News of Note
CRA announces that its administrative arrangement regarding ITC claims by orthodontic practices has been revoked
Email this ContentDavis Dentistry confirmed input tax credit (ITC) claims of a professional practice 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.
Under CRA’s arrangement made in 1991 with the Canadian Dental Association, a dentist registrant could, for each reporting period in a fiscal year, use an estimate up to a maximum of 35% of the total consideration charged for orthodontic treatments to represent the consideration for the supply of orthodontic appliances, and claim ITCs on that basis – but then, at the end of the fiscal year, was required to perform a reconciliation based on the actual amounts charged for orthodontic appliances, and adjust the ITC claims for the year accordingly (keeping in mind that charges for cosmetic services also generated ITCs).
CRA has now announced that this arrangement is revoked effective for any fiscal year of a dentist (who had been relying on this arrangement) that begins on or after January 1, 2025.
Dentists will now be expected to claim ITCs throughout the year based on their actual eligibility to do so without making estimates, i.e., on the basis of the extent that the input was acquired for consumption or use in the course of their commercial activities.
Neal Armstrong. Summary of GST/HST Notice 339, “Input Tax Credits Related to Dental Practices,” October 2024 under ETA Sched. VI, Pt. II, s. 11.1.
CRA explains the 8% adjustment to the FTC deduction under the NERDTOH computation for foreign investment income
Although the general tendency of the NERDTOH definition is to add to the NERDTOH of a CCPC an amount equal to 30 2/3% of its aggregate investment income, in the case of foreign investment income (FII), the refundable tax addition is reduced by the excess of the amount of the foreign tax credit deduction under s. 126(1) for the year minus 8% of the year’s FII.
CRA explained that this 8% rate represents the difference between a deemed tax rate of 38 2/3% on the CCPC's FII (i.e., the sum of the 28% federal corporate tax rate applicable to the CCPC's AII and the 10 2/3% rate applicable to such income under s. 123.3) and the refundable amount thereof of 30 2/3%.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.8 under s.129(4) – NERDTOH – (a)(i).
We have translated 7 more CRA severed letters
We have translated a ruling released by CRA last week and a further 6 CRA interpretations released in May of 2001. Their descriptors and links appear below.
These are additions to our set of 2,999 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 23 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Auer – Supreme Court of Canada finds that the validity of Regulations is to be determined under the Vavilov reasonableness test
Various Canadian decisions have reviewed whether the scope of regulations or other subordinate legislation was consistent with the governing tax legislation and, if not, whether it should be struck out or read narrowly to bring the subordinate legislation back into scope. See Weyerhaeuser, Société des alcools, Mark Anthony, B.C. Ferry, Irving Oil and McNeeley.
In Auer, the appellant asked the court to determine that the Governor in Council (“GIC”) had not acted within the scope of the authority delegated to it under the Divorce Act (Canada) in establishing the Federal Child Support Guidelines, SOR/97‑175. Côté J found that the validity of subordinate legislation (here, such Guidelines) was to be determined in accordance with the Vavilov test of reasonableness, so that “the issue of whether the regulations is a reasonable decision depends on whether the regulations are justifiably (or reasonably) within the scope of the authority delegated by the enabling legislation.” However, she further found:
[F]or subordinate legislation to be found ultra vires on the basis that it is inconsistent with the purpose of the enabling statute, it no longer needs to be “irrelevant”, “extraneous” or “completely unrelated” to that statutory purpose. Continuing to maintain this threshold from Katz Group [2013 SCC 64] would be inconsistent with the robust reasonableness review detailed in Vavilov and would undermine Vavilov’s promise of simplicity, predictability and coherence.
Nonetheless, the following principles from Katz Group continue to inform a Vavilov reasonableness review of the vires of subordinate legislation:
(1) [S]ubordinate legislation must be consistent both with specific provisions of the enabling statute and with its overriding purpose or object; (2) subordinate legislation benefits from a presumption of validity; (3) the challenged subordinate legislation and the enabling statute should be interpreted using a broad and purposive approach to statutory interpretation; and (4) a vires review does not involve assessing the policy merits of the subordinate legislation to determine whether it is necessary, wise, or effective in practice.
Here, the Guidelines were intra vires the GIC, as they fell within a reasonable interpretation of the scope of the GIC’s authority under s. 26.1 of the Divorce Act. Accordingly, the appellant’s challenge to the Guidelines failed.
