News of Note
ConocoPhillips – Federal Court finds that CRA effectively has the discretion under s. 220(2.1) to indefinitely extend the period for filing a Notice of Objection
Email this ContentS. 220(2.1) provides that “where any provision of this Act… requires a person to file a… document…the Minister may waive the requirement, but the person shall provide the document…at the Minister’s request.” Boswell J has found that s. 220(2.1) accords the Minister the discretion to waive the requirement to file a Notice of Objection. Thus, it was improper for CRA to peremptorily reject (on the grounds that it had no power to do so) a ConocoPhillips request that CRA waive a requirement for it to object to a reassessment which ConocoPhillips found out about well after the deadline for getting an extension to object to it.
What does this mean? Boswell J indicated that if CRA waived the requirement for filing a Notice of Objection, it was then empowered by s. 220(2.1) to request the waived document (i.e., to request ConocoPhillips to file a Notice of Objection), so that the appeals process could get back on track – and noted that “should the Minister in this case unreasonably refuse to exercise her jurisdiction and authority to waive the requirement for a notice of objection, ConocoPhillips could then challenge that refusal by way of judicial review in this Court.”
Neal Armstrong. Summaries of ConocoPhillips Canada Resources Corp. v. M.N.R., 2016 FC 98 under s. 220(2.1) and Statutory Interpretation - French and English versions.
CRA doubts the GST free-supply rule provides ITCs to holdcos providing free management to operating subs which generate interest/dividends
A 2004 Interpretation (54669) indicated that a holding corporation supplying management services to related corporations with operating businesses or other exclusive commercial activity could claim ITCs to recover the GST on the expenses incurred in such management activities under the “free supply” rule in ETA s. 141.01(4).
More recently, CRA has substantially qualified this view by confirming that it would consider that “where a person provides property or a service to a person for no consideration but receives interest or dividend revenue from that person it is unlikely that ITCs would be available.” Based on an earlier comment, CRA's rationale might be that although the direct purpose of the management services is to further the operating business (which arguably is all that matters), the indirect purpose of promoting financial returns to the holding corporation (e.g., dividends) should govern.
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 34 under ETA s. 141.01(4).
Hedges – Federal Court of Appeal finds that marihuana sales were not zero-rated drug supplies
The zero-rating of controlled drugs in Sched. VI, Part I, s. 2(d) would apply to dried marihuana if it is viewed as a drug which may only be sold to a consumer under an "exemption" from Health Canada. After noting the Crown’s concession that marihuana is a “drug,” Rennie JA found that "Authorizations to Possess" (ATPs) issued by Health Canada were not such exemptions, so that marihuana did not come within this carve-out for drugs which could only be sold with an exemption. He also was not impressed by the “illogic” of arguing that over-the-counter drugs were taxable because they could be legally sold without exemption (or prescription), whereas sales of marihuana were zero-rated because exemptions were required – even though in the case before him of an unlicensed and illegal producer, no ATPs (incorrectly argued to be “exemptions”) had in fact been obtained.
The findings in this case suggest that licensed (as contrasted to illegal) producers also are required to charge GST or HST to consumers with ATPs.
Neal Armstrong. Summary of Hedges v. The Queen, 2016 FCA 19, under ETA, Sched. VI, Part I, s. 2.
Income Tax Severed Letters 3 February 2016
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that employment severance is not CEE
Canadian exploration expenses are defined to include an “expense incurred…in drilling” etc. CRA considers that a severance payment made to a terminated exploration employee is not CEE (or CDE) as “a severance payment is an expense made by the corporation at the moment of cessation of employment and does not constitute an amount paid for services rendered.” This conclusion is not overwhelmingly correct, as the employee would not be owed any severance if he had not performed any services (see also Lo).
Neal Armstrong. Summary of 8 December 2015 T.I. 2015-0616321E5 F under Reg. 1201(1) - Canadian exploration and development overhead expense.
Gill – Tax Court of Canada finds that the requisite intention for GST-rebate purposes to purchase a new home as a primary residence is determined at the time of agreement rather than closing
One of the requirements for the GST rebate for new homes is that “at the time the particular individual becomes liable…under an agreement of purchase and sale of the complex…[with] the builder…the particular individual is acquiring the complex… for use as the primary residence of the particular individual or a relation… .” The French version of ETA s. 254 seems to indicate that the relevant time for determining this primary-residence intention is the closing, whereas the English version (evincing a recurring standard of ETA drafting) has so far been interpreted as pointing more to the time of signing the purchase agreement.
