News of Note
CRA confirms that the use of space-confirmed, but not standby, passes by airline employees is a taxable benefit
Email this ContentCRA confirmed that the use of space-confirmed airline passes by current airline employees, but not standby passes, is a taxable benefit which is valued at what it would have cost to purchase the space – whereas neither category of pass is taxable to retired employees.
Neal Armstrong. Summary of 17 February 2017 External T.I. 2016-0662341E5 under s. 6(1)(a).
Robotx Solutions – Tax Court of Canada finds that solving narrowly-cast production engineering problems was not SR&ED
There was something paradoxical about a company contractually committing itself to come up with narrowly defined solutions to particular production problems of its clients, e.g., designing, making and installing a “flow rectifier plate” to straighten-out rectangular aluminum bars coming out of an extruder, while at the same time treating a portion of its expenditures in performing such contracts as “experimental development,” which requires that there be significant technological uncertainty to be resolved, i.e., a significant chance that a solution would not be found within a predictable time frame.
Jorré J found that the company had not demonstrated that any of the work on four separate projects of this nature “was engaged in to resolve technological uncertainties that could not be resolved with current methods and existing knowledge.”
Neal Armstrong. Summary of Robotx Solutions Inc. v. The Queen, 2017 CCI 73 under s. 248(1) – scientific research & experimental development.
CRA indicates that handling (and marketing to) the customers of an insurance company was not predominantly arranging for issuance of insurance for GST/HST purposes
A separate company which took care of dealing with the insurance clients of an insurance company including applications and forwarding inquiries, as well as doing marketing, was found by CRA to be likely engaged in the supply of taxable promotional and administrative services rather than GST/HST-exempt “arranging for” supplies.
Neal Armstrong. Summary of 16 December 2016 Interpretation 169841 under ETA – s. 123(1) – financial service – (l).
Income Tax Severed Letters 17 May 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Gaz Métro – Cour du Québec finds that a “mirror debt” arrangement did not result in a legal release of debt for GAAP and capital tax purposes
Gaz Métro issued debt in the public markets and then on-lent the money on the same terms to a limited partnership of which it was a 70% limited partner, so that it was the limited partnership which serviced the debt through its “mirror” debt. Gaz Métro considered that, under generally-accepted accounting principles, this arrangement qualified as one in which (as per the relevant accounting pronouncements) it had been “legally released” from its debt, thereby reducing its capital for Quebec capital tax purposes.
Fournier JCQ considered that, notwithstanding that the partnership had effectively assumed the debt, there had been no legal release given that there had been no novation.
Federally, ss. 181(3) and 190(2) indicate that Part VI capital (other than of OSFI-supervised institutions) is determined under GAAP.
Neal Armstrong. Summary of Gaz Métro inc. c. Agence du revenu du Québec, 2017 QCCQ 3664 under s. 181(3).
Four further full-text translations of Technical Interpretations are available
Full-text translations of four French technical interpretations that were released between March 11, 2015 and March 4, 2015 are listed and briefly described in the table below.
These (and the other translations covering the last 26 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
R & S Industries – Tax Court of Canada finds that a taxpayer is not bound by the statement of boot set out in its s. 97(2) election form
R & S Industries was unsuccessful in a motion to have the Federal Court direct CRA to reconsider its decision to not permit R & S Industries to file an amended s. 97(2) election form so as to change the agreed amounts. R & S then appealed to the Tax Court with a view to convincing the Court that the allocation of consideration between partnership-interest and non-partnership interest consideration set out on the (T2059) election form did not reflect the actual agreed allocation. CRA viewed this as an attempted end-run around R & S’s inability to amend its election, and sought to have the appeal dismissed on jurisdictional grounds.
Graham J considered that there was a crucial distinction between the T2059’s agreed amounts, which could not be altered by the Minister, and the allocation of the consideration, which was a purely factual matter which was merely recorded on the T2059, and which either CRA or the taxpayer were free to challenge in the Tax Court as not according with the actual facts. Accordingly, the Crown’s jurisdictional challenge was dismissed.