Neal Armstrong. Summary of Auer v. Auer, 2024 SCC 36 under Statutory Interpretation – Regulations/ Statutory Delegation.
CRA confirms that a deceased’s FHSA can be rolled into the surviving spouse’s FHSA, RRSP or RRIF even if the proceeds go first to the estate (albeit, subject to s. 153(1)(v)(i) withholding)
CRA confirmed that if amounts from a deceased holder's FHSA are deposited into the estate's account and then subsequently transferred by it directly to the surviving spouse's FHSA, RRSP or RRIF, s.146.6(15)(a) will deem that indirect transfer to be a direct tax-free transfer from the deceased’s FHSA to such spousal plan, to the extent that it is so designated jointly by the legal representative and the surviving spouse and the usual conditions in s. 146.4(7) otherwise relating to a direct transfer are satisfied.
However, CRA indicated that, if because of the withholding tax under s. 153(1)(v)(i) that would be imposed on the amount paid from the deceased’s FHSA to the estate, the estate did not have sufficient cash to pay the gross proceeds of that FHSA directly to the surviving spouse's FHSA, RRSP or RRIF, the tax free transfer amount would be required to be reduced accordingly.
If the proceeds from the deceased’s FHSA were distributed by the estate to the surviving spouse rather than directly to that individual’s FHSA, RRSP or RRIF, the surviving spouse would not be able to then make the tax-free transfer to such plan.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.7 under s.146.6(15)(a).
GST/HST Excise and Specialty Tax Severed Letters January/May 2024
CRA indicates that the marriage-breakdown FHSA transfer provision (s. 146.6(7)) does not override the requirement for the transferee (ex-)spouse to be a “qualifying individual”
In very general terms, ss. 146.6(7)(a)(ii) and (8) contemplate that a tax-free transfer of an individual's FHSA may be made to the FHSA, RRSP or RRIF of the “ex” in a settlement by judicial order or written agreement in relation to their relationship breakdown. CRA indicated that if, at the time the transfer is to be made, the transferee individual does not already hold a FHSA and is not a “qualifying individual” (e.g., was a recent home owner) so that such individual is not eligible to open up a FHSA, then the transfer cannot be made to a FHSA, and can only be transferred directly, within the specified limits, tax-free to that individual's RRSP or RRIF.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.6 under s. 146.6(7).
CRA rules that a French société civile de placement immobilier (SCPI) is a corporation
CRA ruled that a société civile de placement immobilier (“SCPI”) [real estate investment company] was a corporation for ITA purposes and a “company” for purposes of the Canadian application of the Convention with France. Although its members were styled as partners who could be liable for debts of the partnership up to the amount of their subscribed capital and its income was allocated to them for French income tax purposes, their interests were measured by shares, and under French law, an SCPI has legal personality, has the capacity to enter into contracts with third parties, has its own assets and is liable for the debts it may incur.
Neal Armstrong. Summary of 2022 Ruling 2022-0929431R3 F under s. 248(1) – corporation.
Income Tax Severed Letters 6 November 2024
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that, where necessary, a s. 70(2) return can be filed before the filing deadline with an estimated amount of the right or thing
A taxpayer died in October 2021 after reaching a pay equity settlement a few months earlier. The estate received the pay equity amount at the end of 2022 and a T4 for 2022 early the next year.
CRA indicated that the pay equity amount was a “right or thing” at the time of the taxpayer’s death. If (because the amount was not yet ascertained) a rights or things return was not filed on a timely basis (i.e., by the later of one year after the death and 90 days after the assessment of the terminal return), CRA considered that this right or thing was includible in the taxpayer’s terminal return to the extent that “the salary adjustment existed and was determinable at the time of death” – and that, if necessary to accomplish this inclusion, the T1 terminal return should be amended accordingly.
However, CRA stated:
Where it is not possible, for example because of administrative delays, to obtain from the employer the precise amount of the pay equity adjustment payment within the time required to make the election under subsection 70(2) and to file a Rights or Things Return, the CRA will generally accept the filing of such a declaration where the taxpayer declares an amount estimated on the basis of the best information available at the time the declaration is filed. Once the value of the rights or things referred to in subsection 70(2) has been determined with greater certainty, the representative must, if necessary, amend the return.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.5 under s. 70(2).