves on weekends, with the intention of retiring there. They moved into the home (on weekends) when they received the first occupancy certificate; and received a final occupancy permit 18 months later. She did not apply for the federal and Ontario new HST housing rebate until after a further 20 months, i.e., over three years after moving in.
Jorré DJ confirmed the denial of her rebate claims on two alternative grounds.
First, the application was not submitted within two years of the day of substantial completion, as required by s. 256(3)(a)(iii). He noted the relatively minor nature of the items to be completed after the first occupancy certificate was issued and that, in fact, they moved in then.
Second, the new house was not constructed for use as her primary place of residence, as required by s. 256(2)(a), as to which he stated:
On one hand, stated intention, changing addresses, location where the Appellant and her husband vote, the greater size of the house compared to the apartment are all indicia which favour the new house being the primary place of residence of the Appellant.
On the other hand, the apartment in Brampton is where the Appellant and her husband live during the greater part of the week and is much closer to the workplaces of the Appellant and her husband.
This … time spent in each location is very important and must be given great weight.
Neal Armstrong. Summary of Lounsbury v. The Queen, 2019 TCC 109 under ETA s. 256(3)(a)(iii) and s. 256(2)(a).
CRA indicates that there are no barriers to a non-resident estate qualifying as a GRE
The U.S.-resident estate of a U.S.-resident individual who died holding real estate in Canada and did not have a social insurance number (“SIN”) will realize a gain on the disposition of the property. CRA indicated that the definition of graduated rate estate (GRE) does not require an estate to be resident in Canada, and that the requirement in para. (c) of the GRE definition to provide the SIN of the deceased, or “such other information as is acceptable” can be satisfied by the estate providing a temporary or individual tax number.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.10 under s. 248(1) - graduated rate estate – para. (c).
Lin – Federal Court rejects a CRA request for an information-request compliance order because it was unclear which entities were covered
Three individuals whom CRA suspected of not disclosing offshore assets received letters requesting the filing of T1135s and requesting information, which CRA considered to be within its powers to request information under s. 231.1(1). In dismissing the Crown’s application for a compliance order under s. 231.7, Boswell J noted:
[T]he Letters are addressed to both the individuals and their connected entities. The entities are not specified, and it is not clear who is being audited - the individual Respondents or unnamed entities.
The Court must be satisfied that the person against whom a compliance order is sought is one who was required under section 231.1 or 231.2 to provide the access, assistance, information or document sought by the Minister. Because it is not at all clear whether the Letter was directed to the Respondents individually or their connected entities, the first requirement of section 231.7 … for obtaining a compliance order has not been satisfied … .
Neal Armstrong. Summary of Canada (National Revenue) v. Lin, 2019 FC 646 under s. 231.7(1).
CRA indicates that a non-resident estate that becomes resident can then become a GRE
An estate initially was not resident in Canada but 18 months later (on January 1, 2018), it became resident in Canada due to the appointment of a new trustee – thereby resulting in a new taxation year starting at that time under s. 128.1(1)(a)(i). Could it designate itself as the graduated rate estate (“GRE”) of the deceased (non-resident) individual when filing its first tax return (for 2018)?
CRA indicated that the requirement in para. (d) of the GRE definition - that the estate designate itself as the GRE of the deceased individual in its Part I return for its first taxation year ending after 2015 – could be satisfied here because the estate was not required to file a Canadian return for any year before 2018 – thus it could make the required designation in its 2018 return. (The 36-month test for being a GRE also was satisfied.)
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.9 under s. 248(1) - graduated rate estate – para. (d).
CRA indicates that WIP under contingency fee arrangements may be required to be recognized before realized
In FAQ #5 on a CRA web page, CRA stated that in the case of professionals’ contingency fee arrangements, e.g., for personal injury lawyers, “no amount is receivable by the professional until the right to collect the amount is established” and that “for purposes of determining the value of the professional’s work in progress at the end of the year, no amount would normally be recognized.” However, 2017-0709101E5 F (and similarly in 2018-0743031E5) added a statement that “however, it has been brought to our attention that, in certain situations, it is possible, at the end of the year, to establish an amount that can reasonably be expected to be received after the end of the taxation year in respect of [the] work,” in which event, that higher amount will be used in valuing the WIP.
This qualifier was essentially also included in a discussion of professionals’ WIP at the STEP Roundtable, without any further elaboration on when the “certain circumstances” being referenced might arise.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.8 under s. 10(4)(a).