News of Note
The merger or liquidation of a CFA sub into its CFA parent may double-up exempt surplus
Email this ContentA foreign affiliate (Sub) that is generating exempt earnings pays a dividend to its foreign affiliate parent (Parent) more than 90 days into the year, and then is merged into Parent, who is the survivor. It would appear that Reg. 5907(8) deems Sub to have a year end prior to the merger for purposes of the 90-day rule in Reg. 5901(2) and that Sub satisfies an implicit requirement under that rule that it continues to exist for at least a moment after such deemed year end.
On this basis, under Reg. 5907(1)(c)(A)(v) the exempt surplus dividend paid by Sub to Parent is included in Parent's surplus at the date Parent receives the dividend and, under Reg. 5901(2), Sub is deemed to pay that dividend to Parent immediately following the end of the deemed year – so that Sub's exempt surplus balance immediately before that year end (and before the merger) includes the exempt surplus distributed from Sub to Parent earlier in the year. As a result:
The surplus paid out through Sub's dividend to Parent is double-counted in the exempt surplus balance after the merger… . First, under Regulation 5905 the opening surplus balances combines the surplus and deficit balances of Sub and Parent immediately before the merger time … .. Next, the 90-day rule in Regulation 5901(2) deems Sub to pay the dividend to Parent immediately following the end of the year. As a result of this timing, Sub's surplus balance before the merger … includes the surplus previously paid out and already included in Parent's surplus as a result of the dividend.
Similar issues arise if Sub is liquidated.
Neal Armstrong. Summary of Susan Mckilligan, "The 90-Day Rule and Mergers or Liquidations of Foreign Affiliates," International Tax (Wolters Kluwer CCH), October 2017, No. 96, p. 10 under Reg. 5901(2)(a).
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for six French technical interpretation released in May 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Scott – Tax Court of Canada finds that compensation to former Nortel employees for loss of life insurance was non-taxable
In connection with the Nortel asset distributions, a Nortel health and welfare trust made lump sum payments in 2011 to various beneficiaries in satisfaction of their entitlement to payments under the trust. These beneficiaries included:
- Ms. Ellis, who was a retired employee who had had a vested right for the trust to pay the periodic premiums for life insurance policies on her life (giving rise to income inclusions to her under s. 6(4)), with the insurance proceed to be paid to her beneficiary on her death.
- Mr. Scott, who had been the husband of a full-time non-unionized employee, and had been receiving monthly survivor income benefits following her death, that had been included in his income under s. 56(1)(a)(iii) as death benefits.
Sommerfeldt J found that the sum so received by Ms. Ellis was tax free. Although it could easily be considered to be a benefit that arose out of her previous employment, he applied the Savage principle of interpretation that:
where, in addition to the general provision in paragraph 6(1)(a), there is “a specific [statutory provision] containing detailed conditions for the inclusion of an amount in income that would not otherwise be income” … the general provision cannot be used “to fill in all the gaps left by” the specific provision [viz. s. 6(4)].
As for Mr. Scott, his payment was included in his income under s. 56(1)(a)(iii) as an amount paid “in lieu of” a death benefit, a phrase that had been broadly interpreted in Transocean.
Neal Armstrong. Summaries of Scott v. The Queen, 2017 TCC 224 under s. 6(1)(a), s. 56(1)(a)(iii), Tax Court Rules, s. 89(1)(a), ITA s. 107.1(a), s. 9 - Compensation Payments and General Concepts – Stare Decisis.
Barclays Wealth Trustees – English Court of Appeal indicates that the determination of whether there is a single trust should accord with how a trust lawyer would view the matter
Henderson LJ rejected a submission on behalf of HMRC that a separate settlement (i.e., trust) was created whenever further property was contributed to be held by the trustee of a previously-settled trust. He stated that his single-trust view was “how a trust lawyer or practitioner would view the matter,” and also was consistent with the statutory definition (in the Inheritance Tax Act 1984) of “settlement,” which referred to “any disposition or dispositions of property … whereby the property is for the time being … held in trust….”
Neal Armstrong. Summary of Barclays Wealth Trustees (Jersey) Limited v. Commissioners for Her Majesty's Revenue and Customs, [2017] EWCA Civ 1512 under s. 104(1) and Statutory Interpretation – Interpretation/Definition Provisions.
