News of Note
CRA considers that Reg. 1101(5b.1) separate class status cannot be overridden by a Reg. 1103(1) election
Email this ContentReg. 1103(1) allows a taxpayer to elect to include, what otherwise would be Class 2 to 12 properties of the same business, in Class 1, thereby reducing its potential CCA claims but also potentially avoiding (or deferring) recapture of depreciation. An additional 2% CCA claim is potentially available under Reg. 1100(1)(a.2) respecting an eligible non-residential building (potentially including a building addition) for which a Reg. 1101(5b.1) election has been made for it to be included in a separate class.
Regarding a partnership (SENC) holding Class 1 buildings along with additions thereto included in a separate class pursuant to a Reg. 1101(5b.1) election, and also holding property in Classes 8 and 10, CRA stated:
[T]he making of an election under subsection 1103(1) by a taxpayer does not override the election under subsection 1101(5b.1) and will not nullify its effects. … Consequently … SENC could elect, under subsection 1103(1), to include in Class 1 of Schedule II, the properties in Classes 8 and 10, but could not include those covered by the election under subsection 1101(5b.1).
Neal Armstrong. Summary of 15 February 2023 External T.I. 2022-0934821E5 F under Reg. 1103(1).
The Joint Committee comments on the draft GAAR amendments
Comments of the Joint Committee on the draft GAAR rules released with the March 2023 Budget include:
- The GAAR proposals should apply prospectively so that they would not apply to a series of transactions that commenced before the effective date.
- The test in s. 245(4.1)(b) - of comparing expected tax benefits and expected non-tax economic return - will be difficult to apply where the latter are difficult to quantify.
- Taxpayers who are assessed under s. 245 after the time has passed for reporting a transaction or series under proposed s. 237.3(12.1) - but there were intervening developments, such as cases or new published CRA positions, that changed the GAAR profile of the transaction or series - should be allowed to file a late disclosure or have the penalty under draft s. 245(5.1) waived as part of the s. 245 rules in appropriate circumstances.
- Calculations of the penalty amount (referencing the amount of the tax benefit resulting directly or indirectly from the transaction or series) could be uncertain or harsh where multiple taxpayers are involved with different benefit amounts or where the series produced tax deferrals rather than absolute tax savings.
- There should be a s. 245 rule stating that a disclosure filed under proposed s. 237.3(12.1) cannot be used as a factor in any way when determining whether GAAR applies.
Neal Armstrong. Summaries of Joint Committee, Summary of Comments and Recommendations Provided to the Department of Finance on the General Anti-Avoidance Rule Proposals Released on March 28, 2023, 7 June 2023 under s. 245(4.1). s. 245(5.1) and s. 237.3(12.1).
CRA finds that commercial solar equipment and wind turbines were Canadian real estate and, thus, TCP
Were Canadian-situs solar electric power generating projects (consisting of a leasehold interest, solar panels, steel racks and metal posts, and wires, inverters and transformers, collectively the “Solar Equipment”) and wind electric power generating projects (consisting of a leasehold interest, foundation. and wind turbine including tower) taxable Canadian property (TCP)?
In finding that the Solar Equipment consisted of fixtures and, thus, was TCP under para. (a) of the definition (referring to “real … property situated in Canada”), CRA stated:
[A]ny item which is attached even minimally (such as with screws or bolts) is a fixture and if a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture. Solar panels would not lose their essential character nor be useless without the racking system however, they could not effectively function in the context of utility-scale power generation without the racking, which itself serves no purpose unless used with the attached framed solar panels. As all components of the Solar Equipment are attached to the land on which they are situated, it is our view that the Solar Equipment is described in paragraph (a) … .
The wind turbines also (more obviously) constituted fixtures and, thus, TCP.
Neal Armstrong. Summaries of 26 May 2022 External T.I. 2019-0813761E5 under s. 248(1) – TCP – (a) and ETA – s. 123(1) – real property.
Income Tax Severed Letters 7 June 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Finance suggests changing the transfer-pricing rules to focus on transactions’ "economically relevant characteristics"
The consultation paper of Finance on the transfer pricing rules includes draft legislation that is under consideration.
There would be added to s. 247 a definition of "economically relevant characteristics," which will de-emphasize somewhat the contractual terms and refer inter alia to the actual conduct of the parties and their economic circumstances.
A transaction or series of transactions is to be analyzed under draft s. 247(1.1) with reference to its economically relevant characteristics, and (under inter alia draft ss. 247(1.2), (1.3) and (2.02)) if such transaction or series as so analyzed (a “delineated transaction or series”), and taking into account the options realistically available to the participants, differs from the transaction or series that would have been entered into by the particular participants had they been dealing at arm’s length in a commercially rational manner in comparable circumstances, the delineated transaction or series will be disregarded and replaced with an alternative transaction or series that comports with the facts of the delineated transaction or series while achieving an expected result that, had the participants been dealing at arm’s length in comparable circumstances, would have been commercially rational.
