News of Note
National Money Mart – Ontario Court of Appeal finds that a supplier can issue an invoice after being assessed for the HST on the supply
Email this ContentA supplier failed to charge HST on sales of unrefined gold. When CRA discovered this, the supplier issued invoices to the purchaser showing the sale particulars and the applicable amount of HST as being unpaid, and following being assessed for this tax by CRA and paying it, sued the purchaser for its payment.
The purchaser relied on the requirement in ETA s. 224 for compliance with the disclosure requirement in s. 223(1) in order for the supplier to have the right to sue the purchaser for unpaid HST. In finding that the post-sale invoices satisfied this requirement, Brown JA stated:
Section 223(1) is silent on when a registrant must give disclosure of the tax payable to a recipient. The overwhelming weight of the jurisprudence, the CRA’s Policy Statement P-116, and the professional commentary have interpreted that statutory silence to mean that a registrant supplier can comply with the s. 223(1) disclosure obligations by delivering an invoice or receipt containing the prescribed information after the supply transaction.
Neal Armstrong. Summary of National Money Mart Co. v 24 Gold Group Ltd, 2018 ONCA 812 under ETA s. 223(1).
CRA declines to find that a CCPC with too many employees to have a specified investment business must have an active business
Following decisions such as Supreme Theatres that corporations with very little in the way of activity nonetheless qualified as carrying on an active business, s. 125 was amended to define “active business” to include any “business” other than a specified investment business or personal services business. CRA was essentially asked to confirm the proposition that a Canadian-controlled private corporation that employed six full-time employees in its rental operations (so that it thus did not carry on a specified investment business) will therefore qualify as carrying on an active business for purposes of s. 125(1) rather than being considered to earn income from property. CRA declined to give comfort on this point (stating that it was a question of fact) and not referring to any of the above history), but stated that the concept of “business” is “accorded an expanded meaning by subsection 248(1) by being defined in particular as including an undertaking of any kind whatever” (essentially, “activities” of any kind whatever in French).
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.17 under s. 125(1) - “active business carried on by a corporation”.
Income Tax Severed Letters 17 October 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA accepts that a price adjustment clause can operate re statute-barred transactions to affect a tax attribute that is used in the current year
CRA accepts that where a price-adjustment clause retroactively adjusts a tax attribute, such as adjusted cost base, that arose from a rollover transaction that occurred in what is now a statute-barred year, that adjustment may occur “for a taxation year that is otherwise not statute-barred if it has an impact on the tax consequences for that year.”
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.15 under s. 152(4).
CRA finds that a shareholder benefit from using the corporate aircraft is reduced by an interest-free loan made by the shareholder to fund its purchase
IT-432R2, para. 11 indicates that the value of a taxable benefit conferred on a shareholder respecting property made available by the corporation can usually be determined by multiplying a normal rate of return by the greater of the cost and fair market value of the property and adding the operating costs related to the property - but that the amount representing the greater of the cost and fair market value of the property may first be reduced by any outstanding interest-free loans or advances to the corporation made by the shareholder. Although this position was not repeated in AD-18-01 on aircraft benefits, CRA has now stated:
Where a shareholder grants an interest-free loan to the shareholder’s corporation and that corporation uses that amount to acquire an aircraft that is made available to that shareholder for the shareholder’s personal use, the CRA could accept in determining the available-for-use amount that the initial cost of the aircraft is first reduced by the amount of the interest-free loan that the shareholder made to the corporation to enable the corporation to acquire that aircraft.
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.14 under s. 15(1).
Barejo – Tax Court of Canada issues a modified answer in order to accommodate an appeal to the FCA
Barejo Holdings indicated that notes held by a BVI open-ended investment fund constituted debt for purposes of the Act. The appeal from this decision was dismissed at 2016 FCA 304 on the grounds that the Rule 58 question posed to the Tax Court was whether the notes were debts for purposes of the Act rather than for purposes of s. 94.1 thereof.
The parties now jointly referred a question to the Tax Court, which was the same as before except that it asked whether the notes constituted debt for purposes of s. 94.1(1)(a). After noting that both parties wanted him to issue this amended answer to “allow them to have the reasons for my decision reviewed by the Federal Court of Appeal” Boyle J stated: “I am prepared to oblige them.”
Neal Armstrong. Summary of Barejo Holdings ULC v. The Queen, 2018 TCC 200 under s. 94.1(1)(a).
