News of Note
CRA finds that making the ETA nil consideration election can have punitive results respecting GST/HST on related employee benefits
Email this ContentAlthough ETA s. 173(1) often imputes a taxable supply by an employer based on the amount of taxable benefits conferred by it under ITA s. 6(1)(a), s. 173(1)(d)(i) provides that this rule does not apply where the employer was denied an input tax credit under s. 170 on its acquisition of the property or service that, in turn, was provided to the employee. S. 170(1)(b) generally denies the ITC where such property was acquired for the exclusive personal consumption of an employee so as to engage s. 6(1)(a).
CRA found that this s. 173(1)(d)(i) exclusion did not apply where the property in question (an automobile) was acquired by a closely-related corporation and then leased to the employer with the benefit of the s. 156 nil-consideration election, with the automobile being provided for the exclusive personal benefit of an employee. CRA reasoned that as there was no GST/HST payable by the employer on its lease payments, it should not be said that it was being denied ITCs under the s. 170 rule. CRA implicitly accepted that the automobile was being acquired by the employer exclusively for commercial use notwithstanding the personal use of the automobile by its employee.
The above result appears to be anomalous. If the s. 156 election had not been made, the employer would have claimed ITCs on the lease payments made by it to its affiliate, so that the net additional amount required to be remitted by it under s. 173 might be small or minimal. As a result of making the election, it must still compute the same imputed GST/HST s. 173 benefit amount, but without getting a somewhat offsetting ITC.
Neal Armstrong. Summary of 21 December 2017 Interpretation 164739 under ETA s. 173(1)(d)(i).
Smith – Tax Court of Canada finds that two individuals jointly controlling a company were acting in concert respecting the payment of dividends so as to engage s. 160
Two individuals held their 50-50 Opco through a holding company held by a family trust, in the case of Mr Smith, and through a family trust in the case of Mr Scott. Whether unpaid tax liabilities attached under s. 160 to dividends paid regularly by the Opco, for distribution up the chain, turned on whether they were not dealing at arm’s length with Opco. Although each did not control Opco, D’Arcy J followed Fournier in finding that they were acting in concert respecting the payment of the Opco dividends, so that s. 160 so applied:
Mr. Smith and Mr. Scott as the Operating Company’s only directors and officers acted in concert and with a common economic interest to decide how they would withdraw the profits made by the Operating Company for their personal use.
Neal Armstrong. Summary of HLB Smith Holdings Limited v. The Queen, 2018 TCC 83 under s. 251(1)(c).
CRA confirms that partner time will not be included in professionals’ WIP
Accountants, dentists, lawyers, physicians, veterinarians and chiropractors are, on a phased in basis, being required to include the lower of the cost and fair market value of their work in progress in income. These professionals will maximize their deferrals if they choose to follow the direct cost method rather than the absorption cost method in determining the cost of their WIP (so that they will not be required to include the costs of fixed overheads such as rent). The cost of their WIP will include payroll costs including benefits but will not include any value of partner time.
For most professionals, the lower of cost and FMV will be cost determined on this basis. However, in the case of personal injury lawyers and others earning income on a contingency fee basis, their WIP will generally be valued under s. 10(4)(a) at “the amount that can reasonably be expected to become receivable in respect thereof after the end of the year,” i.e., nil.
Neal Armstrong. Summaries of 1 May 2018 letter to APFF, 2017-0709101E5 F under s. 10(5)(a) and s. 10(4)(a).
CRA indicates that generally accumulated “other comprehensive loss” recognized under IFRS or US GAAP does not reduce retained earnings for thin cap purposes
In the course of finding that a Canadian subsidiary that prepared its financial statements only under U.S. generally-accepted accounting principles was not required to reduce its retained earnings for thin cap purposes by the amount of a separately reported OCI debit balance (i.e. an accumulated other comprehensive loss) in those financial statements, the Directorate stated:
We understand that under US GAAP, OCI is a component of equity that is presented separately from retained earnings and paid-in capital … . IFRS similarly requires that OCI be presented as a separate component of equity and not included in retained earnings. …
However, since the Taxpayer’s financial statements are prepared using GAAP of another country, the CRA could question the appropriateness of reporting any specific item as OCI, rather than retained earnings, where such treatment deviates from the treatment under Canadian GAAP (including IFRS) and such deviation has a significant impact on the amount of deductible interest under the thin capitalization rules.
Neal Armstrong. Summary of 19 January 2018 Internal T.I. 2017-0721641I7 under s. 18(5) – equity amount – (a)(i).
Barr – Tax Court of Canada finds that broker fees paid to locate purchasers of a private company were HST-taxable
The sole individual shareholder retained two brokers for the sale of his company or its assets. Whether the commissions that they charged on the ultimate sale of the shares to a purchaser whom they had found were exempt from HST turned, in part, on whether their services were those of “arranging for” the sale of the shares. In finding that this exemption for a “financial service” was not available, Pizzitelli J referred inter alia to the following factors:
- The brokers merely brought potential purchasers to the shareholder and had no involvement in negotiating or concluding the sale, including even the price.
- They did not undertake to find a purchaser for the shares as contrasted to the assets – and, in fact, when they found the ultimate purchaser, that purchaser initially made an offer for the assets (at which point the brokers dropped out of the picture) and, only later, was a share sale negotiated.
- The “brokers were not registered business or securities brokers.”
The first point (which was consistent with 106288) could be viewed as stating that the brokers here did most of what typically is done by brokers who have been retained to find a business buyer. The second point seems asymmetrical in that presumably the commissions could not have been treated as exempt if an asset sale had culminated (and also given that any GST/HST charged likely would have been creditable on an asset sale). As elements of the first two points often are present where brokers are retained to find purchasers for a wholly-owned business, this decision increases risks that commissions paid on the sale of such business may not be considered to be GST/HST exempt.
