News of Note
GEM Health - Tax Court of Canada finds that there was no barter of management services for HST purposes between two affiliates employing the same key manager
Email this ContentA parent corporation holding a subsidiary engaged in HST-exempt activities (of operating nursing homes) reduced the non-creditable HST that the subsidiary otherwise would have borne on management fees charged by the parent to the sub, by having the group’s key executive draw a salary from the subsidiary for the performance of management services respecting the subsidiary’s homes. Sommerfeldt J found that this approach worked, and rejected CRA assessments which grossed-up the fees charged by the parent to the subsidiary by the amount of the executive’s salary at the subsidiary, and conversely imputed the earning of management fees by the subsidiary from the parent. This implicitly amounts to Sommerfeldt J accepting a “two hat” approach to allocating management services: the executive was wearing his hat of subsidiary employee when he spent time on its homes; and was wearing his hat of parent CEO when he attended to other matters. This two-hat approach can be helpful in other contexts, for example, where an executive spends part of her time attending to the investment undertaking of a parent income fund or REIT (ITA s. 132(6)(b)), and the balance to operating matters of subsidiaries which are not consistent with an investment undertaking.
Sommerfeldt J also accepted that the activities of the parent relating to new home construction in other subsidiaries were conducted as their agent, notwithstanding that it booked the expenditures as assets on its books and sent purported invoices for those amounts to the subsidiaries when the work was largely completed. In his view, it was quite contrived to consider that, as each brick was laid, the parent was acquiring the ownership of that brick rather than such brick becoming the property of the real estate owner (i.e., the subsidiary.)
Finally, booking, at year end, a reduction in management fees previously charged by the parent to some of the subsidiaries did not generate an input tax credit for the HST previously charged on the reduced amount because the parent failed to issue credit notes for the reduction, as required by ETA s. 232(3).
Neal Armstrong. Summaries of GEM Health Care Group Limited v. The Queen, 2017 TCC 13 under General Concepts – Agency, ETA s. 153(1), s. 232(3).
CRA publishes the 2016 CTF Annual Roundtable in final form
CRA has published the question and answers for the 2016 Annual CTF CRA Roundtable in final form. Although we have previously circulated posts on most of these items, for convenience we are providing a table linking to the individual items and providing our summary descriptors.
CRA indicates that the expenses of most community consultations and negotiations, and environmental studies undertaken after a decision to explore a particular property, qualify as CEE
Following some amendments to the Canadian exploration expense definition to include some community consultation and environmental study expenses incurred by mining companies at the exploration stage after February 2015, CRA has revised its applicable guidelines to indicate that the expenses of the following generally can qualify as CEE:
- Environmental assessments or community consultations undertaken to obtain a permit or to meet a requirement thereunder – but not where undertaken prior to a decision to explore.
- Environmental sampling or monitoring, or targeted environmental assessments (e.g., on vegetation or fish) respecting the exploration – but not general baseline environmental assessments undertaken prior to carrying out a specific exploration activity.
- Negotiation to secure surface access for exploration purposes or with the local community to secure certainty with respect to exploration operations.
- Planning for, and studies relating to, the conduct of the exploration, or physical and chemical assessments on a deposit re deciding whether to continue the exploration at the site or assessing the potential for a commercial deposit – but not preliminary planning prior to a decision to explore, or assessments of mine development options or profitability of developing the deposit into a mine.
Neal Armstrong. Summary of 24 January 2017 Internal T.I. 2016-0675902I7 under s. 66.1(6) – Canadian exploration expense – para. (f).
CRA confirms that EU withholding is ineligible for foreign tax credits
CRA confirmed its position in 2013-0500491E5 that, as the EU is an international organization rather than a foreign government, withholding taxes levied by the EU on pensions paid to a Canadian resident are not eligible for a foreign tax credit.
Neal Armstrong. Summary of 8 December 2016 Internal T.I. 2016-0634231I7 under s. 126(1).
Income Tax Severed Letters 1 February 2017
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Wiltonpark Ltd. – Court of Appeal of England and Wales infers from the size of a fee charged by a club for cashing credit card vouchers that the fee was for access to the club
When a customer of a self-employed lap dancer at a London club ran out of cash, he could use his credit card to purchase vouchers from the club, which he could apply as payment for her services. However, when she tendered the vouchers to the club for cash, she was charged a 20% commission.
In finding that this commission was consideration for the taxable supply of “the provision of the club's facilities to the dancers to enable them to obtain income from non-cash customers” (rather than merely consideration for a VAT-exempt financial service of encashing the vouchers), Richards LJ stated that “a commission of 20% for the encashment of a voucher…is on the face of it very high, particularly as the appellants ran, as they knew, a very low credit risk.”
