News of Note
Arsove – Tax Court of Canada finds that there was no s. 126(1) foreign tax credit for US taxes for which a spurious offsetting U.S. credit had been claimed
Email this ContentA Canadian-resident individual and U.S. citizen was subject to US. income tax of 15% on a distribution to her out of her IRA. However, she filed her U.S. income tax return on the specious basis that the U.S. tax on the distribution was eliminated by a U.S. foreign tax credit, and the IRS accepted the return.
Lamarre ACJ found that, as no U.S. tax was “ultimately imposed” on the taxpayer, no Canadian foreign tax credit was available. She also noted that this result was consistent with “the purpose of the foreign tax credit… to prevent double taxation.”
Neal Armstrong. Summary of Arsove v. The Queen, 2016 TCC 283 under s. 126(1).
CRA finds that the advantage tax applies where a specified beneficiary of an RCA assigns her rights to receive distributions from the RCA to secure a personal loan
CRA found that the advantage tax in s. 207.62 applied where a specified beneficiary of an RCA assigned her rights to receive distributions from the RCA in order to secure a personal loan. CRA added:
[T]he advantage tax is equal to the present value of the beneficiary’s savings from the secured borrowing terms as compared to those of an unsecured borrowing. If it had been determined that the loan terms did not reflect arm’s length terms, the full amount of the loan would have been subject to the advantage tax.
Neal Armstrong. Summary of 16 September 2016 Internal T.I. 2013-0500581I7 under s. 207.5(1) – advantage – (a).
CRA gives examples of where the holding by an RCA trust of life insurance policy providing more than a nominal death benefit gives rise to RCA advantage tax
CRA in two interpretations has expanded on its comment in 2013-0481421C6 that the holding by an RCA trust of life insurance policy providing more than a nominal death benefit could give rise to RCA advantage tax.
The first interpretation concerned an RCA trust holding a a universal life insurance policy on the life of the individual who was the sole specified beneficiary of the RCA. The amount of the death benefit under the policy was constant over the duration of the policy, while the cash value increased each year, and the protection component correspondingly decreased each year. CRA stated:
[T]he amount of the protection component of the death benefit under the policy far exceeds the individual’s own entitlement to retirement benefits under the RCA. The amount also far exceeds a reasonable level of survivor benefits and there is no actuarial basis to support the amount as being reasonable. Upon the death of the individual, regardless of the individual’s number of years of service, salary history or age, the funds derived from the proceeds of the protection component of the death benefit (as well as the cash value…) would become available to the individual’s spouse…or… estate.
[T]he yearly life insurance coverage… constitutes an advantage…that is subject to advantage tax.
In a similar vein, in the second interpretation respecting a trusteed defined benefit supplementary pension plan (an RCA) for several key owner-managers, CRA stated that there “would be an RCA advantage if the policy was acquired to, in effect, provide key-person coverage to indemnify the employer for potential loss of profits or additional costs that may be incurred in the event of the death of the insured.”
Neal Armstrong. Summaries of 2015 External. T.I. 2013-0499501E5 and 2015 External. T.I. 2014-0544211E5 under s. 207.5(1) - advantage - (a).
CRA reaffirms rebuttable application (subject to 74.4(4)) of 74.4(2) to estate freeze where trust with minor child acquires common shares
When asked to comment on factors taken into account in deciding if “one of the main purposes” of a transfer or loan is reasonably considered to benefit a designated person, CRA stated:
In…2001-0067725…we stated that in a situation where a trust of which the beneficiary is a minor child of the freezor acquires common shares of the freezor’s Holdco on an estate freeze, the provisions of subsection 74.4(2) will generally apply, subject to subsection 74.4(4). The taxpayer would have to rebut the presumption that “one of main purposes” of the transfer was not to reduce the income of the individual and benefit a designated person.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, Income Tax Q.9 under s. 74.4(2).
CRA’s decision to not appeal University of Calgary does not mean that it would not challenge similar ITC methodologies
University of Calgary found that UC's method of calculating input tax credits was fair and reasonable even though equal weight was given to: (often exempt educational) building space (with all of its infrastructure); and a (commercial) parking lot space. CRA commented:
Although the CRA did not appeal…, in subsequent cases with similar types of entities we will be taking a close look… keeping in mind that, an ITC allocation method must reasonably reflect the actual use of the inputs and the manner in which the person conducts its business generally. For example, a university whose predominant purpose is education and research would generally not acquire its main campus over 40% for the purpose of making taxable supplies for consideration.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.15 under ETA s. 141.01(2).
CRA will try to ignore Miedzi Copper re holding company ITCs
In Miedzi Copper, a holding company whose only significant activity was financing its Lux sub which, in turn, financed exploration companies in Poland, was entitled under ETA s. 186 to full input tax credits for the GST on all the fees charged to it by its executives (who were independent contractors rather than employees) and by professional firms. When asked about Miedzi Copper (and the predecessor Stantec case, which CRA also lost), CRA stated:
Our position on the interpretation of section 186 has not changed. … We will apply the Court’s decision in Miedzi Copper [and Stantec] where the situation has the same facts as that case.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.14 under ETA s. 186(1).
CRA notes requirement to issue two assessments where unclaimed GST/HST rebates are allowed on a s. 296(2.1) assessment of net tax
After noting the requirements under s. 296(2) and (2.1) to allow unclaimed but valid credits when assessing net tax, CRA went on to note:
[B]ecause GST/HST rebates are required to be assessed under section 297, even when the rebate amount is allowed under subsection 296(2.1), the registrant will receive two Notices of Assessments, one for the changes to net tax and one for the GST/HST rebate.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.11 under ETA s. 296(2.1).
CRA will no longer unilaterally issue backdated GST/HST registrations
New ETA s. 241(1.5) permits CRA to unilaterally assign a registration to a taxpayer, if it has first notified the taxpayer that the taxpayer should register. However, it cannot backdate the registration.
CRA appears to have acknowledged that this means that CRA can no longer follow its previous practice of unilaterally issuing backdated registrations. However, see also CBA RT Q.23, where CRA stated:
If the CRA exercises the authority under subsection 241(1.5)…to register a particular person, the CRA could still assess that person under paragraph 296(1)(a)…for unremitted net tax in respect of reporting periods prior to that person’s effective registration date.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.10 under ETA s. 241(1.5).
CRA’s policy is to deny initial ITC claims without opportunity for representation
CRA stated that “RIP examiners” (i.e., staff reviewing GST/HST refund claims as initially filed) are not required to provide any notice:
when only disallowing ITCs. Proposal of examination results is only mandatory if GST/HST is assessed, a self-assessment is raised or when reassessing a prior period. However, RIP examiners are required to send a final letter to all registrants explaining their adjustments.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.8 under ETA s. 229(1).
CRA reiterates its policy on backdated voluntary GST/HST registrations
CRA reiterated its established policy re backdated voluntary GST/HST registrations that:
If a taxpayer who is registering voluntarily requests that a registration be backdated beyond a 30-day period…[t]he taxpayer must provide evidence that GST/HST had been charged from the date requested on a regular and consistent basis. Documentation such as copies of the sales journal, sales or service contracts or the earliest 3 to 5 invoices are generally sufficient for this purpose.
What if the request is rejected? CRA noted that agents at the applicable Regional Correspondence Centre will have scanned the documentation that was sent in into a searchable database, and that if the request was denied because this documentation was insufficient, “taxpayers can resubmit the request and the appropriate proof to backdate the registration.”
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, GST Q.6 under ETA s. 240(3).