News of Note

A CRA ruling contemplates that interest which the issuer can elect not to pay is interest for Part XIII but not s. 20(1)(c) purposes

A public company (ACo) will issue unsecured subordinated Notes, whose terms will be conventional except that:

  • ACo may in its discretion elect by notice in writing to cancel the payment of the interest coupons on a going-forward basis, but recognizing that it thereupon loses its right to pay dividends (or the equivalent such as share repurchases) until it recommences interest payments.
  • On the occurrence of a specified event (presumably, some sort of financial difficulty), the Notes will be converted into a number of common shares based on a formula-determined conversion ratio (such that the shares' value could be well below that of the converted principal amount).

The Ruling “Additional Information” states:

The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.

CRA then ruled that the Interest amounts paid to an arm’s length Noteholder will not be subject to Part XIII tax under s. 212(1)(b). Thus, CRA accepted that the Interest on the Notes was interest, but perhaps did not consider that the Interest was paid “pursuant to a legal obligation to pay interest” as required under s. 20(1)(c).

Neal Armstrong. Summary of 2018 Ruling 2017-0732001R3 under s. 212(1)(b).

CRA finds that the GST/HST exemption for valuing damages to insured property did not extend to valuing the property’s replacement value

Para. (j.1) of the financial service definition exempts “the service of providing an insurer … with an appraisal of the damage caused to property, or in the case of a loss of property, the value of the property, where the supplier of the appraisal inspects the property, or in the case of a loss of the property, the last-known place where the property was situated before the loss.” CRA ruled that this exemption did not apply where the service provider merely reported on the replacement value of the damaged property rather than of the damage to the property and (respecting the lost property situation), where it did not inspect the last known place where the property was situated before the loss.

Neal Armstrong. Summary of 20 December 2018 Ruling 189221 under ETA s. 123(1) – financial service – para. (j.1).

Ellaway – Tax Court of Canada finds that no moving expense deduction was available for a move to Canada

An Australian resident who moved to Canada to take up residence there was properly denied her moving expenses of $59,188 because she did not satisfy the requirement in the s. 248(1) definition of “eligible relocation” that, before the move, she ordinarily resided at a residence that was in Canada. Owen J also rejected the taxpayer’s submission that IT-178R3 was misleading in this regard and stated that, in any event, “information bulletins do not create estoppels.”

Neal Armstrong. Summaries of Ellaway v. The Queen, 2019 TCC 118 under s. 248(1) - “eligible relocation” – para. (c) and Statutory Interpretation – Interpretation Bulletins.

CRA rules that a note whose repayment obligation is 100% linked to a commodity does not bear participating debt interest

ACo will issue senior unsecured notes for 100% of their principal amount and bearing an annual coupon of a stipulated percentage of the principal. On maturity, the amount paid (the “Final Redemption Amount “) will equal the product of the principal amount, and an index reflecting the price performance of the specified underlying commodity between a date shortly before the issue date, and a date shortly before the maturity. The Final Redemption Amount will be payable in cash unless a Noteholder timely elects for physical settlement. A calculated early redemption amount is payable on default or certain other events. ACo will likely hedge its exposure under the notes through options.

CRA ruled that s. 212(1)(b)(ii) (which imposes withholding tax on participating debt interest) will not apply to any payments of the interest coupons or to any payments on maturity or earlier redemption. The rationale stated in the CRA headnote is that:

The commodity is not sufficiently linked to the profitability of the issuer’s business.

No interest deductibility ruling was requested, but CRA presumably accepted that the notes were debt.

Neal Armstrong. Summary of 2018 Ruling 2018-0766771R3 under s. 212(3) – participating debt interest.

Renaud – Federal Court of Appeal affirms that a benevolent law practice for indigent clients thereby had a “personal aspect," justifying use of REOP test to deny losses

A Quebec lawyer who worked full-time as a federal government employee also worked 5 to 15 hours a week providing legal services to clients of modest means. Of the four years in issue, practice revenues ranged between $850 (or 5% of claimed expenses) and $3,850 (37% of claimed expenses). Jorré J below observed that the taxpayer’s part-time law practice verged on charitable volunteerism – and, more generally, found that since such practice had a personal aspect, the question as to whether her practice was a business could (consistently with Stewart) be tested through determining whether it had a reasonable expectation of profit, as to which there was none. Her claimed losses were non-deductible.

