News of Note
CRA is imposing GST on B.C. sales tax applicable to sales of expensive autos
Email this ContentIn general terms, ETA s. 154 excludes provincial sales tax from the consideration on which GST/HST is imposed if the sales tax is imposed at no more than the general sales tax rate for the province. B.C. is now imposing sales tax at 20% on cars sold for more than $150,000 and at 15% between $125,000 and $150,000. Thus the effect of s. 154 is that GST is also charged on this B.C. sales tax.
Neal Armstrong. Summary of Excise and GST/HST News, No. 104, July 2018 under ETA s. 154(2).
CRA indicates that most new home warranties are GST/HST taxable
The ETA definition of an (exempt) insurance policy refers to “a policy or contract of insurance … issued by an insurer” but excludes “a warranty in respect of the quality, fitness or performance of tangible property, where the warranty is supplied to a person who acquires the property otherwise than for resale.” CRA has confirmed that the exclusion has the effect of rendering most new home warranties GST/HST taxable even where they are provided by an insurer.
Neal Armstrong. Summary of Excise and GST/HST News, No. 104, July 2018 under ETA s. 123(1) – insurance policy – (a).
Income Tax Severed Letters 11 July 2018
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
BCS Group – C Miller J disagrees with some of his colleagues in finding that a corporation can appear “in person” without counsel
In Masa Sushi, Graham J found that a corporation could not appear “in person” in a General Procedure matter and had to appear through counsel, so that a Rule purporting to permit a corporation to appear in person with the Court’s consent would be ultra vires. He considered that the concept of a corporation appearing “in person” was nonsensical, stating:
A human can be physically present in court. A corporation, being a creation of law with no physical substance, cannot.
C Miller J disagrees, stating:
Yes, there is common law jurisprudence to the effect that “in person” can only mean by the presence of a visible person … but there has been no such jurisprudence, until Masa Sushi, from the Tax Court of Canada.
…Surely we can give the drafters of the legislation and the drafters of the Rules credit for recognizing the uniqueness of the Court, unencumbered by the traditional common law findings of other Courts.
He went on to permit the corporate taxpayer to appear in person through its individual shareholder/director. He noted that this issue has been appealed in another case (Suchoki) to the Federal Court of Appeal.
Neal Armstrong. Summary of BCS Group Business Services Inc. v. The Queen, 2018 TCC 120 under Rule 30(2).
Automodular – Supreme Court of Ontario finds that there was no implied term in a settlement agreement for grossing up a settlement amount for ETA s. 182 tax
Counsel to the parties in an action for wrongful termination by the defendant of an agreement for the long-term supply of parts to it by the plaintiff agreed by exchange of emails on the weekend before the trial that the action would be settled by the payment by the defendant of a $7M sump sum. Dunphy J, in dismissing a motion by the plaintiff for a declaration that there was an implied contractual term that the $7M should be grossed up for HST remittable out of the settlement amount by the plaintiff under ETA s. 182, stated:
It cannot be said here that the agreement lacks commercial efficacy without the implied term. It cannot be said that term the plaintiff seeks was so obvious as to “go without saying” in the eyes of an objective person. …
The simple fact of the matter is that the plaintiff stipulated the sum it was prepared to accept and did not seek to allocate it in any way.
Neal Armstrong. Summary of Automodular Corporation v. General Motors of Canada Limited, 2018 ONSC 1640 under ETA s. 182(1).
CRA treats the application of the purpose test, respecting the acquisition by a private foundation of an indirect interest in a private corporation through a trust, as a question of fact
Where a private foundation or persons with whom it does not deal at arm’s length own more than 20% of the shares of any class of shares of a corporation (the “excess corporate holdings percentage” as defined in s. 149.1(1)), it is obligated to divest itself of the excess shares (the “divestment obligation percentage.” Mr. A, who does not deal at arm’s length with private foundation, settles his freeze shares of a private corporation on an alter-ego trust under s. 73(1), with the trust terms providing that the residue of the trust will be distributed to the private foundation on his death. Will the private foundation will be subject to s. 188.1(3.5) such that it will be treated as owning a portion of the freeze shares?
Along with conditions of a more mechanical nature, CRA noted the purpose test in s. 118.1(3)(d) and (e) – which applied inter alia if it may reasonably be considered that a purpose of the acquisition of a property by the trust was to hold shares and such shares, if they were held by Mr. A, would cause the private foundation to have a divestiture obligation percentage. Perhaps in recognition of potential ambiguities as to how to apply this purpose test to what essentially is a donee, CRA gave the following somewhat muffled response:
…Whether subsections 188.1(3.3) to (3.5) apply to a particular situation is a mixed question of fact and law … . Given the broad nature of these provisions, where a private foundation is a beneficiary under an alter-ego trust, consideration must be given to subsections 188.1(3.3) to (3.5) for the purposes of determining the private foundation’s excess corporate holdings percentage and divestment obligation percentage for a taxation year.
Neal Armstrong. Summary of 8 May 2018 CALU Roundtable Q. 5, 2018-0745861C6 under s. 188.1(3.3).
The adoption of IFRS 9 raises the potential that loan impairment amounts for ITA and IFRS purposes will differ
The s. 20(1)(l) reserve for doubtful loans for a money-lending business of a financial institution is in essence the lesser of a reasonable amount and 90% of the reserve or allowance for impairment determined in accordance with GAAP. IFRS 9, which replaced IAS 39 effective after 2018 (which, in the case of public entities, in turn replaced s. 3015 of the CICA Handbook, as it used to be called), adopts a risk-weighted approach, and unlike the old accounting standards, it incorporates predictive elements.