The alternative position of CRA was that the services of the brokers were excluded by (r.4) of the “financial services” definition. This exclusion refers inter alia to market research and promotional services that are preparatory to an “arranging for” financial service. Market research and promoting the company to potential purchasers was mostly what the brokers did, so that Pizzitelli J considered that the commissions also would have been taxable on this alternative ground. This broad scope accorded to (r.4) appears to be inconsistent with Global Cash Access, a leading decision which apparently was not brought to his attention (and is also inconsistent with Rojas, also not cited). Nonetheless, his decision may embolden CRA to continue applying (r.4).
Neal Armstrong. Summaries of Barr v. The Queen, 2018 TCC 86 under ETA s. 123(1) – financial service – para. (l), para. (r.4).
CRA states that the FMV of a stock option is higher than its in-the-money value
The s. 7 rules did not apply where an employee of a consulting company received, as part of his compensation, incentive stock options that had been received by the company on one of its engagements. Accordingly, the fair market value of the options was included in his employment income when received. As to determining “FMV,” CRA stated:
[T]he intrinsic value of an option is not reflective of its FMV; rather, a valuation method that is appropriate in the circumstances should be used to determine the FMV.
As to the subsequent exercise and sale, CRA stated:
The tax consequences that result from the Employee’s exercise of the Options in Year 2 and the disposition of the optioned shares in Year 3 will depend on the facts. For information, refer to Interpretation Bulletin IT-479R, Transactions in Securities.
This was less crisp (and no more poetic) than saying something like: assuming that the Employee holds the Options and optioned shares on capital account, the FMV of the options when received will be added to their cost under s. 52(1), and the resulting ACB of the options will be added to the ACB of the optioned shares on exercise under s. 49(3)(b)(ii).
Neal Armstrong. Summaries of 7 February 2018 External T.I. 2016-0673331E5 under s. 9 – computation of profit.
Income Tax Severed Letters 9 May 2018
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Moules Industriels – Tax Court of Canada finds that a numerical cap on trustees’ discretion to allocate income or capital did not stop tainting under s. 256(1.2)(f)(ii)
S. 256(1.2)(f)(ii) provides that where a beneficiary’s share of the income or capital of a trust is in the discretion of the trustees, the beneficiary is deemed to own shares held by the trust for purposes of the associated corporation rules. A trust deed provided that such share of beneficiaries who otherwise would cause corporations held by the trust to become associated was capped at 24.99%. The drafter of this clause evidently thought that it made sense that this would mean that no more than 24.99% of the trust’s shareholdings would then effectively be attributed under s. 256(1.2)(f)(ii) to those beneficiaries.
Lamarre ACJ agreed with the CRA position (foreshadowed in 2003-0052261E5) that 100% of those shares instead were effectively attributed to those beneficiaries, stating:
This clause does not have the effect of eliminating the discretionary power contemplated by … the deeds. This power, despite it being potentially subject to the 24.99% cap, remains fundamentally a discretionary power.
Neal Armstrong. Summary of Moules Industriels (C.H.F.G.) Inc. v. The Queen. 2018 CCI 85 under s. 256(1.2)(f)(ii).
Raposo – Tax Court of Canada finds that a partnership with an illegal business was void
The taxpayer and the three other members of the “Raposo clan” were involved in the sale of cocaine in the Gatineau area. The Crown took the position that, as a member of a partnership, the taxpayer was solidarily liable under ETA s. 272.1(5) for uncollected GST on the cocaine sales.
In rejecting this position, Paris J referred to Article 1417 of the Civil Code (“A contract is absolutely null where the condition of formation sanctioned by its nullity is necessary for the protection of the general interest”), and stated that under the jurisprudence “a purpose which is contrary to the public order and which contravenes a penal provision, in the current case, of the Criminal Code, engages the absolute nullity of the contract” (here, an alleged partnership contract). No partnership – no s. 272.1(5) liability.
Thus, the taxpayer benefited from the illegality of his venture. As the contract for his engagement was void, would his Part I income be determined under s. 96, 9 (see also Eldridge) or 5 (see also Coicou)?
Neal Armstrong. Summaries of Raposo v. The Queen, 2018 CCI 81 under ETA s. 272.1(5) and General Concepts – Illegality.
Stankovic – Federal Court finds that a taxpayer with an unreported Swiss bank account was not yet under criminal investigation
CRA found out from the French authorities that the taxpayer was on the list obtained from a disgruntled HSBC employee of those with large Swiss bank accounts. The taxpayer had not reported the account or the interest thereon. When CRA sought a compliance order under s. 231.7(1) for the taxpayer to answer its requests for information issued under s. 231.1(1), the taxpayer argued that it was obvious that this was occurring pursuant to a criminal investigation of her. Russell J disagreed, stating that:
Offshore accounts are not, per se, illegal and it is the duty of the Minister under the Act to inquire and ensure that those with offshore accounts are meeting their tax liabilities. … If the Respondent’s position were accepted, it would mean that, given the government’s intent to deal with offshore tax offenders, every Canadian taxpayer with an offshore bank account would be immune from compliance with the audit requests made under s 231.1(1) because this could lead to criminal proceedings at some time in the future. …
[A] mere suspicion does not change the predominant purpose of an audit into a criminal investigation. See Jarvis … .
He also found (following a Quebec Court of Appeal decision dealing with the same list) that CRA’s use of information stolen by the disgruntled employee did not violate the taxpayer’s Charter rights.
Neal Armstrong. Summaries of Canada (National Revenue) v. Stankovic, 2018 FC 462 under s. 231.1(1) and Charter s. 7.