News of Note
CRA publishes the final version of its 2018 CTF Roundtable answers
Email this ContentAlthough most of these responses were commented on by us in late November after they were presented orally in more abbreviated form at the annual CTF Conference, for convenience of reference the Table below provides the descriptors and links for the final versions of the answers that were published last week.
CRA confirms that it will not apply s. 112(3) to a dividend that has been subjected to s. 55(2) and discusses animating policy considerations
In its published comments on its further conclusions on various questions posed to it on the s. 55(2) rules, CRA provided some more detail than in its oral presentation at the 2018 Annual Conference. For instance, after describing the stop-loss rule in s. 112(3), CRA stated:
Denying a loss on a share that is caused by a dividend that has been subject to tax under subsection 55(2) would seem to be contrary to the scheme of subsection 112(3) which aims to deny losses caused by non-taxable dividends.
The CRA will consider that a dividend that has been subject to the application of subsection 55(2) is not a taxable dividend referred to in subparagraph 112(3)(b)(i).
CRA also was more loquacious on the policy considerations underlying its interpretations. For example, respecting its position that where a dividend in kind paid by a corporation is subject to s. 55(2), the dividend recipient will be considered to have acquired the distributed property at a cost under s. 52(2) equal to its fair market value, CRA stated:
It would not be logical to say that a property received as a dividend in kind that was subject to the application of subsection 55(2) because its purpose was to increase cost or to reduce gain because of the increase in cost would, in turn, not have a cost.
More generally, it stated:
The evolution of the role of subsection 55(2), as reflected in the 2015 legislative amendments to subsections 55(2), 52(3) and paragraph 53(1)(b), invites the conclusion that the application of subsection 55(2) to a dividend should not result in the denial of cost to the property that is received by the dividend recipient on the payment of the dividend.
Neal Armstrong. Summaries of 27 November 2018 CTF Roundtable Q. 2, 2018-0780071C6 under s. 112(3)(b)(i), s. 52(2), s. 52(3), s. 53(1)(b)(ii) and s. 89(1) – capital dividend account - (a)(i)(A).
Jencal Holdings – Tax Court of Canada finds that one of the main reasons for the existence of a holdco for one of five children was SBD multiplication
A reorganization was implemented so that a family company (“KT Holdings”) that indirectly carried on a tire business became held equally by holdcos for each of the five children. Whereas previously the small business deduction was not enjoyed, now each holdco generated the $500,000 deduction through loans being made to generate $500,000 in interest income from KT Holdings that was converted into active business income under s. 129(6)(b). In a planning memo prepared by KPMG, the multiplication of the small business limit was the only identified objective that required the use of holdcos.
Graham J considered that estate planning for the five children was likely a main reason for the separate existence of the holdcos “in general.” However, as the child for the particular holdco {“Jencal”) that was before him did not testify, he could not make any finding that estate planning was a main reason for the separate existence of Jencal. Accordingly, he confirmed the application by CRA of s.256(2.1) to deem Jencal to be associated with KT Holdings, so that s. 125(5.1) applied to reduce the small business limit available to Jencal to nil.
Neal Armstrong. Summary of Jencal Holdings Ltd. v. The Queen, 2019 TCC 16 under s. 256(2.1).
6 further translations of CRA interpretations are available
We have published a further 6 translations of interpretations released in October 2012. Their descriptors and links appear below.
These are additions to our set of 765 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¼ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for February.
CRA discusses the GST residential care exemption
ETA Sched. V, Pt. IV, s. 2 exempts “a supply of a service of providing care, supervision, and a place of residence to children, underprivileged individuals, or individuals with a disability in an establishment operated by the supplier for the purpose of providing such services.”
CRA has published a new GST/HST Memorandum on this exemption. Points made include:
- An establishment is “operated” by a supplier when it has “management and control of the establishment on a day‑to‑day basis” - as to which indicative factors would include authority over making operational decisions in the establishment and control of day‑to‑day operations. (CRA presumably interprets the operator concept similarly in other contexts, e.g., the exemption under Sched. V, Pt. II, s. 2 respecting the operator of a health care facility.)
- A supply of a service of arranging for a third party to supply the indicated items would not qualify, e.g., a provincial government contracts with a corporation to provide care, supervision, and a place of residence to a young adult with a disability and that corporation, in turn, arranges for a third party to provide the services.
- Individuals’ provision of foster care is not considered to be a commercial activity and, thus, is not subject to GST/HST on general principles; however, supplies of services such as assessment, placement, and monitoring services regarding residential foster care are not exempt under Sched. V, Pt. IV, s. 2.
- There will be considered to be a single supply described in Sched. V, Pt. IV, s. 2 notwithstanding that it comprises elements (e.g., meals) that would not be exempted if supplied alone and ancillary elements such as recreational services provided that the particular elements are not provided on an optional basis for an additional charge.
Neal Armstrong. Summary of GST/HST Memorandum 21-2 “Residential Care Services” January 2019 under ETA Sched. V, Pt. IV, s. 2.
CRA accepts but restricts Mullings
The ability of the taxpayer in Mullings to claim the disability tax credit for her young child, who suffered from an inability to digest a common amino acid (“Phe”), turned on whether she was spending at least 14 hours per week on therapy, which was defined in s. 118.3(1.1)(d) to exclude “time spent on dietary…restrictions or regimes.”
