News of Note
CRA finds that the s. 110.6(31) limitation on LCGE claims applied to capital gains reserves distributed by a personal trust
Email this ContentS. 110.6(31) provides that where a previously-claimed capital gains reserve is recognized as a capital gain in a subsequent year under s. 40(1)(a)(ii), the total lifetime capital gains exemption (LCGE) claim of the taxpayer in the subsequent year cannot reflect the benefit of any increases (e.g., from indexing for inflation ) in the quantum of the exemption from the year of the original disposition.
CRA has found that the s. 110.6(31) limitation applies as well where a personal trust realized the capital gain (e.g., from qualified small business corporation shares), claimed the reserve, and then distributed the reserve amount to a beneficiary in the subsequent year utilizing ss. 104(21) and (21.1) designations.
Neal Armstrong. Summary of 3 August 2018 Internal T.I. 2018-0755351I7 under s. 110.6(31) and s. 104(21.2).
Kwan – Tax Court of Canada rejects a contention that child care expense cannot have an educational aspect
The taxpayer (whose wife also worked full time) successfully made child care expense claims for the costs of after-school programs (e.g., chess programs, math tutoring classes and Chinese language classes) for his 10 and 12-year old children, who finished school at 3:00 pm. Pizzitelli J found that it did not matter that these activities had a significant educational component. In addition, he rejected a Crown submission that it was inappropriate for the taxpayer to pay bilingual university students to mind the children at $5 more per hour than high school students would cost, stating that this was an appropriate exercise of “parental discretion.”
Neal Armstrong. Summary of Kwan v. The Queen, 2018 TCC 184 under s. 63(3) – child care expense.
Income Tax Severed Letters 19 September 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that Incoterms did not govern the place of delivery of goods for ETA purposes
Company B, a resident registrant, agreed to sell goods (the “Property”) to Company C, an unregistered non-resident, using the Incoterms® 2010 DAP Port of Liverpool, U.K. so that delivery and title transfer was to occur at the U.K. destination – although the parties agreed that Company C was to indemnify Company B if the Property were lost or damaged in transit. The Property was then loaded onto Company C’s vessel at the Port of Halifax and immediately exported.
CRA indicated that it appeared that, because Company C acquired physical possession of the Property in Canada pursuant to the terms of the agreement, ETA s. 142(2)(a) (which deems a supply of tangible personal property to be made outside Canada if it is, or is to be, delivered or made available outside Canada) did not apply. This answer does not appear to turn on the indemnity because CRA went on to indicate that its answer would not change if the indemnity instead had been provided by an affiliate of Company C.
This answer illustrates that CRA will not always let the determination of the place of supply be governed by the applicable Incoterm.
Similarly, CRA indicated that, as the delivery of the Property to Company C appeared to be in Canada, zero-rating also would not be available for the preceding supply of the Property by a Canadian vendor to Company B.
Neal Armstrong. Summaries of 8 March 2018 CBA Commodity Tax Roundtable, Q.9 under s. 142(2)(a) and Sched. VI, Pt. V, s. 1.
CRA indicates that no ITCs may be available where job candidates are reimbursed for their expenses
It may be unclear that an employee incurred an expense such as a hotel bill as agent for the employer. S. 175 provides that if the relevant property or service was acquired “in relation to” the activities of the employer, it is effectively deemed to have incurred the expense in relation to its own activities for input tax credit purposes. A similar rule under s. 175 applies to firms that reimburse their partners, and charities and public institutions that reimburse “volunteers.”
CRA confirmed that the s. 175 rule was unavailable where candidates for a position at a company were reimbursed for their travel and meal expenses by a headhunter, who then included those costs in its bill to the company, so that the company was not entitled to ITCs (unless an agency argument could be made, which was not discussed by CRA).
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.8 under ETA s. 175.
Hokhold – Federal Court of Appeal finds that a bad debt claim requires the specific identification of which “debt” claims went bad
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, the Tax Court found that he was not entitled to a bad debt deduction on the basis inter alia that he was unable to identify which specific debts had gone bad. In agreeing with this finding, and before going on to dismiss the appeal, Boivin JA stated:
[I]n order to have a “liquidated money demand, recoverable by action” one must know the identity of the debtor and the amount owed … .
Neal Armstrong. Summary of Hokhold v. Canada, 2018 FCA 163 under s. 20(1)(p)(i).
CRA is considering whether crypto-currencies are “money”
CRA indicated that it “is presently considering its position regarding the GST/HST treatment of Bitcoin and similar crypto-currencies.” As it also noted that it had previously taken the position that Bitcoins do not come within the items specifically listed in the ETA definition of “money,” namely currencies and credit instruments or devices such as cheques, promissory notes, letters of credit and bills of exchange or “other similar instrument,” its consideration of whether payment using crypto-currencies is an exempt financial service likely is focusing on whether crypto-currencies are “money” within the undefined meaning of that word.
Neal Armstrong Summary of 8 March 2018 CBA Commodity Taxes Roundtable, Q.7 under ETA s. 123(1) – money.
CRA indicates that a single Notice of Objection can cover multiple disputed GST assessments
Where CRA issues multiple GST/HST assessments they can be objected to on a single Notice of Objection. The required particulars can be provided in attachments thereto.
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.6 under ETA s. 301(1.1).
CRA will change its practices so as to start denying partial ITC claims by orthodontists
Brian Hurd 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.)
CRA has indicated that, as a consequence, it will be withdrawing its current administrative practice – which was to allow orthodontists to treat 35% of most of their taxable expenses as eligible for input tax credits provided that their invoices to their patients broke out a separate charge for the orthodontic device. (A similar practice respecting dental implants also will go.) However, it will provide advance notice of when this practice is being withdrawn so that “stakeholders … can prepare accordingly.”
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.5 under Sched. V. Pt. II, s. 5.
CRA finds that half-siblings are related
The definition of blood relationship in s. 251(6)(a) includes two persons who are the “brother or sister of the other.” Following inter alia Diktakis, CRA found that a sibling includes a half-sibling, so that two individuals who had the same father and different mothers were related to each other.
Neal Armstrong. Summary of 12 July 2018 External T.I. 2018-0755471E5 under s. 251(6)(a).