News of Note
Target – UK Supreme Court finds that the VAT exemption for “transactions … concerning … payments” did not include causing funds transfers through issuing payment instructions
Email this ContentTarget administered loans made by a provider of mortgages and loans (“Shawbrook”), including by operating individual loan accounts and instigating and processing payments due from borrowers.
Article 135(1)(d) of the Principal VAT Directive exempted “transactions, … concerning … payments, transfers, debts, … but excluding debt collection”. (The rough ETA analogue is para. (a) of the financial service definition, which exempts the “payment … or transfer of money …”.) Target in this regard relied on the fact that it procured payments from borrowers’ bank accounts to Shawbrook’s bank accounts by giving instructions for payment which were then automatically and inevitably carried out through the Bankers’ Automated Clearing System (“BACS”).
After referring to various decisions of the Court of Justice of the European Union regarding this exemption, Lord Hamblen stated:
[T]he services must in themselves have the effect of transferring funds and changing the legal and financial situation. It is not enough to give instructions to do so thereby triggering a transfer or payment.
Before dismissing Target’s appeal, he then stated:
It follows that giving instructions which automatically and inevitably resulted in payment from the borrowers’ bank accounts to Shawbrook’s bank accounts via BACS is insufficient to fall within the exemption.
Neal Armstrong. Summary of Target Group Ltd v Revenue and Customs [2023] UKSC 35 under ETA s. 123(1) – financial service – (a).
CRA finds that a US athlete’s Canadian “signing bonus” was in substance employment remuneration for Treaty purposes
A U.S.-resident professional athlete signed a multi-year contract with a Canadian sports team which, in addition to salary, provided for the payment of a “Signing Bonus,” payable in annual instalments but with the instalments being lost for the sports year in which the taxpayer withdrew his services or breached the contract, and thereafter. In finding that the instalment received to date fell under Art. XV(1) of the Canada-U.S. Convention (Canadian employment subject to Canadian income tax without Treaty limitation) rather than Art. XVI(4) (Canadian tax limited to 15% of a payment of an “inducement to sign an agreement relating to the performance of the services of an athlete (other than an [Art. XV(1)] amount”), CRA stated:
Although the Agreement defines the Bonus as meaning compensation for signing the contract, the contractual requirement for the payment of the Bonus links the amount of the Bonus to which the Taxpayer is entitled to the performance of employment services.
Neal Armstrong. Summary of 14 July 2022 Internal T.I. 2020-0869441I7 under Treaties – Income Tax Conventions – Art. 16.
CRA finds that remuneration paid by a Canadian corporation to a non-resident (recently, resident) employee was not subject to withholding
CRA found that monthly remuneration paid by a resident Canadian corporation to its only employee (who ceased to be resident in a previous year) was not subject to income tax source deductions pursuant to the exemption in Reg. 104(2) given that neither of the exclusions in Regs. 104(4)(a) and (b) applied. Although Reg. 104(4)(a) was potentially engaged because of his previous Canadian residency, he was excluded from its application because such remuneration was subject to income tax in the foreign jurisdiction and related to employment duties performed outside Canada. The performance of the duties outside Canada also precluded the application of the Reg. 104(4)(b) exclusion.
However, an annual T4 slip was required.
Neal Armstrong. Summary of 13 March 2023 External T.I. 2022-0947251E5 under Reg. 104(2).
Income Tax Severed Letters 25 October 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A.G. v. Richter – Quebec Court of Appeal finds that the court below could accord priority to interim bankruptcy-proposal financing over the ITA s. 227(4.1) trust for source deductions
At the conclusion of the sale process for the assets of two debtors who had filed a proposal under the Bankruptcy and Insolvency Act (“BIA”), the net sale proceeds were less than both the amount of interim financing from CIBC that the Quebec Superior Court had ordered to have a super-priority, and the total amount of unremitted federal and Quebec source deductions.
In finding that the Superior Court had the jurisdiction to provide that the super-priority charge ranked ahead of the deemed trust for the federal source deductions under ITA s. 227(4.1) (as well as the Quebec equivalent), Schrager JA noted:
- Canada North decided that CCAA courts could grant super-priority charges ranking in priority to s. 227(4.1) deemed trusts.
- Callidus indicated that the “proposal provisions in the BIA serve … the same remedial purpose as those in the CCCA – i.e., the financial rehabilitation of an insolvent corporate debtor” and “to the extent possible, the two statutes should be treated in a harmonized fashion.”
- Regarding the Attorney General’s argument - that BIA s. 50.6(3), which provided that the “court may order that the … charge rank in priority over the claim of any secured creditor,” did not apply because s. 227(4.1) did not create a security interest - “it would seem nonsensical in the overall scheme of the BIA that a court could order that the interim lending charge take priority over the claim of any hypothecary or mortgage creditor but not over the claim of an unsecured creditor benefiting from a sui generis non-proprietary right akin to a floating charge, that is, the ITA Deemed Trust."
