News of Note
Archibald – Federal Court of Appeal confirms that taxpayers cannot rely on favourable CRA treatment of similarly-situated taxpayers
Email this ContentIn the course of dismissing the taxpayer’s appeal of an assessment made on the basis that tuition fees paid to the University of Liverpool for an on-line MBA program did not qualify for the tuition tax credit, Woods J.A. stated that it is “well settled that a taxpayer does not become entitled to relief simply because another taxpayer similarly situated was assessed differently.”
Neal Armstrong. Summaries of Archibald v. Canada, 2018 FCA 2 under s. 118.5(1)(b) and s. 152(1).
CRA opines that s. 129(1.2) denies a dividend refund on the wind-up of a private company bequeathed (but not gifted) to a private foundation
The estate of B gifts her shares of a portfolio holding company (“Holdco”) to a private foundation, with Holdco thereafter using its liquid assets to redeem the common shares held by the private foundation. CRA ruled that, notwithstanding the status of the gifted shares as non-qualifying securities, the gift will be recognized under s. 118.1(13)(c) once the gifted shares are disposed of by virtue of their redemption - and that such gift will be deemed under s. 118.1(15) to have been made by B in her terminal year (so that her s. 70(5) gain on the shares can be sheltered). It also ruled that s. 129(1.2) would not deny a dividend refund to Holdco on the deemed dividend arising on the redemption. In giving the latter ruling, it was influenced by the fact that B's death occurred before 2016, so that the gift was not deemed by s. 118.1(5) to be made by B's estate. So far, these effectively are rulings that the transactions are more tax-efficient than if Holdco instead had been wound-up under s. 88(2) first, before the underlying assets were gifted to the Foundation.
The balance of the Holdco shares were held before B’s death in a spousal trust, whose terms in the wills of B’s deceased husband (A) provided that the residue (including such shares) was to be transferred to the Foundation on B’s death. CRA opined that this transfer to the Foundation was not a gift by the spousal trust (i.e., the Foundation received the residue qua beneficiary). More oddly, it also opined that s. 129(1.2) would apply to deny a dividend refund to Holdco on its redemption of the former-residue shares. In other words, notwithstanding the charitable intent of A when he crafted his wills and the obligation of his trustees to carry out his instructions, “one of the main purposes” of the transactions was generating a dividend refund.
Neal Armstrong. Summaries of 2017 Ruling 2016-0628181R3 under s. 118.1(13)(c), s. 129(1.2) and s. 118.1(1) - total charitable gifts.
CRA indicates that a requirement for unanimous decisions by trustees including the settlor did not by itself engage s. 75(2)
The Directorate essentially confirmed an earlier position that a requirement in a trust indenture for all decisions to be made unanimously by the trustees, who include the settlor, will not by itself necessarily engage s. 75(2). However, in the file under review, the settlor had the power to amend the terms of the trust indenture, and this in combination with the unanimous voting requirement was enough to cause s. 75(2) to apply.
Neal Armstrong. Summary of 16 February 2017 Internal T.I. 2016-0669881I7 under s. 75(2).
CRA rules that a partner’s election to have its LP units redesignated as units of a different class will not entail their disposition
A limited partnership, which invests in securities chosen by its manager of a discretionary basis, is continuously offering two classes of its LP units to investors: Class A units (which bear a management fee) to taxable investors; and Class T units (which do not bear a management fee) to RRSPs. It will add two new classes of units, with the same terms as the Class As except for bearing a different management fee and there being a longer notice period for retracting units (in order to permit a longer-term focus in the underlying investing). It will also provide current partners with the option to re-designate their current units as new units.
CRA ruled that the creation of the new units would not, by itself, result in a disposition of any existing units and that the redesignation would not by itself result in a disposition of such units. Compare 2011-0429611R3, where CRA gave a preliminary view that redesignating one class of REIT preferred units to a second would entail their disposition.
Neal Armstrong. Summary of 2017 Ruling 2017-0687061R3 under s. 248(1) – disposition.
CRA indicates that eligible dividend designations can be made before the dividend payment time and by email
S. 89(14) in its entirety provides:
A corporation designates a portion of a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom the dividend is paid that the portion of the dividend is an eligible dividend.
In this regard, CRA has now stated:
[T]he sending of an e-mail, with an acknowledgment of receipt, would meet the criteria for the designation of a dividend as an eligible dividend pursuant to subsection 89(14).
As to when the written notice must be sent and dated, the CRA accepts that notification in writing should be given to shareholders between the time the dividend is declared and the date the dividend is paid.
