News of Note
CILI – Court of Quebec finds that the satisfaction of a resolutory sales condition nullified the original sale so that reconveyance of the realty to the vendor was not a supply
Email this ContentTwo individuals, who wished to acquire a condo unit in a building (“265”) which was still under construction by the taxpayer (“CILI”), agreed with CILI to acquire another unit in an already completed building (“260”) and move there on condition that, when the 265 unit became available, they would acquire the 265 unit at no loss, if a purchaser had not been found for the 260 unit by a specified date. When that date arrived, and the 260 unit had not yet been sold, CILI, and the two individuals, entered into a “deed of retrocession” pursuant to which the original sale was annulled, the purchase price returned to them, and they acquired the 265 unit from CILI.
CILI also entered into a somewhat similar transaction with the son of its principal. In order to meet a bank-imposed sales target, CILI sold the development’s model condo suite to him for rental by him back to it, on the condition that CILI would take back the unit from him once a third-party purchaser had been secured. When this “resolutory” condition was satisfied, the unit was returned to CILI pursuant to a deed or retrocession, and the purchase price refunded.
On both sales, CILI collected the applicable QST, refunded such QST on the retrocession, and claimed a credit for such refunded tax pursuant to the Quebec equivalent of ETA s. 232, which the ARQ refused on the grounds that the retrocessions represented second taxable supplies of the two units, rather than evidencing annulments of the previous sales.
Before allowing CILI’s appeal, Fournier JCQ found that under the Quebec Civil Code:
A resolutory condition has the effect of destroying the contractual link existing between the parties by extinguishing it as if it had never existed. …
Thus, the return of the unit in each case was to reflect that the original taxable supply was nullified, rather than representing a further taxable supply, so that the application of the s. 332 equivalent was confirmed.
Neal Armstrong. Summary of Corporation immobilière des Laurentides Inc. v. Agence du revenu du Québec, 2024 QCCQ 5297 under ETA s. 232(1).
CRA has confirmed that prior SR&ED claims for non-statute-barred years can be amended to reflect excluded loans
In response to CAE, effective for loans made after 2019, “excluded loans” were excluded from “government assistance” as defined in s. 127(9) for ITC purposes and from s. 12(1)(x) receipts and governmental assistance under s. 13(7.1). Simplistically, an excluded loan is a government-sourced loan which must be non-forgivable and have reasonable repayment terms, but which otherwise can have non-commercial terms, such as a low interest rate.
CRA representatives confirmed that taxpayers impacted by the change in the s. 127(9) definition of government assistance may submit amended tax returns with their revised SR&ED forms for the years affected even where their SR&ED reporting deadline has passed, provided that the taxation year is not statute-barred.
Neal Armstrong. Summary of EY, “Concessional loans – Claimants may amend prior SR&ED claims for taxation years that are not statute-barred,” Tax Alert 2024 No. 54, 15 November 2024 under s. 127(9) – government assistance.
CRA treats the conversion of a Delaware corporation to an Iowa LLC as the continuation of the same entity
A Delaware corporation was converted into an Iowa limited liability company pursuant to provisions in the applicable statutes that contemplated that the converted entity was the same entity as the converted corporation. The Directorate indicated that since both companies were corporations for ITA purposes, it would rely on the foreign company law, which treated the conversion as not entailing the converted company as ceasing to exist and to instead be continued, so that it would regard the Iowa LLC as the same entity as the Delaware corporation.
Neal Armstrong. Summary of 30 July 2024 Internal T.I. 2024-1019041I7 under s. 248(1) - disposition.
CRA indicates that an HBP balance is not zeroed through a contribution to repay the balance until the applicable return designation is made
As part of the rules for allowing an individual to participate in a home buyers’ plan (HBP) in more than one calendar year, individuals can have a fresh participation period in which they can make a further HBP withdrawal from their RRSP if they have contributed amounts to their RRSP that are designated to be non-deductible HBP repayments, so as to reduce their “HBP balance” to nil. In particular, in order for a withdrawal from their RRSP to qualify as a “regular eligible amount,” para. (i) of the definition thereof requires the individual’s HBP balance at the beginning of the withdrawal year be nil.
An individual, who had an HBP balance of $5,000 at the beginning of Year 1, contributed $5,000 to his RRSP on May 7 of that year to repay that HBP balance. On March 25 of Year 2, when filing his T1 return for Year 1, he designated (on Sched. 7 to the return) that contribution as an HBP repayment for Year 1.
CRA indicated that it was only on the return filing date when he made such designation that his HBP balance as at the beginning of Year 2 was reduced to nil, so that he was required to wait until that date before being again able to participate in the HBP.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.11 under s. 146.01(1) – HBP balance.
