News of Note
Marine Atlantic – Tax Court of Canada finds that a registrant is not required to expand the information already in its possession in using an ITC allocation method
Email this ContentThe appellant (MAI), which operated a ferry service between Newfoundland and Nova Scotia, allocated all its inputs between the taxable and exempt supplies made by it (nearly all of which were made on the vessels) by measuring the areas on its ferries used exclusively in making taxable supplies (including the provisions of passenger cabins, and restaurant and dining facilities) and those used exclusively in making exempt supplies (the general seating areas and vehicle passenger decks) to determine relative percentages for those two categories of use, and then treating those percentages as also being applicable to the use of the common areas on the ferries (including corridors, walkways, stairways, public washrooms, the exterior deck, crew cabins, the engine room and navigation facilities), and to the terminal and corporate office areas and the use of fuel.
In accepting MAI’s methodology, D’Arcy J stated:
A GST registrant is entitled to use any method that is fair and reasonable provided that it complies with the provisions of the GST Act. The CRA cannot simply substitute its method for that of the GST registrant. …
[A] GST registrant should be entitled to determine its input tax credits on the basis of information in its possession without having to resort to hiring expensive third parties, such as valuators or, as I will discuss, engineers to measure spaces on its ships or experts to try to determine what percentage of fuel is consumed to propel a ship and what percentage is consumed to produce electricity, heat or hot water. …
He also noted that the taxpayer’s method appeared to be better than the output-based method used by it in earlier reporting periods and accepted by CRA.
Neal Armstrong. Summaries of Marine Atlantic Inc. v. The King, 2023 TCC 95 under ETA s. 141.01(5) and ETA s. 335(5).
We have translated 6 more CRA interpretations
We have translated a further 6 translations of CRA interpretations released in April and March of 2003. Their descriptors and links appear below.
These are additions to our set of 2,527 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 20 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2003-04-04 | 24 February 2003 Internal T.I. 2002-0165537 F - Le détachement d'employés et l'article XV
Also released under document number 2002-01655370.
|
Treaties - Income Tax Conventions - Article 15 | exemption in Art. 15 of US Treaty unavailable where Canadian employee seconded to US affiliate, which reimburses for his payroll |
| 24 March 2003 Internal T.I. 2002-0177587 F - XXXXXXXXXX EN CONSIGNATION PERTE
Also released under document number 2002-01775870.
|
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs | business commences when a significant activity is initiated that is part of an income-generating process | |
| Income Tax Act - Section 9 - Timing | loss when inventory disappears is deducted when the loss is discovered | ||
| 11 March 2003 Internal T.I. 2003-0000087 F - Projet agricole au sens de 122.3(1)b)(i)(B)
Also released under document number 2003-00000870.
|
Income Tax Act - Section 248 - Subsection 248(1) - Farming | woodlot management can be farming | |
| 18 February 2003 Internal T.I. 2003-0182997 F - Calcul du revenu net étranger à 126(1)b)(i)
Also released under document number 2003-01829970.
|
Income Tax Act - Section 126 - Subsection 126(9) - Paragraph 126(9)(a) | qualifying income not reduced by s. 110(1)(d) deduction | |
| 2003-03-28 | 26 March 2003 External T.I. 2003-0008645 F - Non-Arm's Length Sale of Shares | Income Tax Act - Section 84.1 - Subsection 84.1(1) | no presumption that a transaction between companies owned by couple and nephew, respectively, is not arm’s length |
| Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | family relationship (e.g., uncle/nephew) are more likely to give rise to NAL transaction | ||
| 24 March 2003 External T.I. 2002-0165265 F - REMBOURSEMENT DE PRIMES | Income Tax Act - Section 146 - Subsection 146(8.1) | election cannot be made with surviving spouse if bequest of RRSP is to surviving adult child |
Agences Kyoto – Court of Quebcc finds that a written contract or resolutions were unnecessary for the deductibility of inter-company management fees
Regarding the denial by the ARQ of the deduction of management fees paid by the taxpayer (AK) to its wholly-owning parent (GAK), Richard JCQ stated:
Despite the absence of a written contract, resolution or other documentation, [an AK/GAK director] convinced the Court that numerous acts of management were performed by GAK for the benefit of AK, notably in the negotiation of financing, acquisition opportunities, the determination of rents and the payment of life insurance policies for its directors, of which GAK is the beneficiary.
Neal Armstrong. Summary of Agences Kyoto ltée v. Agence du revenu du Québec, 2023 QCCQ 2921 under s. 18(1)(a) – income -producing purpose.
Larouche – Court of Quebec determines the relative business use represented by a home office using the home’s gross rather than net area
In deducting his home office expenses, the taxpayer determined the portion of his home that was used in his business of providing electrical engineering services, which he calculated by dividing the square-foot area of the three rooms that he used in that business by the net square footage of his home, which was the area of the two floors as measured by the exterior dimensions, minus the areas taken up by the walls and minus the area of common areas (stairwells and hallways). In instead accepting the ARQ method, which divided the area of the three rooms by the gross floor area, Brunelle JCQ stated (at para. 35, TaxInterpretations translation):
[A] person's home is first and foremost the individual’s dwelling and "the privileged place of his or her private life". Admittedly, a person may choose to work at home and reserve a certain amount of space for this purpose, but the fact remains that corridors, stairwells and other indoor areas for locomotion are essential to the personal use of the premises.
