News of Note
CRA finds that a non-resident corporation is carrying on business in Canada by virtue of being the legal employer of an employee seconded to Canada
Email this ContentA non-resident employee of a non-resident corporation (NRCo) will work for a year at a Canadian government department while remaining on the NRCo payroll as an NRCo employee. The Department would reimburse NRCo for the employee’s salary and benefits (with no mark-up thereof). In finding that NRCo would be required to file a T2 return by virtue of carrying on business in Canada, CRA stated:
[A] non-resident employer that sends an employee to Canada to exercise employment duties for the employer for one year would generally be rendering services in Canada. As such … NRCo would be carrying on business in Canada.
… We are not aware of any exceptions to the requirement to file a T2 where the non-resident corporation has no profit from the business carried on in Canada.
The reimbursement payments also would be subject to Reg. 105 withholding, and NRCo would be required to remit Canadian income tax withholdings (but likely not EI or CPP) on the employee’s remuneration.
Neal Armstrong. Summaries of 27 November 2017 External T.I. 2017-0731441E5 under s. 150(1)(a), Reg. 105(1) and Reg. 102(1).
CRA finds that a provincial professional association did not collect fees from members as agent for the national professional association
A provincial professional association (the “Association”) was itself a member of a national professional association (the “Society”). CRA found that member fees paid to the Association were not exempted under ETA Sched. V, Pt VI, s. 18 since membership in the Association was not required to maintain a professional status recognized by statute. It noted that persons could offer similar services in the province in question without being a member of the Association.
The Association, in turn, paid fees to the Society. Although these fees appeared to be stated in the Society by-laws to be paid “on behalf of” Society members, CRA found that the fees did not represent Society membership fees that the Association was collecting as agent for the Society given that “the bylaws of the [Society] provide no liability to the individual members to pay membership dues to [Society].”
Neal Armstrong. Summaries of 18 October 2017 Ruling 173963r under Sched. V, Pt VI, s. 18 and General Concepts – Agency.
CRA finds that an Ontario long-term care home qualified for enhanced GST/HST rebates
Elim Housing found that a B.C. long-term care facility, whose residents mostly had dementia, severely impaired mobility, complex medical issues and a life expectancy of between three months and three years, was making "facility supplies," so that it was eligible for the enhanced 83% federal public service body rebate. In response to this decision, CRA effectively reversed an earlier ruling and ruled in 138196 that an Ontario nursing home that was operated by a registered charity qualified for the federal 83% PSB rebate as well as the Ontario 87% PSB rebate. CRA has now provided essentially the same rulings for an Ontario (government funded) “long-term care home,” that sounds generally similar to the nursing home ruled upon in 138196.
Neal Armstrong. Summaries of 26 September 2017 Ruling 126881 under ETA s. 259(1) – facility supply.
Gervais – Federal Court of Appeal confirms that a basis averaging scheme to transfer half of a capital gain to the taxpayer’s wife was an abusive circumvention of the attribution rules
The taxpayer’s wife (Mrs. Gendron) purchased 1.04M preferred shares from the taxpayer (Mr. Gervais) at a cost of $1.04M (with Mr. Gervais electing out of s. 73 rollover treatment) and was gifted a further 1.04M shares (having a $1M accrued capital gain) on a s. 73 rollover basis, so that her cost of the gifted shares was $0.04M. The transactions were reported on the basis that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there was a $0.5M capital gain attributed back to Mr. Gervais on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.
In agreeing with the CRA approach of adding “her” $0.5M capital gain to Mr. Gervais’ return, Noël CJ stated that the above result was:
contrary to the object, spirit and purpose of subsections 73(1) and 74.2(1), the purpose of which is to ensure that a gain (or loss) deferred by reason of a rollover between spouses or common-law partners be attributed back to the transferor. … Because the rollover provided for in subsection 73(1) deferred this accrued gain [of $1M] in its entirety, the whole of the gain realized on the sale to [the third party] had to be attributed back to Mr. Gervais when regard is had to the object, spirit and purpose of subsection 74.2(1).
Neal Armstrong Summary of Gervais v. The Queen, 2018 FCA 3 under s. 245(4).
Blott – Tax Court of Canada finds that giving a spouse access to a joint account was not payment to her
A securities dealer employee claimed a deduction for salary to his wife of $12,000 per annum for her administrative support. In addition to finding that this claim was non-deductible on more usual grounds (e.g., a negative T2200), C Miller J found that there had been no expenditure, stating:
… There are no cheques to Ms. Thériault. Mr. Blott’s income went into the joint account and Ms. Thériault could simply access it. Is there any amount paid to Ms. Thériault in such circumstances? I conclude there is not. … I do not see how anything has been paid or expended to Ms. Thériault. She has received nothing more than what she already had.
Neal Armstrong. Summaries of Blott v. The Queen, 2018 TCC 1 under General Concepts – Payment and Receipt and s. 8(1)(i)(ii).
