News of Note
We have translated 6 more CRA interpretations
Email this ContentWe have translated a further 6 CRA interpretations released in September of 2001. Their descriptors and links appear below.
These are additions to our set of 2,928 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Characterization issues arise for tax purposes when a non-resident uses a Canadian professional employer organization
A professional employer organization (PEO) is an unrelated entity that is used to outsource a foreign entity’s human resource (HR) function. The contract between the foreign entity and the PEO might provide that: the PEO acts as the employer of the individuals in Canada for the purposes of servicing the foreign entity’s needs in Canada, and is responsible for all payroll compliance and reporting provided that it is first paid in full by the foreign entity and receives related indemnities; and the PEO is an independent contractor, and not an agent of the foreign entity.
Canadian tax considerations include:
- Leaving aside the PEO relationship, the foreign entity will often in fact be carrying on business in Canada, under Canadian common-law principles or under ITA s. 253 (which includes reference to orders solicited or anything offered for sale through an agent or servant).
- Although many non-resident companies claim that they have no employees in Canada because their arrangement with the PEO is instead a contract for services, this position may be less tenable where stock options and other equity consideration are provided as part of the compensation package.
- Even if the relationship is a contract for services, the dependent agent provisions of the applicable treaty should be analyzed to determine if the foreign entity is thereby carrying on business through a Canadian permanent establishment.
- If the foreign entity provides stock options to a person hired by the PEO, a resulting provision of “remuneration” to the individual may force the foreign entity to register for Canadian payroll purposes, which would create uncertainty regarding whether the s. 110(1)(d) deduction (which requires an agreement of the individuals concerned with their employer or another qualifying person) would be available.
Neal Armstrong. Summary of Hetal Kotecha, “Canadian Tax Concerns Arising from the Use of Professional Employer Organizations,” International Tax Highlights (IFA), Vol. 3, No. 3, August 2024, p. 9 under Treaties – Income Tax Conventions – Art. 5.
PC Bank – Federal Court of Appeal finds that loyalty point redemption payments made in the course of a financial business could generate ITCs if also in the course of a commercial activity
PC Bank, a corporation in the Loblaw group, issued loyalty points to its cardholders based on their expenditures, which could then be applied by the cardholders towards purchases at Loblaw-branded stores, with PC Bank then paying the cash value of those points (the redemption payments) to Loblaws, but also receiving payments of two types from Loblaws that reduced its loss on paying the redemptions amounts.
Goyette JA found that that the Tax Court erred in finding that PC Bank’s payments of the redemption amounts did not entitle it to notional input tax credits (“NITCs”) pursuant to s. 181(5) (based on the tax fraction thereof) because such amounts did not satisfy the s. 181(5) requirement of being paid “in the course of a commercial activity” of PC Bank. In particular, the Tax Court had not recognized that it did not matter that the redemption amounts were paid in the course of PC Bank’s exempt financial services business given that they were also paid in the course of its commercial activity of “driving customers to Loblaws” – and it also did not matter that PC Bank was incurring a loss on this commercial activity because a commercial activity of a corporation was not required to have a reasonable expectation of profit.
She noted that the redemption amount was not required by s. 181(5) to be paid “exclusively” or “primarily” in the course of a commercial activity, and stated:
Unlike the words exclusively and primarily, the phrase “in the course of” has a broad meaning; it means “incidental to” or “connected to” directly or indirectly … .
She further stated (at para. 36):
In drafting subsection 181(5), Parliament did not include explicit language that the credit be allocated only “to the extent” that the person made the payment in the course of a commercial activity. The absence of this allocative language indicates that Parliament intended to grant an NITC on the entire amount of a coupon redemption payment from the moment the payment was made in the course of a commercial activity.
Accordingly, PC Bank was entitled to its claimed NITCs.
In the course of his extended dissenting reasons, Webb JA stated:
Just as the scheme of the ETA does not contemplate that 100% of a particular property or service that is acquired can be considered to be used in both a commercial activity and a business of making exempt supplies, Parliament did not intend that 100% of a single payment that is made could be considered to be made in both the course of a commercial activity and in the making of exempt supplies.
Neal Armstrong. Summary of President's Choice Bank v. Canada, 2024 FCA 135 under ETA s. 181(5).
CRA rules on a loss-consolidation transaction which avoided loans to the regulated Profitcos through the use of a partnership
CRA ruled on loss consolidation transactions involving a parent with losses and three indirect “Profitco” subsidiaries. The transactions did not entail direct interest-bearing loans to the Proficos, which were regulated entities. Instead, the Profitcos would become limited partners of a newly-formed LP (with a parent newly-formed subsidiary as the GP), which would receive an interest-bearing loan from the parent and subscribe for dividend-bearing preferred shares of a Newco subsidiary of the parent, with the preferred dividends being funded with annual cash contributions to Newco by the parent. Although the LP would in fact generate a thin profit, the Profitcos would take s. 112(1) deductions for their share of the LP’s dividend income.
Neal Armstrong. Summary of 2022 Ruling 2021-0910431R3 under s. 111(1)(a).
Income Tax Severed Letters 21 August 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that renting common areas out to third parties would disqualify a residential housing co-operative continue to qualify as an NPO under s.149(1)(l)
Would a residential housing co-operative (Co-op) continue to qualify as an NPO under s.149(1)(l) if it earned profits from renting its common areas to third-parties (e.g., film companies)? CRA noted its position that “a tax-exempt NPO can earn a profit, as long as the profit is incidental,” i.e., “not significant and arises from activities directly connected to the organization’s not-for-profit objectives.” For example it was acceptable that the Co-op earned “modest revenues from providing laundry machines for use by residents of the Co-op.”
