News of Note
CRA considers on-line seminars generally to be a supply of property rather than a service for GST/HST purposes
Email this ContentCRA has developed a list of factors that are generally present when an on-line supply by a school authority is a “service of instructing,” exempted from GST/HST under Sched. V, Pt. III, s. 8, rather than a supply of “intangible personal property,” including that there is systematic instruction, monitoring or supervision provided over an extended period (e.g., weeks or months) with homework, and with assessment of competency upon completion (with the potential to flunk), and with successful completion of one activity being a prerequisite to moving onto the next level.
On the other hand, there generally is a supply of intangible personal property (e.g., admission to a workshop or seminar) where there is little individualized interaction with the participant and with mere attendance (over the activity period of a few hours or a few consecutive days) being sufficient for the participant to receive evidence of successful completion of the activity (whose purpose is merely to provide information to, or to facilitate the exchange of information amongst, participants).
Neal Armstrong. Summary of Excise and GST/HST News - No. 98 under ETA Sched. V, Pt. III, s. 8.
CRA expands Folio S3-F6-C1 to state that following a winding-up or amalgamation, assumed debt can be allocated for interest-deduction purposes to eligible assets
CRA has added the following two paragraphs to its Folio on interest deductibility:
1.63.1 ...Where a corporation acquires the shares of another corporation in exchange for an assumption of debt or a note payable to the vendor, the CRA would consider the shares that were initially acquired (and have disappeared) to have been substituted for assets formerly held by the acquired corporation that has been wound-up or amalgamated. These assets would then be tested for an eligible purpose.
1.63.2 In situations such as those in ¶1.63.1 but where the debt represents only partial consideration for the share acquisition, if some assets do not meet the purpose test, the taxpayer may adopt a flexible approach in linking the debt to the eligible assets formerly held by the acquired corporation... . Similarly, if some of those eligible assets are subsequently distributed as a dividend or a return of capital, taxpayers would be entitled to link the debt to any remaining eligible assets... .
This essentially repeats a position released 11 days ago in 2014-0555291I7 (dealing with Buyco acquiring Target partly with borrowed money, amalgamating with Target and then distributing Target assets without reducing the debt) except that it deals with purchase price indebtdness rather than borrowed money.
Neal Armstrong. Summary of S3-F6-C1 under s. 20(1)(c).
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).