News of Note

Emergis financed a U.S. acquisition through a tower structure under which:

• it made an interest-bearing loan to a subsidiary Canadian partnership (“USGP”);
• USGP funded such interest payments out of dividends received from a wholly-owned Nova Scotia ULC (“NSULC”);
• NSULC, in turn, received dividends out of the exempt surplus of a wholly-owned LLC; and
• the LLC received s. 95(2)(a)-recharacterized interest on the acquisition-financing loan made to the successor by amalgamation to the U.S. acquisitionco of Emergis.

Emergis’ 99.9% effective share of the interest deduction of USGP for the loan largely offset its interest income from that loan and, in addition, it claimed the s. 112(1) deduction for its effective share of the dividend income from NSULC. From a U.S. perspective, the interest on the loan owing by USGP was deductible interest paid by a U.S. corporation (USGP) to a Canadian resident (Emergis), and was subject to U.S. withholding tax.

In reversing the finding below that Emergis could not deduct such tax pursuant to s. 20(12) because such tax could (in accordance with the exception at the end of s. 20(12)) “reasonably be regarded as having been paid by a corporation [Emergis] in respect of income from a share … of a foreign affiliate [the LLC],” Webb JA and Goyette JA indicated:

• The text of s. 20(12) was” insufficient to displace the general rule that the assets and income of a corporation are not the assets and income of its shareholders”, i.e., s. 20(12) did not provide “that NSULC’s income from its LLC shares should be treated as the income of Emergis, and hence as the income on which Emergis paid the taxes to the US Government”.
• The interest on which Emergis paid the U.S. withholding tax was calculated as a percentage of the principal of the loan and “was not based on the income from the shares of LLC” nor was it “a distribution or allocation of income earned directly or indirectly by Emergis from the shares of LLC”.

Neal Armstrong. Summaries of Emergis Inc. v. Canada, 2023 FCA 78 under s. 20(12) and General Concepts - Ownership.

Davis Dentistry had claimed input tax credits (ITCs) on the basis that a portion of its supplies to each orthodontic patient was of a zero-rated supply of the orthodontic appliance, and that only the balance of what was supplied was an exempt healthcare service, whereas CRA had disallowed its ITC claims on the basis that under the single-supply doctrine, as enunciated in O.A. Brown, there was a single supply of exempt orthodontic services.

In dismissing the Crown’s appeal, Woods JA stated that “Parliament’s intent must override O.A. Brown where legislative intent is clear as it is in the provisions applicable in this case.” Indicators of such intent included:

In the case of a supply of orthodontic appliances and orthodontic services, which are typically supplied together, the fact that one has zero-rated status and the other has exempt status strongly suggests that this was intentional and that a supply of an orthodontic appliance is intended to be zero-rated even when accompanied by orthodontic services. …

It is highly unlikely that Parliament would explicitly provide that any supply of an orthodontic appliance is zero-rated if the intention is that the supply is restricted to the wholesale level.

Thus, the single-supply doctrine should be applied as an interpretive aid, rather than as a blunt instrument.

Neal Armstrong. Summary of Canada v. Dr. Kevin L. Davis Dentistry Professional Corporation, 2023 FCA 76 under ETA Sched. VI, Pt. II, s. 11.1.

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Hootsuite, which provided its customers with an online social media management system, did not itself have the servers and storage facilities to host its platform, and instead accessed those of Amazon Web Services (“AWS”). The Ministry of Finance assessed BC provincial sales tax on the basis inter alia that Hootsuite’s access to AWS software allowing it to access the remote AWS hardware virtually constituted the provision to Hootsuite of software. The PSTA definition of software referenced the delivery, accessing, or the right to use, a software program.

In finding that there was no use by Hootsuite of “software,” Thomas J stated:

[T]he fundamental nature of … [this] product is to provide an on-demand computer infrastructure service. As such, the products are not subject to PST.

Furthermore:

[T]he key distinction between “software” and a “software program” for the purposes of the PSTA is that a “software program” requires the purchaser to utilize the software as an “application”; that is, the user must be able to interact with the software and create an output based in part on those interactions with the program.

Applying this distinction, there was no use by Hootsuite of a “software program” because the AWS programs were opaque to it rather than something it interacted with.

A similar analysis indicated that technical support provided by AWS through an online chat feature provided through a web interface (the “Console”), which was opaque to Hootsuite, did not entail the use by Hootsuite of a “software program” – and, in any event, the fundamental nature of what was being provided here was AWS technical expertise rather than software.

The Ministry also assessed on the basis that the above technical support service, as well as Hootsuite’s access to dedicated telecommunication service in the U.S. allowing AWS to maximize the efficiency of its virtual hardware, constituted a taxable communication service. Thomas J found that these services came within an exemption in the Regulations for telecommunication services that were “merely incidental” to a contract for non-taxable services.

Neal Armstrong. Summaries of Hootsuite Inc. v British Columbia (Finance), 2023 BCSC 358 under the Provincial Sales Tax Act, (B.C.), s. 1 – software, telecommunication service.