News of Note
Chi - Federal Court gives an individual who failed to produce foreign bank statements following a compliance order another chance to avoid imprisonment
Email this ContentAn individual (Chi) failed to supply bank statements for three accounts at a Hong Kong HSBC bank branch pursuant to a s. 231.2(1) requirement and also pursuant to a subsequent compliance order issued under s. 231.7.
LeBlanc J found Chi to be in contempt. After noting that there were mitigating factors calling for a milder sentence than in other cases, he ordered Chi to pay a fine of $2,000, legal costs of $3,500, and provide the HSBC bank statements (or documented evidence that they were not available) all within 30 days, failing which Chi would be subjected to 15 days’ imprisonment.
Neal Armstrong. Summary of Canada (National Revenue) v. Chi, 2018 FC 897 under s. 231.7(4).
Discretionary family trusts may increase the impact of the passive income rules
Under the passive income proposals as implemented, the $500,000 small business limit for a taxation year of a Canadian-controlled private corporation is reduced to nil if the CCPC together with any associated corporations earned over $150,000 of passive income (“adjusted aggregate investment income”) in their taxation years ending in the preceding calendar year. A beneficiary of a discretionary family trust is deemed under s. 256(1.2)(f)(ii) to own all of the shareholdings of the trust, and if a minor is a beneficiary of a trust, ss. 256(1.3) and 256(1.2)(f)(ii) or (iii) generally will look through the trust and the minor to deem the minor’s parents to own the shares held by the trust as though the parents were beneficiaries. These and other association rules may cause the small business deduction to be lost. For example, an adult child’s corporation might be associated with those of the parents due to a testamentary trust.
Neal Armstrong. Summary of Michael Goldberg, "The Passive Investment Rules and Their Associates", Tax Topics (Wolters Kluwer), No. 2426, September 6, 2018, p. 1 under s. 125(5.1).
CRA provides detailed guidance on the RRSP and TFSA advantage rules
Examples of situations where CRA considers that the 100% advantage tax is triggered include:
- Private company employees whose registered plans are issued non-voting prefs that pay dividends well in excess of the subscription price taking into account the company’s performance relative to benchmarks receive a (b)(ii) advantage.
- Where at the same time as an estate freeze an employee received common shares of the Freezeco (an arm’s length employer) for nominal consideration and immediately contributed the shares to her TFSA, there would be an advantage equalling the shares’ subsequent appreciation (as well as any dividends received thereon).
- Where an individual contributed common share warrants to his TFSA for their nominal intrinsic value, the subsequent gain realized by the TFSA on exercise would be an advantage given that “The intrinsic value of a warrant or option is not reflective of the property’s FMV”.
- A mutual fund dealer convinces an individual to switch mutual fund companies and agrees to share 40% of the 5% sales commission he will earn on the purchase of the new funds. The individual asks the dealer to allocate the rebates fully to his TFSA and RRSP and none to his taxable account. The amount of the advantage would be equal to the amount by which the actual rebates paid into the RRSP and TFSA exceeds the amount that would have been paid if the total rebates had been allocated to the three accounts on a pro rata basis. All future increases in the FMV of the plan property relating to the initial advantages would also give rise to advantage tax.
CRA computes an advantage on an annual basis so that where a security fluctuates up and down in the year in a situation where any increment in value is an advantage, CRA will only treat the net increase from January 1 to December 31 as the advantage amount.
Neal Armstrong. Summaries of S3-F10-C3 “Advantages – RRSPs, RRIFs and TFSAs” under 207.01(1) – advantage – (a), (a)(ii), (a)(v), (b)(i), (b)(ii), swap transaction, registered plan swap and s. 207.05(2).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six interpretations from the October 2012 APFF Roundtables, as fully translated by us.
These (and the other full-text translations covering all of the 663 French-language Interpretations released in the last 5 2/3 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. You are currently in the "open" week for October.
CRA accepts but will not extend the Club Intrawest case
Club Intrawest found that what otherwise would be viewed as a single supply of services regarding real property (vacation homes) was to be split into two supplies: a taxable supply respecting the Canadian homes; and a non-taxable supply in relation to the non-Canadian homes. CRA has indicated that it is not prepared to extend this bifurcation approach beyond the context of determining the place of supply of a service in relation to real property.
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.20 under ETA s. 142(1)(d).
CRA will not adopt the ARQ’s fast track procedure for offsetting remittance obligations against ITCs
Revenu Québec has a “fast track” procedure under which a supplier’s QST/GST remittance obligation is in effect set-off against the recipient’s input tax refund/credit. Conditions for this procedure include:
- the requested refund is over $500,000 of net tax;
- the GST/HST and QST filing frequency of the recipient and the supplier is monthly;
- there are no late returns or payments in any tax account respecting the recipient; and
- there is no agency relationship between the recipient and supplier.
CRA has no intention of reinstating its own version of this procedure.
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable. Q.19 under ETA s. 225(1).
