News of Note
CRA confirms that s. 60 deductions do not reduce foreign source income for FTC purposes
Email this ContentS. 126(1)(a) generally denies a foreign tax credit for non-business income taxes paid to a country’s government to the extent that the taxpayer does not have (non-business) income sourced in that country. A CRA ruling dealt with a Canadian-resident individual who contributed to a 401(k) plan while employed in the U.S. He will now collapse the plan and contribute all or part of the withdrawn amount (which will be subject to U.S. withholding tax and to a sort of penalty tax of 10% of the withdrawn amount under Code s. 72) to his RRSP, and claim a s. 60(j) deduction for this contribution.
CRA ruled that for purposes of s. 126(1)(b)(i), his U.S.-source income will be the gross amount included in his income under s. 56(1)(a)(i), without deduction for his claim under s. 60(j). Thus, he potentially can receive a full FTC for the U.S. withholding and penalty tax even though his net U.S.-source income might be nil. Although this might seem contrary to IPL, the key may be s. 4(2), which provides that s. 60 deductions do not reduce income from a particular source.
Neal Armstrong. Summary of 2015 Ruling 2015-0572541R3 under s. 126(1) and s. 60(j).
Joint Committee comments on charitable gifting rules
The Joint Committee has made submissions on the proposed charitable gifting rules in draft ss. 38.3 and 38.4, pointing out various anomalies, ambiguities and oddly narrow policy choices.
Income Tax Severed Letters 14 October 2015
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Telus – Ontario Superior of Court of Justice orders rectification to reorganize a corporate structure to reflect what it was thought to be at the time of making a tax election
A multi-tier alignment election made by Telus respecting a two-tier partnership structure held by it, to continue with the January 31 fiscal year ends of the two partnerships, was subsequently discovered by Telus to be invalid because it had overlooked a minority interest of one of the partnerships in a third partnership. If at the time Telus had known about this problem, it would have caused the partnership holding the minority interest to transfer it on a rollover basis to the partnership’s corporate subsidiary.
In granting the Telus application to correct this error by ordering this transfer to occur on a retroactive basis, Hainey J rejected the Crown submission that it was impermissible to use rectification to order a transaction that was not even remotely contemplated at the time, and stated following Juliar and Fairmont that "the Applicants had a specific and continuing intention throughout to file a valid Election." He stated in the alternative, and following TCR, that if rectification was not available, he could "rely on the equitable jurisdiction of this court" to make the same order.
Neal Armstrong. Summary of Telus Communications Inc. v. A.G. of Canada, 2015 ONSC 6245 under General Concepts – Rectification.
Establishing a “specific intent” should not be necessary in rectification cases
Joel A. Nitikman suggests that the proposition appearing in some of the western cases that, in order for rectification to be available, there must have been a specific intent to have implemented the requested transactions, is inconsistent with the established proposition that rectification can be used to remedy negligence: generally the negligence will be a failure to even think about a particular tax issue so that the supposedly-required specific intent will be lacking.
Neal Armstrong. Summary of Joel A. Nitikman, "Rectification: Specific Intent? General Intent? What is the Test? – Part II", Tax Topics, Wolters Kluwer, No. 2274, October 8, 2015, p.1 under General Concepts – Rectification.
CRA acknowledges that a residential exemption certificate generally protects a purchaser from GST even where the vendor is non-resident
ETA s. 194 provides that where a vendor erroneously states or certifies in writing that it is making an exempt supply of residential real estate then, unless the purchaser knows or ought to have known that the supply is not exempt supply, the purchase price is deemed to be inclusive of HST or GST, so that the purchaser cannot be assessed for that tax. CRA has acknowledged that this provision applies even were the vendor is a non-resident, so that its only recourse is to go after the non-resident for the tax.
Neal Armstrong. Summary of CBAO 2014 Roundtable, Q. 25 under ETA s. 194.
CRA finds that the two-out-of-three telecommunications GST place-of-supply rule overrides the general rules
ETA, s. 142(1)(g) deems a supply by a registrant of a service which is partly performed in Canada to be made in Canada. However, s. 142.1 provides a "two out of three" rule for deeming a telecommunication service to be made in Canada - for example, in the case of a telephone call, if two of the following are in Canada: place where the call is emitted; where it is received; and the billing location. CRA considers a telecommunication service, that is not deemed to be made in Canada under this rule, to be made outside Canada, even if that service is partly performed in Canada.
Neal Armstrong. Summary of CBAO 2014 Roundtable, Q. 27, under ETA s. 142.1(2)(b).
Devon – Federal Court of Appeal implies that large corporations may have the right to raise new issues within one year of their Objection deadline (and finds that they can appeal new issues which were considered and rejected by CRA Appeals)
Although s. 169(2.1) prohibits a large corporation from appealing to the Tax Court an issue which it did not raise in its Notice of Objection, Webb JA found that where an appeals officer considers and communicates rejection of subsequently-raised issues, this has the effect of amending the Notice of Obection, so that the new issues can also be raised in a Notice of Appeal. He also stated:
[S]ince the Minister accepted these submissions, it is a moot point whether the Minister could have refused to accept them on the basis that they were made well after the time permitted…for seeking an extension of time to file a notice of objection, had expired.
This suggests that it may not work for CRA to respond to this decision by instructing appeals officers to refuse to consider new issues if such issues are raised in submissions made within the s. 166(7)(a) one-year extension period.
Neal Armstrong. Summary of Devon Canada Corp. v. The Queen, 2015 FCA 214, under s. 169(2.1).
6051944 Canada Inc. – Tax Court of Canada rejects CRA GST position that a management fee was a profits distribution
A private company with a new home construction business with revenues in the $12M to $16M range had a good 2009 fiscal year and when the 2009 accounts were prepared, accrued and paid management fees to its two shareholder-management companies of $1.8M rather than the fees in the $1M to $1.2M range, as had been accrued and paid for nearby years. A GST auditor was offended, claiming that the enhanced fee was "merely a profit distribution mechanism," and denied input tax credits on the portion of the fees in excess of $1M under ETA s. 170(2) (an analogue of ITA s. 67, although Favreau J perceived significant wording differences).
In allowing the appeal, Favreau J referred to the value of the services provided and the resulting profitability of the business. He did not seem troubled by the fact that the fees varied significantly from year to year notwithstanding that essentially the same services were provided each year. He also noted that for income tax purposes, what was deductible to the company was includible in the income of the management companies at the same federal rate of income taxation.
Neal Armstrong. Summary of 6051944 Canada Inc. The Queen, 2015 CCI 180 under ETA, s. 170(2).
High-Crest - Tax Court of Canada finds that government funding only of operating costs of a nursing home addition did not detract from its purpose of increasing beds
Although assisted–living facilities (or additions thereto) normally are subject to HST on their fair market value when substantially completed, ETA s. 191.1(2) effectively deems the HST to be payable on the greater of most costs and the fair market value where the builder received government funding "for the purpose of making residential units in the complex available to [seniors]."
Owen J found that although the form of government assistance for an addition to a Nova Scotia nursing home was its agreement to subsidize operating costs relating to the additional residents and not the construction costs:
[T]his does not alter the fact that the dominant purpose of the Department in…agreeing to make these payments was to secure additional long‑term care beds for seniors in Nova Scotia. The immediate result of the payments may have been the provision of the Services but that was not the purpose behind the payments.
Neal Armstrong. Summaries of High-Crest Enterprises Ltd. v. The Queen, 2015 TCC 230 under ETA, s. 191.1(1) – government funding and General Concepts – Intention.