News of Note
CRA references the notice clause in a services contract in determining the place-of-supply for HST purposes (and implicitly acknowledges that nutritional consulting’s purpose is maintaining health)
Email this ContentETA Sch V, Part II, s. 1.2 excludes various supplies of medical care services from the GST/HST exemption if they are not a ““qualifying health care supply”, whose definition includes services whose “purpose” is “maintaining health,” “preventing disease” and “assisting…with [a] disorder.” CRA ruled that the provision by a licensed dietician of “consultant nutrition services” to a registered charity (presumably in connection with a redacted charitable undertaking of assisting needy individuals) qualified for exemption.
Although the provincial place-of-supply rules thus were irrelevant, CRA nonetheless commented that because the the Services Contract named a particular address as being that for notices to be sent to the charity, that determined the place of supply. This is a reminder that, in drafting a services contract, one should be aware in specifying which, among a number of plausible choices, should be the address named in the notice clause.
Neal Armstrong Summaries of 16 February 2016 Ruling 165366 Dietetic Services under ETA Sch V, Part II, s. 1 - Qualifying Health Care Supply and New Harmonized Value-Added Tax System Regulations, s. 13(1).
CRA finds that a fee for an agreement to be available to supply services was a supply of property for HST/GST purposes
CRA found that a stipend paid by a hospital to a medical specialist for agreeing to stay close to the hospital so as to be available on an on-call basis was taxable consideration for the supply of property to the hospital rather than for a supply of an exempt medical service, stating:
[T]he hospital acquired a right to call upon the physician to attend the hospital during a given time period…[which] has a distinct utility to the hospital and as such…the right is a discrete supply that is separate from any health care services that may be rendered by the physician to patients of the hospital.
Neal Armstrong. Summary of 8 January 2016 Interpretation 150125 under ETA, Sch V, Part II, s. 5.
Oldcastle Building Products – Tax Court of Canada finds that compensation to a corporation's research head based on a percentage of its net sales of new products was not a “bonus” for SR&ED ITC purposes
Reg. 2900(9) provides that salary and wages for SR&ED investment tax credit purposes excludes “bonuses” and “remuneration based on profits.” The taxpayer agreed to pay the head of its SR&ED program (who was not a major shareholder or other “specified employee”) a base salary plus a “bonus” (which Archambault J preferred to refer to more neutrally as “variable pay”) equal to a percentage of the net sales of new or modified products. However, the base salary eroded based on the variable pay level, so that no base salary would be payable in any year in which his variable pay exceeded $1 million, as occurred in the years in issue.
Archambault J found that the variable pay was not a “bonus” given inter alia that the taxpayer had no discretion as to how much it paid, and also that it was not “based on profits” given that the only expenses deducted in arriving as net sales were freight and insurance. As to a Crown argument that the variable pay did not qualify as a s. 37 expense because the compensation amount referenced “the sales of products respecting which the R&D activities had been performed in prior years” Archambault J stated that “CRA is confusing the nature of the amount paid with the method of its calculation,” and that “the amounts paid did not constitute remuneration for the sale of Oldcastle products because the work of Mr. Castonguay was not the sale of products but, rather, development at the Research Centre of new products.”
Neal Armstrong. Summaries of Oldcastle Building Products Canada Inc. v. The Queen, 2016 CCI 183 under Reg. 2900(9)(c), Reg. 2900(9)(d) and s. 37(8)(a)(ii)(B).
Canadian investors in an LLP viewed as a U.S. corporation generally should not be entitled to U.S. Treaty benefits on U.S. source income of the LLP
The conversion of an LLP or LLLP to a limited or general partnership (which CRA is requiring to occur before 2018 in order for it to be accepted as having been a partnership all along) “should be accorded non-recognition treatment” under the Code.
If a LLP or LLLP (viewed by CRA as a U.S. corporation) were subject to Canadian corporate tax by virtue of being considered to have a Canadian permanent establishment, the U.S. should permit the U.S. partners foreign tax credits for the tax to the same extent as if the LLP/LLLP were regarded as a partnership in Canada.
The Canadian tax treatment to Canadian investors in a U.S. LLP/LLLP would be affected to a significant extent by whether it constituted a foreign affiliate or controlled foreign affiliate to them.
From the U.S. tax standpoint, Canadian partners of the LLP/LLLP should not generally have access to Treaty benefits for income (e.g., U.S.-source dividends) earned through the LLP/LLLP. An open question is whether Article IV(7)(a) blocks the application of X(6) and results in a Code 30% branch profits tax.
