News of Note
Azzopardi – Tax Court of Canada finds that a limited partner was bound by the settlement made by the partnership’s designated member
Email this ContentAfter the Minister made an initial determination that the losses of a film partnership for its 2001 fiscal period were $134.9 million rather than the claimed amount of $255.8 million, the partner who was the designated member filed a notice of objection on behalf of the partnership, resulting in the Minister redetermining the loss to be $194.9 million. The taxpayer, who had an interest in the partnership of under 0.115%, took the position that he was entitled to have a say in how the partnership loss was redetermined.
Spiro J rejected the various arguments advanced by the taxpayer, who had an interest in the partnership of under 0.115%, that he should not be bound by the redetermination, including that:
- the Minister should not have accepted the designated member as the taxpayer’s representative (Spiro J found that the designated member was designated as such in the partnership information return or otherwise authorized by the partnership to so act and that it was unnecessary for the taxpayer to have separately authorized that partner to so act under the “streamlined process” contemplated by s. 165(1.15)); and
- the Minister should not have taken 10 years to reassess the taxpayer (Spiro J found that s. 152(1.7)(b) allows the Minister one year to reassess from the time that a redetermination becomes final and binding, and the Minister was well within the one year period).
Neal Armstrong. Summary of Azzopardi v. The King, 2023 TCC 51 under s. 165(1.15).
CRA finds that a non-resident supplied software licences directly to Canadian users rather than to non-resident sales representatives
ACo, a non-resident that was registered under the regular GST/HST registration provisions and had no physical presence in Canada, appointed non-resident representatives to solicit orders from Canadian business end-users to use its software permitting safe access to their company networks. Some aspects of the arrangements made it appear as if Aco was selling the software licences to the representatives rather than the end-users, i.e., it charged an agreed price for each licence to the representative, who established the price at which the licence would be sold to the end-user – and it was the representative who invoiced the end user and was responsible for collecting the invoice.
However, CRA considered that Aco was not making supplies of the licences to the representatives but rather to the end-user in Canada and that GST/HST applied to such supplies. In this regard, it noted that ACo retained all ownership rights in the software, the representative was not granted a licence to use or reproduce or distribute the software, and it was Aco who was solely authorized to provide the related support services to end-users.
Neal Armstrong. Summary of 21 February 2023 GST/HST Ruling 217305 under ETA s. 142(1)(c).
We have translated 6 more CRA interpretations
We have translated 6 translations of CRA interpretations released in March and February of 2003. Their descriptors and links appear below.
These are additions to our set of 2,552 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 20 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA finds that payments made for loyalty points that had been applied to receive free services without a fixed dollar amount, did not generate ITCs
Aco sells taxable goods under its brand to a network of independent dealers managed by Bco, and also to Bco for sale by it or for resale to such network. Cco provides loyalty points to Aco or (through Aco) Bco or (through Aco and Bco) to the dealers. Such points entitle the retail customer to a 10% discount on widgets purchased at the applicable retail outlet of Bco or a dealer upon redeeming one loyalty point for each widget purchased. Aco reimburses Bco for 85% of the discount provided and (where the retail sale occurs at a dealer) Bco pays over the reimbursement so received by it to the dealer.
Instead of receiving a discount on widget purchases, the customer may be able to choose to redeem points for a free service provided by Bco or the dealer, the cost of which would be reimbursed by Aco directly to Bco or indirectly (via Bco) to the dealer.
CRA indicated that the ETA s. 181 coupon rules would to some extent apply, so that:
- On the acceptance of the points (viewed as “coupons”) by Bco or the dealer as part consideration for the taxable supply of the widgets, they are deemed to have collected tax equal to the GST/HST that would have been collected had the points not been collected (i.e., equal to the tax fraction of the points’ value).
- When Aco pays an amount to Bco respecting the points redeemed by Bco, s. 181(5) would allow Aco an input tax credit (ITC) for the amount of tax embedded in such redeemed “coupons.”
- However, additional information would be required to determine whether Aco would also be entitled to ITCs when making payments to Bco for points redeemed in turn by a dealer.
- Similar consequences would attend the redemption of loyalty points by a customer in exchange for a free service provided by Bco or the dealer – except that, regarding Aco’s payment to Bco respecting the points redeemed by Bco, no ITC would be generated to Aco: s. 181(5)(c) would not be met, i.e., the coupon does not entitle the recipient of the supply by Bco or the dealer to a reduction of the price of the taxable supply by a fixed dollar amount specified in the coupon, and instead the recipient of the service, on redeeming the points, opts in lieu of a fixed dollar amount off the price of widgets for a free service, the value of which varies depending on the location where the service is performed.
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.19 under ETA s. 181(5).
