News of Note
VLN – Tax Court of Canada finds that work performed for 3rd parties did not qualify as the taxpayer’s own SR&ED
Email this ContentLyons J found that work that the taxpayer performed for third parties using high tech equipment (the “System”) that it had purchased did not qualify as its SR&ED activities. It was insufficient that doing so provided it with valuable experience. An example was work performed for the University of Ottawa:
…[T]he fact that UO personnel collaborated with the appellant on tasks involving the System and the appellant’s ability to utilize data and findings, does not alter the fact that the research represented the activities of UO researchers on its projects. I find these activities do not amount to the System being used for the appellant’s SRED.
Neal Armstrong. Summary of VLN Advanced Technologies Inc. v. The Queen under s. 37(8)(a).
Jayco – Tax Court of Canada finds that, under the UCC, goods were delivered by a U.S. manufacturer outside Canada
A U.S. manufacturer of recreational vehicles (Jayco) was found by D’Auray J to have delivered or made available the RVs to its Canadian dealers at its facility in Indiana, so that their supply occurred outside Canada and was not subject to GST/HST. Notwithstanding a statement in the Dealership Sale Service Agreements that neither party was “the agent … of the other for any reason,” she found that, in fact, Jayco arranged for the carrier (a Jayco subsidiary) to ship the RVs to Canada on behalf of the dealers rather than of it. Given that the relevant Uniform Commercial Code provisions were broadly similar to those of the Sale of Goods Act, she quoted as apropos an Ontario judicial statement that:
[I]f certain conditions are present, there may be a symbolical delivery which divests the seller’s possession … . The transfer to the buyer of a bill of lading, as representing the goods, forms a good delivery in performance of the contract.
In contrast, the documents suggested that parts sold by Jayco to the Canadian dealers were delivered on its behalf, so that their supply was made in Canada and subject to GST/HST.
Neal Armstrong. Summary of Jayco, Inc. v. The Queen, 2018 TCC 34 under ETA s. 142(1)(a) and s. 306.1(1)(a).
Formula One decision departs from jurisprudential and OECD standards of what is a PE
A UK corporation, which held the worldwide rights to commercially exploit the Formula One World (car-racing) Championships, was held by the Supreme Court of India in Formula One to have a permanent establishment in India respecting annual three-day Grand Prix races held there given its alleged degree of operational control (not really explained in the decision) over the event. It is suggested that this decision was incorrect:
1. The Supreme Court of India improperly considered the activities of all affiliated entities globally in concluding that a business was being carried on in India by FOWC. No foundation was laid for such an approach in the treaty (even under article 5(4.1) of the 2017 Model Treaty Commentary).
2. The Court focused entirely on control without regard to whose business was actually being carried on in India and without sufficient factual analysis to support its conclusion.
3. The Court's acceptance that a presence of three weeks per year in India, in respect of a commercial venture that operated for only three days per year, suffices to give rise to a permanent establishment is not supported by the Model Treaty and the overwhelming weight of case law, and does violence to the policy behind the existence of this threshold to domestic taxation.
Neal Armstrong. Summary of Richard Tremblay and Ilana Ludwin, "Indian Supreme Court Diverges from OECD Guidelines, Relies on Questionable Canadian Precedent, in Deciding PE Issue in Formula One," Tax Management International Journal, 2018, p. 125 under Treaties – Income Tax Conventions - Art. 5.
The proposed restructuring of Banro entails its effective emigration to the Caymans
Banro is a CBCA holding company with two mines in the Democratic Republic of Congo held though indirect DRC subsidiaries. It, along with its direct and indirect Barbados subsidiaries, filed for protection under the CCAA on December 22, 2017 and was then delisted from the TSX and NYSE American. The secured debt (of U.S.$233M) to be compromised is owed at the level of a Barbados subsidiary held directly by Banro (BGB). This will permit Banro to effectively emigrate to the Cayman Islands as part of the proposed Plan of Compromise and Reorganization.
In particular, Banro’s shares of BGB will be cancelled, BGB will issue shares to a newly-formed Caymans company (Newco) for nominal consideration, and the secured creditors will receive shares of Newco in satisfaction of their secured claims against BGB – except that 25% of their claims will instead be treated as unsecured claims. The unsecured creditors will receive nothing other than sharing pro rata in a nominal sum ($10,000), and the Banro shareholders will receive nothing at all.
Not all secured creditors are equal. The DIP lenders will receive 74% of the equity of Newco and all the voting rights, and the other secured creditors will receive 26% of that equity in the form of non-voting shares, subject to dilution by warrants.
The U.S. tax characterization of the reorganization is stated to be unclear.
Neal Armstrong. Summary of Banro Circular under Public Transactions – Other - Recapitalizations – Debt into common equity.
CRA indicates that the purchase price of a subsurface mineral exploration right was CDE
The definition of “Canadian oil and gas property expense” includes the cost of a right to explore for Canadian hydrocarbons, but the definition of “Canadian development expense” does not explicitly include the cost of a right to explore for Canadian mineral resources. CRA indicated (in the case of a taxpayer who was not in the exploration/mining business and who acquired subsurface mineral exploration rights) that the cost of purchasing those rights would qualify as CDE.
