News of Note
CRA finds that monthly payments to employees to cover part or all of the costs of cell phones required for their duties were fully taxable
Email this ContentAn employer whose employees were required to use cell phones in the course of their duties but which had a "bring your own device policy," paid monthly amounts to each such employee based on their particular requirements not in excess of their actual cell phone costs. CRA found that these monthly amounts were taxable allowances given that the employer did not require detailed receipts.
Neal Armstrong. Summary of 7 April 2015 T.I. 2014-0552731E5 F under s. 6(1)(b).
Income Tax Severed Letters 12 August 2015
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The exemption of the services provided by naturopaths from GST/HST may have imposed a substantial financial penalty on them
Beware your wishes, for they may be granted.
Most naturopathic services of qualified practitioners were exempted effective February 11, 2014. Accordingly, the practitioners became subject to the change-of-use rules in which they were required to remit HST/GST equal to the input tax credits they previously had claimed on their previous purchases of equipment, furniture and other personal capital property (assuming such property was now being used primarily in making exempt supplies) – subject to a pro rata reduction based on declines in the properties’ fair market values since purchase. A similar rule applied to capital property which was realty, except that the recaptured ITCs were mostly based on the percentage increase in exempt use - rather than being an all-or-nothing (primary use) test.
Accordingly, this "gift" from the government could be very expensive for those practitioners who had purchased their own buildings.
Neal Armstrong, Summaries of B-109 "Application of the GST/HST to the Practice of Naturopathic Doctors" under ETA, s. 200(2), s. 206(5), s. 123(1) – recipient, s. 123(1) – supply, s. 182(1), Sched. V, Pt, II, s. 1 – qualifying health care supply, Pt, II, s. 7.
Notwithstanding Anson, LLCs are not fiscally transparent under the ITA
The finding in Anson that profits of a Delaware LLC belonged to the members as they arose is unlikely to change the view in Canada that an LLC is fiscally opaque. The characterization of the LLC Agreement for the LLC in question as causing the profits of the LLC to immediately vest in the owners seems wrong given inter alia that "creditor claims could interrupt the owner’s ultimate access to [the] assets, underlying the profits." Furthermore, Canadian courts have not challenged, and Finance has endorsed, that LLCs are not fiscally transparent.
Neal Armstrong. Summary of Nathan Boidman, "Anson and U.S. LLCs: A Canadian Perspective," Tax Notes International, August 3, 2015, p. 439 under s. 248(1) – corporation.
Starflex – Court of Quebec finds that the Quebec exemption of income, which is Treaty-exempted by Canada, did not permit a deduction under Art. XXI, para. 7 of the Canada-U.S. Convention for donations made to U.S. charities
Art. XXI, para. 7 of the Canada-U.S. Convention provides (subject to conditions) that a gift by a Canadian with U.S.-source income to a qualifying U.S. charity is to be treated the same as one to a registered Canadian charity. Pokomandy JCQ (after noting that a province is not bound by the Convention) found that a Quebec provision, which exempted income for Quebec purposes if it also was exempted under one of Canada's treaties, did not require Quebec to provide donation deductions for gifts to U.S. charities, stating that Art. XXI, para. 7 "confers tax relief and not exemption from tax on income otherwise taxable in Canada."
At the trial opening, the taxpayer sought to add an argument that the donations were deductible as promotional expenses (see Olympia). In refusing to allow this alternative claim as one which contradicted the original claim, Pokomandy JCQ stated:
One cannot claim to have donated a sum and alternatively to have expended it in earning income from a business.
Neal Armstrong. Summaries of Emballages Starflex Inc. v. ARC, 500-80-019409-110, under Treaties, Art. 21 and s. 18(1)(a) –income-producing purpose.
CRA considers that employee-shareholders presumptively receive benefits under s. 15(1) rather than 6(1)(a) where they can significantly influence business policy
Health and welfare trusts are attractive to an employer as CRA permits an employer to deduct the contributions when they are made to the trust rather than when benefits are provided to the employee. (This contrasts with employee benefit plans which only provide for a deduction when the amount is paid to the employee.) The employee is taxed on the benefit provided through the trust in the same manner as if the amount had been paid directly by the employer on behalf of the employee.