In affirming the decision below, Nadon JA stated that “there is no doubt that the law practice of the appellant … certainly qualifies as having a personal aspect."

Neal Armstrong. Summary of Renaud v. Canada, 2019 CAF 154 under s. 3(a) – reasonable expectation of profit.

MEO – European Court of Justice finds that an early termination fee was consideration for the contracted service

Subscribers to the services of a Portuguese telecommunications company (“MEO”) agreed to pay for a minimum subscription period - and when they discontinued service before the end of that guaranteed period they were required under the terms of their contracts to pay a lump sum equal to their monthly subscription fee multiplied by the number of remaining months in the guaranteed period. The ECJ found that this lump sum was taxable “consideration” received by MEO for its services on ordinary principles for VAT purposes, stating:

[I]t must be held that the consideration for the amount paid by the customer to MEO is constituted by the customer’s right to benefit from the fulfilment, by MEO, of the obligations under the services contract, even if the customer does not wish to avail himself or cannot avail himself of that right for a reason attributable to him.

In Canada, the distinction between consideration received by the supplier of services pursuant to the services contract, and compensation received by it for termination of the contract, is relevant because the latter amount is deemed by ETA s. 182 to be inclusive of GST/HST.

Neal Armstrong. Summary of MEO — Serviços de Comunicações e Multimédia SA v. Autoridade Tributária e Aduaneira, ECLI:EU:C:2018:942 (ECJ (5th Chamber)) under ETA s. 123(1) – consideration.

6 more translated CRA interpretations are available

We have published translations of a CRA interpretation released last week, an interpretation released in July 2012 (which a few months ago we missed translating in its proper sequence) and a further 4 CRA interpretations released in February, 2012. Their descriptors and links appear below.

These are additions to our set of 867 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/3 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for June.

Bundle Date Translated severed letter Summaries under Summary descriptor
2019-05-22 26 May 2016 External T.I. 2014-0527251E5 F - Interest Deductibility Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) interest was deductible on a note indirectly issued to satisfy a dividend
2012-07-27 3 July 2012 External T.I. 2012-0448651E5 F - Allocation of Safe Income Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) apportionment of safe income amongst three classes of discretionary common shares took into account the entitlement of the first class under the USA to a preferential dividend
2012-02-17 8 February 2012 Internal T.I. 2011-0431581I7 F - Sous-alinéa 6(1)a)(vi) proposé General Concepts - Effective Date taxpayers can file based on proposed legislation and wait until announcement that it will not be implemented
Income Tax Act - Section 220 - Subsection 220(3.1) no penalties if taxpayer promptly refiles after announcement that favourable amendment will not proceed
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(vi) “studies” are at all levels and bursaries and tuition reimbursements potentially are included
2012-02-10 27 January 2012 Internal T.I. 2011-0428831I7 F - Crédit d'impôt pour frais médicaux Income Tax Act - Section 118.2 - Subsection 118.2(3) - Paragraph 118.2(3)(b) taxpayer could claim credit for years where he was no longer entitled to claim repaid Quebec drug benefit against private plan due to being out of time
Income Tax Act - Section 152 - Subsection 152(4.2) application under s. 152(4.2) for drug claim deductions that later emerged
12 January 2012 External T.I. 2011-0421791E5 F - Usufruit de terres boisées acquises avant 1987 Income Tax Act - Section 248 - Subsection 248(3) - Paragraph 248(3)(a) gift of bare ownership resulted in deemed disposition to deemed s. 248(3)(a) personal trust
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c) property acquired before 18 June 1987 will qualify if s. 110.6(1.3)(c) (i) or (ii) satisfied
27 January 2012 External T.I. 2011-0421551E5 F - Pompiers volontaires Income Tax Act - Section 3 modest amounts received by volunteers are not taxable
Income Tax Act - Section 118.06 - Subsection 118.06(1) “volunteer” firefighters are not true volunteers

