News of Note
CRA states that a Holdco which takes over its wound-up subsidiary's business cannot use the sub’s GST/HST registration number
Email this ContentIf 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).
CRA declines to give comfort that a U.S. style merger qualifies as an ETA s. 271 merger
As a result of the merger of USCo1 into USCo2 with USCo2 as the survivor (“MergeCo”), all of the assets of the Canadian branch business of USCo1 are transferred to USCo2. Would ETA s. 271 (which applies where “two or more corporations are merged or amalgamated to form one corporation”) deem such transfer not to be a supply? CRA responded:
Where pursuant to the state, provincial or federal laws under which the entities are incorporated, the predecessors are continued as one corporation with the new successor being a continuation of the predecessors (otherwise than as a result of a purchase or distribution of property ...), it appears that section 271 would apply.
This, of course, was ducking the question. Everyone would accept that a conventional Canadian continuation-style amalgamation would be a qualifying amalgamation (or merger). The question is whether a conventional U.S.-style absorptive merger with only one survivor would qualify as a merger (or amalgamation) to “form” one corporation. This answer suggests that CRA is either unsure or negative on the issue. Since the questioner did not provide anything other than the bare bones of the U.S. corporate law, diffidence is unsurprising.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q. 5 under ETA s. 271.
CRA indicates that the s. 110(1.1) election is available even if, absent the election, no employer deduction would be claimable
A stock option plan also includes a cashless exercise provision that permits an employee to elect, in lieu of paying the exercise price and acquiring the optioned shares, to receive the in-the-money value of the options in the form of treasury shares. CRA confirmed that, absent a s. 110(1.1) election, the employee would not be eligible for the s. 110(1)(d) deduction, and that a s. 110(1.1) election could be made in order for that deduction to be accessed. CRA stated:
[T]he mechanism in subsection 110(1.1) is available to an employer regardless of whether the employer is already denied a deduction for the stock option expense because of another provision of the Act (such as paragraph 7(3)(b) or 18(1)(b)).
Neal Armstrong. Summary of 18 August 2017 External T.I. 2016-0672931E5 under s. 110(1.1).
Income Tax Severed Letters 1 November 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.