News of Note
Norseman – UK Upper Tribunal finds that failure of a holding company to charge fees for its management services resulted in the loss of VAT credits
Email this ContentA UK holding company that failed to follow through on its intention to recover its head office expenses from its Australian mining subsidiaries because they were running at a loss was denied credits for its VAT costs as it was thereby not making taxable supplies to them. Although VAT credits were available where no current taxable supplies were being made, if the costs were being incurred for a future undertaking of making taxable supplies, that was quite different from the situation here where services were currently being supplied to the subsidiaries for no consideration. Charging a “nominal amount” of £100 per annum also would not have worked.
Similar issues would arise in this situation under ETA s. 141.01(2).
Neal Armstrong. Summary of Norseman Gold plc v Revenue and Customs Commissioners, [2016] BVC 504 (UKUT) under ETA s. 141.01(2).
R v. FTT – English Court of Appeal upholds the validity of documentary demands made by HMRC on UK companies at Australia's instigation
The Australian Tax Office, which suspected that a UK accounting firm was providing nominee directors and shareholders to UK-incorporated companies masquerading as factually resident outside Australia, made a request to the UK Revenue (HMRC) pursuant to Art. 27 of the UK-Australia Treaty (somewhat similar to Art. 24 of the Canada-U.K. Treaty). HMRC, in turn (following permission granted in a First Tier Tribunal hearing) sent demands for documents, respecting these services of the accounting firm and the movement of funds, to the accounting firm and three banks under a gentler and fairer U.K version of ITA s. 231.2.
In rejecting arguments that the various companies named in these demands had to be told prior to the FTT hearing who the taxpayers being investigated were and why the documents were reasonably required to establish the taxpayers' tax position, Sir Terence Etherton stated:
The purpose of the statutory scheme is to assist HMRC at the investigatory stage to obtain documents and information without providing an opportunity for those involved in potentially fraudulent...arrangements to delay or frustrate the investigation by lengthy or complex adversarial proceedings.... [I]n many cases disclosure of… strategy and of sources of information to the taxpayer or those associated with the taxpayer may endanger the investigation by forewarning them.
Neal Armstrong. Summary of R v. FTT, [2016] BTC 10 (CA) under s. 231.2(3).
The FAD rules are premised on FA investments being “dead assets”
Phil Halvorson (who finished a stint at the Department of Finance 10 months ago) and Dalia Hamdy have articulated the purpose behind various of the foreign affiliate dumping rules, for example:
- The s. 212.3(1)(b)(i) safe harbour recognizes that if the non-resident corporation does not materially influence the CRIC's investment decisions (by holding 25% or more of the CRIC's equity as measured by votes or value), it cannot generally be considered to have caused the CRIC to make an investment in anticipation of its acquiring control of the CRIC.
- Given that groups might structure so that every $1.00 of PUC grind to a cross-border class resulted in no more than $0.70 of grind to shares held by the non-resident group, s. 212.3(6)) applies “where a group deliberately structures their holdings to purposely reduce any sting from the PUC grind mechanisms.”
- The FAD rules extend to where the CRIC becomes controlled by the non-resident parent as part of the same series as the investment made by the CRIC in the preceding year in order “to address situations where prior to an acquisition of control of a CRIC an accommodating vendor might 'stuff' foreign affiliate investments under the CRIC.”
- The PLOI rules recognize the conversion of a “dead asset” into one which generates interest revenue within the Canadian tax net.
- The PUC reinstatment rule avoids a double PUC grind or recognizes the redeployment of sales proceeds in Canada.
- The s. 212.3(16) more closely-connected test “is intended to allow a Canadian corporation to invest in FA in circumstances where the Canadian corporation would have made the investment even if it had not been foreign-controlled.”
Neal Armstrong. Summaries of Philip Halvorson and Dalia Hamdy, "An Overview of the Foreign Affiliate Dumping Rules," (OBA article), 23 February 2016 under s. 212.3(1), s. 212.3(4) - dividend time, s. 212.3(6), s. 212.3(11), s. 212.3(9), s. 212.3(16)(a), s. 212.3(18)(a), s. 212.3(18.1).
