News of Note
Walby – Tax Court of Canada finds that s. 248(30) provided no credit for the cash component under a gifting program
Email this ContentMacPhee J applied Maréchaux to find that since the gifting program participated in by the taxpayers was a single interconnected arrangement with a view to profiting from large charitable receipts, none of the “gifts” made by the taxpayers including their cash contributions, qualified as gifts for s. 118.1 purposes, so that no credit could be claimed for even the cash components, as now argued by the taxpayers.
He further found that since s. 248(30) only operated to cure for certain advantages where there was a “gift,” their lack of donative intent also meant no relief under s. 248(30). Furthermore, even if there were a cash “gift”, the amount of the related advantages (being the dollar amount of the software licences that were to be received and donated or, alternatively, the inflated tax credits to be received or, in the further alternative, the value of the “pretence” documents to be received) should be valued for s. 248(32) purposes based on the value of what was expected to be received at the time of the “donation” rather than on what in fact was received under a bogus arrangement. So valued, the advantage amount exceeded the cash contribution amount and, thus, exceeded the 80% threshold under s. 248(30).
Neal Armstrong. Summary of Walby v. The King, 2023 TCC 164 under s. 248(30).
Stackhouse – Tax Court of Canada finds that deductions of losses from a farming business carried on for profit were severely limited because it was a subordinate source of income
Owen J found that the taxpayer’s “farming business has always been subordinate to [her] medical practice as a source of income … and there is no evidence that that will change in the foreseeable future” so that, in light of the amendments to s. 31(1) to overrule Craig, her large farming losses were limited to $17,500 per annum.
Owen J noted that the “[t]here is no evidence that calls into question … that the Appellant pursued her clearly commercial farming activity for profit”, and then stated:
The result in this appeal is most unfortunate. The amended version of the rule has the effect in this case of precluding the operator of a bona fide farming business from deducting losses that would be available to the operator of any other type of business.
Neal Armstrong. Summary of Stackhouse v. The King, 2023 TCC 156 under s. 31(1).
Montour – Quebec Superior Court finds that tobacco duty could not be imposed on Mohawks because Finance had failed to consult with them in designing the tobacco duty provisions
Bourque JCS held that the tobacco duty imposed by s. 42(1) of the Excise Act, 2001 unjustifiably infringes the Aboriginal right and the treaty right of the Mohawks as guaranteed by s. 35(1) of the Constitution Act, 1982 and is of no force and no effect against them, so that the criminal procedures against the Mohawk accused (who had imported tobacco in bulk from the U.S. without paying excise duty) were permanently stayed.
In this regard, she concluded that the participation of the Mohawks in the tobacco trade was protected by their aboriginal right to “freely pursue economic development”. Furthermore, “the Excise Act, 2001 violates their Aboriginal rights by giving broad discretion to the Minister to issue licences without providing any guidance regarding Aboriginal or treaty rights, thereby imposing an unreasonable limitation of the rights”. In addition, there was “no evidence that the interests of the Mohawks of Kahnawà:ke have been taken seriously in the elaboration of the Excise Act, 2001” (para. 1605) so that the “the Crown did not discharge its duties to consult - and even less to accommodate”.
Neal Armstrong. Summary of R. v. Montour, 2023 QCCS 4154 under Constitution Act, 1982, s. 35(1).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and 6 further CRA interpretations released during July of 2002. Their descriptors and links appear below.
These are additions to our set of 2,662 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 21 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).
Finance comments on the new GAAR rules
Points made by Trevor McGowan on the new GAAR rules included:
- The introduction of the economic substance rule in s. 245(4.1) was intended to counter what may be an existing default approach towards dealing with economic substance, arising from Canada Trustco, of considering that a lack of economic substance is generally irrelevant, unless the provisions otherwise indicates - so that economic substance now is relevant.
- The tests in s. 245(4.1)(a) to (c) need to be applied holistically to the transactions as a whole.
- Other than the change of indicating that economic substance has some relevance (which he would not want to portray as an inconsequential change) there is essentially no change to the GAAR analysis.
- He provided a detailed run-down of why the typical exchangeable share deal would satisfy the economic substance tests in s. s. 245(4.1).
- He did not state that there is no general due diligence defence (see Consolidated Canadian Contractors and progeny) to the new penalty (in addition to the narrow defence in s. 245(5.2)), even though invited to comment on this point.
Neal Armstrong. Summary of 26 November 2023 CTF Conference - "The Future of the GAAR" under s. 245(4.1).
PepsiCo - Federal Court of Australia finds that part of the purchase of concentrate by an Australian bottler from an Australian PepsiCo company was a trademark royalty
A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (“SAPL”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to SAPL for bottling and sale, and granted SAPL the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (“PBS”) to SAPL. There was a similar arrangement for the licensed bottling and sale by SAPL of Gatorade pursuant to an EBA with another U.S. company (“SVC”).
