News of Note
Dr. Brian Hurd Dentistry – Tax Court of Canada finds that an orthodontist did not make separate supplies of orthodontic appliances and services
Email this ContentCampbell J found that an incorporated orthodontic practice was making a single supply of exempt orthodontic health services rather than (as argued by it) two supplies comprised of a zero-rated supply of medical equipment (the orthodontic appliance) and of exempt orthodontic services (e.g., adjustment and maintenance services). (Zero-rating would have generated input tax credits.) She stated:
Neither the appliance nor the service on their own can achieve the patient’s goal or objective of correcting or treating their dental issues.
Neal Armstrong. Summaries of Dr. Brian Hurd Dentistry Professional Corp. v. The Queen, 2017 TCC 142 under ETA Sched. V, Pt. II, s. 5 and Sched. VI, Pt. II, s. 11.1.
Zheng – Tax Court of Canada finds that an HST rebate form was signed and completed in the name of an individual who was acting as agent
An individual (Kwong) and his ex-wife (Yu-Lian), who lived along with their daughter in Vancouver, got the younger sister of Yu-Lian (Qun) to purchase a new house in the Markham area for their daughter to live at while she attended university at U of T. Although Qun was named in the purchase agreement and in the application for the Ontario new home rebate application (that was signed by her), all the funds for the purchase came from Kwong and Yu-Lian, Kwong took title to the property and the rebate was credited against the purchase price paid by him at closing.
Russell J found not only that Qun’s role in the purchase transaction was as agent for Kwong, but that:
The Rebate application was not made by Qun…on her own behalf but rather by her in her capacity as agent for…Kwong… .
No worries if your client is AWOL and today is the filing deadline? Although this decision is an authority that, in the appropriate circumstances, a CRA form can be signed by someone as agent even where there is no written authorization from the principal, it goes further than that as Qun was also named as the purchaser in the rebate form.
Qun’s appeal was allowed - rather than being dismissed on the basis that the rebate instead belonged to Kwong (before giving effect to its assignment to the builder). This may imply that Qun was considered to have also appealed as agent.
Neal Armstrong. Summary of Zheng v. The Queen, 2017 TCC 132 under ETA s. 254(2)(b).
Income Tax Severed Letters 2 August 2017
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
McCullock-Finney Estate – Tax Court of Canada finds that merely filling in a T664 form was insufficient to step-up a property’s ACB under s. 110.6(19)
The taxpayer disposed of two rental properties in 2010 and calculated her capital gain on the basis that the properties’ adjusted cost base had been stepped up in 1994 through having made an election under s. 110(19) to utilize her otherwise-expiring capital gains deduction. In confirming the Minister’s disallowance of the amount claimed as stepped-up ACB, Masse DJ found that although she intended to make the election and had filled in the form (and possibly even filed it), she had not done the rest of what was required, namely, to report the deemed s. 110.6(19) gain on Sched. 3 of her 1994 return, and to claim the capital gains deduction in another part of the return.
Neal Armstrong. Summary of McCullock-Finney (Estate) v. The Queen, 2017 TCC 103 under s. 110.6(19).
Callidus Capital – Federal Court of Appeal finds that creditors’ personal liability, for being paid pre-bankruptcy out of GST/HST deemed-trust property, survives bankruptcy
ETA s. 222(3) provides that payments received by a secured creditor out of property that is subject to the deemed statutory trust under s. 222(1) for collected but unremitted GSTHST is itself subject to a deemed trust in favour of the Crown. However, s. 222(1.1) provides that s. 222(1) “does not apply, at or after the time [the debtor] becomes a bankrupt…to any amounts that, before that time, were collected…by the [debtor] as or on account of tax….”
Rennie JA found that, although s. 222(1.1) causes the deemed trust to disappear on bankruptcy, it does not eliminate the liability of a creditor for having received payments prior to bankruptcy that should have been subject to the Crown’s (at that point, still extant) priority under the s. 222(1) deemed trust, and instead were scooped by it.
In his dissenting reasons, Pelletier JA referred inter alia to s. 67(2) of the Bankruptcy and Insolvency Act, which reflected an intention that “Parliament put the Crown on the same footing as unsecured creditors” in a bankruptcy” – with an exception for employee source deductions, which “is explained by the fact that source deductions are amounts which belong to the employee in question…[and] this money does not belong to the employer anymore.”
Neal Armstrong. Summaries of The Queen v. Callisto Capital Corp., 2017 FCA 162 under ETA s. 222(1.1) and ITA s. 227(4.1).
