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Keurig Canada – Court of Quebec finds that the ARQ did not need the equivalent of ITA s. 152(9) to amend its pleadings with an additional reason for failure of a Quebec bump

The taxpayer was assessed under the Quebec general anti-avoidance rule respecting its engaging in “Quebec bump” transactions, which used Class 12 property (namely, a coffee roaster) purchased from a supplier for $820 thousand to generate a non-capital loss of $541 MILLION. After the taxpayer had launched its appeal, counsel for the ARQ realized through a review of documents previously provided that the roaster likely did not qualify as Class 12 depreciable property, and sought to amend the ARQ’s pleadings to allege this as an additional ground for dismissing the appeal.

After noting that the Quebec Taxation Act did not contain a provision equivalent to ITA s. 152(9) (permitting the raising of additional arguments by the government), Lavigne J nonetheless granted the requested amendment, noting that the source of the ARQ’s error was the taxpayer’s returns, which stated falsely (it was alleged) that the roaster was a Class 12 property. She stated:

It was not for the ARQ to find the error. The burden was on the taxpayer to submit accurate tax returns. …

It would be contrary to the interests of justice for the ARQ to be precluded from a defence based on the facts, which were erroneously presented by the plaintiff, even though the file is at the stage of an appeal from the notice of assessment.

Neal Armstrong. Summary of Keurig Canada Inc. v. Agence du revenu du Québec, 2019 QCCQ 451 under ITA s. 152(9).

CRA provides guidance on a GST/HST exemption for respite care services

ETA Sched V, Pt. IV, s. 3 exempts

A supply of a service of providing care and supervision to an individual with limited physical or mental capacity for self-supervision and self-care due to an infirmity or disability, if the service is rendered principally at an establishment of the supplier.

Points made by CRA include:

  • Such an exempt service can include the provision of lodging.
  • The single supply doctrine can assimilate the provision of lunch, snacks, art supplies, and transportation to and from different activities in the exempt supply of the care.
  • The fact that an individual requires assistance with meal preparation and basic activities of daily living alone is not indicative of the individual having limited physical or mental capacity for self-supervision and self-care.
  • The factors taken into account in determining whether the care is provided at facilities of the supplier include:
  • who has authority over making operational decisions in the establishment

  • who has control of day-to-day operations of the establishment

  • who has presence in the establishment

  • the types of activities and routine carried on in the establishment

Neal Armstrong. Summary of GST/HST Memorandum 21-3 "Respite Care Services" January 2019 under ETA Sched V, Pt. IV, s. 3.


CRA confirms that a subsequent capital loss did not render a capital dividend excessive

CRA took only three weeks to respond to a technical interpretation request by confirming that where a corporation has paid a capital dividend in Year 1 based on a capital gain realized by it in that year, a capital loss realized by it in Year 2 only affects the calculation of its capital dividend account going forward so that no Part III tax on the capital dividend is engaged.

Neal Armstrong. Summary of 22 January 2019 External T.I. 2019-0791631E5 under s. 89(1) – capital dividend account – para. (a).

CRA discusses how to measure compliance by a PHSP with the 90% METC-eligible expense test

Under CRA’s revised policy on insured private health services plans (PHSPs), all or substantially all of the premiums paid under the plan must relate to medical expenses that are eligible for the medical expense tax credit (METC). CRA confirmed that this means a test of whether 90% or more of the annual premiums paid under the plan relate to METC-eligible expenses, and it would be irrelevant if, for example, only 88% of the benefits paid in the year were METC-eligible. However, in the case of a self-insured plan, the test is one of whether all or substantially all of the benefits paid to all employees in the calendar year are for METC-eligible expenses.

Where a health care spending account (HCSA) sets a ceiling on the amounts that can be claimed under the plan, the employees’ allocation of the ceiling amount to the various expense categories is not considered, so that if the portion of the benefits paid in the year for METC-eligible benefits was, say, 92%, it would not matter that the total ceiling amounts allocated to METC-eligible expenses was only 80%. In the rare case where there was determined to be a separate HCSA plan for each employee, this same test would be applied to each such separate plan.

CRA provides helpful tabular numerical examples.

