News of Note
CRA indicates that seasonal workers cannot participate in a DSLP and that employee advances are taxable when advanced rather than earned
Email this ContentCRA was asked whether employees working 10 months a year, who are temporarily laid off during the summer but have already been granted an assignment for the next school year, can participate in a deferred salary leave plan (“DSLP”). CRA indicated that if, at the time of making the DSLP agreement, the parties expected the employee to be laid off in the summers, the plan would not qualify, whereas:
if, at the time the agreement is made with an employee, it is clear from all the facts of the situation that the employee will meet all the requirements of paragraph 6801(a), being temporarily out of work during the summer period should not...prevent the employee from participating in a DSLP.
Other points made included:
- Although Reg. 6801(a) refers to an “arrangement,” CRA expects to see an agreement describing the terms and how the deferred amounts will be held.
- A hybrid arrangement is permitted in which, during the employee’s leave, the employee first receives amounts whose recognition is deferred under the DSLP rules, and then receives advances of salary or wages which are to be earned after returning, with such amounts in both cases being included in the employee’s income under ss. 6(3) and 5(1).
- In this type of arrangement (or one where the employee only receives advances during the leave – in which case, it is not within the DSLP rules), the employee is entitled to a s. 8(1)(n) deduction as the advances are “repaid” (i.e., out of reduced pay cheques following the return to work).
- Although under the DSLP rules the employee cannot receive salary or wages during the leave, reasonable fringe benefits are permitted.
- The employee is required to return to work for at least the period of the leave - so that, for example, an employee who worked 20 hours per week before a six month leave, could not return to work for only three months at 40 hours per week.
- Upon death or retirement of the employee, the deferred DSLP amounts are immediately recognized.
Neal Armstrong. Summaries of 19 December 2016 External T.I. 2016-0643191E5 Tr under Reg. 6801(a), s. 5(1) and s. 8(1)(n).
101139810 Saskatchewan – Tax Court of Canada decision discloses that CRA assessed only a single level of corporate taxation on a bad butterfly
An individual (Case) held his 1/3 shareholding in a small business corporation through a personal holding company (8231) which also held 1/3 of its assets in the form of investment assets. In order to accomplish a sale of the SBC shareholding to the two other SBC shareholders, that shareholding was first split between two new wholly-owned corporations of Case (TC1 and TC2), essentially using butterfly mechanics, with Case then selling his shares of TC1 and TC2 to the other two shareholders, and applying the capital gains exemption to a modest portion of the resulting gain. This plan did not work because the purchasers were unrelated, thereby precluding access to the butterfly or s. 55(3)(a) spin-off safe harbour.
As one might expect, CRA initially assessed both 8231, and TC1 and TC2, to convert their s. 84(3) deemed dividends realized on the cross-redemption of the shareholdings between them which had arisen under the butterfly mechanics, into capital gains (subject to a deductions in the case of TC1 and TC2 for the safe income of 8231 considered to be received by them.) However 15 months later, CRA vacated the s. 55(2) assessment of 8231 for reasons that are not explained – so that the only outstanding s. 55(2) assessments were of the corporations acquired by the purchasers.
Case did not treat this as munificence, and his counsel argued that the assessments of TC1 and TC2 also should be vacated, on the grounds that essentially the same gain was reported by him. In addition to finding that this argument did not dovetail with the s. 55(2) wording, Favreau J stated:
I am inclined to favour a narrow construction of double taxation such that it arises where the same amount is taxed in the hands of the same person. Mr. Case and the appellants are not the same persons.
Neal Armstrong. Summaries of 101139810 Saskatchewan Ltd. v. The Queen, 2017 TCC 3 under s. 55(2.1)(b) and s. 55(2)(f).
PPP Group – Tax Court of Canada finds that automobile replacement “warranty” payments did not qualify for ITCs under ETA s. 175.1
A Quebec company (“PPP”) through car dealers offered motor vehicle replacement “warranties,” which, in the event of the loss of the vehicle through accident or theft, would cover the difference between the depreciated value of the vehicle (which was covered by the regular insurer) and the cost of a new replacement vehicle. The consumer who had purchased the PPP warranty was required to acquire the new replacement vehicle from the dealer, and the dealer was paid directly by PPP.
PPP was unsuccessful in its contention that it was entitled to input tax credits under ETA s. 175.1 for a pro rata portion (e.g., 5/105, ignoring QST) of the claims paid by it. First, s. 175.1 did not apply to "insurance policies,” which Tardif J considered to be a more apt description of this product than “warranty.” Second, s. 175.1 required that the warranty be “in respect of the quality, fitness or performance” of the product, which Tardif J unsurprisingly found was getting at things like manufacturing defects rather than loss of a vehicle from theft or catastrophic accident.
ITCs also were unavailable under more general principles (under ETA s. 169) since the person acquiring the property or services funded by the “warranty” payment was the consumer getting the replacement vehicle rather than PPP itself (although PPP valiantly argued that it was paying for a valuable claim processing service received from the dealer.)
Neal Armstrong. Summaries of PPP Group Ltd v. The Queen, 2017 CCI 2 under ETA s. 175.1, 169(1) and General Concepts – Illegality.
Joel Theatrical Rigging Contractors – Tax Court of Canada finds that solving a challenge by trial and error likely does not qualify as SR&ED
Although 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).