News of Note
Joint Committee points out draconian effects of the new SBD rules
Email this ContentThe definition of “specified corporate income” in the new small business deduction rules references the concept of a Canadian-controlled private corporation providing services or property to a private corporation in which any person, who does not deal at arm’s length with a shareholder of the CCPC, has “a direct or indirect interest.” This concept is quite ambiguous. For example, Mr. Smith has units in the iShares Dow Jones Fund, which holds Ford Motors which, in turn, holds Ford Canada. This may indicate that an auto parts manufacturer of which he is a shareholder loses the SBD on its income from Ford Canada.
The tainting effect of there being “any” related shareholder of the private company purchaser also can be harsh. For example, a small contractor could lose SBD access on income from a significant contract with a large private corporation having a very small employee-shareholder who was related.
Neal Armstrong. Summary of 2 June 2017 Joint Committee Submission to Finance respecting the Small Business Deduction, appending Submission to Randy Hewlett of the Income Tax Rulings Directorate dated 14 February 2017, under s. 125(1) – specified corporate income – (a)(i), specified partnership income – (c).
Six further full-text translations of CRA technical interpretations are available
Full-text translations of the six French technical interpretations that were released last week and between February 4, 2015 and January 28, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 28 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for June.
SLFI Group - Invesco Canada – Tax Court of Canada finds that an SPV funding MFT brokerage commissions was providing a GST-taxable management service
Citibank in the U.S. agreed to fund the payment of the upfront brokerage commissions that were payable on the issuance of units in the Invesco/Trimark funds (the “Funds”) in consideration for receiving an assignment of X% of the management fees that otherwise would have been earned by the Invesco manager (the “Manager”). More precisely, the Manager agreed to relinquish its receipt of that X% of its fees, and the Funds agreed to pay the same percentage amounts to a special purpose non-resident Citibank-formed vehicle (“Funding Corp”) in consideration for Funding Corp paying the brokerage commissions. Funding Corp then immediately sold its fee-amount entitlements to Citibank.
The Funds argued that they were receiving a GST/HST exempt financial service from Funding Corp – so that this arrangement in effect eliminated the GST or HST on the portion of the management fees that was assigned to Funding Corp. This turned principally on whether this consideration paid by the Funds to Funding Corp was tainted under para. (q) of the financial service definition on the basis that Funding Corp provided any management or administrative service to the Funds.
V.A. Miller J indicated that taking care of the brokerage commissions was part and parcel of the management duties of the Manager, and delegating that duty to Funding Corp did not detract from its performance being a management function. Therefore, the consideration paid by the Funds to Funding Corp was tainted as Funding Corp was providing a management service.
Neal Armstrong. Summary of SLFI Group - Invesco Canada Ltd. v. The Queen, 2017 TCC 78 under ETA, s. 123(1) – financial service - (q).
Bellil – Federal Court of Appeal states that the absence of an intent to defraud is irrelevant to whether an individual has knowingly made a false statement
An unemployed engineer spent 11 weeks in Tunisia. On his weekly Employment Insurance declarations he answered “no” to the question, was he outside Canada, and was assessed a penalty under s. 38(1) of the Employment Insurance Act for making a statement that he “knew” to be false or misleading.
De Montigny JA found that the Social Security Tribunal, Appeals Division had committed an error, which required the case to be remitted for a fresh hearing, when it had reversed the penalty on the grounds that the engineer had had no intent to defraud the system. He stated:
[T]he only requirement imposed by the legislature is that a claimant made a representation that the claimant “knew’’ was false or misleading, that is to say, with full knowledge of the facts. The absence of fraud or having integrity is irrelevant.
This decision may inform the interpretation of "knowingly" used in ITA s. 163(2) (the French versions of ss. 38(1) and 163(2) both use “sciemment.”)
Neal Armstrong. Summaries of Canada (A.G.) v. Bellil, 2017 CAF 104 under Employment Insurance Act, s. 38(1)(a) and ITA, s. 163(2).
Persepolis – Tax Court of Canada declines to infer the existence of an agency arrangement
A company (“Persepolis”), which had been incorporated to do renovation work on a cost plus 15% basis on a building owned by a corporation whose shareholder was friends with its sole shareholder, was found not to have incurred its renovation costs as agent for that owner in the absence of convincing evidence that the owner “had implicitly accepted an agency relationship with respect to the renovations.” Accordingly, Persepolis had been correctly assessed for failure to charge HST to the owner on the costs incurred by it.
Neal Armstrong. Summary of Persepolis Contracting Inc. v. The Queen, 2017 TCC 89 under General Concepts – Agency.
Hybrid sales transactions still may be worthwhile
Although hybrid sales transactions (in which individual shareholders of a target Canadian –controlled private corporation utilize the capital gains exemption by exchanging a portion of their shares for preferred shares, which then are sold to the arm’s length purchaser, with the purchaser retracting the prefs and effecting an asset purchase payable in part by set-off against the redemption note) are less attractive following the repeal of the eligible capital property regime, they can still offer significant benefits if the vendor CCPC has sufficient funds or high-basis assets. The authors provide a numerical example showing an integrated tax rate of 26.0% on a hybrid sale in Alberta v. 29.5% for an asset sale, and state:
If the vendor has enough cash on hand or high-basis assets, it can successfully recover its RDTOH balance and retain the full benefit of hybrid sales (on an integrated basis)….
