News of Note
CRA finds that a government-assisted NPO providing door-to-door transportation services in a rural municipality was supplying GST/HST exempt municipal transit services
Email this ContentA non-profit organization which provided daily pre-booked door-to-door transportation services to members of the rural public within a municipality for fares was ruled to be providing a GST/HST exempt municipal transit services under Sched. V, Pt. VI, s. 1 given inter alia that it received funding from the province and the municipality to support the supply of public passenger transportation services, and all or substantially all of the its supplies were supplies of “public passenger transportation services” (not a defined term) provided within the municipality and its environs. However, its contract or charter service, where it provided a driver and vehicle for events, usually weddings, was taxable.
Neal Armstrong. Summary of 11 July 2018 Ruling 187784 under Sched. V, Pt. VI, s. 1 – municipal transit service.
Satyam – Australian Full Court finds that a Treaty can impose tax
The Indian taxpayer (Satyam) argued unsuccessfully before the Full Federal Court of Australia “that tax treaties are, and can only be, exclusively relieving: that is, they are only ever ‘shields not swords’ and not the grant of a standalone taxing power and independent imposition of taxation.”
The issue arose in the context of the interpretation of Art. 23(1) of the Australia-India Treaty, which provided:
Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State.
From a Canadian perspective, the bolded language had the unusual effect of indicating that a technical-services royalty, which Australia was permitted to tax under the Australian royalties article of the Treaty, was deemed to arise in Australia not only for the purposes of the Article of the Treaty dealing with the elimination of double taxation, but also for the purposes of the Australian domestic taxation provisions. Consequently, technical services fees (which were deemed royalties) earned by Satyam, which in the absence of the Treaty would have been considered to not arise in Australia so that they would not have been subject to Australian income tax under the approximate Australian equivalent of ITA s. 115, were now deemed for the purposes of that provision to arise in Australia and to therefore be subject to Australian income tax.
Neal Armstrong. Summary of Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172 under Treaties – Income Tax Conventions – Art. 24.
CRA finds that royalties paid by a Canadian company for TV video streams could be bifurcated for Part XIII purposes based on Canadian and non-resident viewership
Canco streams movies and TV shows (the “digital content”) to its Canadian and foreign subscribers (who pay monthly fees) through a TV video stream and a digital content library. Canco pays a royalty to an arm’s length U.K. content provider (“U.K. Content Provider”) that is based on the amount of viewing of the digital content by Canco’s subscribers. Canco either stores its digital content on a server that is located outside of Canada or it is streamed directly by the U.K. Content Provider to Canco’s subscribers.
CRA found that s. 212(5) was still applicable in this streaming context, stating that “a motion picture film that is streamed remains a ‘motion picture film’ and a streamed TV show is a “means of reproduction” of the TV work." It also found that the royalty payments could be bifurcated between a (Part XIII) taxable and non-taxable component, stating that “a portion of the payments to the U.K. Content Provider relates to the use or reproduction of the digital content outside of Canada since Canco’s server is situated outside of Canada and the foreign subscribers are viewing the streamed content outside of Canada.”
Art. 12 of the Canada-U.K Treaty exempted copyright royalties, but there was an exclusion from this exemption for payments in respect of motion pictures or of works on film, videotape or other means of reproduction for use in connection with television broadcasting. CRA rejected an argument that the definition of “broadcasting” in the Interpretation Act had the effect of making this exclusion inapplicable to TV shows. Instead “an ordinary meaning was intended to be given to the words ‘television’ and ‘broadcasting’ and … their meaning, under either domestic or international law, is broad enough to include the digital streaming of television content” – so that the applicable Treaty rate was 10%, not zero.
Neal Armstrong. Summaries of 27 March 2018 External T.I. 2017-0715561E5 under s. 212(5) and Treaties – Income Tax Conventions – Art. 12.
CRA found that the covenant of the assuming debtor to pay accrued interest on a debt assumption was a payment in kind subject to Part XIII tax
As part of the consideration for the drop-down of the assets of a Canadian partnership (whose partners were Canco and its wholly-owned Canadian subsidiary) to a wholly-owned U.S. subsidiary (“Debtor Affiliate”), Debtor Affiliate assumed the loan including accrued interest thereon that had been owing by Partnership to another Partnership subsidiary (“Creditor Affiliate”), and Creditor Affiliate released the Partnership from its obligations under the Loan.
The Rulings Directorate indicated that this transaction likely entailed a novation of the loan, and that Part XIII tax thereby applied under s. 212(1)(b) and s. 212(13.1)(a) at that time on the amount of the accrued interest on the basis that:
[A]t the time of this novation, the Partnership would be considered to have made a payment or credit in kind of the Accrued Interest to the Creditor Affiliate by delivering the Debtor Affiliate’s covenant to make the payments under the Loan agreement to the Creditor Affiliate.