This case likely suggests that the CRA practice, of requiring that corrections to s. 85 etc. election forms be made through the filing of amended election forms accompanied by a late-filing penalty, is wrong to the extent that the changes relate to information other than the elected amounts.
Neal Armstrong. Summary of R & S Industries Inc. v. The Queen, 2017 TCC 75 under s. 97(2).
Post-Anson, CRA maintains its position of no foreign tax credit for U.S. taxes paid by a Canadian member on undistributed LLC income
Notwithstanding Anson, CRA considers that where a Canadian-resident member’s share of LLC income is subject to U.S. tax but the income is not distributed, no Canadian foreign tax credit will be available in the year the income is earned – nor in a subsequent year given that s. 126(1) does not permit the carryforward of the foreign tax.
CRA also considers that this result is consistent with Canada’s Treaty obligations. In particular, after noting that the OECD Commentary on Art. 23B of the Model Convention “expressly contemplates that states may impose timing restrictions on claiming foreign tax credits,” and that where this is so “these countries…would be expected to seek other ways…to relieve the double taxation which might otherwise arise in [such] cases,” CRA stated:
In the case of Canada, such “other ways … to relieve the double taxation” include deductions allowed under subsections 20(11) and 20(12) of the Act. As such, in our view, the limits imposed by subsection 126(1) of the Act on claiming a foreign tax credit are in accordance with the OECD guidelines and do not affect the general principle of Article XXIV of the Treaty.
Neal Armstrong. Summaries of 13 April 2017 External T.I. 2015-0601781E5 under s. 126(1) and Treaties – Art. 24.
No T4A for rent
Reg. 200(1) contemplates the filing of T4A forms for a fee, commission or other amount for “services.” CRA indicated that there was no T4A reporting requirement for an amount paid as rent.
Neal Armstrong. Summary of 31 March 2017 External T.I. 2016-0675221E5 under Reg. 200(1).
Ploughman – Tax Court of Canada indicates that a defence under s. 163.2(6) of “good faith” reliance on information is unavailable where the reliance was unreasonable
In Guindon, a family lawyer and president of a charity was liable for penalties under s. 163.2(4) for issuing charitable receipts to 134 different investors in a charitable donation scheme after falsely representing in a tax opinion that that she had looked at the implementing documents (which did not exist). Sommerfeldt J has now found that the individual (Mr. Ploughman) who, despite his protestations to the contrary, was found to be a creator or promoter of the charitable donation scheme at issue in Guindon, was also liable for s. 163.2 penalties.
The particular act which Sommerfeldt J focused on was that, shortly before the April 30 filing deadline, Mr. Ploughman sent a letter to the donors recommending that they submit their (false) charitable receipts to CRA. At that time, he was aware that the timeshare units which had purportedly been donated in the previous year had not yet been created, and was also aware that the trust which purportedly had distributed those units to the donors had not yet been settled (or was indifferent as to whether this was the case). Thus, Mr. Ploughman “participated in, assented to or acquiesced in the making of” the false donor statements.
Sommerfeldt J rejected Mr. Ploughman’s submission that he had relied in good faith on the opinion letter of Ms. Guindon. First, the s. 163.2(6) safe harbour for good-faith reliance applied only to information provided by or on behalf of the donors, which was not the case here. Second, he noted that although the phrase “good faith” has been interpreted as referring to the “’actual, existing state of the mind, whether so from ignorance, skepticism, sophistry, delusion, fanaticism, or imbecility’,” he preferred the standard applied in a BC Court of Appeal decision of:
Honesty of intention, and freedom from knowledge of circumstances which ought to put the holder on inquiry.
Mr. Ploughman was not free of knowledge that should have put him on inquiry.
Neal Armstrong. Summaries of Ploughman v. The Queen, 2017 TCC 64 under s. 163.2(4) and s. 163.2(6).