The facts are somewhat analogous to those in Global Cash Access, where Global was charged for something analogous to cheque-cashing services by the casino in fee amounts ranging from 12.5% down to 2.5%, depending on the size of the individual amounts – with Sharlow JA finding that these were for exempt encashment services. One distinction might be that it would have been less consonant with the “economic realities” (to use a phrase of Richards LJ) to characterize these amount as being paid by Global for access to the casino – and another, that the amounts were high, but not outrageous, when viewed as consideration only for encashing.
Neal Armstrong. Summary of Wiltonpark Ltd & Ors v Revenue & Customs Commissioners, [2016] EWCA Civ 1294 under ETA s. 123(1) – financial service – para. (a).
Full translations of the 2015 APFF Financial Strategies and Instruments Roundtable items and current French severed letters are available
Full-text translations of the two French technical interpretations released last Wednesday, as well as all 9 of the questions and answers from the 2015 APFF Financial Strategies and Instruments Roundtable, 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. Next week is the “open” week for February.
The B2B rules can operate inconsistently with the intent of Canada’s treaties
The back-to-back (B2B) rules may impose tax that is inconsistent with Canada's obligations under its bilateral tax treaties.
The reference in the B2B rules to what the withholding tax rate would be on a payment of interest or royalties to an ultimate funder may produce similar results to the derivative benefits rule in Art. XXIX –A:4 of the Canada-U.S. Treaty, but there can be significant differences. The B2B rules do not provide relief if the withholding tax rate on payments to the immediate funder is higher than that which would be applicable to payments to the ultimate funder. However, in the situation where an ultimate funder in a jurisdiction with a Treaty rate of 10% lends to a company in a non-Treaty county, who lends to the immediate funder in a country with a Treaty rate of 10%, the application of the B2B rules to this arrangement likely would result in a withholding rate of 15% - whereas:
the derivative benefit tests in the LOB rules might not provide relief in this case, since they generally require that the ultimate owner be entitled to treaty benefits that are at least as favourable (instead of providing relief to the extent of the ultimate owner's entitlement to benefits.
The B2B rules add a layer of difficulty to many licensing arrangements:
Consider a Canadian resident that licenses software-from an unrelated US resident. In order to rely on the exemption from withholding tax under the Canada-US treaty, the Canadian requests a representation from the licensor that there is no licensing arrangement that may be caught by the connection test in the back-to-back rules. Although the non-resident is a licensor of software to many customers around the world, this is likely a very unusual request, and may be viewed as requiring the disclosure of confidential information. The licensor may be unwilling to divulge this information or may seek additional fees for doing so….
Neal Armstrong. Summaries of Ian Bradley, Denny Kwan, and Dian Wang, "Is The Back-to-Back Withholding Tax Regime an Effective Anti-Treaty-shopping Measure?," Canadian Tax Journal, (2016) 64:4, 833-58 under Treaties, Art. 11, s. 212(3.2), s. 212(3.9)(b), s. 212(3.1).
CRA considers that no statute-barring applies to initial assessments of transfer-pricing penalties
In the situation where Canco acquires a non-depreciable capital property in Year 1 from an affiliate at a price that is substantially in excess of an arm’s length price, and then disposes of the property at a gain in Year 8 to a third party, CRA considers that a transfer pricing capital adjustment can be made to grind the adjusted cost base of the property in Year 1 even though that year is now statute-barred re Part I reassessments – and that, as “an initial assessment under subsection 247(3) can be made at any time,” a s. 247(3) penalty could be imposed re this Year 1 TPCA in the absence of reasonable efforts etc.
Neal Armstrong. Summaries of 14 September 2016 Internal T.I. 2016-0631631I7 under s. 247(3), s. 247(11) and s. 247(2).
CRA finds that the broker sale rule in s. 110(2.1) requires an immediate payment of the sales proceeds of the stock option shares directly to the charity
S. 110(1)(d.01) provides a deduction (over and above that under s. 110(1)(d)) where the taxpayer makes an immediate donation of a listed share that was acquired under a stock option exercise to a qualified done. This rule is expanded by s. 110(2.1), which also permits the taxpayer to direct a broker approved by the employer to immediately dispose of the shares and pay the proceeds to a qualified donee.
CRA indicated that this expanded rule does not apply if the broker pays the proceeds of disposition directly to the taxpayer (rather than the charity), who then donates the proceeds to the charity. CRA also indicated that the “immediately” requirement in s. 110(2.1) requires not only an immediate sale by the broker, but also an immediate donation of the sales proceeds to the charity in question.
Neal Armstrong. Summaries of 6 December 2016 External T.I. 2015-0605971E5 under s. 110(2.1) and s. 7(1.31).