News of Note
ADT Canada – Quebec Court of Appeal holds that a home security monitoring service was not a supply of a “telecommunication service”
Email this ContentADT Canada, which provided its security-monitoring services remotely and, thus, used significant telecommunication services, was found to be making a single supply of a security service to its customers rather than of a “telecommunication service,” which was defined in the Quebec Sales Tax Act (essentially with the same wording as in the ETA) as one would expect.
Neal Armstrong. Summary of Services de sécurité ADT Canada inc. v. Agence du revenu du Québec, 2017 QCCA 1507 under ETA s. 123(1) - telecommunication service.
CRA is inclined to base the s. 6(2) standby charge on the leasing cost to the employer rather than the automobile’s cost to an affiliated purchaser
In the situation where Holdco acquires an automobile and leases it to a related corporation (Opco) at a fair market value rent, with Opco making the automobile available to one of its employees, a literal reading the standby charge formula would indicate that the standby charge is based on both the cost of the automobile to Holdco and the leasing cost to Opco, so that effectively there is double taxation. Finance has been notified about this.
Depending on all the facts of the situation, CRA generally would be inclined to base the standby charge only on the leasing cost to Opco.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.13 under s. 6(2).
CRA states that convention expenses “historically” have been viewed as capital expenditures
S. 20(10) very oddly provides that the cost of up to two qualifying conventions can be deducted in computing business income notwithstanding s. 18(1)(b). Given that the Anglo-Persian line of cases established that employees and agents are not a capital asset (as they are more-or-less free to walk out the door at any time), it is implausible that a convention expense could be found to be a capital expenditure (although the Shaver case and Griffith, [1956] C.T.C. 47 did just that.)
When asked about this, CRA sort of waffled:
Where a taxpayer has incurred expenses related to a convention in order to earn income from a business and such expenses are not capital expenditures, such expenses may be deductible in computing its business income without reference to subsection 20(10).
Historically, the CRA's position with respect to convention expenses is that such expenditures are generally capital expenditures to which paragraph 18(1)(b) applies.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.12 under s. 20(10).
CRA indicates that the s. 13(38)(d)(iii) transitional election is irrelevant to ECP dispositions by a calendar-year partnership
A partnership with a calendar year end, but whose corporate partners have March 31 taxation year ends, disposed of eligible capital property in November 2016. CRA indicated that because income is computed at the partnership rather than partner level, there is no need for (or ability of) the partners to make the s. 13(38)(d)(iii) transitional election, i.e., the relevant taxpayer had a calendar year.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.11 under s. 13(38)(d)(iii).
CRA indicates that a s. 184(3) excess dividend election deems the elected-upon amount to retroactively be income even if it is still unpaid
The s. 184(3)(b) excess dividend election is made respecting the amount of the original dividend that was payable. S. 184(3)(d) deems the shareholder to have received the excess dividend. CRA confirmed that the effect of this is that the excess portion of the dividend becomes taxable to the shareholder as of the time of the original dividend declaration, even if it still remains unpaid.
CRA had already notified Finance of this anomaly.
Neal Armstrong. Summaries 6 October 2017 APFF Roundtable, Q.10 under s. 184(3) and s. 185(3).
Income Tax Severed Letters 11 August 2017
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA asserts that a second freeze transaction by a family trust could be viewed as an indirect transfer by the original freezor
As a result of a previous estate freeze, A holds the voting freeze preferred shares of Opco (which is not a small business corporation) and a discretionary family trust (“Initial Trust”), with spouse and children as beneficiaries, holds the non-voting common shares. Now a further freeze is implemented under which Initial Trust exchanges its shares for preferred shares, and New Trust, with spouse children, grandchildren and family corporations as beneficiaries, subscribes for new non-voting common shares.
CRA acknowledged that only the (born) grandchildren (and not the spouse) could be designated persons in respect of Initial Trust (which was the relevant transferor to Opco on the second freeze) for s. 74.4(2) purposes, but did not give up that easily, stating:
[T]he application of subsection 74.4(2) could arise with respect to the estate freeze by Initial Trust if it were determined that the transfer of property made during this estate freeze was made indirectly by Mr. A by means of Initial Trust.
Consequently, were it were possible to establish that the Purpose Test was satisfied, subsection 74.4(2) could also apply to Mr. A in respect of the estate freeze by Initial Trust.
Neal Armstrong. Summaries 6 October 2017 APFF Roundtable, Q.9 under s. 74.4(2) and s. 74.5(5).
CRA is serious about NR4 reporting of withholding-exempt amounts
CRA, presumably at its instigation rather than at the request of the APFF organizers, repeated its statement at the 2017 IFA Roundtable (2017-0691141C6) that NR4 reporting is required for all periodic amounts (as described in Regs. 202(1)(a) to (h)) paid to a non-resident of Canada, even if the amount is exempt from Part XIII and XIII.2 tax.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.8 under Reg. 202(1).
CRA confirms that where damages relate to a particular asset of a business that was not disposed of, they will reduce the asset’s cost
In 2016-0652851C6 F, as a result of breach of a purchaser's obligation to purchase a personal residence, the individual vendor received $50,000 in damages from the defaulted purchaser, which CRA stated was proceeds of disposition of a promise giving rise to a capital gain of $50,000.
In confirming its earlier position, CRA stated that although IT 365R2 provides that "where the amount of compensation relates to a particular asset that was not disposed of, the amount will serve to reduce the cost of that asset to the taxpayer," this position only applies respecting non-performance of business contracts.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.7 under s. 54 – capital property.
CRA states that there can be a services PE in Canada during the tail end of a project which ends in the first few months of a calendar year
CRA rejected the premise of a question that referred to a situation where the conditions in Art. V, 9(b) of the Canada-U.S. Convention (respecting a services PE) are satisfied during a taxation year respecting a particular project, which continues for several months longer in the following taxation year, but with the 183-day criteria not being met in that subsequent year. CRA responded that “since paragraph 9(b) of Article V of the Convention specifies that the 183-day test applies to ‘any twelve-month period,’ that period need not correspond to the fiscal year of the taxpayer.”
CRA then provided an example where a U.S. enterprise with a calendar taxation year provides services on an ongoing basis from January 15, 20_1, to January 25 20_2, and stated that it shall be deemed to provide such services through a permanent establishment in Canada for the entire period.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.6 under Treaties – Art. 5.