News of Note
CRA construes voluntary GST registration provision broadly
Email this ContentThe ETA stipulates that a non-resident who is not engaged in commercial activity in Canada but which "regularly solicits orders" for the supply by it of tangible personal property to Canadians may voluntarily register for GST purposes. However, the CRA will register a non-resident person that purchases and sells taxable tangible personal property for delivery in Canada in the ordinary course of carrying on a business outside Canada, but does not regularly solicit orders in respect of such sales.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 14. ("Voluntary Registration") (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx), under ETA, s. 240(3)(b).
Vivaconcept International - Tax Court finds that voluntarily agreeing to a debt reduction under a proposal does not preclude a bad debt claim for the related GST
Subject to conditions, the ETA allows both a bad debt claim (under s. 231) for the GST included in a bad trade debt, and for a credit (under s. 232) for the related GST where the consideration for the supply is voluntarily adjusted after the fact and a credit note is issued by the creditor "within a reasonable time" of that adjustment. What happens if, after the trade debtor becomes insolvent, the creditor agrees with the debtor to reverse the debt under a proposal with the creditors?
Tardif J appears to have concluded that such an adjustment does not preclude a s. 231 bad debt claim. Furthermore, he indicated in the alternative that issuing a credit note 23 months after the adjustment would normally represent "a relatively long time," but here that was an acceptable delay for s. 232 purposes as the credit note was issued by the taxpayer shortly after being informed by Revenue Quebec that it was denying the bad debt claim.
Neal Armstrong. Summaries of Vivaconcept International Inc. v. The Queen, 2013 CCI 336 under ETA – s. 231(1) and s. 232(3).
Casa Blanca - Tax Court finds that HST is not chargeable on the assignment of a right to a deposit
Suppose that a registrant has entered into an agreement to acquire real estate for $1M and then, after the real estate has appreciated to $1.1 million, assigns the purchase agreement to an assignee for an "assignment fee" of $0.1M plus a further amount of $0.1M to reflect that the deposit will now be held by the property's vendor for the account of the assignee. CRA characterizes this as a single supply of real estate for $0.2M so that, in the absence of any exemption, HST is payable on this full amount.
Hogan J disagreed. The assignment of the purchase agreements and of rights to the deposits were not inextricably linked, as it would be quite possible to structure a sale where there was no assignment of the deposit and the assignee gave a fresh deposit to the property vendor. Accordingly, there were two supplies: of an interest in real property; and of a financial instrument (a right to money). In the alternative, there is no supply at all respecting the deposit as the definition of property excludes money.
Neal Armstrong. Summary of Casa Blanca Homes Ltd. v. The Queen, 2013 TCC 338 under ETA - 123(1) - supply.
CRA confirms that a s. 40(1)(a)(iii) reserve can be claimed as a deduction from a s. 55(2) capital gain
In 1999-000929, CRA indicated that a capital gains reserve under s. 40(1)(a)(iii) generally could be claimed respecting a capital gain, resulting from the application of s. 55(2) to what otherwise would be a s. 84(3) deemed dividend, where the s. 84(3) dividend arose on the receipt of a promissory note (payable at future dates) made as a conditional rather than absolute payment. On redacted facts, CRA has confirmed that the reserve also is available where the deemed dividend (to which s. 55(2) applied) arose as a result of the purchase for cancellation of shares for an unpaid (i.e., still owing) purchase price.
Neal Armstrong. Summary of 7 October 2013 Memorandum 2013-0504081I7 F under s. 40(1)(a)(iii).
CRA illustrates its policy that different partnership units or classes are not separate property
CRA considers that all of the interest of a partner in a partnership constitutes a single property even if that interest is unitized. This means, for example, that if a partner disposes of 40% of its units during a year, it will not receive any addition to the ACB of those units (under s. 96(1.01) or any other provision) for 40% of the partnership income for the year, and 100% of the partnership income for that year will be added to the ACB of the retained units.
Neal Armstrong. Summary of 1 October 2013 T.I. 2013-0491571E5 under s. 43(1).
Income Tax Severed Letters 6 November 2013
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA treats bitcoins as securities rather than commodities for capital v. income account purposes
CRA has issued a Press Release stating that its positions in IT-490 on Barter Transactions and in IT-479R on Transactions in Securities apply to transactions in digital currency such as bitcoins.
Neal Armstrong. Summaries of 5 November 2013 CRA Press Release "What you should know about digital currency" under s. 9 – Capital gain v. profit - Commodities, and commodities futures and derivatives, and s. 9 – Computation of profit.
