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CRA rules that a foreign collective investment vehicle is fiscally transparent rather than a unit trust
Investors subscribe for units of a “Fund”, both situated in and governed by the laws of a redacted non-resident jurisdiction. The units are described as representing proportionate interests in the property of a particular Subfund (holding a particular managed portfolio) but with an entitlement to exchange their co-ownership interest in that Subfund’s property for that in another Subfund.
Investors with different tax profiles are required to invest in separate Classes of units so that there is no pooling of withholding tax rates applicable to the securities in a Subfund’s portfolio.
The non-resident Depositary deals at arm’s length with the non-resident manager, and the Canadian securities are held by a Canadian-resident custodial subsidiary of the Depositary.
CRA ruled that the funds were fiscally transparent, so that non-resident investors holding units in a Subfund that, in turn, held Canadian equities, would be treated for Canadian withholding tax purposes and s. 116 purposes in the same manner as if they received a pro rata distribution on or proceeds of the Canadian securities.
This arrangement is somewhat similar to that in a 2014 ruling on an Irish contractual fund (2013-0496831R3 – see also 2015-0606141R3, 2009-0345011R3 and 2006-0199741R3), whose descriptions also looked somewhat similar to a unit trust, and was ruled upon to be a co-ownership arrangement. It is also is more dissimilar with (but still broadly similar to) that in a recent ruling on a Luxembourg investment mutual fund (2015-0605161R3).
Neal Armstrong. Summary of 2018 Ruling 2017-0738041R3 under s. 104(1).
CRA indicates that a health and welfare trust can administer a plan that is funded only with union or employee contributes where it also has employer-funded plans
CRA indicated that a health and welfare trust (“HWT”) which is jointly established by a union and multiple employers, can provide benefit coverage to non-unionized employees of participating employers, retired employees, and individuals who are not employees (i.e., dependants or survivors of current or retired employees where the underlying plan (i.e., a group sickness or accident insurance plan (“GSAIP”), a private health services plan (“PHSP”), or a group term life insurance policy (“GTLIP”)) allows for the provision of benefit coverage to such individuals – although a GTLIP may only provide benefit coverage to current and former (including retired) employees.
Although Folio S2-F1-C1 indicates that a trust funded only with contributions made by employees or an employee union would not qualify as a HWT, there is no explicit requirement that an employer be legally obligated to make contributions in respect of each plan or policy administered by a HWT. Accordingly:
[W]here is it established that retired employees may be provided benefit coverage through a GSAIP, PHSP, or GTLIP, and none of the participating employers have a legal obligation to pay any premiums or contributions in respect of the particular plan or policy, it would appear permissible for a HWT to administer such a plan or policy provided that the trust also administers other employer-funded plans or policies.
A HWT may administer a plan that offers drug and alcohol rehabilitation services, provided the plan qualifies as a PHSP, which entails a requirement inter alia that substantially all of the premiums paid under the plan relate to the coverage of medical expenses that are eligible for the medical expense tax credit.
Neal Armstrong. Summary of 22 January 2019 External T.I. 2016-0645581E5 under s. 6(1)(a)(i).
CRA indicates that a transfer structured as a sales agreement for nominal consideration may qualify as a gift
A parent gifted property to a child. A correspondent seemed to assume that this gift was legally required to be effected through an agreement specifying nominal consideration (of $1), with such nominal consideration actually being paid, rather than the gift being effected through a deed of gift. Would this be respected as a gift so that s. 69(1)(c) applied? CRA responded that it:
may be willing to accept that the transfer of property between non-arm’s length parties for the nominal amount of $1 could be considered a gift. For example, if the agreement governing the transfer provides for consideration of $1 merely to ensure that the agreement is legally binding, the CRA may consider the transfer to be a gift.
… If it is determined that the transfer of property was a sale for inadequate consideration rather than a gift, paragraph 69(1)(c) would not apply.
Neal Armstrong, Summary of 24 January 2019 External T.I. 2018-0773301E5 under s. 69(1)(c).
Dickinson – Court of Appeal of England and Wales states that Revenue must not let the application of its internal policies preclude the exercise of its statutory discretion
In the course of considering whether a determination by HMRC to issue advance payment notices to taxpayers before their appeals of tax assessments were heard amounted to an unlawful abuse of power (it did not), McCombe LJ discussed the tension between the desirability of HMRC developing and applying policies consistently while at the same time being mindful of the need to exercise its discretion. In this regard, he quoted with approval an earlier statement that
One aspect of the duty of fairness is that, in general, a decision- maker may not fetter his discretion. However, it is well established in public law that a decision- maker may formulate a policy to enable him to exercise a discretion consistently provided that it is not applied so rigidly that it precludes the proper exercise of discretion in each case.
And then stated:
The simple rule is, as Arden LJ said, the internal policy must not preclude a proper exercise of the statutory discretion in each case.
Neal Armstrong. Summary of Dickinson & Ors v Revenue and Customs  EWCA Civ 2798 under ETA s. 315(3).