CRA acknowledges that ITCs identified during a GST audit generally should be deducted in a return assessed by the auditor
Input tax credit claims, if identified on a timely basis, can be claimed in the return for the reporting period in which the GST/HST first became payable or in a subsequent reporting period. However, CRA appears to agree that where, during an audit, a registrant identifies previously unclaimed ITCs, the right course of action in accordance with ETA s. 296(2) is for those ITCs to be deducted in the return being assessed by the auditor (being the first such return in which the ITCs were claimable) rather than being deferred to be claimed in a future return, or being claimed under a request made to CRA to adjust a previously-filed return in accordance with P- 149.
May 2015 CPA Roundtable, GST Q. 12 under ETA s. 296(2).
CRA considers that no invoice is required for an on-supply covered by an ETA s.156 election
Where a member of a corporate group makes all the purchases (properly documented with invoices from the 3rd party suppliers), and then resupplies the purchased goods or services to other group members with which it has made valid ETA s. 156 elections, CRA does not consider that there is a documentary requirement for such resupplies to be evidenced by invoices.
May 2015 CPA Roundtable, GST Q. 6 under ETA s. 169(4).
Urquhart – Federal Court of Appeal finds an implied obligation to incur costs to earn enhanced commissions under an oral employment contract of a salesman
Rennie JA found that on an objective appreciation of the arrangements (not reduced to writing) between a Ford dealership and a salesman, including reasonable inferences from the commission arrangements, the salesman was required to bear some costs of vehicle transport and of vehicle accessories, so that such costs were deductible by him under s. 8(1)(f)(i). The disallowance of deductions for such costs by the Tax Court was reversed.
Neal Armstrong. Summary of Urquhart v. The Queen, 2016 FCA 76 under s. 8(1)(f).
Ivan Cassell Ltd. – Tax Court of Canada finds that a company with ancillary rental operations providing CEO services out of a home office to a single corporation had a PSB
A corporation (ICL) providing the services of CEO to another corporation (WPNL), that indirectly was owned as to 50% by the CEO and his family, was found to be carrying on a personal services business. The facts that ICL carried on an ancillary rental operation, that the individual was not (as de facto CEO) subject to significant supervision and that he spent a lot of his time working out of his home (and in fact only had a “make-shift space available to him as the need arose” at the WPNL premises), did not tip the balance. It also hurt ICL’s case that it did not even bother to invoice WPNL and that no attempt was made to depart from the typical remuneration package for a CEO (fixed monthly remuneration plus a year-end bonus).
Neal Armstrong. Summary of Ivan Cassell Ltd. v. The Queen, 2016 TCC 53 under s. 125(7) – personal services business.
Crooks – Tax Court applies the “ultimate liability” doctrine to trump the bad form of the taxpayer’s agreements so that for HST purposes she was the sole recipient of a supply
An agreement for the purchase of a new condo by the taxpayer was amended shortly before closing at the insistence of the mortgage lender to add her friend as a co-purchaser (with the friend receiving a 1% ownership interest in the condo at closing). If Hershfield J had followed Al-Hossain (where the taxpayer position should have been stronger because the co-purchaser had signed a declaration of trust), he would have denied the new housing rebate to the taxpayer given that the combined effect of ETA ss. 254(2) and 262(3) was to deny the rebate if any interest (even a 1% interest) in the condo was supplied to any person who was not related to a person acquiring the condo as a primary residence.
He characterized the amended purchase agreement as instead entailing, at most, a supply of a 1% interest in the property by the taxpayer to her friend in consideration for her friend’s guarantee – and as not resulting in any interest in the condo also being supplied by the builder to the friend. In this regard, he stated:
The amended agreement did nothing of substance. Indeed, if such an agreement had been entered into to gain an unintended tax advantage, it might be seen as a wholly artificial transaction – a sham.