Example 3 illustrates how the suggested rules would operate in circumstances similar to Cameco. Canco, the group’s ultimate parent, sells product to Forco under a long-term contract renewable only at the option of Forco using a price that is between the median and the lower end of historical product pricing and is fixed other than for an inflation adjustment. The delineated transaction or series is the purchase of product by Forco from Canco in which Forco takes title to the product and resells it, and Canco performs all significant risk control activities and has the financial capacity to assume such risk. The paper states:
Positing Canco as a commercially rational party dealing at arm's length with Forco in comparable circumstances, it would have expected the opportunity to participate in the market for the product. It would not have agreed to use a fixed price based on a relatively low historical product price thereby exposing itself over a prolonged period to the downside risk that its operating costs would exceed the intra-group selling price, all the while assuming all of the MNE group's economically significant risks. Similarly, it would have retained some autonomy as to the disposition of its product over time. …
[T]he overall result of the application of proposed [s. 247(2.02)] would be the recognition by Canco of significant additional income in line with its functional profile … .
Subject to some exceptions, Finance also suggests bringing the content required in Canada's documentation requirements in line with that laid out in Chapter V (Documentation) of the OECD Transfer Pricing Guidelines, e.g., requiring Canadian members of MNE groups that are also subject to CbC reporting requirements to provide the group’s “Master File” to CRA at CRA’s request.
Neal Armstrong. Summary of Department of Finance, “Consultation on Reforming and Modernizing Canada's Transfer Pricing Rules” 6 June 2023 under s. 247(1.3).
University of New Brunswick – Tax Court of Canada finds that a post-doctoral fellow was not an employee of the University
Bocock J indicated that whether annual awards made to a post-doctoral fellow (PDF) of the University were employee remuneration for CPP and EI purposes turned on a determination of their “dominant purpose,” namely, “whether on balance the payments were made on account of monetary assistance to enhance the PDF’s education and research skills or paid as income in consideration of various services provided by the PDF to the University.” Bocock J concluded that the “annual award was paid with the dominant characteristic of furtherance of the education and learning of … the PDF,” so that the PDF was not an employee.
In this regard, he had found that:
- “PDFs received minimal oversight and supervision” so that they had “free range” in their pursuit of research;
- any teaching tasks taken on were separately remunerated by the University; and
- there was no documented “obligation of the PDF to provide laboratory, tutorial, teaching or research assistance to the University.”
Neal Armstrong. Summary of University of New Brunswick v. M.N.R., 2023 TCC 72 under s. 5(1).
We have translated 7 more CRA interpretations
We have translated an interpretations released by CRA last week and a further 6 translations of CRA interpretations released in May of 2003. Their descriptors and links appear below.
These are additions to our set of 2,487 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 20 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2023-05-31 | 8 March 2023 External T.I. 2017-0729871E5 F - Déduction supplémentaire prévue au sous-alinéa 110 | Income Tax Regulations - Regulation 1100 - Subsection 1100(1) - Paragraph 1100(1)(c.1) | transfer of Class 14.1 property on s 85 rollover basis eliminated the additional 2% CCA under Reg. 1100(1)(c.1)(i) |
| 2003-05-23 | 13 May 2003 Internal T.I. 2003-0001787 F - CHOIX-IMPACT SUR FNACC
Also released under document number 2003-00017870.
|
Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e.1) | notwithstanding Finance’s intent, s. 104(19) election resulted in subsequent recapture |
| Statutory Interpretation - Ordinary Meaning | clearly expressed legislative text to be followed, even though contrary to more favourable Finance intent | ||
| 13 May 2003 Internal T.I. 2003-0002167 F - TRAVAIL TEMPORAIRE
Also released under document number 2003-00021670.
|
Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(a) - Subparagraph 6(6)(a)(i) | test of work of a temporary nature not met where appointment as a director could be readily renewed through re-election | |
| 2003-05-16 | 16 May 2003 External T.I. 2002-0178685 F - CALCUL DU COUT D'UN TITRE DE CREANCE
Also released under document number 2002-01786850.
|
Income Tax Act - Section 20 - Subsection 20(14) | overview of s. 20(14) and s. 53(2)(l) |
| Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(l) | accrued interest initially included in ACB | ||
| 13 May 2003 External T.I. 2002-0176525 F - CHANTIER DE CONSTRUCTION
Also released under document number 2002-01765250.
|
Income Tax Act - Section 6 - Subsection 6(6) | W2 amounts likely not an appropriate basis for establishing proper s. 6(6) allowance amounts | |
| 2003-05-09 | 7 May 2003 External T.I. 2002-0164995 F - SENS DE ENSEMBLE DES BENEFICIE
Also released under document number 2002-01649950.