CRA rules that a Canadian sub providing computer and admin/ marketing support services to its non-resident parent would not cause the parent to carry on business in Canada
CRA ruled that the provision of various services by Canco to its immediate foreign parent and to other non-resident members of the group would not by themselves cause those members to carry on business in Canada. These services consisted of various “computer services” including hosting the group website on a Canadian servicer and handling email and time and billing systems and central network management services, as well as “other support services” including accounting, financial, anti-money laundering, compliance, administrative support, information resources management and marketing services. Canco would not have the authority to execute or deliver any contract, agreement or instrument in the name of, or on behalf of, or to act as agent of, its parent or any other non-resident member of the group.
Neal Armstrong. Summary of 2021 Ruling 2019-0800191R3 under s. 2(3)(b).
CRA finds that an employer’s lump sum contribution to an employee life and health trust in relation to future hires was non-deductible
An employer discontinued providing health and welfare benefits for employees hired after a certain date pursuant to the terms of a collective bargaining agreement. In consideration for this discontinuance, it agreed to make contributions to a trust to fund certain designated employee benefits as described in s. 144.1(1) for the New Hires.
CRA indicated that, in order for this lump sum contribution to satisfy the requirements of s. 144.1(6)(b) for a deduction, it was required to have been “directly attributable to specific active employees” and stated that “[w]here a contribution is made in respect of new or future hires comprised of unidentified individuals, most of whom are not yet employees of the employer, this requirement would not be met and the contribution would not be deductible under subsection 144.1(6).”
Neal Armstrong. Summary of 14 March 2023 External T.I. 2022-0925831E5 under s. 144.1(6)(b).
CRA indicates that idle forest land could cause a property to not qualify as a qualified farm or fishing property
Can the “used principally” requirement in s. 110.6(1.3)(a)(ii)(A)(II) (potentially relevant to a property qualifying as a “qualified farm or fishing property” for capital gains deduction purposes) be met where an individual owns a 70 acre parcel of land of which 25 acres is workable farmland and 45 acres is forest?
CRA indicated that where in a particular year, more than 50% of a particular property is being used for some purpose other than farming (or fishing) or is otherwise vacant or idle, generally speaking, such non-farming use would result in the entire property not being considered as being used principally in the business of farming in Canada for the year. However, if the unusable portion was not suitable for any use, then it may be excluded from the “used principally” determination.
Neal Armstrong. Summaries of 13 June 2023 External T.I. 2021-0891701E5 under s. 110.6(1.3)(a)(ii)(A)(II) and s. 248(1) - property.
Income Tax Severed Letters 9 August 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Az-Zahraa Housing Society – Federal Court finds that CRA had fettered its statutorily-accorded discretion by strictly adhering to its published guidelines
A non-profit society received assistance from a government organization (BC Housing) towards its goal of providing affordable accommodation to lower-income renters by selling some of its condo units to BC Housing, with BC Housing then providing those units to the society on a rent-free basis. The Minister’s delegate denied the society’s application to be designated as a municipality pursuant to s. 259(1) (which would have entitled it to GST rebates under s. 259(4)) on the ground that the above government assistance was not government “funding” as required in the CRA published information sheet as to when it would grant a “municipality” designation.
Before ordering that this denial of designation be remitted to a fresh CRA delegate for redetermination, Grammond J stated:
This is an obvious case of fettering of discretion. Section 259 … simply does not lay out any criteria for the exercise of the Minister’s power to designate an entity as a municipality. By refusing to consider circumstances that fell outside the four corners of the information sheet, the Minister’s delegate essentially treated the latter as if it superseded the broad discretion granted by section 259… .
As the Minister’s delegate fettered her discretion, the decision is unreasonable.
Neal Armstrong. Summary of Az-Zahraa Housing Society v. Canada (National Revenue), 2023 FC 842 under ETA s. 259(1) – municipality.
CRA indicates that joint tenants of a newly-constructed residence are each responsible for the GST/HST on 100% of the property’s FMV
Two individuals (the “Owners”) acquired a residential property as joint tenants and contracted for a laneway house to be constructed on the property and leased out.
CRA found that since each Owner, as a joint tenant, was considered at common law to own the entire property, and given that the self-supply rule in ETA s. 191(1) applied to the whole residential complex and not to an interest therein and the rule does not provide for the division of the tax payable on the deemed supply among multiple joint-tenant builders, each co-owner was subject to tax on the FMV of the whole building. However, where one joint tenant accounted for such tax payable on the self-supply, such accounting and the remittance of any resulting positive amount of net tax by that joint tenant would discharge the liability of the other joint tenant, and only one of the Owners was required to report and remit the GST/HST deemed to have been collected on the fair market value of the newly constructed laneway house.
Neal Armstrong. Summaries of 23 March 2023 GST/HST Ruling 244917 under ETA s. 273(1) and s. 191(1).