He didn’t stop there. He applied the “ultimate liability” Bondfield doctrine to find that because the taxpayer “accepted ultimate liability for payment to the builder in the unlikely event the builder was able to make a case against [her friend],” the taxpayer was the sole “recipient” of the supply by the builder, so that the ETA s. 123 “recipient” definition deemed the builder to supply the condo solely to the taxpayer.
Although Hershfield J provided stellar assistance to an unrepresented taxpayer, this approach of emphasizing the true intention of the parties rather than the documentary form would generate uncertainties in other contexts.
Neal Armstrong. Summaries of Crooks v. The Queen, 2016 TCC 52 under ETA s. 254(2)(a), s. 123(1) - recipient, General Concepts - Substance, and Statutory Interpretation - Benefits-Conferral Legislation.
Bakorp – Federal Court of Appeal finds that an overpayment of Part IV tax for a subsequent year did not cut off interest for an underpayment in the previous year, before application of the overpayment by CRA
Bakorp was found by CRA to have underpaid its Part IV tax for its 1993 taxation year, and overpaid Part IV tax for its 1995 taxation year. When CRA reassessed in February 2000, it applied the 1995 overpayment to the 1993 year and assessed interest from the 1993 underpayment date up to February 2000.
Bakorp unsuccessfully argued that interest should be computed as if the overpayment for its 1995 year had been retroactively applied at the time it paid its initially-computed Part IV tax liability for 1995 (i.e., shortly after its 1995 taxation year end rather than in February 2000) to the underpayment for its 1993 year, so that much of the interest that otherwise would have accrued on its underpayment for its 1993 taxation year was eliminated. Webb JA noted that this argument implied that Bakorp effectively would have been entitled to a double-interest benefit from the application of its overpayment for its 1995 taxation year – as that application would not only retroactively cut off interest on its underpayment for its 1993 taxation year but also generate refund interest respecting its overpayment for its 1995 year. This obviously could not have been intended.
Neal Armstrong. Summaries of Bakorp Management Ltd. v. MNR, 2016 FCA 74 under s. 187(2) and s. 248(28).
CRA indicates that auditors will ask for the accounting firm’s working papers where there is an absence of direct information and a high risk issue
Points made by Gord Parr, Director, Large Business Audit Division, International and Large Business Directorate, Compliance Programs Branch include:
- Effective April 1, 2016, the Compliance Programs Branch will be split into two branches: one dealing with international aggressive tax planning, large business audits, criminal investigations and the off-shore program; and the other with small-medium enterprise income tax, GST/HST programs, and SR&ED.
- CRA generally will disclose to taxpayers which of the three risk categories they fall into and what are the overall risk factors on the file.
- In order to facilitate an integrated approach to large business compliance, senior auditors from domestic, international and ATP will be put into integrated teams reporting to a large file case-manager.
- Large case managers now will be rotated every four, rather than every six, years.
- Under CRA’s “audit currency” policy, when it starts an audit it generally will look only at the most recent taxation year that has been assessed and the immediately preceding year. However, “if there are recurring issues, if the taxpayer is considered high risk, if the taxpayer has been less than transparent and cooperative with the CRA, then we will consider going back into earlier years to address those high-risk issues.”
- As announced at the 2015 Annual CTF conference, if information that was requested by Audit is not provided until the Appeals stage, there is a mandatory referral of the file back to Audit.
- Respecting BP Canada:
[A]uditors should attempt to collect the information from the most direct source, and in the least intrusive manner. So if the source documentation is available in the taxpayer's books and records, and there's open and transparent disclosure of the uncertain tax positions, there's a level of cooperation and mutual trust, and the CRA is getting the information it needs to determine whether taxable income is understated or the tax balance is overstated…then generally we wouldn't request access to the taxpayer's or the accountants' working papers. But, where we can't get that direct information, in those situations where there is a high risk issue we will request that information. The request has to be relevant to the outstanding issues… .
- BEPS has not yet had any effect on CRA’s transfer-pricing policies.
- Very few competent authority files end up in binding arbitration.
Neal Armstrong. 23 February 2016 Toronto Centre Tax Professionals Seminar.