CRA confirms that the ACB increase under s. 53(1)(e)(vi) for a negative ACB gain does not occur until immediately after rather than at the partnership year end
2009-0349911E5 dealt with a limited partnership (“LP”) which, in February 2008, realized a capital gain, of which $100,000 was allocable to a limited partner, whose interest had an ACB at the beginning of the (calendar) 2008 fiscal period of LP of $10,000. $100,000 was withdrawn by the limited partner in March 2008, producing a negative ACB gain of $90,000. CRA indicated that this negative ACB gain was added back to that negative ACB, so as to increase it to nil “as at December 31, 2008”, and that the capital gain allocated to the limited partner increased the ACB of its interest to $100,000 on January 1, 2009.
When now asked about this, CRA effectively acknowledged that the quoted date of the ACB increase pursuant to s. 53(1)(e)(vi) was incorrect, and that “the addition of $90,000 under subparagraph 53(1)(e)(vi) should be made on January 1, 2009.” (Otherwise, there presumably would be circularity issues, since the negative ACB gain under s. 40(3.1) is triggered as at the fiscal period year end.)
Neal Armstrong. Summary of 5 August 2024 External T.I. 2024-1031811E5 under s. 53(1)(e)(vi).
CRA confirms that where both ss. 107(2) and 148(7) apply to a personal trust’s distribution of a life insurance policy in satisfaction of capital interest, s. 107(2) prevails over s. 148(7)
In 2023-0990531C6, CRA indicated that, where a life insurance policy is distributed by a personal trust in satisfaction of an income interest in the trust, there would be a disposition of that interest and of the policy at FMV, irrespective of which of s. 106(3) or 107(2) applied. CRA confirmed that this did not call into question its earlier positions in inter alia 2011-0391781E5 that where an interest in a life insurance policy held by a personal trust is distributed to a resident beneficiary in full or partial satisfaction of the beneficiary's capital interest, s. 107(2) (assuming its conditions were satisfied) would prevail over s. 148(7), so that s. 107(2) rollover treatment would apply.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.10 under s. 148(7).
Income Tax Severed Letters 13 November 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that building a secondary unit to access the multigenerational home renovation credit caused that portion of the building to no longer be the taxpayer’s principal residence
CRA noted that the construction of a secondary unit within the taxpayer’s home so as to qualify for the multigenerational home renovation tax credit would thereby preclude the taxpayer from treating the whole home as his or her principal residence. It further indicated that subsequently selling the secondary unit to the qualifying-relation occupants would not generally result in loss of the credit.
Neal Armstrong. Summaries of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.9 under s. 122.92(1) – qualifying relation, s. 252(2)(g), s. 54 – principal residence, and s. 122.92(1) – eligible individual.
CRA announces that its administrative arrangement regarding ITC claims by orthodontic practices has been revoked
Davis Dentistry confirmed input tax credit (ITC) claims of a professional practice on the basis that a portion of its supplies to each orthodontic patient was of a zero-rated supply of the orthodontic appliance, and that only the balance of what was supplied was an exempt healthcare service.
Under CRA’s arrangement made in 1991 with the Canadian Dental Association, a dentist registrant could, for each reporting period in a fiscal year, use an estimate up to a maximum of 35% of the total consideration charged for orthodontic treatments to represent the consideration for the supply of orthodontic appliances, and claim ITCs on that basis – but then, at the end of the fiscal year, was required to perform a reconciliation based on the actual amounts charged for orthodontic appliances, and adjust the ITC claims for the year accordingly (keeping in mind that charges for cosmetic services also generated ITCs).
CRA has now announced that this arrangement is revoked effective for any fiscal year of a dentist (who had been relying on this arrangement) that begins on or after January 1, 2025.
Dentists will now be expected to claim ITCs throughout the year based on their actual eligibility to do so without making estimates, i.e., on the basis of the extent that the input was acquired for consumption or use in the course of their commercial activities.
Neal Armstrong. Summary of GST/HST Notice 339, “Input Tax Credits Related to Dental Practices,” October 2024 under ETA Sched. VI, Pt. II, s. 11.1.
CRA explains the 8% adjustment to the FTC deduction under the NERDTOH computation for foreign investment income
Although the general tendency of the NERDTOH definition is to add to the NERDTOH of a CCPC an amount equal to 30 2/3% of its aggregate investment income, in the case of foreign investment income (FII), the refundable tax addition is reduced by the excess of the amount of the foreign tax credit deduction under s. 126(1) for the year minus 8% of the year’s FII.
CRA explained that this 8% rate represents the difference between a deemed tax rate of 38 2/3% on the CCPC's FII (i.e., the sum of the 28% federal corporate tax rate applicable to the CCPC's AII and the 10 2/3% rate applicable to such income under s. 123.3) and the refundable amount thereof of 30 2/3%.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.8 under s.129(4) – NERDTOH – (a)(i).