- If the above interpretation of s. 50.6(3) was incorrect, the Superior Court nonetheless had the inherent jurisdiction to order the super-priority: “Judgments of this Court have acknowledged the existence of this inherent jurisdiction under the BIA.”
Neal Armstrong. Summary of Attorney General of Canada v. Richter Advisory Group Inc., 2023 QCCA 1295 under BIA, s. 50.6(3).
BCM Cayman – Court of Appeal of England and Wales confirms that a two-tier partnership structure can be legally respected as such if the upper-tier partnership is an LP
The taxpayer (“Cayman Ltd.”) was a Cayman company which was the general partner of a Cayman LP (“Cayman LP”) which, in turn, had a 19% interest in a UK LLP.
Whether it was Cayman Ltd. (a taxpayer in this case) or Fyled (a UK corporate limited partner of the Cayman LP) who was liable for UK corporate income tax on carry profits allocated to the Cayman LP turned, in part, on whether Fyled was to be considered as a member of the UK LLP.
In finding that Fyled could not be considered to be carrying on business in common with the named partners of the UK LLP and, thus, was not a member of the UK LLP, Whipple LJ stated:
Cayman LP's business was carried on by its general partner (Cayman Ltd) and … the limited partners (including Fyled) were prohibited by Cayman law from taking part in Cayman LP's business … .
Thus, the well-known statement in Lindley and Banks on Partnership, that “where a firm purports to become a partner, this will, as a matter of law, constitute each of the members of that firm as a partner in his own right,” was inapplicable because the limited partner of the upper-tier partnership was prohibited from engaging with the partners of the lower-tier partnership.
Neal Armstrong. Summaries of BCM Cayman LP & Anor v Commissioners for His Majesty's Revenue and Customs [2023] EWCA Civ 1179 under s. 102(2) and s. 248(1) - corporation.
We have translated 7 more CRA severed letters
We have translated a CRA ruling released last week and a further 6 CRA interpretations released during October of 2002. Their descriptors and links appear below.
These are additions to our set of 2,618 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2023-10-18 | 2022 Ruling 2022-0937661R3 F - 104(4) and pipeline transaction | Income Tax Act - Section 84 - Subsection 84(2) | pipeline transaction to raise the funds for the application of the CRA s. 104(5.8) GAAR position to an inter vivos trust used to try to avoid the 21-year deemed disposition |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(5.8) | GAAR applicable to trust holding a corporate beneficiary that was distributed property from an inter vivos trust approaching its 21st anniversary | ||
| Income Tax Act - Section 245 - Subsection 245(2) | GAAR treated as self-applying | ||
| 2002-10-25 | 5 November 2002 External T.I. 2002-0161695 F - CDC HYPOTHEQUE | Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) | no credit to CDA of creditor on receiving life insurance proceeds pursuant to pledged policy of debtor |
| 2002-10-11 | 30 October 2002 External T.I. 2002-0132745 F - RENOVATION A UN IMMEUBLE | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense | expenditure to restore a building to its original condition may be a current expense |
| 29 October 2002 External T.I. 2002-0135815 F - BONI CADEAUX RECOMPENSES | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | bonus received by employees under a profit-sharing program not covered by gifts exclusion in ITTN No. 22 | |
| 31 October 2002 External T.I. 2002-0141265 F - NATURE D'UN BIEN APRES ROULEMENT | Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate | property does not change its character as capital property where transferred to related corporation under s. 85(1) for immediate sale | |
| Income Tax Act - Section 69 - Subsection 69(11) | no GAAR abuse where transfer of appreciated capital property to affiliated Lossco for immediate sale | ||
| 4 November 2002 External T.I. 2002-0158885 F - Alloc. of Safe Inc. & Disc. Div. Shares | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | payment of dividends on discretionary dividend shares with no liquidation entitlement would not result in a significant reduction | |
| 30 October 2002 External T.I. 2002-0126045 F - TRANSFERT A UN MINEUR | Income Tax Act - Section 248 - Subsection 248(1) - Specified Member | contributions of the specified member to the partnership business must be instrumental to its success |
CRA rules on pipeline transaction to fund the tax payable by a trust under GAAR regarding an avoidance of s. 104(5.8)
A family inter vivos trust for resident beneficiaries (Trust 1) had distributed its common shares of an investment holding company (Holdings) on an s. 107(2) rollover basis to a corporate beneficiary (Holdco) that was held by a newly-formed trust for family members (Trust 2). CRA was then approached, who determined that GAAR applied to the rollout of the Holdings shares to Holdco, so that s. 104(5.8) should be treated as applying to the capital property of Trust 2 upon the (now imminent) occurrence of the 21st anniversary of the formation of Trust 1 so as to result in a deemed disposition of such property pursuant to s. 104(4)(b)(ii) – and the Directorate so ruled in this ruling letter.