Jorré J found that controlling the child’s Phe levels (so as to prevent severe brain damage) required that medical formula food be given in precise and timed doses, which was “no different from administering any other prescription medication,” and that “measuring and controlling Phe intake is properly characterized as administration of the therapy and not as control of X’s diet” – so that the time so spent counted towards the 14 hours. This “measuring” included significant time devoted to obtaining blood level checks by labs. The taxpayer got the credit.
CRA appears to have accepted the Mullings decision (Hughes is similar), but noted that it should not be inferred that the decision has established that time spent for lab tests should be included in the time spent administering therapy as described in s. 118.3(1)(d), as in other cases the lab testing might very well have less of a direct connection with dealing with the individual’s impairment.
Neal Armstrong. Summaries of 8 March 2018 Internal T.I. 2017-0724351I7 under s. 118.3(1.1)(a.1) and s. 118.3(1.1)(d).
CRA confirmed that a taxpayer can appeal to a CRA employee’s supervisor and that Appeals should refer new information first requested by Audit back to Audit
CRA confirmed that a taxpayer has the right, if it disagrees with how its concerns were addressed by an employee, “to discuss the matter with the employee’s supervisor” – and also confirmed that:
A protocol was initiated at the end of 2015 between the Audit and Appeals branches. A relevant part of the protocol was to bring a case back to audit if the taxpayer had submitted information to Appeals that had been requested by Audit and not provided by the taxpayer.
Neal Armstrong. Summary of May 2017 Alberta CPA Roundtable. Q.1 (plenary) under s. 165(1).
Bourgault – Tax Court of Canada independently assesses whether a rectification judgment was “justifiably obtained”
The written agreement for the purchase by the taxpayer of shares of a real estate corporation (“Quatre Saisons”) stated that the purchase price was to be satisfied by the payment to the vendor (“Placeval”) of 50%, then 30%, of the sales proceeds of real property of Quatre Saisons - and then sewed confusion by stating that such proceeds were to be paid to Placeval as commissions. Those percentage amounts in fact were paid by Quatre Saisons directly to Placeval and CRA assessed the taxpayer for shareholder benefits under s. 15(1). Two months after this assessment, the Quebec Superior Court issued an order for the rectification of the agreement to change the stated purchase price to $1. Before assessing, CRA was aware of the application for this judgment, but did not see fit to intervene, so that the Crown was not a party to the application.
Before granting the taxpayer’s appeal from the assessment, Favreau J first indicated that the Crown was not bound by the Court order “as neither the Attorney General of Canada nor the Minister was involved in the application,” and also found that the judgment was not “res judicata.” He nonetheless found that “The parties justifiably obtained the judgment of the Superior Court to rectify the situation” in light of evidence that from the outset they had been consistently treating (e.g., in their financial statements and in invoicing procedures for services performed) the payments made by Quatre Saisons to Placeval as commissions rather than sales proceeds.
Neal Armstrong. Summary of Bourgault v. The Queen, 2019 CCI 6 under General Concepts – Rectification.
CRA illustrates the effective date of the passive income rules for non-calendar year associated corporations
New s. 125(5.1)(b), which eliminates the business limit of a Canadian-controlled private corporation if it or associated corporations had significant passive income (a.k.a. “aggregate investment income”) in their taxation years ending in the preceding calendar year, is stated to apply to taxation years that begin after 2018.
CRA provided a further example at the Annual CTF Conference (to that in 2018-0771871E5) of the operation of the effective date. Holdco and Opco are associated and both have 12-month taxation years ending on 30 June 2019 and 2020. Holdco has investment income of $150,000 per year. CRA stated:
Opco would be first subject to the passive income reduction in its first taxation year beginning after 2018 (that is, Opco’s taxation year ending June 30, 2020). For its taxation year ending June 30, 2020, Opco would include the total of all amounts each of which is the adjusted aggregate investment income of Opco (for taxation year ending June 30, 2019) and Holdco (include the $150,000 of investment income for the taxation year ending June 30, 2019) that ended in the preceding calendar year (calendar year 2019).
Neal Armstrong. Summary of 27 November 2018 CTF Roundtable Q. 16, 2018-0780031C6 under s. 125(5.1)(b).
Poirier – Tax Court of Canada considers whether ETA s. 296(2.1) can be used to overcome the 2-year deadline for claiming the NRRP rebate
An individual (Poirier) applied for the new housing rebate on his purchase of a new condo unit even though he had already agreed to lease it out effective the closing date. When this claim was denied, he then applied (shortly before the notice of assessment denying the new housing rebate) for the new residential rental property (NRRP) rebate even though this application was made past the application deadline (being two years from the month of purchase).
Poirier referred to ETA s. 296(2.1), which generally requires CRA to take unclaimed rebates into account when assessing a taxpayer.
Smith J indicated that the jurisprudence was unclear whether s. 296(2.1) could be applied to require CRA to grant an offsetting credit for the NRRP rebate when it assessed Poirier to deny the new housing rebate – so that he did not foreclose the possibility that s. 296(2.1) could thereby overcome the two-year deadline. However, he found that such a use of s. 296(2.1) was precluded in this instance because of s. 296(2.1)(b), which provided that the rebate cannot be provided as a credit against the assessment if it has already been claimed by the taxpayer. Thus, it appears that Poirier might have been better off if he had not claimed the NRRP rebate, and then objected to the assessment denying the hew housing rebate on the basis that it should have been reduced by the NRRP rebate - although, this would still have been an uphill battle.
Neal Armstrong. Summaries of Poirier v. The Queen, 2019 TCC 8 under ETA s. 297(1), s. 254(2)(b), s. 256.2(7)(a), s. 262(1), s. 296(2.1) and Interpretation Act s. 32.