Finance official indicates that the PPT should be applied before GAAR

Stephanie Smith provided various MLI-related comments, including several noted below:

  • The Canadian MLI implementing bill provides that, to the extent of any inconsistency between the provisions of the MLI (e.g., the principal purpose test (“PPT”)) and those of the Income Tax Convention Interpretation Act, the latter (the “ITCIA”) will prevail. S. 4.1 of the ITCIA provides that “notwithstanding the provisions of a Convention … the GAAR, applies to any benefit provided under the Convention.” The intention is that if the PPT applies, there will be no tax benefit under the Convention, to which the GAAR could apply. Conversely, if there is a benefit under the Convention after any application of the PPT, s. 4.1 ensures that the benefit can be subject to the application of GAAR. Thus, the correct order of application is: PPT 1st; GAAR 2nd.
  • Approximately 20 of Canada’s treaties will be updated to include arbitration. Of those 20, 13 counties have agreed to Canada’s preference for baseball-style arbitration (e.g., Australia, France, Italy and Spain) and seven (e.g., Sweden and Japan) have indicated their preference for independent opinion. For those seven, further negotiation is needed.
  • When the Notice of Ways and Means motion for the implementation of the MLI was tabled, Canada indicated that it would adopt additional provisions of the MLI including the tie-breaker rule for dual-resident entities, so that about 23 of Canada’s tax treaties are expected to be updated with that rule. Many of Canada’s tax treaties already have that rule, so this will result in that provision covering almost all of Canada’s treaty network.
  • Finance is hopeful that Canada will be among the additional jurisdictions that will deposit their MLI instruments of ratification by the end of 2019. There are a number of procedural steps still to go.
  • Finance is in the course of preparing “synthetic” unofficial Treaty texts, i.e., consolidations that show the effect of the application of the MLI to each covered tax treaty.

Neal Armstrong. Summaries of 14 May 2019 IFA Conference – Stephanie Smith on MLI – GAAR and PPT under Treaties – MLI – Art. 7(1), Art. 19 and Art. 4.

Morrissette – Tax Court decision casts doubt on the s. 184(3) short-cut method

In 2011-0412071C6 F, CRA indicated that if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short-cut” method under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income.

That is more-or-less what happened here. However, the taxpayer then appealed the assessment of the taxable dividend arising to him pursuant to the s. 184(3) election on the ground that the purported capital dividend paid to him by the corporation in fact was a valid capital dividend – and stating that he only agreed to make the election in order to avoid a punitive assessment of his corporation for Part III tax on the supposedly excess dividend. The Crown moved to have the taxpayer’s appeal struck on the grounds that it disclosed no reasonable cause of action (he was bound by his election).

Smith J dismissed the Crown’s motion, stating that he “cannot gloss over a legislative provision which requires the Minister to make an assessment permitting the taxpayer to then make an election” - i.e., a valid s. 184(3) election requires a preceding Part III tax assessment. Although this strongly suggests that the Minister’s assessment based on a void s. 184(3) election was also void, he noted that all that was necessary for him to determine was that the Crown had not established that the taxpayer’s appeal had no reasonable prospect of success.

His finding nonetheless suggests that other assessments made pursuant to assessments of taxable dividends made on the basis of the short-cut method could be attacked as being void if timely proceedings were brought.

Neal Armstrong. Summaries of Morrissette v. The Queen, 2019 CCI 103 under s. 184(3) and Tax Court Rules s. 53(1)(c).

Roofmart Ontario – Federal Court authorizes a CRA requirement for a construction material company to disclose its customers with significant purchases

Campbell J authorized a requirement by the Minister for Roofmart to disclose the particulars of all its customers who in any of the past 4 ½ years had made purchases of construction materials from Roofmart in excess of an annualized total of $20,000. He found that they constituted an ascertainable group, and the request was made to verify that they were meeting their ITA and ETA obligations, e.g., their return reporting requirements.

Neal Armstrong. Summary of Minister of National Revenue v. Roofmart Ontario Inc., 2019 FC 506 under s. 231.2(3).