News of Note
6 further full-text translations of CRA interpretations are available
Email this ContentWe have published a further 6 translations of interpretations released in June 2012. Their descriptors and links appear below.
These are additions to our set of 795 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for March.
CRA indicates that auditors should communicate their reasons for requiring information from taxpayers
Comments of Ted Gallivan included:
Q.3 CRA’s annual audit yield has grown from $8.8 to $13.8 billion gross, with the use of around 5% more in CRA resources. Having said that, the goal is to increase compliance rather than to increase audit yields (Q.10).
Q.5 and 6. CRA is evaluating whether the focus of risk assessment should be done on a transaction-by-transaction, taxpayer-by-taxpayer or return-by-return basis. If CRA sees a big risk indicator, it should tell the taxpayer at that point, rather than waiting for an audit, when decisions have already been made and positions solidified. More generally, CRA is considering getting information to taxpayers even before they file their returns (Q.2).
Q.7 CRA decided not to appeal the BP decision to the Supreme Court because it would effectively have been asking for absolute authority. Headquarters then clarified to field auditors that there must be a valid business reason for seeking information, and that that reason should be communicated to the taxpayer.
Q.9 Although the Panama papers and other leaks did not necessarily relate to the most aggressive types of tax avoidance, it was necessary for CRA to respond to show its resolve. The fact that the 30 exchanging jurisdictions all gave the list a priority resulted in improved information-exchange functioning.
Q.10 There will be a trend towards better coordination within different branches of CRA, such as between the rulings and audit functions (or possibly involving Appeals) and more involvement from Justice, before a decision is made to assess taxpayers.
Neal Armstrong. Ted Gallivan at the 27 February 2019 CTF Corporate Management Tax Conference, including summary of Q.7 under s. 231.1(1).
Finucane – UK Supreme Court finds that the government was required to demonstrate that it resiled from an undertaking based on genuine policy grounds
It is unclear to what extent CRA is legally bound to honour rulings given by it.
The applicant’s husband, a solicitor, was murdered in their home, in the presence of her and their children, by Irish loyalist terrorists with the assistance of collusion from members of the government security forces. Respecting her claim that the government should be held to its promise to hold an inquiry, Lord Kerr stated:
[W]here a clear and unambiguous undertaking has been made, the authority giving the undertaking will not be allowed to depart from it unless it is shown that it is fair to do so. The court is the arbiter of fairness in this context. And a matter sounding on the question of fairness is whether the alteration in policy frustrates any reliance which the person or group has placed on it. …
However, in finding that the government could now resile from its undertaking, he stated:
Where political issues overtake a promise or undertaking given by government, and where contemporary considerations impel a different course, provided a bona fide decision is taken on genuine policy grounds not to adhere to the original undertaking, it will be difficult for a person who holds a legitimate expectation to enforce compliance with it.
Neal Armstrong. Summary of Finucane, Re Application for Judicial Review (Northern Ireland) [2019] UKSC 7 under s. 152(1).
Keurig Canada – Court of Quebec finds that the ARQ did not need the equivalent of ITA s. 152(9) to amend its pleadings with an additional reason for failure of a Quebec bump
The taxpayer was assessed under the Quebec general anti-avoidance rule respecting its engaging in “Quebec bump” transactions, which used Class 12 property (namely, a coffee roaster) purchased from a supplier for $820 thousand to generate a non-capital loss of $541 MILLION. After the taxpayer had launched its appeal, counsel for the ARQ realized through a review of documents previously provided that the roaster likely did not qualify as Class 12 depreciable property, and sought to amend the ARQ’s pleadings to allege this as an additional ground for dismissing the appeal.
After noting that the Quebec Taxation Act did not contain a provision equivalent to ITA s. 152(9) (permitting the raising of additional arguments by the government), Lavigne J nonetheless granted the requested amendment, noting that the source of the ARQ’s error was the taxpayer’s returns, which stated falsely (it was alleged) that the roaster was a Class 12 property. She stated:
It was not for the ARQ to find the error. The burden was on the taxpayer to submit accurate tax returns. …
It would be contrary to the interests of justice for the ARQ to be precluded from a defence based on the facts, which were erroneously presented by the plaintiff, even though the file is at the stage of an appeal from the notice of assessment.
Neal Armstrong. Summary of Keurig Canada Inc. v. Agence du revenu du Québec, 2019 QCCQ 451 under ITA s. 152(9).
CRA provides guidance on a GST/HST exemption for respite care services
ETA Sched V, Pt. IV, s. 3 exempts
A supply of a service of providing care and supervision to an individual with limited physical or mental capacity for self-supervision and self-care due to an infirmity or disability, if the service is rendered principally at an establishment of the supplier.
Points made by CRA include:
- Such an exempt service can include the provision of lodging.
- The single supply doctrine can assimilate the provision of lunch, snacks, art supplies, and transportation to and from different activities in the exempt supply of the care.
- The fact that an individual requires assistance with meal preparation and basic activities of daily living alone is not indicative of the individual having limited physical or mental capacity for self-supervision and self-care.
