News of Note
Joel Theatrical Rigging Contractors – Tax Court of Canada finds that solving a challenge by trial and error likely does not qualify as SR&ED
Email this ContentAlthough this likely was implicit in other cases, Sommerfeldt J explicitly found that the trial and error method (i.e., trying thing after thing after thing until something works, rather than testing against an hypothesis) was likely inconsistent with the scientific method, so that such work likely does not qualify as SR&ED. (The projects before him failed for a host of reasons.)
Neal Armstrong. Summary of Joel Theatrical Rigging Contractors (1980) Ltd. v. The Queen, 2017 TCC 6 under s. 248(1) - scientific research and experimental development.
CRA states that all capital distributions made by Canadian-resident trusts to non-resident beneficiaries must be reported on NR4s
Although s. 212(11) somewhat confusingly deems all trust capital distributions to a non-resident beneficiary to be income distributions for Part XIII purposes, s. 212(1)(c) only imposes Part XIII tax on s. 104(13) income and capital dividend distributions. However, CRA resorts to the broad literal wording of s. 212(11) when it comes to NR4 reporting and requires a Canadian-resident trust to report all capital distributions made to a non-resident beneficiary on the form.
Neal Armstrong. Summary of 22 December 2016 External T.I. 2015-0608201E5 Tr under Reg. 202(1)(c).
CRA confirms that capital gains cannot constitute s. 95(2)(a.1)(iv) income
Although CRA notes that the foreign accrual property income definition specifically contemplates some overlap between variables A and B, that overlap is with respect to gains on income account and not capital gains.
Where the foreign affiliate disposes of the property on capital account (in this case, an intangible sold to the ultimate Canadian parent of the Canco holding the foreign affiliate), the two categories do not overlap, so that the gain will be dealt with under the capital gains component of FAPI (variable B) and not the component (variable A) dealing inter alia with income from a business other than an active business (notwithstanding that the taxable capital gain would come within the wording of s. 95(2)(a.1)(iv) if it were considered to “pertain to” or be “incident to” such a business.)
Neal Armstrong. Summary of 25 October 2016 Internal T.I. 2016-0658241I7 under s. 95(2)(a.1)(iv).
Finance is considering increasing “transparency” for provincially-formed partnerships that are not Canadian-reporting partnerships
No Canadian income tax reporting is generally required of partnerships formed under provincial law if they do not carry on business in Canada and have only non-resident partners. Ontario LPs, as an example, also are not subject to signficant reporting obligations under the provincial legislation applicable to partnerships. Non-resident investors, who may be resident in tax havens, are investing in jurisdictions with more onerous tax regimes "through" such LPs.
Today’s Toronto Star stated:
Federal Finance Minister Bill Morneau says his government sees this as an important issue and that he is working with his provincial colleagues to bring greater transparency to the corporate registration system.
“We as a government, and I personally, am committed to making progress on ensuring that we are not providing any haven for any inappropriate activities and that we’re having companies and individuals paying the share of tax that should be due,” he said in an interview.
Neal Armstrong. Summary of Robert Cribb and Marco Chown Oved, "Snow washing: Canada is the world’s newest tax haven", Toronto Star, 25 January 2017 under Reg. 229(1).
Sierra Metals is relying on a preliminary internal sale to qualify its capital distribution of a subsidiary under s. 84(4.1)
Sierra Metals is proposing to effect a stated capital distribution of a Newco subsidiary (i.e., Cautivo Mining, which indirectly holds a Peruvian exploration company) to its shareholders in reliance primarily on the exception in ss. 84(4.1)(a) and (b) from deemed dividend treatment, although a nod is also given to the s. 84(2) exception. The disclosure relies on the proposition that the Newco shares will be issued to Sierra immediately before the distribution in exchange for transferring Sierra’s existing subsidiary to Newco, so that what will be distributed will represent proceeds of disposition.
Newco will be making a rights offering immediately after the distribution (which, as compared to the alternative of Newco being capitalized by Sierra with cash beforehand, has the effect of reducing the size of the distribution).