CRA indicates that the returns to a spouse and older children from a Holdco in which they reinvested their Opco capital gains exemption could qualify as TOSI excluded amounts
A family trust (“Trust”) distributed the taxable portion of its gain on the sale of qualified small business corporation shares (of Opco) to its beneficiaries (Mr. and Mrs. X, and their children. Child X and Y, aged 15 and 22) who claimed the s. 110.6 deduction. The beneficiaries then used their sales proceeds to subscribe for the shares of a newly-incorporated holding company (Holdco): Trust – 50% of the Holdco shares; Mr. and Mrs. X – 20% each; and Child X and Y – 5% each). Holdco generated $150,000 from investing these funds in the stock market and paid a $100,000 dividend pro rata to its shareholders with Trust, in turn, distributing its $50,000 dividend to Mrs. X and Child X and Y.
In considering the split income rules, CRA indicated:
- The dividend paid by Holdco to Child X clearly would be added to the child’s split income given the age of under 17.
- If Holdco did not carry on a business, then the dividends received from Holdco would be “excluded amounts” for Mr. X, Mrs. X and Child Y because they were not derived from a business and, thus, not from a related business.
- If Holdco instead was carrying on a business (of earning income from the stock market) and, thus, a related business respecting Mr. X, Mrs. X and Child Y, the shares of Mr. and Mrs. X would be excluded shares given that they had the greater than 10% shareholdings in Holdco, Holdco’s income was not from property and substantially all of its income was from its own business. However, Child Y would not hold excluded shares given a shareholding of only 5%.
- Child Y could not benefit from the exclusion for arm’s length capital contributions provided in s. (f)(ii) of the "excluded amount" definition given that the capital subscribed for Holdco shares came from a taxable capital gain from the disposition of property which directly or indirectly came from a related business (i.e., the shares of Opco). This would only leave the “safe harbour capital return” exclusion for receiving the highest prescribed rate on the amount subscribed.
- A similar analysis applied to the distribution by Trust.
Neal Armstrong. Summaries of 5 October 2018 APFF Roundtable, Q.13 under s. 120.4(1) – excluded shares, excluded amount – (e)(i) and arm’s length capital.
CRA indicates that having non-contributing children as members of a family stock market partnership is subject to challenge under the old rather than TOSI rules
CRA confirmed that the tax on split income is inapplicable to a family partnership that invested in the stock market where the children had not contributed anything to the partnership or participated in the trading decisions or other management decisions, given the exclusions from “split income” for dividends on shares listed on designated stock exchanges and for taxable capital gains realized on such shares. However, CRA went on to indicate that given such lack of contribution of the children, it would review the application of inter alia ss. 103(1). 103(1.1), 74.1 and 96(1.8).
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.12 under s. 120.4(1) – split income – s. (a)(i).
CRA suggests a tracing approach for determining for TOSI purposes whether a dividend paid by Holdco to a child is derived from a related business or from Holdco’s stock portfolio
All the voting shares of Opco are held by Mr. X and all its participating shares are held by a family trust (“Trust”). In the prior year, Holdco, which is wholly-owned by Child X (age 35, who is not involved in the Opco business) generated $150,000 of passive income, and also received qua beneficiary a $100,000 distribution of a dividend that Trust had received from Opco. Could Holdco now pay a $75,000 dividend (the “Dividend”) on the basis that it was derived from income on the stock market investments rather than from Opco, so as to avoid the split income tax?
CRA concluded that “Holdco must adequately monitor its funds derived from stock market investments in order to determine whether those funds were used to pay the Dividend.” Split income tax would apply if the Dividend came “out of the funds from the $100,000 dividend received from Opco or from any dividends previously received from Opco.”
On the other hand “if it can be determined that Holdco will pay the Dividend to Child X out of its after-tax income from its stock market investments, then that dividend would be an excluded amount for Child X and would not be included in calculating the child’s split income.” There were two possibilities in this regard. First, the stock portfolio of Holdco might represent an investment “business,” in which case it would not be a “related business” because Mr. X (the father) was not involved in this business. Alternatively, if it was not a business, then it would again follow that it could not be a related business. Thus, either way, the stock portfolio would represent a good source for the Dividend that would not engage the tax on split income.
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.11 under s. 120.4(1) – excluded amount – s. (e)(i).
CRA indicates that beneficial interests in discretionary trusts holding shares of a corporation with a mooted related business for TOSI purposes must be valued
The definition of “related business” of a specified individual in (c)(i)(B) in the s. 120.4 split income rules references a business of a corporation where a source individual owns property “that derives, directly or indirectly, all or part of its fair market value” from shares of the corporation. CRA indicated that such property would extend to an interest in a discretionary trust, and stated that the valuation of such an interest was a question of fact.
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.10 under s. 120.4(1) – related business – s. (c)(i)(B).