In contrast, here the anticipated profits from renting out the Co-op’s common areas were expected “to be considerable enough to assist the Co-op in paying for major repairs, ongoing maintenance of the building, maintaining a reserve fund, and lowering monthly maintenance fees for the residents.” Accordingly, that activity would disqualify it under s. 149(1)(l).
Neal Armstrong. Summary of 13 May 2024 External T.I. 2022-0944461E5 under s. 149(1)(l).
CRA rules on a post-mortem pipeline with a 24-month implementation timeline, and an earlier note repayment to fund terminal return taxes
CRA ruled on a straightforward post-mortem pipeline concerning the estate of the deceased - who had died holding high-ACB preferred shares of Opco and common shares and preferred shares of the Holdco holding the Opco common shares – providing for:
- Opco redeeming preferred shares held by the estate, giving rise to a deemed dividend and a capital loss, which the estate carried back under s. 164(6).
- The estate transferring its Holdco shares under s. 85(1) to Newco (newly formed by it) in exchange for a Note of Newco whose principal was limited in accordance with s. 84.1(2)(a.1) to reflect that the estate had claimed the capital gains deduction, and Newco common shares for the balance.
- Newco using proceeds of interest-bearing loan (made on a back-to-back basis by Opco to Holdco, and by Holdco to Newco) to repay a portion of the Note so as to fund the payment by the estate of income taxes arising in the deceased’s terminal return.
- At least one year following 2, Newco and Holdco amalgamating.
- Over the following year (or more), the Note being gradually repaid.
Neal Armstrong. Summary of 2024 Ruling 2023-0993651R3 under s. 84(2).
CRA rules that emission allowances issued under the Quebec cap and trade regime constitute “emission allowances” for GST/HST purposes
ETA s, 221(2.1) indicates that a supplier of an “emission allowance” is not required to collect GST/HST on the supply. The Finance Explanatory Notes indicate that the recipient is required to account for the tax on the supply, but in most cases would not have any amount to remit because of an offsetting input tax credit.
The Environment Quality Act (Quebec) provides for the issuance (pursuant to a cap and trade system) by the Quebec Minister of “offset credits” representing greenhouse gas (GHG) emission removals and reductions (measured in metric tonnes of CO2 equivalents) generated from verified projects, as well as other “emission allowances,” which may be used by a GHG emitter to “cover” its GHG emissions, or traded to another emitter or another “participant” (e.g., an exchange) for use to cover purchasers' emissions.
CRA ruled that the emission allowances issued by the Minister satisfied the “emission allowance” definition in s. 123(1), so that subsequent supplies constituted supplies of emission allowances for GST/HST purposes.
Neal Armstrong. Summary of 31 January 2024 GST/HST Ruling 245426 under ETA s. 123(1) - emission allowance.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in September of 2001. Their descriptors and links appear below.
These are additions to our set of 2,922 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
The joint acquisition by Intact and Tryg of a UK multinational target entailed unwinding a sandwich structure using s. 212.1(4) and a Danish demerger transaction
An article by Carrie Smit and Tommy Friedlich and the public documents referenced by them illuminate the transactions on which CRA ruled in 2020-0875391R3.
Intact, a Canadian public company insurer, and Tryg, a Danish public company insurer dealing at arm’s length with Intact, engaged in co-ordinated transactions to acquire a U.K. target (RSA, a U.K. public company multinational) so that: Intact retained RSA’s Canadian business and certain other international businesses; Tryg acquired the RSA Scandinavian businesses; and Intact and Tryg initially jointly owned RSA’s Danish business and subsequently sold it to an arm’s length party (Alm Group). An indirect U.K. subsidiary of RSA held a Canadian subsidiary (RSA Canada), i.e., there was a sandwich structure.
RSA was acquired by a UK Bidco owned exclusively “beneath” Intact notwithstanding that over half of the funding was provided by Tryg. The Tryg portion of the funding was paid to the direct shareholder of the UK Bidco on account of the purchase price payable by Tryg for the Scandinavian companies that were transferred to it postclosing.
CRA ruled that s. 212.1(4) would not apply to the transfer of RSA Canada by its UK shareholder to Intact such that s. 212.1(1.1)(a) would not deem a dividend to be paid by RSA Canada to that shareholder. CRA accepted that, notwithstanding the funding by Tryg of more than 50% of the acquisition, Tryg did not control RSA and its subsidiaries (including the UK shareholder of RSA Canada) and dealt at arm’s length with Intact.
At the acquisition time, RSA indirectly held a “Danish Opco,” which indirectly held both “keeper” and “non-keeper” businesses, CRA gave detailed and favourable rulings on the application of the s. 15(1.5) demerger rules to a division of Danish Opco between a Demergerco 2 and Demergerco 1 (which was to be sold to Alm Group).
Neal Armstrong. Summary of Intact Financial Corporation (“Intact”) Business Acquisition Report 51-102F4, Form 51-102F3 Material Change Report, Material Document, Co-operation Agreement dated 18 November 2020, Carrie Smit and Tommy Friedlich, “Conquer and Divide: The CRA Rules on a Foreign Acquisition, Reorganization, and Demerger Transaction,” International Tax Highlights (IFA), Vol, 3, No. 2, May 2024, p. 16 and 2021 Ruling 2020-0875391R3 under Public Transactions - Mergers & Acquisitions - Cross-Border Acquisitions - Outbound – Other.