Smith J has interpreted the French version as pointing to the time of signing the purchase agreement (which under Art. 1785 of the Civil Code can be styled as a “preliminary contract”), as “this interpretation accords a common meaning to the two versions of the provision.”
Neal Armstrong. Summary of Gill v. The Queen, 2016 CCI 13, under ETA s. 254(2)(b).
CRA indicates that the s. 110(1.1) election is not available if employee stock options on Target shares are purchased by the purchaser rather than surrendered to Target
An employee can claim a s. 110(1)(d) deduction for a stock option benefit realized by the employee on the cash settlement of a stock option if among other things the employer elects under s. 110(1.1) that neither it nor any person not dealing at arm’s length with the employer will take a deduction for the amount.
CRA considers that the election and, therefore, the s. 110(1)(d) deduction, is not available where at the same time as an arm’s length third party purchases all the shares of the employer, it also purchases all the employee stock options. It considers that the employer can only make the election if it or a person with whom it did not deal at arm’s length made the s. 7(1)(b) payment to the employee – whereas here, it is the third party who made that payment, and CRA considers the third party to not be an eligible payer because it dealt at arm’s length with the employer prior to its acquisition of the employer’s shares.
Neal Armstrong. Summary of 7 December 2015 T.I. 2015-0585171E5 F under s. 110(1.1).
CRA finds that fees paid to the U.S. or U.K. for access to customer lists were exempt royalties
The applicable Treaty exempts, from withholding tax, a payment made by a resident of Canada to a U.S. or U.K. resident “for the use of or the right to use… information concerning industrial, commercial or scientific experience.” CRA considered that this exemption would apply to amounts styled as “fees” paid for the right to access lists of customers who had purchased particular types of products.
Neal Armstrong. Summary of 15 June 2015 T.I. 2014-0525501E5 under Treaties – Art. 12.
Standard Life has not changed CRA’s view that the fresh start rule can apply to a newly-acquired foreign affiliate
In 2014-0536581I7, CRA found that the fresh start rule can apply to bump the tax basis of the assets of a foreign corporation which is acquired by Canco and thereby becomes a foreign affiliate of Canco which is carrying on an investment business, even though s. 95(2)(k)(ii)(A) references a requirement that the “foreign affiliate” have also carried on that business in the preceding taxation year. CRA considered that this was merely a convenient way of referring to the corporation which now happens to be a foreign affiliate of Canco rather than implying that there was a requirement that it also have been a foreign affiliate of Canco in the preceding year.
In Standard Life, Pizzitelli J took essentially the opposite approach to the interpretation of a similar requirement under s. 138(11.3) – so that it was necessary for the taxpayer to qualify as an "insurer" in the preceding taxation year rather than only in the current year, in order for an asset bump to be available. When this point was raised with the Rulings Directorate, it stated:
[I]n accordance with the textual, contextual and purposive approach…we are of the view that there are substantial differences in interpreting the provisions of subsection 138(11.3) and paragraph 95(2)(k)… as applicable to the relevant facts in the Standard Life case and document 2014-053658. As a result, our conclusions previously reached in document 2014-053658 remain unchanged.
Neal Armstrong. Summary of 5 November 2015 Memo 2015-0585381I7 under s. 95(2)(k).
Laval University – Tax Court of Canada finds that an agreement to offer, at a distant date, to license premises to unidentified individuals was deemed to be a real property supply
Tardif J found that two agreements under which Quebec City agreed to pay a $10M grant to Laval University for the expansion of its sports complex and the University agreed that the City populace would have access to the complex for 70% of its operating hours constituted a supply by the University in consideration for the $10M.
He then found that ETA s. 136(1) deemed this to be a supply of immovable property (which therefore was a taxable supply) rather than a potentially exempt supply of movable property or a service. On its face, s. 136(1) assimilates, to real property supplies, licences of real property – whereas, what was at stake here was a promise that at a future date, the University would provide licences of sorts to as-yet unidentified individuals who wanted to exercise or play sports at the complex. Accordingly, this represents an expansive interpretation of s. 136(1).
Neal Armstrong. Summaries of Laval University v. The Queen, 2016 CCI 17, under ETA s. 123(1) – consideration, s. 136(1).