News of Note
Income Tax Severed Letters 14 October 2015
Email this ContentThis 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.
A Liechtenstein Foundation with a Canadian-resident beneficiary may not be subject to the NRT rules
After affirming its position that a Liechtenstein Foundation "generally will be considered to be a trust for purposes of the Act," CRA accepted that a Liechtenstein Foundation whose sole "beneficiary" was a resident Canadian individual was not subject to the NRT rules in s. 94(3) because the Foundation had no "resident beneficiary," whose definition requires the existence of a "connected contributor." There was none, as no Canadian resident had ever made a "contribution" (as broadly defined) to the Foundation.
Neal Armstrong. Summary of 20 August 2015 T.I. 2015-0581681E5 F under s. 94(1) - connected contributor.
CRA finds that a depreciable property continues as such on a s. 88(1) winding-up irrespective of the parent’s purpose
Reg. 1102(1)(c) provides that depreciable property does not include a property which is not acquired for an income-producing purpose. CRA dealt with the situation where a parent received depreciable property of its subsidiary on a s. 88(1) winding-up with no intention of using the property for an income–producing purpose (it was kept idle) - and a number of years later, sold the property at a loss.
In light of Reg. 1102(14), which deemed the property to belong to the same prescribed class as when it was held in the subsidiary, and the somewhat conflicting reasons in Hickman which nonetheless pointed in the same general direction, CRA concluded that the property retained its character as depreciable property in the hands of the parent. Furthermore, keeping the property idle did not constitute a change of use under s. 13(7)(a), so that the terminal loss was not realized until the year of the sale.
Although it was depreciable property, the parent nonetheless was precluded from claiming CCA, in light of the income-producing purpose test in the preamble to s. 20(1) that was emphasized in Hickman.
Neal Armstrong. Summaries of 22 June 2015 Memo 2014-0553731I7 under Reg. 1102(14), s. 13(7)(a) and s. 20(1).