The expected-credit-loss model comprises the following three stages:
- Stage 1. An allowance is recorded on the initial recognition of a non-credit-impaired financial asset The allowance under this stage is measured on the basis of the expected lifetime cash shortfalls that would result if a default occurs within 12 months after the reporting date, weighted for the probability of a default
- Stage 2. The allowance is recorded relating to a financial asset or a group of financial assets where there has been a significant increase in credit risk since the initial recognition. In this stage, the amount of loss allowance is equal to the expected credit loss over the life of the financial asset
- Stage 3. The allowance for credit-impaired loans is recorded. In this stage, one or more events have taken place to cause the financial asset to become impaired.
There is some concern that only stage 3 amounts will be recognized by CRA as impaired as required by s. 20(1)(l)(ii)(D).
Neal Armstrong. Summary of Arthur Driedger and Stephen Wong, “IFRS 9: Financial Instruments,” Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p.6 under s. 20(1)(l)(ii).
S. 98(5) can unexpectedly trump s. 98(3)
S. 98(4) provides that s. 98(3) is not applicable “in any case” where s. 98(5) is applicable. Thus, if s. 98(5) applies on the basis of one former partner using any property in the business that was the partnership business, s. 98(3) will not apply to the other partner even where the parties filed a joint s. 98(3) election.
Neal Armstrong. Summary of Paul Cormack and Janette Pantry, “Partnership Reorganizations,” Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p. 5 under s. 98(5).
Minto Apartment REIT is using a Class B exchangeable and Class C preferred unit structure
On July 3, Minto Apartment REIT completed an initial public offering in which unitholders are investing in a portfolio of rental properties formerly held by Minto Properties. This is being accomplished first by Minto Properties transferring the portfolio (appraised at $1.179 billion) to a newly-formed wholly-owned LP in consideration for cash, the assumption of a portion of the related secured debt, the issuance of two promissory notes and a partnership interest that then will be converted into “common” Class A units, exchangeable Class B units and “preferred” Class C units, with Minto Properties then selling its Class A units to the REIT for a note that is repaid out of the IPO proceeds.
The Class C units (valued at $233 million) are intended to service the secured debt that was retained by Minto Properties. This approach to deal with excess boot issues was also used in the Melcor and CT REIT IPOs.
Neal Armstrong. Summary of Minto Apartment REIT prospectus under Offerings – REIT and LP Offerings – Domestic REITs.
CRA effectively indicates that general partner distributions have been subject to GST/HST all along
CRA has released Notice 308 discussing the new investment limited partnership (ILP) rules (which were effective as early as September 8, 2017, subject to some detailed transitional rules). Noteworthy points include:
- CRA effectively takes the position that under the previous rules (i.e., before taking into account the ILP amendments) most general partners were required to charge HST on the fair market value of the periodic admin and management services provided by them to an investment limited partnership (i.e., a partnership that will be an ILP under the amendments.) In an example dealing with such a partnership, it states that the general partner (GP) is required to amend its returns to show GST/HST as having been collectible by it on the fair market value (FMV) of the monthly management fees provided by it before the effective date of the new rules. Given the predominant view in the industry, CRA thus is effectively declaring that most general partners of ILPs are delinquent in their filings under the old rules. This is not the last you will hear of this.
- There is no discussion of carries/promotes. However, a variant of the above example deals with the situation where the GP charges both a monthly fee calculated as a percentage of NAV and an annual fee based on the “performance” of the LP fund.
- The only comment made by CRA on the performance fee was "given the annual payment that [GP] may be entitled to receive from LP Fund, the monthly payment may not be reflective of the FMV of the management and administrative services rendered in a particular month."
- This may indicate that CRA considers that where the GP makes regular charges (e.g., takes monthly GP draws) for its management and admin services, a less frequent performance fee, carry or promote will not per se be subject to GST/HST – but the fact that the limited partners were willing for their partnership to bear this less frequent charge may indicate that the regular actual charges were less than the FMV of the GP’s monthly services.
- Although there are other rules that turn on FMV (e.g., the self-supply rule for new apartment complexes on first occupancy or substantial completion), in practice it would be very difficult to determine a notional FMV for a GP’s monthly services.
- CRA indicates that a real estate fund which for limited liability or financing reasons invests in real estate through subsidiary LPs is an ILP even if most of its investors are not financial institutions.
- New s. 132(6) deems an ILP with a Canadian-resident GP but with mostly non-resident members to be a non-resident person (so that, for example, manager services supplied to it could be zero-rated.) However, s. 132(2) deems a non-resident to be resident respecting the activities that it carries on through a Canadian permanent establishment. CRA appears to implicitly accept that such an ILP will not nonetheless be deemed by s. 132(2) to be resident in Canada by virtue of carrying on all its activities through the GP, who presumably would have an office in Canada that might be considered to be a Canadian PE of the ILP. CRA instead only references the situation where there is a Canadian PE maintained on behalf of the ILP in its own right, e.g., an office that it rents out.
Neal Armstrong. Summaries of GST/HST Notice 308 GST/HST and Investment Limited Partnerships July 2018 under ETA s, 272.1(3), s. 272.1(8), s. 132(6), s. 123(1) – investment limited partnership, s. 225.2(2), s. 240(3)(c), 238(2), 238(2.1), Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, s. 3(e), s. 54(1), s. 55(2), s. 55(4)(c) and s. 73(1).