News of Note
Victoria Power – Federal Court of Australia finds that a calculated reduction in the amount of a rebate required to be paid by a taxpayer was not income to it
Email this ContentAustralian electricity distributors were entitled to require their customers to pay an amount equal to the estimated net economic burden to the distributors of hooking them up to electricity, i.e., where the the present value of the incremental cost exceeded the present value of the incremental revenue. Moshinsky J found that these “Customer Cash Contribution” amounts were ordinary income to the distributors as they were received “as an ordinary incident of their electricity distribution businesses.” In Canada, the relevant distinction to be drawn likely would have been between a s. 9 receipt or (having regard to some similarities with the Consumers' Gas case) a s. 12(1)(x) receipt – keeping in mind that the s. 13(7.4) offset is potentially available only for the latter.
The customer could instead choose to perform the work, in which case, on transferring the constructed assets to a distributor, the distributor would pay a rebate that did not represent the full cost of the work, so that again, the customer effectively bore the excess of the present value of the incremental cost over the present value of the incremental revenue (the “Customer Contribution”). In finding that a Customer Contribution was not ordinary income to the distributor, Moshinsky J stated:
[T]he Customer Contribution was not a payment or gain received by the Distributor; it was merely a component used in the calculation of the [rebate] amount to be paid [the other way] by the Distributor to the customer.
Neal Armstrong. Summary of Victoria Power Networks Pty Ltd v Commissioner of Taxation [2019] FCA 77 under s. 9 - nature of income.
Income Tax Severed Letters 20 February 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA provides further TOSI examples
In a PowerPoint presentation at the December 3, 2018 CPA Canada Income Tax for the General Practitioner Course CRA mostly recycled previously-published examples of the operation of the tax on split income rules, but also presented a few new (albeit, not startling) examples.
B, aged 20, was issued 20% of the shares of Opco (a CCPC) as part of his compensation for programming work. Opco is majority-owned by an unrelated individual (A, aged 40). A dividend paid by Opco to B is not subject to TOSI given that it is not income from a related business because there is no “source individual” (A is not related to B).
A dividend paid by the family farming corporation to a family trust and distributed from the trust to inter alia an adult child who in the current year had averaged less than 20 hours a week during the farming season nonetheless qualified as an excluded amount from an “excluded business” given that the child (the specified individual) averaged more than 20 hours per week in the farming season for five prior taxation years.
The definition of an excluded share references inter alia a test of less than 90% of the business income of the corporation being from the provision of services. CRA indicated that where goods are provided in combination with a service and the goods are not incidental (e.g., auto repairs and home renovations) the revenue from the goods will be considered. Conversely, services can be incidental to the sale of goods, e.g., the delivery and installation of goods sold. CRA recognizes that billing practices and accounting systems may not specifically identify revenue from non-services, so that there is flexibility when reviewing such situations.
Neal Armstrong. Summaries of 3 December 2018 CPA Canada Roundtable, 2018-0773811C6 - Tax on Split Income under s. 120.4(1) - related business – (a)(ii), excluded business and excluded shares – (a)(i).
Shallhorn – Court of Quebec finds that the cost to a paraplegic person of installing a home elevator was an eligible medical expense
Laurin J found that a paraplegic person, who incurred approximately $80,000 to install an elevator in his home, which thereby gave him access to all floors, was entitled to a medical tax credit under the Quebec equivalent of ITA s. 118.2(2)(l.2). Laurin J rejected the position of the ARQ that the elevator was ineligible because it could also be used by non-handicapped individuals.
Neal Armstrong. Summary of Shallhorn v. Agence du revenu du Québec, 2019 QCCQ 449 under s. 118.2(2)(l.2).
CRA treats additional benefit features of a supplemental pension plan as SDAs
CRA noted its position that a supplemental pension plan to top up the pension benefits for executives whose remuneration is such as to make the registered pension plan (RPP) contribution limits too low will not give rise to a salary deferral arrangement (SDA) where this plan operates similarly to an RPP but for exceeding the monetary limits. However, CRA stated that there likely will be an SDA where the plan also provides that members can elect to reduce or forego future bonus entitlements and accrued vacation pay entitlements for additional allocations (of equal amounts) to the member’s account (to be paid out at the earliest of termination of employment, retirement or death) – stating that these additional features “appear to be primarily motivated by tax deferral considerations.”
