News of Note
Starflex – Quebec Court of Appeal indicates that gifts to charities likely cannot be deducted as business expenses
Email this ContentArt. XXI, para. 7 of the Canada-U.S. Convention provides (subject to conditions) that a gift by a Canadian with U.S.-source income to a qualifying U.S. charity is to be treated the same as one to a registered Canadian charity. The Cour du Québec found that a Quebec provision, which exempted income for Quebec purposes if it also was exempted under one of Canada's treaties, did not require Quebec to provide donation deductions for gifts to U.S. charities.
The Quebec Court of Appeal did not deal with this aspect of the case. The taxpayer had requested, at the trial's opening, to amend its pleadings to claim, in the alternative, that its donations made to U.S. charities were deductible as business (promotional) expenses, relying on Olympia. In confirming the refusal below to allow this amendment, the Court of Appeal essentially found that Olympia was inconsistent with the Symes approach to statutory interpretation, stating:
The specific tax treatment provided in the TA respecting gifts must prevail similarly to the pronouncements of the Supreme Court in Symes… . The Court specified there that child care expenses could not be deducted as business expenses under the applicable tax principles, in the face of a specific and complete regime for child care expenses provided in section 63 of the Income Tax Act. The same reasoning should be favoured in addressing the treatment of gifts.
Neal Armstrong. Summary of Emballages Starflex Inc. v. Agence du revenu du Québec, 2016 QCCA 1856 under s. 18(1)(a) - income producing purpose.
Severed letters from April 2010 onwards are available
We have continued to upload back issues of severed letters and our collection now includes all those issued by the Income Tax Rulings Directorate since April 2010.
CRA considers that an exempt low-rental housing corp can use a CDA
CRA considers that one-half of the capital gains generated by a private corporation that is exempt as a low-rental housing corporation under s. 149(1)(n) are added to its capital dividend account and can be paid out as capital dividends.
However, should it lose its exempt status, it also would lose its CDA under s. 89(1.2) – and the timing of the capital gains arising to it under the s. 149(10) disposition of its property would preclude those gains from being added to the available amount of its CDA.
Neal Armstrong. Summaries of 17 August 2016 Internal T.I. 2016-0639251I7 under s. 89(1) – capital dividend account - (a) and s. 89(1.2).
CRA indicates that significant employer discretion as to stock option vesting will oust an “agreement” to acquire the shares
CRA considers that in order for there to be a s. 7/110(1)(d) agreement to issue shares, there must be “legally binding rights and enforceable obligations” respecting the covered shares. CRA has provided various examples illustrating the implications of this view.
For example, where under a fully discretionary stock bonus plan, the shares are issued when the employer’s discretion is exercised, the plan will not be considered to be a s. 7 plan, so that it generally will be required to qualify as a three-year bonus plan or deferred share unit plan. On the other hand, “if the eventual issuance of the shares is subject to time or other objective vesting conditions,” the share issuance will be governed by s. 7 (because there was an agreement between the time of the grant and the issuance).
A second example is where employees are granted options with FMV exercise prices but which are exercisable only upon the corporation subsequently notifying the employees of its decision on the number of options that each employee may exercise. CRA considers that the employee would not have a legal agreement to acquire the shares before receiving such notification, so that the s. 110(1)(d) deduction would not be available if the shares had appreciated over the exercise price in the interim.
A third example (similar to the second) is where a trust is established by the employer to acquire and hold shares of the employer for employees, but allocations among the employees are entirely at the discretion of the trustees – so that CRA would consider that there is no agreement to acquire the shares until such discretion is exercised.
Neal Armstrong. Summaries of 19 September 2016 Internal T.I. 2016-0641841I7 under s. 7(3)(b), s. 110(1)(d) and s. 7(2).
Income Tax Severed Letters 21 December 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Full text translations of the balance of the APFF Roundtable questions are available
The table below links to full-text translations of the balance of the APFF Roundtable questions and answers (Q.9 to Q.21) and the first three from the APFF Financial Strategies and Instruments Roundtable - as well as of the French internal technical interpretation which was released last Wednesday (reflecting minor CRA corrections to a previous version of the same interpretation).
The translations are paywalled in the usual (3 work-weeks per month) manner.
