News of Note

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).

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.

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).

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).