Neal Armstrong. Summary of 24 January 2019 External T.I. 2016-0651291E5 under s. 248(1) – private health services plan.

Income Tax Severed Letters 27 February 2019

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA indicates that BEPS has not substantially affected its transfer-pricing practices

CRA comments relating to the mooted BEPS impact on CRA transfer-pricing practices included:

  • BEPS Actions 8 to 10 did not effect substantial changes, i.e., the underlying principles are the same.
  • CRA hopes to have final guidance out (re BEPS changes) by November 2019 including clarifying the concepts of risk-free return and risk-adjusted return.
  • Canada has not adopted the simplification measure concerning low-value-added intragroup services – so that, rather than accepting a flat markup on intragroup service-charges because of the OECD guidance, CRA will continue to rely on IC87-2R to govern intragroup pricing until adoption of a new measure.
  • Penalties are usually imposed for failure to have accurate and complete contemporaneous documentation respecting the ss. 247(4)(a)(iv) to (vi) matters (regarding the underlying analysis).
  • CRA will audit the “story” in the underlying documentation, e.g., if the taxpayer represent that one of the parties is a low-risk distributor and CRA’s review demonstrates that it is a full-fledged distributor, penalties will probably be imposed (provided the $5 million threshold is exceeded).

Neal Armstrong. Summaries of 26 February 2019 Toronto CRA & Tax Professionals Seminar under s. 247(2) and s. 247(4)(a).

The OECD Commentaries on the PPT are helpful re treaty-benefit situations that have economic substance

Comments on Art. 7 of the MLI (containing the principal purpose test) include:

  • The OECD Commentary (whose examples are based in large part on the facts of treaty abuse cases in various jurisdictions, whose results the Commentary may consider to be inapplicable under the PPT test) suggest that the PPT may apply mostly in situations where there is very little real economic substance to the transactions.
  • Because the PPT states that a benefit under a covered tax treaty (“CTA”) "shall not be granted” where the provision applies, the application of this provision could make taxpayers worse off than under a reasonable alternative transaction, e.g., a taxpayer who has sought to lower the dividend withholding tax rate from 10% to 5% could be subject to a 25% withholding rate under this complete-denial approach.
  • In interpreting a similar one-of-the-principal purposes test, UK courts have held that a principal purpose "has a connotation of importance” (Travel Document Services) and that a principal purpose of a transaction may be to obtain a tax advantage even if the transaction had a commercial objective at least as important as the tax advantage (Lloyds TSB Equipment Leasing). [See also the Groupe Honco line of cases.] Accordingly, the threshold for the PPT may be lower than in most domestic general anti-avoidance rules.
  • Since the PPT applies where it is "reasonable to conclude" that one of the principal purposes of an arrangement or transaction was to obtain a benefit under the CTA, it also imposes a relatively low burden on the tax authority, effectively requiring taxpayers to argue that it would be unreasonable to conclude that obtaining the benefit was a principal purpose of the arrangement or transaction.
  • The remedial benefits rule in Art. 7(4) has only been adopted by 28 jurisdictions (not including Canada) and is poorly drafted.

Neal Armstrong. Summaries of David G. Duff, “Tax Treaty Abuse and the Principal Purpose Test – Part 2,” Canadian Tax Journal, (2018) 66:4, 947-1011 under Treaties - MLI – Art. 7(1) and Art. 7(4).

Escape Trailer – Federal Court of Canada suggests that imposing HST on goods earmarked for immediate export fails to apply s. 142 purposively

When a B.C.-based company (the “applicant”) sold an RV to a U.S. customer, it could have avoided the requirement to charge HST on the sale price by delivering the RV to the customer in the U.S. (so that under ETA s. 142 the place of supply would have been outside Canada) or by shipping the RV to the customer in the U.S. on a common carrier (thereby engaging zero-rating). Both options were cumbersome or inconvenient, and what it did instead was to deliver the RV to the customer in a parking lot just north of the border, with the customer then driving the RV across the border as the importer of record. When CRA assessed the applicant for failure to charge HST on the sales (on the basis that they were taxable under s. 142), the applicant paid the tax but then requested that CRA recommend a remission order under s. 23(2) of the Financial Administration Act. The requested grounds were three of the criteria set out in the CRA Remission Guide, namely, financial setback coupled with extenuating factors, incorrect CRA advice and “unintended results of the legislation.”