|
Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Beneficiary | whether meaning of “beneficiary” outside ss. 104-108 includes those in the class who have not been designated depends on the context |
| Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(c) - Subparagraph 110.6(14)(c)(ii) | “all of the beneficiaries” only references those of the potential class who have been designated as beneficiaries | ||
| 7 May 2003 External T.I. 2003-0182755 F - Superficial Loss on Shares
Also released under document number 2003-01827550.
|
Income Tax Act - Section 54 - Superficial Loss | transactions for sale by individual to her husband circumvented s. 40(2)(g)(i) through the sale by him back to her RRSP, and could be GAARable | |
| Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(iv) - Clause 40(2)(g)(iv)(B) | sale by individual to her husband followed by immediate sale by him to her RRSP, circumvented s. 40(2)(g)(iv)(B) |
Garg Investments – Tax Court of Canada finds that the recipients of a supply were the agents named in the purchase agreement, not the beneficial purchaser
A claimant of the new residential rental property rebate (NRRPR) is required under ETA s. 256.2(3)(a) to be the “recipient” of the supply of the property meaning, generally, that it is liable for the consideration for the supply under the purchase agreement. A corporation which took title to newly-constructed residential properties which it paid for with its own funds and rented out, was denied the NRRPR because it was not named in the purchase agreement (the builder required that individuals be named as the purchasers, so that the individual shareholders of the corporation were so named).
McPhee J noted that Cheema (dealing with the new housing rebate under s. 254) made a similar finding, and stated:
Similar to section 254, subsection 256.2(3)(a) does not distinguish between beneficial and legal ownership, so it is of no consequence that the three related individuals acquired the Subject Properties as bare trustees of the Appellant. …
Similar to the Cheema decision, it is the relationship between the purchaser and the seller that is relevant to the entitlement to the NRRPR rebate, not the relationship between the co-purchasers.
Neal Armstrong. Summary of Garg Investments Inc. v. The King, 2023 TCC 67 under ETA s. 256.2(3)(a).
Hillcore – Tax Court of Canada strikes the Reply of the Crown in its entirety
Before striking the Reply of the Crown in its entirety (but with leave to the Crown to file a fresh Reply that complied with the Rules), Lafleur J referred to the principle:
Where the deficiencies in a pleading are extensive, lack specificity or are vague, the proper remedy is to set the pleadings aside with leave to file a new pleading that meets the requirements set out in the Rules.
Examples of around six heads of deficiencies that she identified included:
- admitting or denying facts that not been pleaded;
- referring to assumptions of fact made by CRA in assessing which instead were assumptions of mixed fact and law, e.g., that specified parties did not deal with each other at arm’s length and that contracts were shams; and
- including Schedules that contained evidence, as well as materials from which it was difficult or impossible to extract clear factual allegations.
Neal Armstrong. Summary of Hillcore Financial Corporation v. The King, 2023 TCC 71 under Rule 53(1).
CRA finds that Art. XXI(7) of the Canada-US Treaty treats gifts to U.S. 501(c)(3) organizations as eligible gifts, but does not permit registered charities to make such gifts
A public foundation made gifts without strings attached to certain U.S. 501(c)(3) organizations during taxation years ending prior to 2022. Art. XXI(7) of the Canada-U.S. Treaty provided that, for purposes of Canadian taxation, a gift made by a resident of Canada in a taxation year to an organization - that was resident in the U.S., was generally exempt from U.S. tax, and could qualify in Canada as a registered charity if it were created or established and resident in Canada - as a gift to a registered charity, subject to potential numerical limitations.
Although the scope of what IRC s. 501(c)(3) encompasses is broad, CRA indicated that it accepted that a gift made by a Canadian resident to a U.S. 501(c)(3) organization will be an eligible gift for purposes of the s. 110.1 corporate deduction or the s. 118.1 individual credit.
However, the U.S. 501(c)(3) organizations generally would not be “qualified donees” given that, under the definition of that term in s. 149.1, “other than the United Nations or its agencies, only foreign entities that have applied for and were registered by the Minister are a qualified donee.” Accordingly, making such gifts were grounds for revocation of the registered charity status of the public foundation. The rationale for this narrow interpretation of Art. XXI(7) was that “the Canada-U.S. Treaty provides limited tax relief to residents of Canada and the U.S. who may be subject to double taxation on income and on capital imposed on behalf of each country” and Art. XXI(7) by its terms did not extend to the requirements for being a Canadian registered charity.
The same analysis applied to gifts made to U.S. 501(c)(3) organizations by a private foundation or a charitable organization.
Neal Armstrong. Summary of 15 February 2023 Internal T.I. 2022-0925731I7 under Art. 21.