Neal Armstrong. Summary of Larouche v. Agence du revenu du Québec, 2023 QCCQ 3350 under s. 18(12).
Morin – Court of Quebec finds that management fees paid to a related company that performed its functions through the agency of the fee payer were non-deductible
A pharmacist (“Morin”), who previously had operated six pharmacies as proprietorships, agreed with her management company (“377”) that she would incur various of the expenses of the pharmacies as they related to services provided by technicians and support staff, as contrasted to professional staff, as agent for 377 and that the gross profits from the pharmacies would be split on a 30/70 basis between 377 and her. 377 sent quarterly invoices to Morin and issued credit notes for its computed share of the expenses.
Tremblay JCQ confirmed the ARQ position that the $2.5 million in management fees charged by 377 to Morin for the years at issue under the above arrangement were completely non-deductible as they were not incurred for an income-producing purpose. Morin was performing exactly the same functions as before, and the sole effect of the arrangement was to reduce her income by the fee amounts. Tremblay JCQ stated):
… Ms. Morin had no expectation of receiving any income from the management fees she paid to 377. …
It seems obvious that a reasonable businesswoman, considering only her commercial interests, would not have committed herself to such an expense.
However, the ARQ reassessments to deny her deductions, which were made beyond the normal reassessment period, were statute-barred, given that the general plan had been proposed by Morin’s tax advisors and she “could reasonably expect that the structure proposed to her could produce the legal and tax effects envisaged by her professionals.”
Neal Armstrong. Summaries of Morin v. Agence du revenu du Québec, 2023 QCCQ 2406 under ITA s. 18(1)(a) – income-producing purpose, and s. 152(4)(a)(i).
CRA finds that a company which negotiated agreements between credit card companies and merchants was supplying a GST/HST-exempt service
“Acquirers,” who used funds from the customer’s credit card issuer to provide funds to pay merchants for their customers’ purchases, retained the Company to find merchants and negotiate agreements with them to receive such services of the Acquirer, in consideration for a fee based on the number of merchant transactions processed by the Acquirer. After indicating that the service of the Acquirer was an exempt financial service under para. (a) or (i) of the definition, and after ruling that the supply of the Company to the Acquirer was a single supply that was exempted under para. (l), CRA stated:
[T]he purpose of the Company’s supply is to act as an intermediary to bring together the Acquirer and prospective merchant customers of the Acquirer with the view to causing supplies by the Acquirer of its Acquirer Service to occur. The Company is involved in the entire negotiation process for the supply of Acquirer Services by the Acquirer to merchants. In that process, it appears that in each case the Company is relied upon heavily by the merchant and the Acquirer. The Company delivers to the Acquirer a fully negotiated Merchant Agreement to which the merchant will be bound, subject to the Acquirer’s approval.
Zomaron and 207227 are similar.
Neal Armstrong. Summary of 9 March 2023 GST/HST Ruling 244638 under ETA s. 123(1) – financial service – (l).
CRA rules that a variable return at note maturity linked to a non-resident company’s stock was not participating debt interest
A Canadian public corporation (ACO) will issue unsecured and unsubordinated notes to non-residents with whom it deals at arm’s length. The issue price for each Note will equal its principal and correspond to the value of a ‘Reference Stock” on the date issued. The Reference Stock will be proposed by the noteholder but must be a listed stock of a non-resident issuer dealing at arm’s length with ACO and must have a correlation to ACO’s common shares that is lower than that of the S&P 500 index to ACO’s common shares. The Notes will bear interest at a stipulated rate expressed as a percentage of the Principal Amount.
At maturity, ACO will pay an amount equal to the closing price of the Reference Stock if it does not exceed the “Cap Price,” and otherwise will pay the Cap Price. ACO may elect to repay the Note at maturity with Reference Stock.
CRA ruled that the exclusion for participating debt interest did not apply. Its summary indicated:
[C]onsistent with the policy of the provision, the payments are not tied to the profitability of the issuer. In other words, the payments do not represent a disguised payment of profits out of Canada.
Neal Armstrong. Summary of 2021 Ruling 2020-0865991R3 under s. 212(3) – participating debt interest.
GST/HST Severed Letters March/April 2023
This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their March and April 2023 release) is now available for your viewing.
Income Tax Severed Letters 12 July 2023
This morning's release of eight letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that s. 110.6(1.3)(a) can still be satisfied long after the farmer’s death
Mr. A owned farmland and farmed it for his chief source of income. Under his will, the farmland was devised to his daughter who did not farm it and sold it more than 24 months after his death. CRA found that this timing of her sale would not preclude the conditions in ss. 110.6(1.3)(a)(i) and 110.6(1.3)(a)(ii)(A) from being satisfied,
Regarding s. 110.6(1.3)(a)(i), it required that the farmland have been owned for the period of at least 24 months immediately preceding the determination time (the daughter’s disposition) by one or more of the specified persons or partnerships such as her, her father and his estate. Here, since the farm was owned continuously by Mr. A, his estate and his daughter for a period of at least 24 months immediately preceding the daughter’s disposition, this test was satisfied.
S. 110.6(1.3)(a)(ii)(A) was satisfied because Mr. A had met the active farming and gross revenue tests for a period of at least two years. It did not matter that he was not the person who owned the property at the determination time, nor during the prior 24 months.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.15 under s. 110.6(1.3)(a).