Neal Armstrong. Summary of preliminary prospectus of Cautivo Mining under Spin-Offs & Distributions – Ss. 84(4.1)(a) and (b) distributions of proceeds.
Further fully translated 2015 APFF Roundtable items and current French severed letters are available
Full-text translations of the four French technical interpretations released last Wednesday, as well as of the remaining questions from the 2015 APFF Roundtable (Q.11 to Q. 25), are now available and are listed and briefly described in the table below.
These (and the other translations covering the last 14 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Stock ’94 - European Court of Justice finds that interest on a loan funding a taxable supply of goods was part of the consideration for a single supply of the goods
A Hungarian company was set up to assist Hungarian farmers by lending them money to fund the purchase by them from it of current assets needed in their business. The European Court of Justice (subject to some further findings of facts to be made by the local court) essentially applied the single supply doctrine to find that the loan interest was part of the consideration for the sale of products by the company to the farmers, so that the interest was subject to VAT (even though, of course, interest on loans viewed as being for a separate supply was VAT-exempt). The Court was influenced by the facts that the loan could only be used to fund the purchases from the company (which was their sole purpose), and that the company was not authorized to make loans to anyone other than farmers.
The Tax Court of Canada would not lightly recharacterize a loan and purchase transaction as a deferred purchase price transaction. However, it is not obvious that the Tax Court could not treat interest on the deferred purchase price for a taxable supply as itself being part of the taxable consideration for a single supply.
Neal Armstrong. Summary of Stock ‘94 Szolgáltató Zrt. v Regional Customs and Finance Directorate-General for Southern Transdanubia of the National Tax and Customs Office, Hungary, ECLI:EU:C:2016:936, [2016] EUECJ C-208/15 (European Court of Justice (5th Chamber)) under ETA s. 123(1) - financial service - (f).
The somewhat new Folio on moving expenses does not contain any startling positions
The Folio on moving expenses, which was issued last year, is similar to IT-178R3. It has some added examples, including of an individual who moved for employment reasons from his previous dwelling A in Saskatoon into a temporary residence (dwelling B) in Regina for a few months before being able to possession of his permanent new residence (dwelling C) in Regina, who was not be able to deduct the costs of selling the temporary dwelling B as a moving expense (because the individual did not “ordinarily” reside there) – but nonetheless could deduct most of his moving costs on the basis that there was a move in two stages from dwelling A to C.
A different result occurs under a similar example: an individual moves from Halifax to Brampton to work in downtown Toronto and, after a few months, moves to a central Toronto location to eliminate the long commute. Here, CRA indicates that there was ordinary residence in Brampton, so that the moving expenses going from Brampton to downtown do not qualify.
Neal Armstrong. Summaries of Folio S1-F3-C4 under s. 248(1) – eligible relocation, s. 62(1) and s. 62(3).
Income Tax Severed Letters 25 January 2017
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
North Shore Power - Tax Court of Canada finds that HST was imposed on a customer through the issuance to it of a credit note by an insolvent supplier
A supplier (Menova) received substantial down payments (described as “deposits”) 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.
CRA’s position was that the HST included in the credit memos was required to be added back to the net tax of North Shore (thereby effectively reversing the input tax credits previously claimed by North Shore). North Shore argued that “a mere recording of the credit does not meet the test” of a credit note (an argument which was modestly supported by Compagnie Minière Québec Cartier). In rejecting this submission, Bocock J adopted a much broader meaning for credit note, viz. “a note issued by a business indicating that a customer is entitled to be credited by the issuer with a certain amount.” The upshot was that North Shore effectively was denied ITCs for HST that it had incurred for clear commercial purposes (although, to mention another issue, ITCs are only available under s. 169 where property or services have been "acquired.")
In passing, Bocock J also found that the “deposits” were not deposits for HST purposes, stating that they did not represent “payment of earnest money to guarantee the completion of the contracts.”
Neal Armstrong. Summaries of North Shore Power Group Inc. v. The Queen, 2017 TCC 1 under ETA s. 232(3), s. 231(1), s. 168(9).