Concept Danat – Tax Court of Canada states that an SR&ED claim cannot be based on estimated hours worked
The taxpayer based its reported expenditures on three alleged SR&ED projects on its estimate that its employees spent 10.2% of their time on the SR&ED activities. In rejecting this approach, Lafleur J stated:
Danat has not provided exact details of the hours devoted to the projects. …[A]n exact register of the hours worked must be provided in order to make an SR&ED claim … . Similarly, the description of the tasks carried out by the different employees was not clear or sufficiently detailed enough to make the claim.
The projects in question also did not qualify as SR&ED given inter alia their lack of technological uncertainty. In passing, Lafleur J stated that CRA’s guidelines on what constituted SR&ED in Eligibility of Work for SR&ED Investment Tax Credits Policy were “useful and reliable.”
Victoria Power – Federal Court of Australia finds that a calculated reduction in the amount of a rebate required to be paid by a taxpayer was not income to it
Australian electricity distributors were entitled to require their customers to pay an amount equal to the estimated net economic burden to the distributors of hooking them up to electricity, i.e., where the the present value of the incremental cost exceeded the present value of the incremental revenue. Moshinsky J found that these “Customer Cash Contribution” amounts were ordinary income to the distributors as they were received “as an ordinary incident of their electricity distribution businesses.” In Canada, the relevant distinction to be drawn likely would have been between a s. 9 receipt or (having regard to some similarities with the Consumers' Gas case) a s. 12(1)(x) receipt – keeping in mind that the s. 13(7.4) offset is potentially available only for the latter.
The customer could instead choose to perform the work, in which case, on transferring the constructed assets to a distributor, the distributor would pay a rebate that did not represent the full cost of the work, so that again, the customer effectively bore the excess of the present value of the incremental cost over the present value of the incremental revenue (the “Customer Contribution”). In finding that a Customer Contribution was not ordinary income to the distributor, Moshinsky J stated:
[T]he Customer Contribution was not a payment or gain received by the Distributor; it was merely a component used in the calculation of the [rebate] amount to be paid [the other way] by the Distributor to the customer.
Neal Armstrong. Summary of Victoria Power Networks Pty Ltd v Commissioner of Taxation  FCA 77 under s. 9 - nature of income.
In a PowerPoint presentation at the December 3, 2018 CPA Canada Income Tax for the General Practitioner Course CRA mostly recycled previously-published examples of the operation of the tax on split income rules, but also presented a few new (albeit, not startling) examples.
B, aged 20, was issued 20% of the shares of Opco (a CCPC) as part of his compensation for programming work. Opco is majority-owned by an unrelated individual (A, aged 40). A dividend paid by Opco to B is not subject to TOSI given that it is not income from a related business because there is no “source individual” (A is not related to B).
A dividend paid by the family farming corporation to a family trust and distributed from the trust to inter alia an adult child who in the current year had averaged less than 20 hours a week during the farming season nonetheless qualified as an excluded amount from an “excluded business” given that the child (the specified individual) averaged more than 20 hours per week in the farming season for five prior taxation years.
The definition of an excluded share references inter alia a test of less than 90% of the business income of the corporation being from the provision of services. CRA indicated that where goods are provided in combination with a service and the goods are not incidental (e.g., auto repairs and home renovations) the revenue from the goods will be considered. Conversely, services can be incidental to the sale of goods, e.g., the delivery and installation of goods sold. CRA recognizes that billing practices and accounting systems may not specifically identify revenue from non-services, so that there is flexibility when reviewing such situations.
Neal Armstrong. Summaries of 3 December 2018 CPA Canada Roundtable, 2018-0773811C6 - Tax on Split Income under s. 120.4(1) - related business – (a)(ii), excluded business and excluded shares – (a)(i).
Shallhorn – Court of Quebec finds that the cost to a paraplegic person of installing a home elevator was an eligible medical expense
Laurin J found that a paraplegic person, who incurred approximately $80,000 to install an elevator in his home, which thereby gave him access to all floors, was entitled to a medical tax credit under the Quebec equivalent of ITA s. 118.2(2)(l.2). Laurin J rejected the position of the ARQ that the elevator was ineligible because it could also be used by non-handicapped individuals.
Neal Armstrong. Summary of Shallhorn v. Agence du revenu du Québec, 2019 QCCQ 449 under s. 118.2(2)(l.2).
CRA noted its position that a supplemental pension plan to top up the pension benefits for executives whose remuneration is such as to make the registered pension plan (RPP) contribution limits too low will not give rise to a salary deferral arrangement (SDA) where this plan operates similarly to an RPP but for exceeding the monetary limits. However, CRA stated that there likely will be an SDA where the plan also provides that members can elect to reduce or forego future bonus entitlements and accrued vacation pay entitlements for additional allocations (of equal amounts) to the member’s account (to be paid out at the earliest of termination of employment, retirement or death) – stating that these additional features “appear to be primarily motivated by tax deferral considerations.”