Six further full-text translations of CRA technical interpretations/Roundtable items are available
Full-text translations of the French technical interpretation released last week, and of a further five items from the October 10, 2014 APFF Roundtable, are listed and briefly described in the table below.
These (and the other translations covering the last 32 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for August.
572256 Ontario – Tax Court of Canada finds that where a corporation acquired property on behalf of another, the agency rather than trust relationship predominated
Paris J found that, notwithstanding the absence in evidence of a written agency agreement, a corporation (SVO) had purchased property as agent for the taxpayer and others, so that the taxpayer’s pro rata portion of the maintenance and upkeep expenses of SVO entitled it to claim input tax credits. In this regard, Paris J relied on the passage in Scott, The Law of Trusts (also quoted in De Mond) stating:
If [a person] undertakes to act on behalf of the other and subject to his control he is an agent; but if he is vested with the title to property that he holds for his principal, he is also a trustee. In such a case, however, it is the agency relation that predominates, and the principles of agency, rather than the principles of trust, are applicable.
Neal Armstrong. Summary of 572256 Ontario Ltd. v. The Queen, 2017 TCC 108 under General Concepts – Agency.
The s. 212(3.7) formula can allocate a disproportionate part of a direct loan to Canco as being from a non-resident shareholder of the lender
The formula in s. 212(3.7) can operate as a boon or a bane where shareholder funding of a non-resident intermediary might be tainted by the connectivity test in s. 212(3.6)(a)(ii).
If Canco owes $30 to the intermediary and the intermediary, in turn, owes $40 in debt to a non-resident that is tainted under the connectivity test in s. 212(3.1)(c), then it does not matter that the intermediary has also been funded with tainted equity from another non-resident: the $40 non-resident creditor will be treated under the formula as the sole ultimate funder of the $30 direct loan to Canco.
On the other hand, if there instead is no indirect debt and the $30 direct debt to Canco is funded entirely or at least as to $20 out of surplus funds derived from the intermediary's operations, the shareholder of the intermediary effectively will be considered under the formula to have funded the entire amount of the $30 direct loan even though its share capital account was only $10 – so that Canco will be deemed under the formula to have paid all the interest under the direct loan to that shareholder.
Neal Armstrong. Summaries of Peter Lee, "The Character Substitution Rules", International Tax (Wolters Kluwer CCH), June 2017, No. 94, p. 10 under s. 212(3.7) and s. 212(3.6)(a)(ii).
S. 95(2)(a)(ii)(D) is drafted too restrictively in light of the underlying policy to extend s. 95(2)(a)(ii)(B)
S. 95(2)(a)(ii)(D) (“Cap D“) has been drafted too narrowly in relation to its underlying policy, which is to expand the basic rule in s. 95(2)(a)(ii)(B) in order to accommodate the indirect internal funding of an FA Opco (“FA3”) through internal debt financing By FA1 of a holding company (“FA 2”) for FA3. In particular:
- Cap D imports the narrow s. 20(1)(c) terminology, whereas s. 95(2)(a)(ii)(B) applies to any amount as long as the deductibility criterion therein is met. “Thus, for example, it is not clear why Cap D is not available in respect of royalties.”
- The requirement for a throughout-the-year connection between FA2 and FA3 can pose difficulties for mid-year reorganizations.
- “The subject to tax criterion has generally been the most problematic condition of Cap D.” Although the rule has been relaxed to somewhat accommodate US LLCs, “as becomes obvious from the questions put forward at the recent IFA seminar [2017-0691221C6], certain issues remain in this area.”
Neal Armstrong. Summary of Michael N. Kandev, "Putting on our Thinking Cap About "CAP D", International Tax (Wolters Kluwer CCH), June 2017, No. 94, p. 5 under s. 95(2)(a)(ii)(D).
CRA indicates that a testamentary trust could be a beneficiary or beneficially interested in an estate
S. 70(3) provides that the rights and things election under s. 70(2) is unavailable if the rights or things (the “Property”) have been distributed by the estate before the deadline for making the election has expired to beneficiaries or other persons beneficially interested in the estate. In the situation where the will bequeathed the Property to a testamentary trust, CRA considered that:
[T]o the extent that the testamentary trust is, under applicable private law, a beneficiary of the estate at the time of the transfer or distribution of the Property by the estate, the testamentary trust could be considered a beneficiary or a person beneficially interested in the estate of the deceased individual for the purposes of subsection 70(3).
Neal Armstrong. Summary of 28 June 2017 External T.I. 2016-0653921E5 Tr under s. 70(3).