CRA confirms that where a partnership with FA1 as a 40% partner pays interest to FA2, only 40% of the interest can be recharacterized as active under s. 95(2)(a)(ii)(B)(II)
Canco wholly-owns two non-resident corporations (“FA1” and “FALuxco”). FA1 is the 40% partner of “MLP,” whose other non-resident partners are not FAs of Canco. MLP borrows $200M from FALuxco, bearing interest of $10M per annum, for use in its active U.S. business.
CRA found that only 40% of the $10M interest received by FALuxco should be recharacterized as income from an active business under s. 95(2)(a)(ii)(B)(II) (resulting in FALuxco having FAPI of $6M - because only $4M of interest would be deductible in computing FA1’s earnings). CRA stated that from a policy perspective:
[S]ince a partnership is treated as a flow-through for Canadian tax purposes, for the purpose of subclause 95(2)(a)(ii)(B)(II) the interest paid by a partnership should be viewed as interest paid proportionately by each of its members. [Accordingly] to the extent that a portion of the interest paid to FALuxco by MLP is considered to be paid by a member that is not described in subclause 95(2)(a)(ii)(B)(I) [i.e., the non-FA members of MLP], that portion should not be recharacterized as income from an active business since it would not be so recharacterized if it had been paid directly by that member.
Neal Armstrong. Summary of 31 August 2017 Internal T.I. 2016-0680801I7 under s. 95(2)(a)(ii)(B)(II).
Income Tax Severed Letters 10 January 2017
This morning's release of five severed letter from the Income Tax Rulings Directorate is now available for your viewing.
Kenny – Tax Court of Canada finds that foreign government assistance scuppered the “substantially all” test in s. 118.94 (which did not violate a non-discrimination Treaty Art.)
In 2014, an Irish resident earned $32,728.52 in employment income from working for a few weeks in Fort McMurray, and also received $23,002.37 from the Irish government, mostly as means-tested assistance. C Miller J found that these assistance payments qualified under s. 56(1)(u) as “social assistance payment[s] made on the basis of … means,” notwithstanding that they were not income for Irish purposes and were foreign rather than domestic assistance. Accordingly, the taxpayer could not claim full Canadian credits of $28,717, as he did not satisfy the condition in s. 118.94 that “substantially all” of his income for the year was included in computing his taxable income earned in Canada for the year.
In this regard, C Miller J stated:
… [C]ases have relied on percentages as low as 76% to be considered substantially all. In Mr. Kenny’s case, I would be stretching “substantially all” beyond any measure of elasticity if I concluded that 60% represented “substantially all”.
In rejecting counsel’s submission that this result violated the prohibition in Art. 24(1) of the Canada-Ireland Treaty against subjecting nationals of Ireland to more burdensome taxation than for nationals of Canada (and vice versa), C Miller J stated:
I read this provision as applying to nationals, not residents, to ensure that a Canadian citizen residing in Ireland and receiving the same payments (employment from Canada and social assistance from Ireland) as Mr. Kenny would not be treated any differently. I do not find subsection 24(1) of the Treaty assists Mr. Kenny in this regard.
Neal Armstrong. Summaries of Kenny v. The Queen, 2018 TCC 2 under s. 118.94 and Treaties – Articles of Treaties – Art. 25.
CRA maintains its restrictive position respecting the GST/HST exemption for supplies of goods before their release
ETA s. 144 provides that “a supply of goods that have been imported … but have not been released [by the CBSA] before the goods are delivered … to the recipient of the supply, shall be deemed to be made outside Canada,” so that even if the vendor is a registrant, it is not required to charge GST/HST.
CRA considers that s. 144 does not apply if the goods were supplied by the vendor before they were imported and, in this regard, applies ETA s. 133, which deems goods to be supplied at the time that the sale agreement is entered into. Accordingly, in an example where a registered non-resident enters into a somewhat long-term agreement for the supply of fuel oil to Canco, and thereafter delivers the fuel oil to Canco at a Canadian port, CRA considers that s. 144 does not relieve the non-resident from the requirement to charge GST/HST notwithstanding that the fuel oil has not yet been released at the time of its delivery in Canada.
Neal Armstrong. Summary of 8 September 2017 Interpretation 180362 under ETA s. 144.
CRA indicates that a bad debt credit cannot be claimed for uncollectible GST/HST assessed on audit
ETA s. 231(1.1) provides that a supplier cannot claim a bad debt deduction unless “the tax collectible in respect of the supply is included in determining the amount of net tax reported in the reporting entity’s return … for the reporting period in which the tax became collectible.” CRA considers that the quoted language means that where a supplier is assessed on audit for failure to charge and remit the tax, no bad debt deduction is available for the uncollectible tax where, for example, the customer declared bankruptcy before the audit and resulting assessment.
Not a problem! CRA stated:
[S]ection 232 does appear to offer a solution where the consideration is reduced. Where the supplier issues a credit note to the customer (which is now bankrupt) to relieve it of that debt, the supplier would be entitled to claim a deduction if all conditions set out in paragraph 232(3)(b) are met.
The point appears to be that if the supplier is willing to give up its claim against the bankrupt estate for, say, $100, it can generate a bad debt deduction for the GST/HST (say, $13) provided it issues a credit note for the $100.
Neal Armstrong. Summary of 18 September 2017 Interpretation 176502 under ETA s. 231(1.1).