News of Note
bcIMC – B.C. Supreme Court held that bcIMC was immune from HST payable on its investment fund but for an intergovernmental agreement
Email this ContentbcIMC is a BC Crown agent which was formed to manage and hold, under a provincial statutory trust, investments for the provincial pension plans. Weatherill J rejected a federal Crown argument that bcIMC was not immune under s. 125 of the Constitution Act from HST otherwise payable on the fees taken out of the funds under its management - on the grounds inter alia that ETA s. 267.1(5) deemed the statutory trust impressed on bcIMC’s investments to be a separate (non-Crown) person who thus was not exempt from federal tax on such fees - stating that “Canada cannot, under the guise of the deemed trust provisions of the ETA or otherwise, defeat the Province’s immunity from taxation.” However, he found that such immunity was taken away by agreements between B.C. and Canada in which the Province committed itself and its agents to pay any tax imposed under the ETA. He stated:
Section 16 of [bcIMC’s incorporating legislation] states that bcIMC “…is not liable for taxation except as the government is liable for taxation”. That language, in my view, is the specific legislative authority required to bind bcIMC to the Agreements and should be interpreted accordingly.
Neal Armstrong. Summary of British Columbia Investment Management Corp. v. Canada (A. G.), 2016 BCSC 1803 under Constitution Act, 1867, s. 125.
Freitas – Tax Court of Canada finds that a s. 96(1.1) allocation of income from an accounting firm was business income rather than a retiring allowance
A retired Deloitte partner received an opinion from his firm that professional income allocated to him under ITA s. 96(1.1) was a retiring allowance and thus excluded from being subject to CPP contributions, and also relied on the CRA opinion in 9527946 that:
Income allocated pursuant to subsection 96(1.1)… for the purposes of the CPP provision is not considered to be from a business carried on by the retired partner and consequently such a partner is not required to contribute to CPP solely as result of receiving such income.
Campbell J concluded that both opinions were incorrect, finding that a s. 96(1.1) allocation of professional income was business income.
Neal Armstrong. Summary of Freitas v. The Queen, 2017 TCC 46 under s. 248(1) – retiring allowance.
CRA indicates that the test of a real property security under the Canada-U.S. Treaty is a point-in-time test
The question of whether a share or trust interest derives its value from Canadian real property for purposes of the Canada-U.S. Treaty is a point-in-time test so that the sale of such share or interest immediately after the sale of the Canadian real property for cash will be exempt, even though under the 60-month look-back rule, the share or interest may be taxable Canadian property.
CRA also stated that in both the Treaty and TCP context,
the phrase “derived principally from real property”… allows one to look through a particular property (which is, for example, a share of a corporation or an interest in a trust) to the real property situated in Canada and held, directly or indirectly, by such corporation or trust
without indicating any exception for where intermediate interests are held as debt.
Neal Armstrong. Summary of 1 March 2017 External T.I. 2016-0658431E5 under Treaties – Art. 13.
Finance proposes to extend the s. 95(2)(a)(ii)(D) safe harbour to inter-FA fees that are deemed FAPI under s. 95(2)(b)(i)(B)(I)
S. 95(2)(b)(i)(B)(I) provides that if FA1 provides services to FA2 then, to the extent that the fees therefor paid by FA2 are deductible in computing its foreign accrual property income, they are included in FA1’s FAPI. This result is inappropriate where the fees so paid by FA2 are deducted in relation to its investment in shares of an Opco that are excluded property. Accordingly, Finance has provided a comfort letter that it will propose that s. 95(2)(b)(i)(B)(I) not apply in this type of situation, which is conceptually described as one where conditions generally analogous to those in s. 95(2)(a)(ii)(D) are satisfied respecting FA1’s services income.
Neal Armstrong. Summary of 23 December 2016 Comfort Letter under s. 95(2)(b)(i)(B)(I).
CRA denied interest expense where a premium was received on extending notes’ maturity
Rather than issuing fresh notes, a company obtained the noteholders’ agreement to extend the current notes’ maturity, and received a significant premium given that the notes' stipulated interest rate was now higher than prevailing yields.
The Directorate did not see anything in this being a reopening rather than a new issuance to change its position in S3-F6-C1, para. 1.96 that “the interest expense will be reduced over the life of the [re-opened] debt with reference to the amount of the premium.” The Directorate also stated (in this 2015 Internal Interpretation) that if the premium was not taxable over time in this manner, the applicable fraction of the premium “could” be included in the company’s income as an eligible capital amount.
Neal Armstrong. Summaries of 11 September 2015 Internal T.I. 2015-0586301I7 under s. 20(1)(c) and s. 14(5) – cumulative eligible capital – E.
Cybernius – Federal Court orders the Minister to make a taxpayer-requested s. 221.2(1) transfer between two taxpayer accounts
S. 221.2(1) gives CRA the discretion to transfer amounts between different tax accounts of a taxpayer. CRA refused a taxpayer request to transfer a credit balance respecting the taxpayer’s Part I tax – which had arisen because CRA had garnished amounts to collect an arbitrary assessment for some taxation years which later turned out not to have any significant Part I tax liability – to satisfy its arrears of source deduction remittances. McVeigh J found that CRA had acted unreasonably in not granting this request – which initially had been refused on the grounds that at the time of the request, a subsequent year’s return was overdue – given that by the time the matter came before her, the taxpayer was no longer delinquent in its filing obligations – and effectively ordered CRA to grant the transfer request.
Neal Armstrong. Summaries of Cybernius Medical Ltd. v. Canada (Attorney General), 2017 FC 226 under s. 221.2(1) and s. 225.1(1).
CRA indicates that the upstream loan rules can be used to avoid the debt forgiveness rules
CRA’s view is that when an upstream loan to Canco from its wholly owned CFA is forgiven following a sale of the CFA, this will not qualify as a repayment of the loan for purposes of the upstream loan rules so that, at best, reserves will need to be claimed under s. 90(9) throughout the indefinite lifetime of Canco. However, the debt forgiveness rules will not apply to the forgiveness because the amount of the upstream loan is included in the income of Canco under s. 90(6) of the upstream loan rules, even though there may be the offsetting s. 90(9) deduction.
Neal Armstrong. Summaries of 20 March 2017 External T.I. 2014-0545591E5 under s. 90(9) and s. 80(1) – excluded obligation – para. (a).
Income Tax Severed Letters 5 April 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that there generally is no 3rd party requirement to report benefits under $500
Some points made by CRA in response to submissions on its recent Folio on employee benefits (S2-F3-C2):
- Where sales personnel are awarded trips as an incentive, the value of the benefit can “be reduced to the extent of the employment-related activities” required to be performed on the trip.
- Where employment benefits are provided by someone other than the actual employer, “if the amount of the payment [or benefit] is $500 or less, CRA generally waives the T4A reporting requirement unless income tax was withheld at source…[or in the case of] group term life insurance benefits.”
- CRA will amend the Folio to further clarify that it is following Spence to the effect that benefits should be valued based on their fair market value rather than cost.
Neal Armstrong. Summary of 15 November 2016 TEI Roundtable, Q.2, 2016-0670911C6 under s. 6(1)(a).
Six further full-text translations of severed letters are available
Full-text translations of the French severed letter released last week and five French severed letters released between May 20, 2015 and April 29, 2015 are now available, and are listed and briefly described in the table below.
These (and the other translations covering the last 23 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the "open" week for April.