National Money Mart v 24 Gold - Ontario Superior Court finds that the 2-year Ontario limitation period for a claim for unpaid HST starts running only when the supplier pays that tax
ETA s. 224 provides that a supplier can sue the recipient of a taxable supply for unpaid GST/HST on the supply upon meeting conditions including that the supplier “has accounted for or remitted the tax payable by the recipient in respect of the supply to the Receiver General.” A supplier did not charge HST on a sale of unrefined gold (perhaps being unaware of the distinction between it and refined gold). Later it was audited and assessed for the missing HST, and on payment of the assessment, it sued the purchaser for the tax.
The purchaser argued that the two-year time limitation under the Limitations Act 2002 (Ontario) started running from the time that the supplier should have invoiced the HST on the sales, so that the supplier’s right of action under ETA s. 224 was out of time. In rejecting this argument, Diamond J found that the supplier did not have a right of action under s. 224 until it had been assessed for and paid the HST, so that the two-year limitation period only started running from that point. Thus, the supplier’s s. 224 action had been brought in time.
He also found that the purchaser was not time-barred under ETA s. 225(4) from claiming an input tax credit given that HST had not originally been charged by the supplier.
Neal Armstrong. Summaries of National Money Mart Co. v 24 Gold Group Ltd, 2017 ONSC 6373 under ETA s. 224 and s. 225(4)(c).
CRA notes that a fee paid for assignment of a non-builder’s new house purchase contract does not affect the GST/HST new housing rebate
The computation of the new housing GST or HST rebate takes into account the total taxable consideration for the supply of the new house to the individual purchaser. Where A, who agreed to purchase a new home from the builder, assigns her purchase agreement before closing to B for consideration representing the increased value of the underlying house, the new housing GST rebate to B will be computed on the basis only of the original purchase price – unless A also constituted a builder (e.g., A had entered into the purchase contract for the primary purpose of reselling the house), in which case, the assignment fee would be taxable, and the computation of the rebate would also take into account the amount of the assignment fee.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.21 under ETA s. 254(2)(i) and s. 254(4).
CRA indicates that no GST/HST should be charged on a cancellation fee paid by a new home builder to the purchaser
In an appreciating housing market, an individual purchaser whose plans have changed may assign his purchase contract back to the builder for an amount based on the appreciation to date, rather than selling his purchase contract to a third party.
On the assignment, the purchaser would be considered to be transferring an interest in a residential complex. If the purchaser was not a builder (which generally would be the case if he had entered into the purchase contract for the purpose of using the house for personal use rather than for resale), the general exemption for sales of interests in residential complexes would be available. If the purchaser instead was a builder, the assignment would be taxable - but still no GST/HST would be charged given that the builder/assignee would be registered.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.20 under ETA Sched. V, Pt I, s. 2.
CRA states that an invoice addressed to the wrong person can be corrected for GST/HST purposes with a letter confirming this
CRA indicated that where an invoice has named the wrong person as the recipient of a taxable supply, this can be corrected by obtaining an amended invoice from the supplier or by obtaining a letter from it confirming the name of the recipient to whom the invoice should have been addressed. Although not discussed, it is helpful that CRA did not state that the original invoice must be reversed by a credit note complying with ETA s. 232(3)(a) and the Credit Note and Debit Note Information (GST/HST) Regulations.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.19 under Input Tax Credit Information (GST/HST) Regulations - s. 2 – supporting documentation.
Where an imported supply was self-assessed for Division IV tax, CRA can assess to reverse this tax if it has assessed the non-resident for not charging Division II tax
Where a Canadian financial institution self-assessed itself for Division IV GST on an imported supply from an unregistered non-resident and then CRA assesses the non-resident for failure to have registered and to have collected and remitted GST on that supply:
the financial institution would be able to request to have its return reassessed in order to have the amount that was originally included as Division IV tax removed and refunded to the financial institution subject to the applicable legislative time limit.
This is a better approach to getting a recovery of the tax which the non-resident would now be seeking to collect from it than to apply to CRA for a rebate, as there is a two-year time limitation on rebate claims, and they are not available if the return is question has been assessed for some other reason.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.17 under ETA s. 261(1) and s. 296(6).
CRA confirms that where a partnership reimburses a partner for a partnership expense, an invoice on file in the partner’s name is satisfactory
Where a partner makes a purchase for use in the partnership business and receives a satisfactory invoice other than that it is in his name rather than that of the partnership, this will satisfy the documentary requirements for the partnership claiming an input tax credit.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q.18 under ETA s. 175.