CRA has rewritten its Bulletin on such trusts (IT-85R2) in a way that further obscures the statutory logic for various positions that are taken. Various unhelpful comments have been added, including that:
- Such a trust cannot provide benefit coverage to the partners of a partnership (whereas previously, CRA stated that a partnership needs two distinct trusts for its partners and employees).
- Contributions made after a trust loses its status as a health and welfare trust "will" be treated as capital contributions which are non-deductible under s. 18(1)(b) [i.e., they will be treated as capital even if they do not create "an advantage for the enduring benefit of a trade" - see British Insulated and Halsby Cables].
- "There is a general presumption that an employee-shareholder receives a benefit in the capacity of a shareholder [so that s. 15(1) applies] when the individual can significantly influence business policy."
CRA has dropped a statement that benefits that would not otherwise be taxable under s. 6(1)(a) may be treated at the trustee’s discretion as having been paid out of prior year’s funds or current year’s employer contributions to avoid the application of s. 104(13), and has maintained a statement that employer contributions which are voluntary or gratuitous are non-deductible (cf. Aluminum Co., see also Ken and Ray’s).
Neal Armstrong. Summaries of Folio S2-F1-C1: "Health and Welfare Trusts" under s. 248(1) – employee benefit plan, s. 18(1)(a) – income producing purpose, s. 6(1)(a), s. 15(1), s. 9 – nature of income.
Gleig – Tax Court of Canada finds that promissory notes were a prescribed benefit for tax shelter purposes where the holder had no intention of demanding their payment
Although the language of the definition of a prescribed benefit in Reg. 231(6) (now Reg. 3100(1)) is aimed at more sophisticated arrangements that this, Lyons J found that promissory notes issued by investors to a promoter in consideration for the promoter incurring resource expenditures on their behalf were a prescribed benefit on the basis of the promoter’s testimony that it never intended to demand payment of the notes. Accordingly, the arrangement was a tax shelter as the resource deductions promised to them were mostly funded by the notes rather than cash. This is similar in the result to finding that the notes were shams.
Neal Armstrong. Summary of Gleig v. The Queen, 2015 TCC 191, under s. 237.1(1) – tax shelter.
CRA applies ss. 69(1)(b)(ii) and s. 69(1)(c) to the gross rather than net FMV of gifted property subject to an encumbrance
If an individual donates an immovable worth $200,000 that is subject to a $100,000 charge and it qualifies as a gift under the relevant provincial law (here, of Quebec), CRA will consider the proceeds to the donor under s. 69(1)(b)(ii) and the cost to the done under s. 69(1)(c) to be $200,000, notwithstanding that presumably the amount of the gift is only $100,000. In this regard, CRA stated that a real estate property is only one property, so that it apparently was resisting the temptation to think of this transaction as a sale of $100,000 of the property in consideration for the assumption of the $100,000 hypothec, and a gift of the balance of the property for $100,000.
Neal Armstrong. See summary of 9 June 2015 T.I. 2014-0519981E5 F under s. 69(1)(b)(ii).
CRA rules on cash circling to effect intercompany payments and that s. 80 does not apply to a loan extinguishment without an explicit set-off
A ruled-upon loss shifting transaction between Lossco and its indirect Parent avoids a daylight loan through Lossco making a series of loans to Parent and Parent making a series of subscriptions for Lossco pref shares (so that presumably the same sum of money is continually circled, although the ruling letter is too bashful to say this).
The transaction will be unwound by Lossco delivering the loans (owing to it by parent) to Parent as the redemption proceeds for the prefs in its capital. CRA ruled that this would not give rise to a forgiven amount (see also 2013-0498551R3).
Neal Armstrong. Summary of 2014 Ruling 2014-0543911R3 under s. 111(1)(a).
S. 22 election is not restricted to Canadian businesses
IT-188R states that "section 22 is applicable upon election by a vendor and a purchaser, where the vendor…sells all or substantially all of the assets of a business that was carried on in Canada to the purchaser who proposes to continue the business." CRA has confirmed that no particular significance should be attached to the "in Canada" reference, so that the election is available for the sale by a Canadian taxpayer of a branch business carried on abroad.
Neal Armstrong. Summary of 12 February 2015 T.I. 2014-0560491E5 F under s. 22(1).