Great-West Life – Federal Court of Appeal states that the GST “financial services” definition should be applied based only on the “predominant elements” supplied
A third party (Emergis) provided automated claims processing services to Great-West Life, which administered or insured various client drug plans, so that the prescription drug claim of an employee would be processed at the pharmacy counter upon presentation of a magnetic card.
In the Tax Court below, Owen J ultimately found that the charges of Emergis to Great-West for this service were taxable under the Financial Services and Financial Institutions (GST/HST) Regulations, as they were "quintessentially administrative in nature." More interestingly, he also found that in the absence of this Regulation, the service would have been exempt as being for the payment of insurance policy claims – notwithstanding that the Emergis service entailed the provision of taxable supplies described in para. (r.4) of the financial services definition, e.g., collecting, collating or providing information. He stated that "those services do not represent the essential character or substance of the supply, which is paying drug benefits to plan members."
In the Court of Appeal, Woods JA did not comment directly on the (now, apparently ineffectual) para. (r.4) rule, but appeared to essentially agree with this general approach when she stated:
…[I]t is necessary to determine the predominant elements of the supply if it is a single compound supply. It is only the predominant elements that are taken into account in applying the inclusions and exclusions in the “financial service” definition.
Neal Armstrong. Summary of Great-West Life Assurance Co. v The Queen, 2016 FCA 316 under Financial Services and Financial Institutions (GST/HST) Regulations.
CRA considers that income from an estate residue generally can be distributed on a deductible basis provided that the executor is not directed to pay the tax thereon
CRA considers that the residue of the Estate can include income and that such income generally can be made payable to a residual beneficiary, so that such income can be deducted by the estate under s. 104(6).
However, depending on the wording of the Will, after the debts and specific bequests of the estate have been paid, the Executor may be required to pay the taxes owing on the income generated by the Estate and distribute the after tax “residue” to the residual beneficiaries. In such cases distributions to residual beneficiaries could not be considered to be income payable to a beneficiary for purposes of subsections 104(6) and 104(13).
In such a case, instead of the deduction, “the income would be taxed in the estate, and the residual beneficiaries would receive capital distributions, comprised of after tax paid capital of the estate.”
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.14 under s. 104(24).
CRA acknowledges fixing of the s. 129(6) deemed active business income rule
In contrast to a problem in the July 29, 2016 draft legislation, under recently enacted s. 129(10), where an Opco earns all its income as active business income from arm’s length third parties and pays rents to an associated “Rentco,” an appropriate sharing of the $500,000 business limit between Opco and Rentco is permitted.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.15 under s. 125(10).
Suncor – CRA abandons attempt to impute a hedging contract between Petro-Canada and an indirect UK subsidiary
When an indirect UK subsidiary of Petro-Canada acquired another UK company with an interest in a North Sea oilfield, Petro-Canada effectively locked in the price of oil in relation to this acquisition by entering into a forward contract with Morgan Stanley and Deutsche Bank respecting a specified quantity of 28,000 barrels of oil per day for a 3.5 year period under which it would be required to make cash payments to the counterparties if the price of oil went up, and conversely if the price of oil went down. The price of oil went up so that it incurred monthly cash payments totaling US$287 million in the first few months of the contract, and closed out all of its post-2007 obligations in November and December 2007 for a settlement payment of US$1.72 billion.
CRA did not deny the resulting 2007 loss to Petro-Canada of Cdn.$2.02 billion, but instead applied s. 247(2)(c) to include Cdn.$2.02 billion in the 2007 income of Petro-Canada as an imputed reimbursement to Petro-Canada by its UK subsidiary of the settlement payments (and assessed a s. 247(3) penalty for failure to prepare contemporaneous documentation in connection with the imputed reimbursement.) This was a difficult assessing position to support because, in fact, there was no hedging contract between Petro-Canada and its UK subsidiary to adjust under s. 247(2)(c).
The case has now been settled on the basis of CRA abandoning its position.
Neal Armstrong. Summary of Suncor Energy Inc. (as successor to Petro-Canada) v. The Queen, 2014-4179(IT)G: Notice of Appeal filed on 21 November 2014; Reply dated 13 April 2015; Answer filed on 10 July 2015; Partial Consent to Judgement dated 21 November 2016; and Judgment dated 5 December 2016; See also Suncor Press Release dated 5 December 2016 “Suncor Energy successfully resolves $1.3 billion tax dispute with Canada Revenue Agency.”