The definition in Art. 12(4) of the Australia-U.S. treaty (the “DTA”) of “royalties” referred inter alia to “payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any … trademark.”
Moshinsky J found that Australia was permitted under the DTA to impose withholding tax of 5% on a portion of the purchases paid by SAPL to PBS (essentially determined by him to be 5.88%, based on expert evidence as to licensing “comparables”) on the basis that it constituted consideration for the use, or right to use, the trademarks to which PepsiCo or SVC were beneficially entitled, stating:
[W]hile the payments made by SAPL were, on their face, payments for the purchase of concentrate, this is not determinative of their characterisation for the purposes of Art 12(4) … .
PepsiCo and SVC nominated PBS to be the seller of the concentrate under the EBAs for the relevant years. This constituted a direction to SAPL to pay PBS rather than PepsiCo or SVC … .
PepsiCo and SVC … were entitled to receive the payments under the EBAs and directed SAPL to pay PBS. In these circumstances, PepsiCo and SVC were beneficially entitled to the relevant portions of the payments.
Neal Armstrong. Summary of PepsiCo, Inc v Commissioner of Taxation [2023] FCA 1490 under Treaties – Income Tax Conventions – Art. 12.
CRA rules that the domestication of an exempted Bermuda limited partnership under the DRULPA does not entail dispositions or the creation of a corporation
CRA ruled that the “domestication” of an exempted Bermuda limited partnership to become a limited partnership governed by the Delaware Revised Uniform Limited Partnership Act (the “DRULPA”) did not entail a disposition by the partnership of its property or by the members of their partnership interests, notwithstanding that the partnership did not have separate legal personality under Bermuda law, and acquired such personality under the DRULPA.
CRA accepted a representation that the partnership activity (of holding shares of subsidiaries) was carried on in common with a view to a profit and that the partnership was considered a partnership for purposes of the Act prior to the domestication transaction, and ruled that following the domestication, the partnership will be treated as a partnership for purposes of the Act. This suggests that a limited partnership governed by the DRULPA is a partnership rather than a corporation (see also 2006-0216451I7 F).
Neal Armstrong. Summaries of 2023 Ruling 2022-0950461R3 under s. 248(1) – disposition and s. 96.
GST/HST Severed Letters June 2023
This afternoon's release of four severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their June 2023 release) is now available for your viewing.
CRA indicates that participation in Canadian board meetings by telephone from outside Canada is not the exercise of the office in Canada
Regarding non-resident directors who participate outside Canada and by telephone at board meetings of a resident corporation held in Canada, CRA stated:
[A] non-resident director located outside Canada who participates in a meeting of the board of directors of a corporation resident in Canada held in Canada by means of a telephone system, or by means of any other telecommunications system, generally does not thereby realize income from an office or employment exercised in Canada. In those circumstances, the telephone system, or any other similar system, appears to us to be used as a means of transmitting services rendered from outside Canada.
CRA further indicated that, in the context of the directors not previously having been Canadian residents, their fees also would be exempted from withholding under Reg. 104(2).
Neal Armstrong. Summary of 17 December 2018 Internal T.I. 2016-0659031I7 F under s. 115(1)(a)(i) and Reg. 104(2).
CRA indicates that the conferral of a benefit on a non-resident sister by bearing the Part XIII tax on a royalty paid to it, is non-taxable
Canco was assessed for and paid Part XIII tax regarding royalty payments that it made to its non-resident parent (Parentco) and to a non-resident subsidiary of Parentco (Sisterco), and did not seek to recover that tax from them. Should s. 15(2) be applied on the basis of each non-resident owing it for the applicable tax?
CRA adverted to 2006-0214291I7, which effectively indicated that the unrecovered payment of Parentco’s Part XIII tax constituted a taxable benefit subject to ss. 15(1) and 214(3)(a), but that ss. 56(2) and 214(3)(a) did not apply to the unrecovered payment of Sisterco’s Part XIII tax because such payment would not be included in the non-resident’s shareholder’s income if Part I were applicable to it. The Directorate then found that Canco conferred a benefit on Parentco and Sisterco rather than Parentco and Sisterco having become indebted to Canco.
In the case of Parentco, this implied a taxable benefit pursuant to ss. 15(1) and 214(3)(a). However:
[T]he amount of Part XIII tax paid by Canco on behalf of Sisterco would not be included in computing the income of Sisterco under subsections 15(1) or (2) because, respectively, on the one hand, Sisterco is not a shareholder of Canco and, on the other hand, Sisterco would not be considered to a have received a loan from or become indebted to Canco.
Neal Armstrong. Summary of 21 June 2023 Internal T.I. 2017-0720181I7 under s. 214(3)(a).