CRA indicates that registration based on prospective commercial activity must be based on a demonstrable clear intention to do so
A charity may wish to make an ETA s. 211 election in order that rentals made by it of its real estate are deemed to be taxable supplies (thereby generating input tax credits to it). CRA accepted the proposition that where a charity would not qualify as being engaged in making taxable supplies until it made a s. 211 election, it nonetheless potentially could register for GST/HST purposes in advance of the effective date of the s. 211 election on the basis of the s. 141.1(3)(a) rule, which effectively assimilates start-up activities to commercial activity – provided that the charity was in a position “to demonstrate a clear intention to engage in a commercial activity.”
However, CRA effectively cautioned that doing so could potentially be fraught since s. 211(2) deems there to be a deemed taxable supply of the elected-upon real property on the day before the effective date of the election if the electing charity (or other public service body) did not acquire the property on the day of the election or become a registrant on the effective day of the election. Although it thus would be safest to become a registrant and have the effective date of the s. 211 election occur on the same day, CRA indicated that this self-supply rule also would not apply if the real property was acquired on the day before the effective day of the election.
CRA also indicated that election applies on a property-by-property basis, i.e., “the election applies to the entire legal description and not just to a portion of the real property.”
Neal Armstrong. Summaries of 8 March 2018 CBA Commodity Tax Roundtable, Q.16 under ETA s. 211(2) and s. 141.1(3)(a).
Alta Energy may inform the Canadian interpretation of the MLI
In Alta Energy, Hogan J found that the reference in the preamble to the Canada-Luxembourg Treaty to the prevention or reduction of double taxation was too vague to be indicative of the rationale of the specific Treaty Articles relied upon by the taxpayer – and also found in a GAAR context that Treaty-shopping was not contrary to the object and spirit of the Treaty. This approach might inform a consideration of the minimum standards in the MLI that specifically condemn double non-taxation and treaty shopping and provide a principal purpose general anti-abuse test (“PPT”).
[I]n the absence of either a rule that changes the liable-to-tax test to a subject-to-tax test or a limitation-on-benefits clause, it could still be argued that the clear wording of a treaty would be too powerful an evidence of a treaty’s object and purpose to be overridden by a vague preamble or a subjective PPT.
Neal Armstrong. Summary of Michael N. Kandev, “Taxpayer Wins Treaty Shopping Challenge in Alta Energy Luxembourg,” Tax Management International Journal, 14 September 2018, p. 572 under Treaties – MLI – Art. 6.
CRA confirms that a non-statute-barred partner can be assessed directly where the s. 152(1.4) partnership loss determination period is exceeded
CRA confirmed (consistently with comments in 2078970 Ontario) that if it has not made a partnership loss determination within the three-year limitation period under s. 152(1.4), it has the option of assessing the partners directly where their returns are not yet statute-barred.
Neal Armstrong. Summary of 17 April 2018 Internal T.I. 2017-0734751I7 under s. 152(1.4).
Cameco – Tax Court of Canada finds that having Swiss/Lux subsidiaries enter into long-term purchase contracts at a somewhat fixed price with third parties and the taxpayer did not engage s. 247(2)
Cameco Canada formed a Swiss subsidiary (“CESA/CEL,” - more precisely, a two-employee Swiss branch of a Luxembourg subsidiary ("CESA"), that was succeeded a few years later by a Swiss subsidiary ("CEL")), that entered into long-term contracts (guaranteed by Cameco Canada) for the purchase of Russian-sourced uranium from a third party (e.g., "Tenex"). CESA/CEL also purchased uranium from the Cameco Canada under long-term base-escalated supply contracts (the “BPCs”), and then sold that uranium to Cameco US (who had marketed the uranium) at 98% of the sales price obtained by Cameco US. When the price of uranium subsequently increased significantly, CESA/CEL made substantial profits from the resale of the uranium under both types of contract given that its purchase prices only partially escalated with increasing uranium market prices. Owen J essentially found that both sets of contracts had terms that reflected the depressed uranium market at the time they were concluded and renewed, and that s. 247(2) did not authorize CRA to deem most of the profit to have instead accrued to Cameco Canada through applying s. 247(2) to effectively transfer the benefit of the advantageous Tenex purchase contract to Cameco Canada, or to deem Cameco Canada to have received a higher selling price under the BPCs.
His comments included:
- The concept of a “series” under s. 247(2) should be interpreted narrowly in order to not make it impossible to engage in the comparative analysis contemplated under that section and the OECD Guidelines.
- Ss. 247(2)(b) and (d) essentially dealt with “commercially irrational” transactions, which was not the case here.
- The decision of Cameco Canada to offshore the contracts to CESA/CEL was consistent with “the purpose of the foreign affiliate regime … to allow Canadian multinationals to compete in international markets through foreign subsidiaries without attracting Canadian income tax.”
- “The Appellant’s and CESA/CEL’s strategic decision to enter into the BPCs when they did may have been based on the subjective views of those parties as to the price of uranium, but that fact has no bearing on whether the terms and conditions agreed to in the Long-term Contracts are arm’s length terms and conditions.”
- S. 247(2)(a) permitted the taxpayer to fall "within an arm’s length range of prices" rather than requiring the taxpayer to hit a pinpoint price.
Neal Armstrong. Summaries of Cameco Corporation v. The Queen, 2018 TCC 195 under s. 247(2) and General Concepts - Sham.