Neal Armstrong. Summary of Nathan Boidman, Peter Glicklich and Michael Kandev, "Canada's New Approach to U.S. LLPs and LLLPs," Tax Management International Journal, 2016, p.479 under s. 248(1) – corporation.
CRA considers that medical evaluations for insurers are no longer GST-exempt including where report writing in the U.S. is separately charged
CRA considers that independent medical evaluations (IMEs) supplied by non-employee doctors to insurance companies or lawyers before March 21, 2013 were exempt health supplies. Effective after that date, s. 1.2 of Part II of Sched. V was added to exclude supplies whose purpose was not patient care or treatment, so that in CRA’s view, this amendment generally rendered IMEs taxable. Where the doctor is a U.S. resident (and HST registrant) performing the exams in Ontario and preparing his report in his U.S. home office, CRA will consider there to be a single supply of an IME so that all his fee will be taxable because it was performed, in part, in Canada (and this is so even if there is a separate charge for the report preparation).
Neal Armstrong. Summaries of 8 January 2016 Interpretation 150125 under ETA Sch V, Part II, s. 1.2 and s. 1 – qualifying health care service, ETA. 142(1)(g), New Harmonized Value-Added Tax System Regulations, s. 13(1).
CRA indicates that a financial institution’s issuing shares and paying dividends to non-resident shareholders may be a zero-rated supply
CRA indicated that the issuance of shares and the payment of dividends by a financial institution to its non-resident shareholders could potentially qualify as zero-rated supplies, with the implication that GST on related inputs could be creditable. CRA considered that reporting to the shareholders and managing shareholder meetings were not a supply to the shareholders and, instead, represented inputs incurred in the institution’s operations.
Neal Armstrong. Summaries under of 17 December 2015 Interpretation 153009 under ETA, Sched. VI, Part IX, s. 1, ETA s. 123(1), financial service, para. (f), and ETA s. 123(1) – supply.
Double taxation can arise under the FAD rules if a Canadian Buyco delivers shares issued to it by its non-resident parent to the target ((10(f)) corporation’s shareholders
Where a U.S. public corporation uses a Canadian Buyco to acquire the shares of a Canadian target (most of whose assets are foreign affiliates) in consideration for shares that will represent more than 10% of its outstanding shares, there will a technical investment by the Canadian Buyco in a foreign affiliate (its U.S. parent) if the share consideration is first issued by the U.S. parent to Buyco, before Buyco delivers that consideration to the shareholders of the target. Thus, there would be a double deemed dividend under s. 212.3(2): first, for this transitory investment; and second, for the “real” investment of Buyco in the target.
This result can be avoided by using a triangular arrangement pursuant to which the U.S. parent issues the share consideration directly to the target shareholders.
It generally will be advantageous to use a Canadian Buyco rather than make a direct acquisition, where the Canadian target does not have signficant Canadian assets.
Neal Armstrong. Summaries of Ian Crosbie, "Recent Transactions of Interest, Part I," draft 2015 Annual Conference paper under s. 212.3(2) and s. 88(1)(c.3)(i).
Income Tax Severed Letters 31 August 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that services are re tangible personal property for HST place-of-supply purposes if they “serve a particular need…relating to the property”
Although, the HST rules for determining the province in which a service is supplied generally look to the address of the recipient, the place of supply of services in relation to tangible personal property is generally the province where the TPP is situate (unless it moves around, in which case there generally is reference to the province of primary performance). In the course of explaining a heavily redacted ruling, CRA stated:
[W]hether a service is considered to be in relation to TPP depends on whether there is a direct connection between the service and the property, taking into account the objectives of the service and the particular circumstances of each case. With respect to determining the objectives of the service, it must be determined whether the service is designed, developed or undertaken to fulfill or serve a particular need or requirement arising from or relating to the property. It must then be determined whether the relationship between the purpose or objective of the service and the property is direct rather than merely indirect.
Hope that helps.
Neal Armstrong. Summary of 16 March 2016 Ruling 158766 under New Harmonized Value-Added Tax System Regulations, s. 15.
CRA rules that the supply of a law society membership to a non-resident not practising law in the province was zero-rated
CRA ruled that a supply of some sort of law society membership to a non-resident lawyer who was not registered for GST purposes and did not practise in Canada was a zero-rated supply of intangible personal property. This accords with the consistent CRA view that a supply of membership in an organization is a supply of intangible personal property rather than of a service.
Neal Armstrong. Summary of 8 April 2016 Ruling 158060 under ETA, Sched. VI, Pt. V, s. 10.1.