News of Note
CRA rules that GST applied to credit application fees charged by a financing company to a vendor’s customers before it agreed to factor the related receivables
Email this ContentCRA found that credit application fees, which a financing company charged to prospective customers of an equipment vendor before it agreed to factor (on a secured basis) the receivables of the vendor arising on the sale, were taxable. CRA’s reasoning is suspect.
Neal Armstrong. Summary of 9 January 2012 Ruling Case Number 112274 under ETA – s. 123(1) – financial service.
CRA warns that mutual fund trailer commissions may be subject to GST
In a 2012 Interpretation which was recently released, CRA went out of its way to warn that trailer commissions (or "renewal commissions" as it termed them) paid by a mutual fund manager to licensed representatives who sold the mutual fund units might not be exempt from GST. It previously warned in 14 July 2011 Headquarters Letter 132388 that trailer commissions paid to mortgage brokers might not be exempt.
Neal Armstrong. Summary of 29 June 2012 Interpretation Case No. 104941 under ETA – s. 123(1) – financial service.
Share reorganizations of a CRIC continue to preclude subsequent PUC reinstatements
The reinstatement rule in the foreign affiliate dumping rules generally provides for the restoration of paid-up capital of a class of shares of a corporation resident in Canada (or a qualifying substitute corporation) when it distributes the foreign affiliate shares (or proceeds thereof) the investment in which gave rise to the previous grind in that PUC or, under the draft FAD amendments released on August 16, 2013, it distributes the proceeds of debt investments which gave rise to such a grind.
This reinstatement rule only applies to the same class of CRIC or QSC shares to which there was a previous grind. Accordingly, access to reinstatement will be lost if such shares are exchanged for shares of another class or for shares of a related corporation. See Example 9-D.
This problem has not been fixed in the August 16, 2013 draft amendments.
Neal Armstrong. Discussion of PUC reinstatement rules under s. 212.3(9).
CRA confirms that flunking the 150 unitholder test does not result in immediate (or necessarily permanent) loss of a MFT’s RCGTOH account
CRA has confirmed that where a mutual fund trust ceases to satisfy in a year the requirement for at least 150 unitholders, if will still be a good MFT for that year for purposes of the refundable capital gains tax on hand (RCGTOH) rules – and that its remaining RCGTOH balance will thereafter be frozen for reactivation in any subsequent year throughout which it satisfies the 150 unitholder test and the other MFT requirements.
Neal Armstrong. Summary of 7 August 2013 Memorandum 2013-0497961I7 under s. 132(4) - Refundable Capital Gains Tax On Hand.
CRA no longer considers substantially refurbished equipment to be new equipment for the purposes of s. 127(9) - "qualified property"
CRA has previously indicated that it would consider an extensively renovated piece of equipment to be new equipment for the purposes of the definition of "qualified property" in s. 127(9), but this is no longer the case. CRA cited the administrative difficulty in applying that position, as shown in the Pêcheries Yvon Savage decision.
Scott Armstrong. Summary of 11 July 2013 T.I. 2013-0490091I7 under s. 127(9) - "qualified property."
Income Tax Severed Letters 21 August 2013
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The safe harbour rule in the revised FAD rules for toeholds is coupled with a treacherous exclusion
The current foreign affiliate dumping rules can apply to an investment of a corporation resident in Canada (a CRIC) in a non-resident corporation even if control of the CRIC by a non-resident corporation is not acquired until subsequently, albeit, as part of the same series of transactions. The August 16, 2013 draft amendments to the FAD rules now provide a safe harbour where, at the investment time, the non-resident did not have a substantial (25% or greater) equity stake in the CRIC.
This safe harbour is not available inter alia if, in connection with the investment, any person (other than the CRIC or a related person) "has in any material respect the risk of loss or opportunity for gain or profit in respect of a property that can reasonably be considered to relate to the investment." This exclusion is very broad and might apply, for example, if there were a third-party investor in the foreign subsidiary. See Example 1-E. Given the breadth of the series of transactions concept (see Canada Trustco, Copthorne and Groupe Honco), loss of the safe harbour could be problematic. See Example 1-D.
Neal Armstrong. Discussion of draft s. 212.3(1)(b)(iii) under Safe Harbour Rule.
Enervest proposes a DRIP with a 2% cash premium feature
CRA accepts that cash dividends, of public shareholder participants in a dividend reinvestment plan, which are reinvested in treasury shares at a discount to market of up to 5% do not give rise to a shareholder benefit under s. 15(1). In 1999, CRA refused to extend this policy to income funds and REITs, so that distributions reinvested under a distribution reinvestment plan gave rise to a taxable benefit under s. 105(1) to the extent the cost of the acquired units was at a discount to the market price (9911853).
Under the Enervest DRIP, the cash distributions of participants are reinvested in treasury units at a 5% discount to market. Enervest is proposing to amend its DRIP so that participants can elect to have the new units, which are issued under the DRIP, then immediately sold by a broker with the participants receiving cash equal to 102% of their cost.
The effect of this may be to increase the odds of there being a taxable benefit, but to reduce the benefit from 5% to 2%. When the DRIP is adopted, the tax disclosure presumably will be similar to that for Argent Energy, including a statement that the Trust is not required to, and will not, include any taxable s. 105 benefit in its T3 reporting.
Under another type of DRIP which does not have the taxable benefit issue, the distributions are reinvested on a non-discounted basis, and the participant then receive a "bonus" distribution of units from the Trust of, say, 5%. Recent examples include Choice, Inovalis, Dundee Industrial and Dundee International.
Neal Armstrong. Summary of Circular of Enervest Diversified Income Trust under Public Transactions – Other – Distribution Reinvestment Plans – Discounted Unit Plans.
CRA amends T1135 to require more detailed foreign income reporting, to "crack down" on cheating
An amended T1135 form contains more detailed reporting requirements, including:
- the name of the specific foreign institution or other entity holding funds outside Canada;
- the specific country to which the foreign property relates; and
- the income generated from the foreign property.
The new requirements flow from a CRA strategy "to crack down on those who attempt to cheat the system."
Scott Armstrong. Summary of T1135, Foreign Income Verification Statement under s. 233.3(3).
CRA considers that whether there is a gift is a question of contract interpretation?
When asked whether a sale of property in Quebec for consideration of one dollar could qualify as a gift for purposes of s. 69(1)(c), CRA stated that in the absence of sham, this was a function of the legal effect under Quebec law of the governing contract of acquisition. This sounds different than the jurisprudence on what is a gift for donation credit purposes, which seems to focus on whether there has been a gratuitous transfer as a factual matter (see Burns, Slobodrian and Maréchaux), and as well the CRA policy that charities can issue full receipts at fund raising events where complimentary benefits do not exceed the lesser of 10% of the ticket price and $75 (ITTN No. 26), presumably irrespective of what the "donation contract" says or whether it's governed by Quebec law.
Neal Armstrong. Summary of 6 June 2013 T.I. 2013-0490711E5 F under s. 69(1)(c).