Neal Armstrong. Summary of 18 December 2017 External T.I. 2017-0720731E5 F under s. 89(14).
North Shore – Federal Court of Appeal finds that previously-collected HST is not “credited” by the supplier to the purchaser under ETA s. 232 unless the sum is put at the purchaser's disposal
A supplier (Menova) received substantial down payments respecting its sale of solar array projects, and then became insolvent before earning more than a fraction of the down payments. Menova then issued credit memos to the business customer (North Shore) for the value of the unperformed work, and was petitioned into bankruptcy before refunding any amount shown on the credit memos. CRA considered that because the applicable portion of the previously-charged and collected HST thus had been credited through the adjustment shown on the credit memos, such HST was required to be added back to North Shore’s current HST return under ETA s. 232, thus effectively reversing the input tax credit previously claimed by North Shore.
Woods JA stated:
[T]he term “credit” in section 232 [means]: an operation by which a sum is put at the disposal of someone else. I do not suggest that money must actually be set aside, but it is not sufficient if there is no sum at the disposal of the purchaser.
[As] Menova did not put funds at the disposal of North Shore when it issued the credit memos … section 232 does not apply to the transactions at issue as HST was not credited to North Shore.
Neal Armstrong. Summary of North Shore Power Group Inc. v. Canada, 2018 FCA 9 under ETA s. 232(2) and 231(1).
CRA finds that a trust is related for purposes of Art. XXIX-A (3) of the Canada-U.S. Treaty to a corporation that is controlled by its corporate trustee
Under Art. XXIX-A (3) of the Canada-U.S. Treaty, a non-qualifying person that is resident in the U.S. may benefit from the provisions of the Treaty to the extent that, amongst other conditions, it or “a person related thereto,” is engaged in the active conduct of a trade or business in the U.S. CRA found that in the situation where a U.S. parent was the trustee of a U.S. trust whose beneficiary was a U.S. Opco that was engaged in a U.S. business, that U.S. Opco qualified as a related person for these purposes. CRA reasoned that, under Art. III(2) of the Treaty, the Canadian domestic rules on a related person governed this test of relatedness under Art. XXIX-A (3), and that under those rules and having regard to the deeming by s. 104(2) of a reference to a trust as being a reference to the trustee, the Trust controlled US Opco by virtue of its trustee (US parent) controlling US Opco – so that the Trust and US Opco were related.
This meant that the Trust potentially could access Treaty benefits in relation to its income derived directly or indirectly from Canada in connection with or incidental to US Opco’s (substantial) business. The particular income in question was interest on a loan that the Trust made to a Canadian-group company, but CRA did not comment on this aspect of the Art. XXIX-A (3) tests.
Neal Armstrong. Summary of 8 September 2017 External T.I. 2014-0549771E5 under Treaties – Articles – Art. 29A.
Income Tax Severed Letters 17 January 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
6305521 Canada – Court of Quebec finds that an incorporated repairman reporting to a foreman was not carrying on a personal services business
An individual was the sole shareholder and employee of a corporation. His corporation did work for various employment agencies (7 over the course of 9 years) which, in turn, provided his services and of others in repairing aircraft under the supervision of an agency foreman. Lareau JCQ found that the corporation was not carrying on a personal services business (under the Quebec version of those rules).
The fact that the work to be performed was precisely described and performed in a secured environment reflected the highly technical character of the required tasks rather than indicating that he was under the superintendence and control of the agencies so as to be the equivalent of an incorporated employee. In addition, he was required to provide his own tools, his corporation offered his services to various agencies at a time, he could work for more than one agency during a period, and his hours were variable depending on the exigencies of the work.
Neal Armstrong. Summary of 6305521 Canada Inc. v. ARQ, 2017 QCCQ 14869 under s. 125(7) – personal services business.
SAE – Court of Appeal of England and Wales broadly defines “college”
The ETA definition of a “university” includes a “college affiliated with” a qualifying university. Patten LJ defined the word “college” broadly as “a group of people organised as an institution usually (but not necessarily) in the field of education,” before going on to find that a corporation providing training in audio and digital media technologies and whose students in courses validated by Middlesex University were considered by MU to be members of MU nonetheless did not qualify as a college “of” MU, as required by the UK VAT legislation.
Neal Armstrong. Summary of SAE Education Ltd v. Revenue and Customs Commissioners, [2017] EWCA Civ 1116 under ETA s. 123(1) – university.