Neal Armstrong. Summaries of 11 January 2019 External T.I. 2018-0740741E5 under s. 248(1) – salary deferral arrangement and s. 6(14)(a).
CRA rules on a pipeline for an inter vivos trust
A Canadian inter vivos family trust (Trust1) which is coming up to its 21st anniversary will distribute some of its assets to a Canadian-resident individual beneficiary under s. 107(2) shortly before that date. However, for some reason, it will not distribute its preferred shares of Opco1 (a CCPC whose assets are mainly rental properties and shares of subsidiaries including an operating subsidiary) and instead will realize a capital gain under s. 104(4)(b)(ii) on the 21st anniversary and will include the resulting taxable capital gain in its income for the year. (Other beneficiaries might not be resident in Canada.)
Thereafter, Trust1 will engage in a pipeline transaction in which it will transfer its preferred shares of Opco1 to a new CCPC (Newco) in consideration for Newco preferred shares with full paid-up capital, at the same time as the other shareholders of Opco1 transfer their shares on a s. 85(1) rollover basis to Newco. The activities of Opco1 will be maintained over the years, and after one year Newco and Opco1 will amalgamate. Amalco will begin to progressively (over a period of XX months) redeem its Class C shares, with the redemption proceeds paid partly with the profits generated by Opco1 subsequently to the pipeline.
Neal Armstrong. Summary of 2018 Ruling 2018-0765411R3 F under s. 84(2).
6 further full-text translations of CRA interpretations are available
We have published a further 6 translations of interpretations released in August and July 2012. Their descriptors and links appear below.
These are additions to our set of 783 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 2/3 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2012-08-24 | 30 July 2012 Internal T.I. 2012-0436711I7 F - Reassessment beyond the normal reassessment period | Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) | CRA could reassess beyond normal reassessment period based solely on an ARQ audit report showing error and carelessness of the taxpayer |
| 2012-08-10 | 3 July 2012 External T.I. 2012-0443421E5 F - 84.1 and partnership | Income Tax Act - Section 245 - Subsection 245(4) | s. 245(2) has been applied to the use of a partnership to avoid s. 84.1 |
| Income Tax Act - Section 84.1 - Subsection 84.1(1) | use of partnership to avoid s. 84.1 could be attacked through challenge to partnership validity or applying s. 245(1) re circumvention of s. 84.1 | ||
| 13 July 2012 External T.I. 2012-0443281E5 F - DPA- véhicule dans le cadre d'un bien locatif | Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) | CCA could be claimable on motor vehicle used to earn rental income | |
| 2012-07-20 | 9 July 2012 External T.I. 2012-0438751E5 F - Police d'assurance-vie | Income Tax Act - Section 148 - Subsection 148(9) - Proceeds of Disposition | proceeds of disposition arise when policy settled and are calculated by insurer |
| Income Tax Act - Section 237 - Subsection 237(1.1) | provision of SIN by holder of matured policy to insurer is required | ||
| 2012-07-06 | 28 June 2012 External T.I. 2011-0427871E5 F - Application des paragraphes 98(3) 98(5) et 73(1) | Income Tax Act - Section 73 - Subsection 73(1) | s. 73(1) available on transfer of undivided interest from one separate spouse to the other following s. 98(3) wind-up of their rental partnership |
| Income Tax Act - Section 98 - Subsection 98(5) | rental operation generating property income is a business for s. 98(5) purposes | ||
| 26 June 2012 External T.I. 2011-0417391E5 F - Bien remis à une fiducie | Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Testamentary Trust | being a contingent beneficiary of an inter vivos trust disqualified a testamentary trust as such | |
| Income Tax Act - Section 248 - Subsection 248(25) | testamentary trust that was included in the class of potential beneficiaries of a discretionary inter vivos trust was a beneficiary |
Sutlej Foods – Tax Court of Canada finds that corporations but not individuals potentially can be represented in a general procedure case by their accountant
In Masa Sushi, Graham J found that a corporation could not appear “in person” in a General Procedure matter and had to appear through counsel, so that a Rule purporting to permit a corporation to appear in person with the Court’s consent would be ultra vires. Russell J has sided with the opposite conclusion reached by C Miller J in BCS Group (under appeal), stating that “meaning must be given to the clear subsection 17.1(1) Parliamentary language that a party, a term encompassing both corporate and non-corporate parties, may appear in person in a general procedure appeal.” However, Russell J went on to find that he had concerns about the corporate applicant before him being represented by its accountant rather than by counsel, and refused that application.
