News of Note
CRA confirms that EU withholding is ineligible for foreign tax credits
Email this ContentCRA 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).
CRA indicates that seasonal workers cannot participate in a DSLP and that employee advances are taxable when advanced rather than earned
CRA 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.