[In this example] the full recovery of RDTOH is possible because the vendor has $2 million of high-basis capital assets….
In Alberta, if one assumes that there is no recapture on the depreciable property, a rule-of-thumb breakeven point is one dollar of basis or cash per dollar of CGE claimed. For example, if a single exemption of $835,000 is claimed, the vendor should fully recover RDTOH if it has cash or basis in its capital assets of at least $835,000….
Neal Armstrong. Summary of Matthew Clark, Josh Proulx and Rami Pandher, "Hybrid Sales," Canadian Tax Highlights (Canadian Tax Foundation), Vol. 25, No. 5, May 2017, p. 4 under s. 110.6(2.1).
CRA considers that the capital portion of annuity payments made to a Turkish resident are subject to withholding
The definition of “annuity” in Art. 18 of the Canada-Turkey Treaty excludes “any annuity the cost of which was deductible for the purposes of taxation in the Contracting State in which it was acquired.” Where a resident of Turkey has acquired a prescribed annuity contract, it could be argued that the portion of each annuity payment that would be treated in the hands of a Canadian resident as a capital payment comes within the quoted exclusion. However, CRA considers that this is not the case given inter alia that the capital portion does not represent a deduction for the cost of the annuity that is available when the annuity is acquired, so that each annuity payment is subject to the (Treaty-reduced) Part XIII tax of 15%.
In the case of an RRSP annuity, the RRSP contributions were deductible, so that the quoted exclusion from “annuity” would apply. However, the Income Tax Conventions Interpretation Act deems all payments out of an RRSP to be pension payments (where “pension” is not specifically defined in the Treaty), so that RRSP payments made to a Turkish resident are also subject to (Treaty-reduced) withholding as pension payment.
Neal Armstrong. Summaies of 30 March 2017 External T.I. 2015-0609951E5 Tr under Treaties - Art. 18 and Income Tax Conventions Interpretation Act, s. 5 - pension.
Professional firms may only be required to recognize the payroll costs (not the dockets) of salaried professional staff and not partners’ time in their WIP
Most professionals subject to the new 2017 Budget rule will choose to value their work-in-progress at the lower of cost and fair market value. In the December 18, 1981 Notes of the Department of Finance dealing with the similar proposal in the 1981 Budget, it stated that the cost of WIP would not include: fixed or indirect overhead costs, such as rental, secretarial, and general office expenses; and the cost of the time of partners or proprietors.
A longer transitional period than two years may be warranted given that many of the primary beneficiaries of the WIP deferral may no longer be with the firm and so that the current partners, who may have had limited benefit from the deferral, will bear the entire cost of unwinding the deferral.
Given that s. 10(4)(a) would appear to contemplate that the valuation of WIP should be determined based on what the professional can reasonably expect will be collected under a fee arrangement in a subsequent year, rather than on what is collectible at year end, the legal basis for the CRA position for not requiring the recognition of WIP associated with contingent fee arrangements is unclear.
Neal Armstrong. Summaries of 31 May 2017 Submission of the Joint Committee on Professionals’ Work in Progress under s. 10(5)(a) and s. 34.
Hart – Federal Court of Australia finds that summarizing legal tax advice received in a submission to the tax authority resulted in loss of privilege over the opinion letter
The taxpayer argued that he was not subject to the application of the Australian general anti-avoidance rule given that he had relied on two legal opinions. The taxpayer’s counsel had voluntarily provided a précis to the Commissioner of one of two legal opinions in some considerable detail.
Bromwich J found that this amounted to waiver of legal professional privilege over the letters.
A similar dilemma was avoided in Inwest, where it was sufficient, in helping to establish that the taxpayer’s filing position did not reflect carelessness, to indicate that it had consulted with counsel, without the specific advice received being put in evidence – so that there was no waiver of solicitor-client privilege.
Neal Armstrong. Summary of Hart v Commissioner of Taxation (No 3) [2017] FCA 571 under s. 232(1) – solicitor-client privilege.
MP Western Properties – Tax Court of Canada states that the Crown must produce all documents “considered by officials involved in or consulted during” a GAAR-related audit
Predecessors of the taxpayers had been acquired for their losses in transactions where less than 50% of their voting shares, but more than 90% of their non-voting participating shares, had been acquired. The Minister had reassessed to deny the acquired losses primarily on the basis that there had been an acquisition of control, but secondarily through applying the general anti-avoidance rule.
In discussing the scope of the obligations of CRA and Finance to provide correspondence relating to loss utilization schemes that had been requested by the taxpayers, V.A. Miller J stated:
… It is my view that in a GAAR appeal, draft documents prepared in the context of a taxpayer’s audit or considered by officials involved in or consulted during the audit and assessment of the taxpayer should be disclosed. They inform the Minister’s mental process leading up to an assessment. They may also inform the Minister’s understanding of the policy at issue.
Neal Armstrong. Summaries of MP Western Properties Inc. v. The Queen, 2017 TCC 82 under Tax Court Rules, Rule 95 and ITA s. 245(4).