Mast - Tax Court finds that being required to repay at least 50% of the loan principal over the 10-year term, with the balance on maturity, did not represent bona fide repayment arrangements
S. 15(2.4) excludes various types of loans made to employees from the shareholder loan rule in s. 15(2). However, s. 15(2.4)(e) provides that this exemption does not apply if the loan was not received because of the employee's (or a spouse's) employment.
In finding that a $1 million interest-free loan received by the sole shareholder and principal employee of a corporation was received by him qua shareholder rather than employee, Angers J adopted a requirement in 2011-0406271E5 (similar to IT-119R4, para. 11) that the taxpayer establish that a loan might be made on similar terms to a non-shareholding employee. This was not established here as, among other things, it was an unsecured loan representing a substantial portion of the corporation's retained earnings. The reasons do not indicate any appreciation for the notion that a corporation may make a loan to an individual who is its critical and key employee on very favourable terms as an employment incentive.
There is a disturbing finding that there were no bona fide repayment arrangements as required by s. 15(2.4)(f) notwithstanding that the taxpayer was required to pay back a minimum of $50,000 of principal a year (i.e., faster amortization than most housing loans) and the term was 10 years. Given the similarity of s. 15(2.4)(f) to other provisions, this has broader implications
Neal Armstrong. Summary of Mast v. The Queen, 2013 TCC 309 under s. 15(2.4).
Ross – Tax Court finds that untruthfulness on audit may not matter for statute-barring purposes
If you file a return honestly on the basis of the information available to you at the time, but you are untruthful to CRA on a subsequent audit when you become aware of a problem, can CRA now reassess that return (which otherwise is statute-barred) on the basis that such reassessment "can reasonably be regarded as relating to …any misrepresentation made by the taxpayer…that is attributable to neglect, carelessness or willful default or any fraud…in filing the return or supplying any information under this Act." Bocock J’s reasoning would appear to suggest that your misrepresentation "reasonably related to a period subsequent," rather than to the return-filing year, so that the year cannot be opened up.
Ross concerned the registration of a flimsy pension plan rather than the filing of a return, so that it related only to the branches of ss. 152(4)(a)(i) and (4.01) respecting misrepresentations in "supplying any information under the Act" rather than in filing returns. In obiter dicta, Bocock J boldly went one step further and stated that "the Minister would not be entitled to reassess outside the normal period under paragraph 152(4) where the taxpayers' only misrepresentations were made outside the returns and occurred solely in supplying information under the Act." This will be controversial.
Neal Armstrong. Summaries of Ross v. The Queen, 2013 TCC 333 under ss. 152(4.01), 152(4)(a)(i) and Reg. 8502(a).
Hochschild Mining plc will use a Canadian Buyco to acquire IMZ following a s. 86 spin-off of IMZ's non-targeted assets
Hochschild Mining plc, a UK-listed Latin American miner with 60% ownership of a Peruvian joint-venture company, is interested in the 40% minority stake held by TSX-listed International Minerals Corporation but not in its Nevadan gold assets. IMZ will transfer its Nevadan assets to a wholly-owned Newco subsidiary (Chaparral Gold) and spin-out Chaparral Gold to its shareholders under a s. 86 reorganization. As part of the same Yukon plan of arrangement, a wholly-owned Canadian Buyco subsidiary of Hochschild will acquire all the IMZ shares for cash.
This transaction is consistent with a recent tendency to spin-out subsidiaries on s. 86 reorgs (see Fission/Alpha Minerals, Resverlogix/RVX Therapeutics, C&C/Platino, Erdene/Advanced Primary Materials and CTF/FleetCor) rather than s. 84(2) distributions, and a preference of some foreign purchasers to use Canadian Buycos even in the face of the foreign affiliate dumping rules (see IMIC/Afferro, Serabi/Kenai and Coeur d'Alene/Orko). The RRSP disclosure notes that if Chaparral Gold satisfied the public corporation conditions as late as six months after its first taxation year, it could retroactively elect to be a public corporation from inception.
It is not expected that the spin-off of Chaparral Gold will qualify for US tax purposes as a Code s. 355 tax-free spin-off. Instead, the plan of arrangement will be treated as a single integrated transaction resulting in a capital gain or loss to US shareholders.
Neal Armstrong and Abe Leitner. Summary of Circular of International Minerals Corporation under Spin-offs - S. 86 reorganization spin-offs.