News of Note
CRA finds that a partner in an upper-tier partnership is a member of the lower-tier partnership for branch tax purposes
Email this ContentCRA found that a non-resident corporate member of a holding partnership holding, in turn, an interest in an “opco” partnership carrying on a Canadian business would be considered for purposes of Reg. 808(4) to be a “member” of the opco partnership, so that its investment allowance for branch tax purposes would include its proportionate share (through the holding partnership) in the relevant Canadian assets of the opco partnership.
If CRA were willing to extend this accommodating position, it could be helpful in other contexts, for example, treating a limited partner of an upper-tier LP as a limited partner of the lower-tier LP, so that its share of lower-tier losses could qualify as a limited partnership loss of it. (See also Green.)
Neal Armstrong. Summary of 22 September 2017 External T.I. 2016-0632881E5 under Reg. 808(4)(b).
Income Tax Severed Letters 8 Novemeber 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that the value of a free automobile to be included in s. 9 income should reflect what the recipient would normally charge for its services
CRA indicated that where a personal service business corporation (“PSB”) provides its services to a client and, as a result, receives “free” use of an automobile, the value of the services provided by the PSB (to be measured by “the price which the PSB would normally have charged a stranger for its services”) should be brought into its income. The posited facts were that, in fact, it was a corporation related to the client who provided the automobile, but this did not make a difference to CRA’s answer.
If the automobile was for the personal use of the PSB shareholder, there would be a resulting taxable benefit to the shareholder.
Neal Armstrong. Summary of 9 May 2016 Internal T.I. 2016-0638461I7 under s. 9 – computation of profit.
Hokhold - Tax Court of Canada denies bad debt deduction where the timing and specific identity of the bad debts were unidentified
Partly as a delayed consequence of CRA’s seizure of computers and dental equipment of a dental practice and the misplacing of records when his practice subsequently was closed, the dentist was only able to collect a portion of the revenues that he had included in his 2005 to 2008 returns. However, he was denied a bad debt deduction.
First, he was unable to identify which specific debts had gone bad. Paris J stated:
I cannot see how the Appellant in this case could have made such a determination [of uncollectibility] without knowing who his debtors were or what amount they owed him.
Furthermore, his missing records precluded him from identifying the specific year in which those debts went bad, as explicitly required by s. 20(1)(p)(i).
Neal Armstrong. Summary of Hokhold v. The Queen, 2017 TCC 217 under s. 20(1)(p)(i).
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors for the two French technical interpretation released last week and of four released in May-June 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for November.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2017-11-01 | 21 April 2016 External T.I. 2015-0607451E5 F - Use of capital of a trust by a spouse | Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) - Subparagraph 73(1.01)(c)(ii) | occupation of trust property (a residence) by individual’s spouse does not breach the capital-use requirement "under" the trust |
| 14 September 2017 External T.I. 2017-0685121E5 F - Associated corporations | Income Tax Act - Section 256 - Subsection 256(1.2) - Paragraph 256(1.2)(f) - Subparagraph 256(1.2)(f)(ii) | Childco associated with Parent-controlled corp whose non-voting equity is held by family trust | |
| Income Tax Act - Section 256 - Subsection 256(2) - Paragraph 256(2)(b) - Subparagraph 256(2)(b)(ii) | election under s. 256(2)(b)(ii) busts s. 256(2)(a) transitivity but not association with 3rd corporation | ||
| Income Tax Act - Section 125 - Subsection 125(5.1) | making s. 256(2)(b)(ii) election, by eliminating s. 256)2)(a) transitivity, reduces the reduction for taxable capital employed in Canada | ||
| 2014-06-04 | 18 December 2013 Internal T.I. 2012-0472211I7 F - Voyages offerts par une compagnie | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | Caribbean sales incentive trip provided to incorporated sales reps represents a benefit to them from their corporation |
| Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(d) | Caribbean sales incentive trip provided to incorporated sales reps excluded if s. 6(1)(a) benefit to them qua employee | ||
| Income Tax Act - Section 67.1 - Subsection 67.1(4) - Paragraph 67.1(4)(b) | Caribbean sales incentive trip is "entertainment" | ||
| Income Tax Act - Section 9 - Nature of Income | Caribbean sales incentive trip provided to incorporated sales reps was s. 9 income to their corp to extent of personal portion | ||
| 2014-05-28 | 8 May 2014 External T.I. 2014-0516711E5 F - Accord écrit et Pension alimentaire | Income Tax Act - Section 118 - Subsection 118(5) | court-ordered support amount obligation cannot be eliminated by agreement |
| 25 April 2014 External T.I. 2014-0528011E5 F - Subsection 55(2) - redemption of shares | Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) | increase in direct interest under s. 55(3)(a)(ii) or (v) with no increase in indirect interest; tainting effect on redemption occurring as part of series | |
| 16 May 2014 External T.I. 2014-0526161E5 F - CII des places en garderie | Income Tax Act - Section 127 - Subsection 127(9) - Child Care Space Amount | owner of child-care facility entitled to ITCs even though development work and operations conducted by its part-owned agent |
CRA affirms its position that car dealers and travel agents generally do not supply an “arranging for” supply of insurance
When hectored over its seemingly rigid position that car dealers and travel agents who line up insurance generally are not providing a GST/HST-exempt supply of “arranging for” a financial service, CRA stated:
Where the facts in a given situation are the same or similar to those that we have reviewed, it is reasonable to expect that the same conclusions may be reached.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.12 under ETA s. 123(1) - fianancial service - para. (l).
CRA has revised its procedures for dealing with late ETA s. 156 elections
Respecting requests for acceptance of a late ETA s. 156 election, CRA stated:
At the end of January 2017, a memorandum to introduce new internal procedures for the review and processing of requests received by tax services offices to accept late-filed Form RC4616 was issued to the field offices. As a result of these new procedures, all requests should now be reviewed by audit staff to determine if the parties listed on Form RC4616 meet all of the legislated eligibility conditions for making or revoking the section 156 election and if the late-filed Form RC4616 should be accepted based upon the guidelines listed in GST/HST Policy Statement P-255.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.11(a) under s. 156(4)(b)(ii).
RAR Consultants – Tax Court of Canada imposes penalties for failure to file T1134s respecting a foreign affiliate
In 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).