News of Note
The new look-through rule in ss. 212.1(5) and (6) may defeat the purpose of a pipeline transaction
Email this ContentEstates commonly use “pipeline” transactions (to take advantage of the step-up to them, under s. 70(5), of the cost of the shares of Opco) under which they sell their Opco shares to Newco for Newco notes. However, under the new look-through rule in ss. 212.1(5) and (6), a non-resident residuary beneficiary will be deemed to have sold a pro-rata portion of the Opco shares to Newco for s. 212.1 purposes. Given that the non-resident (by virtue of being an estate beneficiary) will also be deemed by ss. 212.1(3)(b) and (a) to not be dealing at arm’s length with Newco, a deemed dividend generally will arise to the non-resident beneficiary under s. 212.1, thereby defeating the purpose of the pipeline.
Neal Armstrong. Summary of Henry Shew, “Post-Mortem Pipeline Fails for Non-Resident Beneficiaries,” Canadian Tax Focus, Vol. 9, No. 1, February 2019, p. 1 under s. 212.1(6).
CRA finds that a course prepping students to write an English proficiency test was not GST/HST exempt
CRA found that the supply by a private corporation of instruction in a preparation course for the students’ writing of the International English Language Testing System (IELTS) test did not qualify as “language courses that form part of a program of second-language instruction in either English or French” as required under ETA Sched. V, Pt. III, s. 11, so that such supply was not exempt.
Neal Armstrong. Summary of 27 September 2018 Ruling 187397 under ETA Sched. V, Pt. III, s. 11.
CRA confirms the efficacy of a prepaid concurrent lease financing structure for HST purposes
CRA commented on the use of a prepaid concurrent lease structure to finance equipment leases. The Lessor leases equipment to consumers. The Trust, which has raised money from somewhere, is then leased the Lessor’s reversion, so that the Trust is interposed as lessee and sublessor between the Lessor and the consumers. The Trust uses its financing to prepay most of the rent (plus HST thereon) under the concurrent lease between it and the Lessor. An ETA s. 177(1.1) election also is made for the Lessor to collect the HST on the rents from the consumers owing under what now are subleases, as agent for the Trust.
CRA gave interpretations that it would respect the ETA s. 177(1.1) election and the efficacy of the concurrent lease, so that it considers there to be a supply of the equipment by the Lessor to the Trust pursuant to ETA s. 136(1).
Neal Armstrong. Summary of 21 September 2018 Interpretation 167678 under ETA s. 136(1). See also 5 December 2003 Interpretation 44874.
Lapierre – Tax Court of Canada finds that a Canadian resident working for a UN-authorized agency in Afghanistan was not exempted
A Canadian resident, who was an employee of the International Security Assistance Force (ISAF) in Afghanistan serving as an international civilian consultant, would have been exempted on his salary if the ISAF had qualified as a UN-affiliated agency or if it was a non-military body that was a subsidiary body to the NATO Council. The ISAF did not so qualify because it instead was merely authorized by the UN rather than being a UN agency, and it also was a military body that was not a subsidiary body of NATO. His salary was taxable. This case essentially confirms 2012-0461051E5 F.
Neal Armstrong. Summaries of Lapierre v. The Queen, 2019 TCC 18 under Reg. 8900(1)(b) and s. 81(1)(a).
Income Tax Severed Letters 6 February 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Monsell – Tax Court of Canada finds that CRA had the onus of substantiating assessments underlying s. 160 assessments where it had superior records access
The taxpayers (a husband and wife) received payments from a corporation that had been reassessed for its 2005 to 2007 taxation years and had not objected thereto. Their only ground of appeal to s. 160 assessments was that these “underlying” reassessments were incorrect.
D’Auray J quoted the principle in Mignardi that
where the facts concerning the underlying reassessments are exclusively or peculiarly within the knowledge of the Minister, the onus will shift to the Minister to show the correctness of the underlying reassessments
before finding that the onus was on the Minister to demonstrate the correctness of the underlying reassessments for the 2005 and 2006 years. This was so because the taxpayers did not have access to the corporate records for those years, whereas CRA had been given such documents and then lost them. The Minister failed to discharge this onus.
However, for the 2007 year, no audit was performed and the Minister reassessed solely on the basis of the information contained in the corporate tax returns. Thus, the onus instead was on the taxpayers to demonstrate that this reassessment was incorrect, which they failed to do.
Since the amount of this underlying reassessment for 2007 was greater than the amount of the two payments made to the taxpayers, their s. 160 assessments were upheld.
Neal Armstrong. Summaries of Monsell v. The Queen, 2019 TCC 5 under s. 160(1) and s. 125(3)(b).
CRA indicates that coverage for employee's U.S. medical expenses would qualify if they were substantially METC-type expenses
CRA indicated that premiums paid by an employer under a Blue Cross plan, that would reimburse an employee for certain medical and health care costs incurred while in the U.S., would not be a taxable benefit (based on the exemption for private health services plans) provided that “‘all or substantially all’ of the premiums paid under the plan relate to medical expenses that are eligible for the medical expense tax credit (METC).” CRA further indicated that such “eligible medical expenses are not restricted to those paid in Canada or for medical services provided in Canada” – and that the insurer of the plan should determine whether this test in fact was being met.
Neal Armstrong. Summary of 12 December 2018 External T.I. 2017-0718661E5 under s. 248(1) - private health services plan.
CRA finds that monthly payments to cover employed bus driver costs were taxable since no receipts required
CRA found that fixed monthly payments to school bus drivers to cover such employees’ cost of the use of a personal cellular phone, bus washing (e.g., at a car wash), and electricity consumption (to cover the cost for plugging in the employer’s school bus at the employees’ residence to ensure that the bus would start in the morning) should be included in the employees’ income under s. 6(1)(b) given that the employees were not required to submit receipts.
Neal Armstrong. Summary of 13 April 2018 External T.I. 2017-0682891E5 under s. 6(1)(b).
Xia – Tax Court of Canada finds that a gross negligence penalty applied for failure to check out an exempt receipt theory re tips
A well-educated slot attendant at a casino, who doubled his income through the receipt of his share of tips, was subject to a gross negligence penalty for failure to report the tip income given inter alia his failure to consult with anyone respecting his position that the tips were non-taxable as being a share of exempt lottery winnings.
Neal Armstrong. Summaries of Xia v. The Queen, 2019 TCC 30 under s. 5(1) and s. 163(2).
CRA rules on a pipeline with different promissory-note mechanics
In 2018, CRA issued rulings under ss. 84(2), 84.1 and 245(2) on a straightforward but mildly unusual pipeline transaction. The estate transferred its stepped-up preferred shares of an investments holding company (Holdco) to a Newco in consideration for shares of Newco – then one year after this, Newco will effect a reduction in the paid-up capital of such shares through the issuance of 8 promissory notes payable to the estate. They will each be payable in the 1st, 2nd, 3rd (etc. through to the 8th) quarter thereafter. Such notes will thereafter be paid in accordance with their terms and (after the passing of at least XX months) Holdco and Newco also will amalgamate.
Neal Armstrong. Summary of 2018 Ruling 2018-0777441R3 F under s. 84(2).