Neal Armstrong. Summary of 13 July 2018 Internal T.I. 2017-0713301I7 under s. 212(1)(b).
CRA reaffirms the requirement for a circular calculation of Pt IV tax and RDTOH
In the context of a group of corporations undertaking a reorganization involving share redemptions between multiple corporations, with one or more of the corporations having an existing RDTOH balance, CRA confirmed that a circular RDTOH, dividend refund and Part IV tax calculation was required, with the result that “the Part IV tax and of the dividend refund of each connected corporation increase proportionally with each calculation.” CRA went on to indicate that this was not especially harsh:
[E]ven though computing a corporation’s Part IV tax and dividend refund by successive circular calculations inflate these amounts and … these calculations are tedious, they are not financially injurious to the connected corporations as the net amount of Part IV tax payable by one corporation (Part IV tax payable minus its dividend refund) will equal the net amount of the dividend refund (dividend refund minus Part IV tax payable) of the other.
Neal Armstrong. Summary of 11 October 2018 External T.I. 2018-0771831E5 under s. 186(1)(b).
CRA rules that a purchaser could acquire Lossco’s business through a sub LP and then acquire Lossco as an empty shell to get its losses under s. 88(1.1)
A foreign-owned Canadian-resident corporation (“Taxpayer”) used a subsidiary LP to acquire the sole business of a “Lossco” that was in CCAA proceedings and then, a number of years later (and perhaps well after the completion of the CCAA restructuring) it purchases the shares of Lossco for nominal consideration and winds up Lossco. Lossco had generated non-capital losses and investment tax credits from its business before the sale of that business by the CCAA monitor to the subsidiary LP of Taxpayer.
CRA ruled that (i) proceeding in this two-step manner, and (ii) the absence of any activity or assets in Lossco for a number of years following its sale of its business and prior to its acquisition by Taxpayer, did not preclude Taxpayer from utilizing Lossco's non-capital losses and ITCs in sheltering income allocated to it by the subsidiary LP and by other subsidiary LPs carrying on similar businesses.
Neal Armstrong. Summaries of 2018 Ruling 2017-0711071R3 under s. 88(1.1)(b) and s. 88(1)(e.3).
Income Tax Severed Letters 31 October 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that s. 84(3) does not apply to the cancellation of preferred shares held by a partnership in the corporation into which it is wound-up
A family farming partnership was dissolved as a result of all the members transferring their partnership interests to a jointly-owned corporation (Opco). One of the partnership’s assets was preferred shares of Opco. These preferred shares were cancelled for no consideration in connection with the winding-up of the partnership and the transfer of its assets to Opco.
CRA confirmed that because the preferred shares were cancelled for no consideration, no s. 84(3) deemed dividend arose.
Respecting an assertion by the correspondent that s. 98(5) applied to the partnership winding-up, CRA indicated that this raised the issue of when the partners transferred their interests in the partnership to Opco, and stated:
[W]here such transfers occur simultaneously … subsection 98(5) would not be applicable, given that Opco would not be a partner of Partnership immediately before Partnership ceased to exist.
Neal Armstrong. Summaries of 27 June 2018 External T.I. 2018-0745681E5 F under s. 84(3), s. 98(5) and s. 28(1)(f).
CRA finds that resource royalties payable under a federal statute generally are deductible in computing business income
S. 18(1)(m), which generally prohibited the deduction of resource royalties, was repealed over 10 years ago – but is their deduction nonetheless prohibited by s. 18(1)(a)? CRA stated, regarding royalties paid under the Canada Petroleum Resources Act (Canada):
[T]he amount of [such] royalties … is not subject to that restriction because, inter alia, if it were not paid, a taxpayer could lose the opportunity to carry on its business and thereby earn income … [and such amount] is generally deductible in computing the business income of a taxpayer.
Neal Armstrong. Summary of 27 June 2018 External T.I. 2018-0742881E5 F under s. 18(1)(a) – income-producing purpose.
CRA indicates that recognizing a s. 50(1)(b) loss on shares does not trigger a s. 7(1.1) benefit
Where an arm’s length employee of a Canadian-controlled private corporation (“Opco”) acquires shares under a stock option, the resulting benefit (which is added to the adjusted cost base of the shares under s. 53(1)(j)) will not be triggered if the employee elects under s. 50(1)(b) to recognize a capital loss in the year Opco goes bankrupt, whereas such benefit will be triggered when Opco ultimately is wound up and its shares cancelled. Symmetry is achieved assuming that the employee qualified for the s. 110(1)(d.1) deduction and the capital loss qualified as a business investment loss. CRA did not address the scenario where the shares of the bankrupt corporation are never cancelled.
Neal Armstrong. Summary of 28 May 2018 External T.I. 2017-0692931E5 under s. 7(1.1).