News of Note

CRA has issued a new GST/HST Memorandum respecting the (partial) rebate under ETA s. 259 available to public service bodies (such as NPOs, charities, municipalities, hospitals and various schools) for GST/HST payable by them. Most of the Memorandum is a primer on the various circumstances in which a net amount of GST/HST can first become payable by a PSP (including on a self-assessment basis) rather than on the relatively mechanical calculation of the rebate itself.

Although the Memorandum provides 29 examples, they are drafted at such a level of bloodless abstraction that they shed minimal light on the interpretation of the provisions being illustrated. For example, Example 7 references a PSB that is charged at the Ontario rate of 13% on software programming services acquired by it for “use” 80% at its Ontario head office and 20% at one of its offices in PEI – and goes on to note that the PSB would be required to self-assess itself for the 2% higher PEI HST rate on the 20% portion for use in PEI, before then calculating its rebate. If the PSB had its IT department in PEI, executive(s) overseeing them in Ontario, its servers in Chicago and website users benefitting from the software across Canada and elsewhere, on what basis would the percentage split be determined? Example 47 in draft Notice 266, published over five years ago, is similar. Does the absence of any burgeoning published policy signify that CRA is not attempting to enforce this provision, so that it is not developing any experience with it (maybe kind of like the GST GAAR – see Brent Murray)?

Neal Armstrong. 15 summaries of GST/HST Memorandum 13.5 Non-creditable Tax Charged January 2017 including under ETA s. 220.08(1).

A parent corporation holding a subsidiary engaged in HST-exempt activities (of operating nursing homes) reduced the non-creditable HST that the subsidiary otherwise would have borne on management fees charged by the parent to the sub, by having the group’s key executive draw a salary from the subsidiary for the performance of management services respecting the subsidiary’s homes. Sommerfeldt J found that this approach worked, and rejected CRA assessments which grossed-up the fees charged by the parent to the subsidiary by the amount of the executive’s salary at the subsidiary, and conversely imputed the earning of management fees by the subsidiary from the parent. This implicitly amounts to Sommerfeldt J accepting a “two hat” approach to allocating management services: the executive was wearing his hat of subsidiary employee when he spent time on its homes; and was wearing his hat of parent CEO when he attended to other matters. This two-hat approach can be helpful in other contexts, for example, where an executive spends part of her time attending to the investment undertaking of a parent income fund or REIT (ITA s. 132(6)(b)), and the balance to operating matters of subsidiaries which are not consistent with an investment undertaking.

Sommerfeldt J also accepted that the activities of the parent relating to new home construction in other subsidiaries were conducted as their agent, notwithstanding that it booked the expenditures as assets on its books and sent purported invoices for those amounts to the subsidiaries when the work was largely completed. In his view, it was quite contrived to consider that, as each brick was laid, the parent was acquiring the ownership of that brick rather than such brick becoming the property of the real estate owner (i.e., the subsidiary.)

Finally, booking, at year end, a reduction in management fees previously charged by the parent to some of the subsidiaries did not generate an input tax credit for the HST previously charged on the reduced amount because the parent failed to issue credit notes for the reduction, as required by ETA s. 232(3).

Neal Armstrong. Summaries of GEM Health Care Group Limited v. The Queen, 2017 TCC 13 under General Concepts – Agency, ETA s. 153(1), s. 232(3).

Following some amendments to the Canadian exploration expense definition to include some community consultation and environmental study expenses incurred by mining companies at the exploration stage after February 2015, CRA has revised its applicable guidelines to indicate that the expenses of the following generally can qualify as CEE:

• Environmental assessments or community consultations undertaken to obtain a permit or to meet a requirement thereunder – but not where undertaken prior to a decision to explore.
• Environmental sampling or monitoring, or targeted environmental assessments (e.g., on vegetation or fish) respecting the exploration – but not general baseline environmental assessments undertaken prior to carrying out a specific exploration activity.
• Negotiation to secure surface access for exploration purposes or with the local community to secure certainty with respect to exploration operations.
• Planning for, and studies relating to, the conduct of the exploration, or physical and chemical assessments on a deposit re deciding whether to continue the exploration at the site or assessing the potential for a commercial deposit – but not preliminary planning prior to a decision to explore, or assessments of mine development options or profitability of developing the deposit into a mine.

Neal Armstrong. Summary of 24 January 2017 Internal T.I. 2016-0675902I7 under s. 66.1(6) – Canadian exploration expense – para. (f).

This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.