- The factors taken into account in determining whether the care is provided at facilities of the supplier include:
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who has authority over making operational decisions in the establishment
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who has control of day-to-day operations of the establishment
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who has presence in the establishment
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the types of activities and routine carried on in the establishment
Neal Armstrong. Summary of GST/HST Memorandum 21-3 "Respite Care Services" January 2019 under ETA Sched V, Pt. IV, s. 3.
CRA confirms that a subsequent capital loss did not render a capital dividend excessive
CRA took only three weeks to respond to a technical interpretation request by confirming that where a corporation has paid a capital dividend in Year 1 based on a capital gain realized by it in that year, a capital loss realized by it in Year 2 only affects the calculation of its capital dividend account going forward so that no Part III tax on the capital dividend is engaged.
Neal Armstrong. Summary of 22 January 2019 External T.I. 2019-0791631E5 under s. 89(1) – capital dividend account – para. (a).
CRA discusses how to measure compliance by a PHSP with the 90% METC-eligible expense test
Under CRA’s revised policy on insured private health services plans (PHSPs), all or substantially all of the premiums paid under the plan must relate to medical expenses that are eligible for the medical expense tax credit (METC). CRA confirmed that this means a test of whether 90% or more of the annual premiums paid under the plan relate to METC-eligible expenses, and it would be irrelevant if, for example, only 88% of the benefits paid in the year were METC-eligible. However, in the case of a self-insured plan, the test is one of whether all or substantially all of the benefits paid to all employees in the calendar year are for METC-eligible expenses.
Where a health care spending account (HCSA) sets a ceiling on the amounts that can be claimed under the plan, the employees’ allocation of the ceiling amount to the various expense categories is not considered, so that if the portion of the benefits paid in the year for METC-eligible benefits was, say, 92%, it would not matter that the total ceiling amounts allocated to METC-eligible expenses was only 80%. In the rare case where there was determined to be a separate HCSA plan for each employee, this same test would be applied to each such separate plan.
CRA provides helpful tabular numerical examples.
Neal Armstrong. Summary of 24 January 2019 External T.I. 2016-0651291E5 under s. 248(1) – private health services plan.
Income Tax Severed Letters 27 February 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that BEPS has not substantially affected its transfer-pricing practices
CRA comments relating to the mooted BEPS impact on CRA transfer-pricing practices included:
- BEPS Actions 8 to 10 did not effect substantial changes, i.e., the underlying principles are the same.
- CRA hopes to have final guidance out (re BEPS changes) by November 2019 including clarifying the concepts of risk-free return and risk-adjusted return.
- Canada has not adopted the simplification measure concerning low-value-added intragroup services – so that, rather than accepting a flat markup on intragroup service-charges because of the OECD guidance, CRA will continue to rely on IC87-2R to govern intragroup pricing until adoption of a new measure.
- Penalties are usually imposed for failure to have accurate and complete contemporaneous documentation respecting the ss. 247(4)(a)(iv) to (vi) matters (regarding the underlying analysis).
- CRA will audit the “story” in the underlying documentation, e.g., if the taxpayer represent that one of the parties is a low-risk distributor and CRA’s review demonstrates that it is a full-fledged distributor, penalties will probably be imposed (provided the $5 million threshold is exceeded).
Neal Armstrong. Summaries of 26 February 2019 Toronto CRA & Tax Professionals Seminar under s. 247(2) and s. 247(4)(a).
The OECD Commentaries on the PPT are helpful re treaty-benefit situations that have economic substance
Comments on Art. 7 of the MLI (containing the principal purpose test) include:
- The OECD Commentary (whose examples are based in large part on the facts of treaty abuse cases in various jurisdictions, whose results the Commentary may consider to be inapplicable under the PPT test) suggest that the PPT may apply mostly in situations where there is very little real economic substance to the transactions.
- Because the PPT states that a benefit under a covered tax treaty (“CTA”) "shall not be granted” where the provision applies, the application of this provision could make taxpayers worse off than under a reasonable alternative transaction, e.g., a taxpayer who has sought to lower the dividend withholding tax rate from 10% to 5% could be subject to a 25% withholding rate under this complete-denial approach.
- In interpreting a similar one-of-the-principal purposes test, UK courts have held that a principal purpose "has a connotation of importance” (Travel Document Services) and that a principal purpose of a transaction may be to obtain a tax advantage even if the transaction had a commercial objective at least as important as the tax advantage (Lloyds TSB Equipment Leasing). [See also the Groupe Honco line of cases.] Accordingly, the threshold for the PPT may be lower than in most domestic general anti-avoidance rules.
- Since the PPT applies where it is "reasonable to conclude" that one of the principal purposes of an arrangement or transaction was to obtain a benefit under the CTA, it also imposes a relatively low burden on the tax authority, effectively requiring taxpayers to argue that it would be unreasonable to conclude that obtaining the benefit was a principal purpose of the arrangement or transaction.
- The remedial benefits rule in Art. 7(4) has only been adopted by 28 jurisdictions (not including Canada) and is poorly drafted.
Neal Armstrong. Summaries of David G. Duff, “Tax Treaty Abuse and the Principal Purpose Test – Part 2,” Canadian Tax Journal, (2018) 66:4, 947-1011 under Treaties - MLI – Art. 7(1) and Art. 7(4).