After finding that CRA had reasonably rejected the first two grounds, Manson J went on to find that CRA had not been unreasonable in choosing “to follow the express language of section 142 over the broader purpose of the ETA to tax the consumption of goods or services in Canada,” noting that this was “consistent with past jurisprudence of this Court which has preferred the strict language of the ETA over its broader purpose.” However, he went on to state, obiter:

[I]f I had [instead] applied the correctness standard to this issue, I may have come to the opposite conclusion.

…The Officer’s literal interpretation tends to frustrate both a purposive construction of section 142 and the intent of the ETA to tax consumption of goods in Canada … [and] appears to lead to a result which is at odds with the equitable underpinnings of subsection 23(2) of the FAA.

Neal Armstrong. Summaries of Escape Trailer Industries Ltd v. Canada (Attorney General), 2019 FC 31 under Financial Administration Act, s. 23(2), ETA s. 142(1)(a) and Statutory Interpretation – Ordinary meaning.

6 further full-text translations of CRA interpretations are available

We have published a further 6 translations of interpretations released in July and June 2012. Their descriptors and links appear below.

These are additions to our set of 789 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for March.

Bundle Date Translated severed letter Summaries under Summary descriptor
2012-07-06 26 June 2012 Internal T.I. 2012-0436381I7 F - Nature d’un revenu - Indemnité d’assurance Income Tax Act - Section 129 - Subsection 129(6) insurance proceeds in lieu of rents from associated corp did not qualify under s. 129(6)
Income Tax Act - Section 9 - Compensation Payments life insurance proceeds for rental property did not have the character of rents from an associated corp
2012-06-29 14 June 2012 External T.I. 2011-0428341E5 F - Crédit activités physiques, activités artistiques Income Tax Act - Section 63 - Subsection 63(3) - Child Care Expense expenses that qualified for the child fitness or children's arts tax credit potentially could qualify as child care expenses
2012-06-22 5 June 2012 External T.I. 2011-0417971E5 F - Sociétés associées - CII Income Tax Act - Section 127 - Subsection 127(10.2) computation of expenditure limit where one CCPC acquires another
15 June 2012 External T.I. 2012-0434761E5 F - Dons liés à une police d'assurance-vie Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts gift if pay policy premiums following assignment of policy to charity, but not by virtue of designating charity as policy beneficiary
Income Tax Act - Section 248 - Subsection 248(31) donated life insurance policy to be valued on ordinary principles
General Concepts - Fair Market Value - Other 7 factors to be considered in valuing a donated life insurance policy
13 June 2012 External T.I. 2011-0416781E5 F - Entente contractuelle particulière Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) intragroup charges to reflect use of each other’s capital under cash pooling arrangement are non-deductible
13 June 2012 Internal T.I. 2012-0435351I7 F - SEPE - chèques en circulation Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation outstanding and uncashed cheques did not reduce cash
General Concepts - Payment & Receipt in Quebec, payment by cheque does not occur until debiting of bank account

Fono – Court of Quebec finds that a taxpayer gradually shifting his ties to Ottawa continued to reside in Quebec while he had secondary and personal ties there

A Quebec taxpayer, who got a job in Ottawa in 2007 along with an apartment there, was found to have continued to be resident in Quebec for his 2009 and 2010 years given that he maintained significant ties with Quebec including a significant other who stayed in Quebec and gave birth there to a child in 2010 and with the taxpayer visiting Quebec on a weekly basis. Furthermore, the taxpayer maintained various secondary Quebec ties such as bank accounts, car registration, Quebec rental properties and membership in the Quebec CPA order. Somewhat curiously, Pokomàndy JCQ found that the taxpayer did not become resident in Ontario until 2011 at the very earliest notwithstanding that the taxpayer and his significant other purchased a permanent home in Ottawa which the taxpayer, at the least, moved into in November 2010. (The provincial residency tests are based on status on December 31 of each year.)

Neal Armstrong. Summary of Fono v. Agence du revenu du Québec, 2018 QCCQ 10534 under s. 2(1).