He also declined the application of the individual applicants to be represented by the same accountant, on the ground that, in a general procedure case, an individual must be represented by counsel, full stop. This of course illustrates a curious aspect of the Miller/Russell view, namely, that corporations, but not individuals, potentially can avoid the requirement for representation by a lawyer.
Neal Armstrong. Summary of Sutlej Foods Inc. v. The Queen, 2019 TCC 20 under Rule 30(2).
CRA agreed to fictional transfer pricing adjustments and rules that they also did not affect the exempt surplus calculation (other than for the foreign taxes adjustment)
CRA assessed a Canadian subsidiary (Canco 1) in a Canadian multinational group under s. 247(2) on the basis that the fees earned by a sister company (Forco 1) resident in Country A from a customer were too high from a transfer-pricing perspective and the fees earned by Canco 1 under a services contract as part of the same business arrangements were correlatively too low. After negotiations between the competent authorities for Canada and Country A, it was agreed that Canco 1 would not appeal this assessment, and the income of Forco 1 (which was from an active business) would be reduced by assessment by the Country A taxing authority, thereby generating income tax refunds for those years. It was agreed that there would be no adjustment to the actual fees charged to the (apparently arm’s length) customer(s) and that there would be no secondary adjustments.
CRA ruled that these downward adjustments to the business income of Forco 1 reduced its (exempt) earnings as determined under s. (a)(i) of the definition of “earnings” in Reg. 5907(1), i.e., its earnings as computed in accordance with the Country A income tax law – but that such adjustments were to be added to its earnings pursuant to Reg. 5907(2)(f), stating in its summary in the latter regard that:
The money realized and retained by the foreign affiliate [i.e., Forco 1], but excluded from its income for foreign income tax purposes as a result of the corresponding adjustment by the foreign tax authority, would be "revenue, income, or profit" derived by the foreign affiliate for purposes of paragraph 5907(2)(f) ... .
CRA also ruled that upon receipt of the Country A reassessment reflecting such downward income adjustments for the relevant years, the “net earnings” of Forco 1 for those years as defined in Reg. 5907(1)(a) would be increased by the amount of income taxes that had been correspondingly overpaid.
Neal Armstrong. Summary of 2018 Ruling 2017-0729431R3 under Reg. 5907(2)(f).
Ark Angel Foundation – Federal Court of Appeal confirms CRA’s revocation of charitable registration for paying unsubstantiated consulting fees to a director
The Foundation, a charitable foundation, received most of its revenues from three other registered charities (including the Humane Society of Canada Foundation) that were dominated by the same individual, and disbursed most of those revenues to those three charities, except that it paid approximately 1/3 of its revenues to the individual. Woods JA found that the failure of the Foundation to provide any records that substantiated the basis for the consulting fees justified the CRA’s decision to revoke the Foundation’s registration under s. 168(1)(e) (failure to maintain adequate records) and also on more substantive grounds under s. 168(1)(b) (failure to establish that the consulting services fees represented the devotion of Foundation resources to charitable activities).
Neal Armstrong. Summaries of Ark Angel Foundation v. Canada (National Revenue), 2019 FCA 21 under s. 168(1)(e) and s. 168(1)(b).