News of Note
RAR Consultants – Tax Court of Canada imposes penalties for failure to file T1134s respecting a foreign affiliate
Email this ContentIn the years in question, the T1134 forms provided an exemption from the required filing where inter alia the cost amount of the taxpayer’s investment in foreign affiliates was less than $100,000. Before confirming penalties for failure to file T1134s, Bocock J rejected a submission that the value of the sole foreign affiliate investment of the taxpayer (a 28% interest in a Bermuda company) had declined by the years in question to below $100,000. He did so on factual grounds, rather than on the basis of the meaning of “cost amount,” stating that he found the assertion of such diminished value to be improbable.
Accordingly, the taxpayer was subject to s. 162(7) penalties for failure to file the T1134s.
Neal Armstrong. Summary of RAR Consultants Ltd. v. The Queen, 2017 TCC 214 under s. 233.4(4).
High-Crest - Tax Court of Canada states that even modest government funding can cause the HST self-supply rule to apply to cost rather than the lower FMV
Although assisted–living facilities (or additions thereto) normally are subject to HST on their fair market value when substantially completed, ETA s. 191.1(2) effectively deems the HST to be payable on the greater of most costs and the fair market value where the builder received government funding "for the purpose of making residential units in the complex available to [seniors]."
Jorré J found that the Nova Scotia government’s service agreement with an incorporated nursing home (“High Crest”) to pay for the health care and raw food costs, and some of the accommodation costs, of the residents in a 20-bed addition to High Crest’s nursing home had this purpose, notwithstanding that the province did not, at least in form, pay for the construction costs. He stated:
High-Crest would not have made such a large and risky investment in the construction of the addition, a construction with a fair market value upon completion that was substantially less than its cost, if it did not expect the service contract to come into operation and be renewed for many years.
[T]he section … [applies] without regard to the extent of the support; in relation to the costs of the accommodation, the support can be modest or it can be the entire cost or anything in between.
Owen J had previously dismissed High Crest’s appeal, but that case was nullified by the Federal Court of Appeal for procedural reasons (Owen J having been asked by the Chief Justice of the Tax Court to decide the case based on the trial transcript before Jorré J).
Neal Armstrong. Summary of High-Crest Enterprises Ltd. v. The Queen, 2017 TCC 210 under s. 191.1(1) – government funding.
Boettger – Quebec Court of Appeal confirms that a trust with an Alberta trustee, who was a mere “implementer” of the Quebec settlor’s wishes, was resident in Quebec
An Alberta trust was found by the Court of Quebec below to be resident in Quebec. The settlor and beneficiary (his wife) were unfamiliar with the sole trustee (an Alberta lawyer), who instead was a contact of the Montreal law firm (and who could be removed by the settlor at any time). The most significant act of the trustee was something he was directed to do under the trust deed and thereafter there was essentially nothing for him to do other than send in the trust tax return along with payment. Lavigne J stated "The role of the Trustee was not to manage and grow the assets of the NS Trust but rather to hold them passively and follow the detailed steps in the Plan dictated by the [professional advisors]."
St-Pierre JCA in the Court of Appeal essentially agreed with all the significant findings of Lavigne J, other than to indicate that she had given too much prominence to the tax motivation for the trust. However, this was not important:
If the Judge decided that the residence of the trust was in Quebec, this was not by reason of the underlying tax motivation for its establishment, but because the established facts demonstrated that the control of its actual activities and that the management of its affairs rested practically (in reality) in the hands of its settlor, and not in those of the trustee who, in fact, acted only as the implementer ["exécutant"]. …
The tax motivation is a fact.
This fact constitutes a backdrop to take into account respecting the trust and its actual activities. [emphasis in original]
Neal Armstrong. Summary of Boettger v. Agence du revenu du Québec, 2017 QCCA 1670 under s. 2(1).
CRA states that a Holdco which takes over its wound-up subsidiary's business cannot use the sub’s GST/HST registration number
If a GST/HST-registered subsidiary carrying on a taxable business is wound-up into its parent, the parent must apply for a new registration number (using its own business number) rather than taking over the sub’s registration number. The Regulations pursuant to ETA s. 272 deem the parent to be a successor of the subsidiary for small supplier exemption purposes, so that if the sub was not a small supplier, the parent likely will not be one either.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.10 under ETA s. 272.
CRA indicates that the s. 256(2)(b)(ii) election busts s. 256(2)(a) transitivity but not association with the 3rd corporation
Three children each of whom wholly-owns a Childco are also, along with their parent, the discretionary beneficiaries of a family trust owning all the non-voting common shares of Parentco, whose voting shares are held by their parent.
Each Childco is associated with Parentco given that s. 256(1.2)(f)(ii) deems a discretionary beneficiary to own the trust shares for association purposes. Accordingly, under the “transitivity” rule in s. 256(2)(a), the Childcos are also associated with each other.