CRA also appeared to indicate that on the s. 85(1) transfer of a Canadian resource property with a nil balance in the relevant resource pool, a “nil” elected amount can be designated.
Neal Armstrong. Summaries of 7 February 2018 External T.I. 2016-0637221E5 under s. 66.2(5) – Canadian development expense and s. 85(1)(a).
CRA finds that a partnership is not fiscally transparent for patronage dividend purposes
Can a cooperative corporation, that is a member of a limited partnership, deduct patronage dividends computed on the basis of sales made by the partnership to its customers who are members of the cooperative corporation? In responding negatively, CRA indicated that this approach would be contrary to “customer” being defined in s. 135(4) as a customer of the “taxpayer,” which under the s. 96(1) assumptions was to be treated as the partnership rather than its member.
Neal Armstrong. Summary of 29 January 2018 External T.I. 2017-0702731E5 under s. 135(4) - customer.
Cheema – Federal Court of Appeal indicates that a reference to a purchaser included a bare trustee
In order to satisfy lender requirements, the individual taxpayer persuaded a friend (Dr. Akbari) to jointly sign an agreement for the purchase of a new home. The Ontario new housing rebate rules required that each individual who becomes liable under the purchase agreement is acquiring the new house as the primary place of residence of that individual or a relation. “From the beginning it was understood that Dr. Akbari would not have any real interest in the property” and, indeed, at the closing of the purchase Dr. Akbari executed a declaration of trust in favour of the taxpayer.
Stratas JA (speaking for the majority, with Webb JA dissenting) nonetheless found that Dr. Akbari’s co-signing of the purchase agreement scuppered the rebate. The fact that Dr. Akbari “had no beneficial interest in the property” was “irrelevant,” as what mattered was that Dr. Akbari became liable to the builder under the purchase agreement when he signed it. Thus, the proposition that the ETA (and ITA) focus on the beneficial owner rather than any bare trustee, should now be applied with caution. His interpretation accorded with the principle that “an interpretation that favours administrative efficiency is more likely to have been intended by Parliament over one that does not” (i.e., CRA only need look at the purchase agreement to see who is the “legal acquirer,” rather than sorting out beneficial interests.)
Part of the debate between Stratas and Webb JJA. was as to the scope of ETA s. 133, which provides that a supply of property is deemed to be made at the time the agreement for its supply is entered into. Stratas JA was not bothered that the new home did not yet exist at the time of signing the purchase agreement, stating that “Deeming provisions create legal fictions … for example, the supply of a home that is not yet constructed.” Furthermore, “As Mr. Cheema and Dr. Akbari both signed the agreement of purchase and sale, they are deemed to receive a supply of the property at the time they entered into the agreement.” This is a further indication that, notwithstanding its wording, s. 133 is to be interpreted as deeming there to be a deemed acquisition at the time of execution of the related agreement for the property’s (or service’s) supply.
Neal Armstrong. Summaries of Canada v. Cheema, 2018 FCA 45 under ETA s. 254(2)(b), s. 133 and Statutory Interpretation – Ordinary Meaning, Ease of Administration.
CRA treats the members of a partnership as the payers of RCA withdrawals made to the partnership employees for source deduction purposes
A partnership that was the employer respecting a supplementary retirement plan that was a retirement compensation arrangement (RCA) submitted that no withholding should apply to its withdrawal of plan surplus on the basis that, as a partnership, it not taxable under Part I and on the basis that the applicable source deduction Regulation (Reg. 106(1)) indicated that withholding was to be made based on the amount of tax that may reasonably be expected to be payable under the Act by the recipient with respect to the payment.
In rejecting the employer’s position, the Directorate stated that “subsection 96(1) … ensures that the members of the partnership are taxable on their respective share of the partnership’s income” and that in applying Reg. 106(1), “the amount to be withheld from the [withdrawal] Payment should be equal to the total amount of tax that may reasonably be expected to be payable under the Act by the members of the employer partnership with respect to the Payment.”
Neal Armstrong. Summary of 7 February 2018 Internal T.I. 2017-0711961I7 under s. 153(1)(q) and Reg. 103(6).
CRA applies its guidelines on cash as an active business asset to the “specified small business corporation” test
CRA set out general guidelines on when cash held by a corporation would be considered to be used in an active business carried on by it for purposes of the “specified small business corporation” definition in Reg. 4901(2) (respecting qualification of its shares for RRSPs). The listed factors (which are similar to those applied by CRA in other contexts) included:
- Cash or near cash property is considered to be used principally in the business if its withdrawal would destabilize the business.
- Cash which is only temporarily surplus to the business needs may qualify.
- Cash balances which accumulate only to be depleted in accordance with the annual seasonal fluctuations of the business will generally qualify – but a permanent balance in excess of the company's reasonable working capital needs will generally not qualify.
- Funds will not qualify by virtue only of being accumulated to purchase capital assets or repay long-term debt.
Neal Armstrong. Summary of 25 January 2018 External T.I. 2017-0717561E5 under Reg. 4901(2) - “specified small business corporation”.
Income Tax Severed Letters 28 February 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.