News of Note
CRA rules that on-charges made to an Ontario tire seller’s customers for waste diversion fees imposed on it by Ontario Tire Stewardship are subject to HST
A company (“ACo”) which imports tires into Ontario is required to pay a per-tire “stewardship fee” to Ontario Tire Stewardship (“OTS”) to help cover the costs of the used tire recycling program carried on by OTS. ACo then adds a separately-identified “OTS charge” on its invoices for its tire sales in order to recoup those OTS fees.
In 144133, CRA had ruled that the “fees” charged by OTS were not subject to HST because OTS was not supplying anything to the companies required to pay them. CRA has now ruled that the charges made by ACo to its customers to recoup the OTS fees paid by it are part of the consideration for its sales to them, so that those charges are subject to HST.
This is broadly analogous to HST in effect being imposed on municipal taxes when the tenant pays such taxes, viewed as a form of additional rent (see 156633 and 38588).
Neal Armstrong. Summary of 18 September 2015 Ruling 168521r under ETA s. 123(1) - consideration.
Columbia Sportswear - Karnataka High Court finds that quality assurance work in a purchasing office in India did not give rise to a permanent establishment there
A U.S.-resident outdoor apparel company did not sell or distribute its products in India, but established a liaison office there to purchase, for export, apparel from local manufacturers. The U.S.-India Treaty had the standard exclusion from the definition of “permanent establishment” for
the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise.
The Indian tax authority latched onto the word "solely." However, the Karnataka High Court found that activities of the liaison office in doing more than bare-bones purchasing agent work, such as detailed quality assurance work on the manufacturer's products and acting as a go-between between them and the U.S. head office, did not detract from its coming within this exception.
Neal Armstrong. Summary of Columbia Sportswear Co. v. Director of Income Tax (2015), W.P. No. 39548/2012 (T-IT) under Treaties – Art. 5.
CRA recognizes the concept of intangible real property
CRA reversed 2014-0522241I7 to find that a right to mine for minerals in a mineral resource outside Canada is intangible property rather than tangible property (stating that “real property can include… intangible property”), so that the right constituted “specified foreign property” under para. (a) rather than “tangible property” under para. (b) of the definition of that term in s. 233.3. Use of “intangible property” (e.g., in s. 13(7.5)(c)) or “tangible property” (as contrasted to real property, intangible personal property or tangible personal property) is quite rare in the ITA and ETA, so that this point appears insignificant.
Neal Armstrong. Summary of 2016-0631181I7 under s. 233.3(1) – specified foreign property.
CRA confirms that U.S.-dollar dividends are translated on a cash rather than accrual basis
Even before 2012, CRA's position was that, in the case of regular (cf., deemed) dividends, in order for an eligible dividend designation to be valid, it must stipulate the (dollar) amount of the dividend (2010-0373281C6), and this is even clearer following an amendment, effective for dividends paid after March 28, 2012, to permit designation of part of a dividend as an eligible dividend (see 2013-0512041E5 F).
Citing Banner Pharmacaps, CRA considers that a dividend does not “arise” for s. 261(2) purposes until it is paid (rather than declared) so that its amount, including for eligible dividend designation purposes, is translated using the spot rate on the payment date.
Neal Armstrong. Summary of 20 November 2014-0539951E5 under s. 261(2).
Income Tax Severed Letters 16 March 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
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
A 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).