However, if Parentco elects under s. 256(2)(b)(ii) to have a nil business limit, it will be deemed to not be associated with the Childcos for purposes of applying the transitivity rule for s. 125 purposes. Accordingly, for small-business-deduction purposes, the Childcos will no longer be associated with each other - but will still be associated with Parentco for such (and other) purposes. If these elections are made, in computing the business limit reduction for a Childco under s. 125(5.1), the reduction must take into account the taxable capital employed in Canada of Parentco, but not of the other Childcos. Given that the business limit could be allocated away from Parentco by agreement under s. 125(3) even without the elections, this latter taxable capital point may be the more significant advantage of making the elections.
Neal Armstrong. Summaries of 14 September 2017 External T.I. 2017-0685121E5 F under s. 256(2)(b)(ii) and s. 125(5.1).
The implementation of IFRS 17 will result in the double taxation of insurers in the absence of legislative or administrative relief
An insurer's computation of income for tax purposes is in large part driven by the insurer's accounting income. Thus, it is problematic that IFRS 17 on "Insurance Contracts," which will be effective for fiscal years beginning after calendar 2020, forces an insurer to defer profits on the issuance of insurance policies and to recognize the profits as the insurer provides services under the insurance contracts. In contrast, existing accounting rules require an insurer to generally recognize the profit on the insurance contract's issuance at the policy's inception. As a result of the transitional adjustment to retained earnings under IFRS 17, profits previously recognized for tax purposes under current rules are included in profits again in years after the new IFRS 17 standard becomes effective.
To avoid double taxation of profits, the tax rules likely require amendment or some other form of administrative accommodation.
Neal Armstrong. Summary of Paul Vienneau, "New Profit Accounting for Insurers", Canadian Tax Highlights, Vol. 25, No. 10, October 2017, p. 10 under s. 138(1).
CRA indicates that the ITC documentary requirements can be met by piecing together the retailer’s receipt and the credit card reporting
S. 3(c) of the Input Tax Credit Information (GST/HST) Regulations provides that a “good” invoice or other “supporting documentation” must contain the name of the recipient or its agent if the supply is for $150 or more. CRA considers that “there is no requirement that the evidence needed to support an ITC claim be contained in a single document,” so that if the registrant makes a purchase from a retail store whose receipts do not identify the recipient, the documentary requirements nonetheless will be met if the purchase is made on the recipient’s (or agent’s) credit or debit card, so that the last four digits of the card will appear on the retailer’s receipt, and the purchase will appear on the credit card or bank statement of the recipient or agent.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.3 under Input Tax Credit Information (GST/HST) Regulations, s. 3(c).
CRA indicates that the delivery of rented equipment to the Canadian lessee’s facilities would not result in a non-resident lessee carrying on business in Canada
A non-resident leasing company enters into an agreement outside Canada for the lease of industrial equipment to a Canadian lessee. The lessor acquires the equipment outside Canada and delivers it to the lessee’s Canadian facility. The lessor has no other relevant connection to Canada, e.g., agents, employees or facilities in Canada, soliciting of Canadian business, Canadian bank accounts or servicing obligations under the lease. CRA indicated that the non-resident would not be considered to be carrying on business in Canada for GST/HST purposes given that “the only relevant factor present in Canada … is the place of delivery, which is insufficient to conclude that the non-resident is carrying on business in Canada.”
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.4 under ETA s. 240(1).
CRA states that a principal business determination generally need not be made on an annual basis
Leasing companies and third-party administrators (e.g., insurance companies) might have their mix of exempt and taxable activities fluctuate annually above and below 50%. How is “principal business” determined for purposes of the “financial institution” definition in ETA s. 149, and is the determination made on an annual basis? On the second question, CRA responded:
[G]enerally a person does not need to determine its “principal business” on an annual basis; this determination should be made any time there is a significant change to the person’s business activities.
The factors which CRA would consider in comparing two business activities in this context include the relative: revenues and number of supplies made; assets; and time and efforts required.
Neal Armstrong. Summaries of 23 March 2017 CBA Commodity Taxes Roundtable, Q.1 under ETA s. 149(1)(a)(iii) and s. 149(1)(a)(viii).
CRA finds that where an alter ego trust for an individual hold his residence, occupation by his spouse of the residence is not a use of the trust capital
An individual transfers his personal residence to a trust, which is drafted so as to be an alter ego trust described in s. 73(1.01)(c)(ii), i.e., he is the sole income and capital beneficiary for his life. CRA indicated that the requirements of s. 73(1.01)(c)(ii) (presumably with a focus on the requirement that during his lifetime and "under" the trust, “no person except the individual may … obtain the use of any of the … capital of the trust”) will not be breached if the individual’s spouse occupies the residence along with him.
Neal Armstrong. Summary of 21 April 2016 External T.I. 2015-0607451E5 F under s. 73(1.01)(c)(ii).