The resulting tax to Trust 2 was to be elected under s. 159(6.1) staggered over 10 years. It was proposed that a family beneficiary of Trust 2 (Father) generate the funds to make contributions to Trust 2 to pay the initial instalments of such tax by engaging in a pipeline transaction in which Trust 2 would distribute some of its common shares of Holdco (with stepped up basis under s. 104(4)) to Father for sale by him to a Newco (owned by him and children) in consideration for common shares of Newco, with Newco using advances from Holdings to make the requisite note repayments to Father (both before and after the amalgamation of Newco and Amalco, to occur a year later).
The wording of the GAAR ruling implicitly seems to treat GAAR as something that the taxpayer can apply to itself (see Quinco Financial, where this view was adopted in the Tax Court, but not especially endorsed in the Court of Appeal).
Neal Armstrong. Summary of 2022 Ruling 2022-0937661R3 F under s. 84(2).
Pier 1 Imports – Federal Court of Appeal confirms that there can be both a statutory appeal and an application for judicial review of the same CITT order
The Attorney General brought both an appeal pursuant to s. 68(1) of the Customs Act regarding alleged errors of law in an order of the Canadian International Trade Tribunal and an application for judicial review regarding the alleged unreasonableness of such order.
In discussing the issue as to whether s. 18.5 of the Federal Courts Act precluded the judicial review application given the statutory appeal mechanism, Boivin JA adopted the finding in inter alia Best Buy (2021 FCA 161) that in such circumstances, “a complete bar to judicial review would be incompatible with the rule of law” and that both types of errors are reviewable: “errors of law are reviewable under the correctness standard via the statutory appeal mechanism in subsection 68(1) of the Customs Act, while errors of fact are reviewable under the reasonableness standard through an application for judicial review …”.
After dismissing both the appeal and the application, Boivin JA went on to state:
The better approach to reflect Parliament’s intent and the rule of law might be the more restrictive stance adopted by the Ontario Court of Appeal, which reiterates that “judicial review is always available,” but mandates that courts ask themselves whether it is an “appropriate” exercise of their discretion, adding that this is so only in “rare cases” (Yatar [2022 ONCA 446, leave granted]).
Neal Armstrong. Summary of Canada (Attorney General) v. Pier 1 Imports (U.S.), Inc., 2023 FCA 209 under Customs Act, s. 68(1).
CRA finds that interest can be imputed under s. 247(2) to a PLOI which already is subject to s. 17.1 imputed interest
A corporation resident in Canada (“CRIC”) made various loans to an indirect wholly-owning parent which bore interest, payable at least annually, at a floating rate equal to the prescribed rate under Reg. 4301(b.1), with a timely joint election under s. 15(2.11) being made by them for each of those loans to qualify as a “pertinent loan or indebtedness” for the purposes of ss. 15(2) and 17.1(1). In finding that CRA could apply both ss. 17.1 and 247 to these loans (presumably meaning that if the arm’s-length rate was higher than the prescribed rate, interest at that higher rate would be imputed), the Directorate stated:
Subsection 247(2) can apply to debts owing by a non-resident person to a Canadian resident corporation with which the non-resident person does not deal at arm’s length, to which subsection 17.1(1) applies. More specifically, we submit that the principle of statutory interpretation according to which a specific provision in a statute precludes the application of a general provision in that statute, commonly known as the rule of implied exception, does not apply with respect to sections 17.1 and 247 because there is no conflict between those two provisions and they do not interfere with their policy objectives. In short … subsection 247(2), which was broadly worded to embody the arm’s length principle, was meant to apply to all cross-border transactions, arrangements or events, including financial transactions, between non-arm’s length persons or partnerships, unless a specific exclusion applies.
This assertion that there is no conflict in imposing a different interest rate under the general provision (s. 247(2)) than that determined under the specific rule (s. 17.1) applicable to the transaction appears to be a misconstruction of the rule of statutory interpretation at issue, namely, that one should not give “precedence to a general provision over the detailed provisions enacted by Parliament to deal with [the transaction]” (Schwartz, at para. 52; see also Shell, at para. 51). The principle also cuts both ways – presumably, CRA would not accept that if a specific provision limits or prohibits deductibility, the denied expenses nonetheless can be deducted under a general provision (see Symes).
Neal Armstrong. Summary of 6 September 2023 Internal T.I. 2019-0805481I7 under s.247(2.1).