News of Note
CRA indicates that self-assessment where a non-resident supplier has failed to charge HST does not relieve the recipient of the obligation to pay HST to that supplier
Email this ContentWhere a non-resident makes a taxable supply of, say, a service to a Canadian registrant and fails to charge GST/HST due, for instance, on the mistaken belief that it was not carrying on business in Canada, the Canadian recipient would typically self-assess itself for GST/HST under ss. 218 and 218.1 if it did not acquire the service exclusively in the course of its commercial activities. If CRA subsequently assessed the non-resident for failure to charge GST/HST on the basis that the place of the supply was in Canada, would CRA not expect the supplier to remit the GST/HST given that the tax had already been paid?
CRA indicated that since the supply in fact was made in Canada, the self-assessment by the recipient was “in error.” The recipient could claim a rebate of such tax under s. 261 within two years after the day the amount was paid provided that the recipient was not assessed for such amount under s. 296. “Where a rebate under section 261 is restricted or is outside the two year period, the recipient may request a (re)assessment of the applicable return for the particular period.”
The fact that the recipient would in many circumstances need to rely on CRA exercising its discretion to assess or reassess its return to reverse the self-assessed tax would be an additional impediment to the non-resident supplier recovering such tax from the recipient.
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.15 under ETA s. 217 – imported taxable supply.
CRA confirms the application of s. 7(1.31) to the acquisition and immediate sale of RSU shares
S. 7(1.31) applies in relation to shares of a public corporation if a share of the corporation is acquired under an agreement described in s. 7(1), an identical share is disposed of within 30 days after that acquisition, no other identical shares are acquired or disposed of by the employee after that acquisition and before the disposition, and the employee makes the required designation. If s. 7(1.31) applies, the employee is permitted to designate the most recently acquired shares as the shares deemed to be disposed of.
CRA commented on an example. An employee who acquired 10 common shares of the public-company employer, was also issued, for no consideration (other than services rendered), 10 restricted stock units (RSUs) of the employer under an agreement to which s. 7(1) applied. When the 10 RSUs vest, the employee is issued 10 common shares of the employer (the “RSU Shares”) with a fair market value of $10 per share. Immediately thereafter, the employer directs a broker to dispose of 5 RSU Shares, and the $50 proceeds are utilized by the employer to satisfy its withholding tax obligation.
CRA indicated that provided the s. 7(1.31) conditions were satisfied, the deemed cost of the RSU shares under s. 53(1)(j), equal to the taxable benefit of $100, would not be pooled with the lower ACB of the historical shares by virtue of s. 47(3), so that no gain would be realized on the sale of half of the RSU shares.
Neal Armstrong. Summary of 12 September 2022 External T.I. 2021-0886441E5 under s. 7(1.3).
Bowker – Federal Court of Appeal states that the DoJ cannot settle a tax case on a basis fundamentally at odds with its view of the facts and law
The taxpayer had a s. 163(2) penalty vacated in the Tax Court on the basis that her involvement in the false amended return filed by her was completely passive.
Regarding its costs award, the Tax Court noted that the taxpayer’s counsel had offered to settle on the basis that the s. 163(2) penalty would be vacated and replaced by a $2500 penalty under s. 162(7)(b). In reversing the Tax Court’s finding that this settlement offer was a factor tending to increase the costs award in the taxpayer’s favour, Pelletier JA found that s. 162(7)(b) should be narrowly construed in light of the noscitur a sociis principle and “would not apply to the case of returns that were filed when required but were negligently prepared.” Accordingly, on the basis of the Galway principle, the “settlement proposal was not one which the Minister could have accepted as the lower penalty under paragraph 162(7)(b) was not available.”
Regarding a proposal made in the alternative under the settlement offer that the Minister waive the penalty under s. 220(3.1), Pelletier JA stated that the “principle in Galway rests on the Minister’s view of the facts and the law, not on what the Minister’s view might have been.” Since at the time of the offer, the Crown “remained convinced that she had acted in a grossly negligent way in relation to false statements in her income tax return,” the taxpayer’s offer was not one that the Crown could accept. Instead, a waiver of the penalty under s. 220(3.1) “could only be based on the respondent’s personal circumstances.”
Since the settlement offer could not have been accepted by the Minister in accordance with Galway, it was irrelevant to the quantum of the costs award.
Neal Armstrong. Summaries of Canada v. Bowker, 2023 FCA 133 under s. 162(7)(b), s. 220(3.1), Statutory interpretation - noscitur a sociis, General concepts – judicial comity and Rule 147(3)(d).
Income Tax Severed Letters 14 June 2023
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Les Structures G.B. - Quebec Superior Court rectifies transaction documents because they did not implement the parties' intention to not trigger Part IV tax
The shareholders of a CCPC implemented a reorganization that was intended to crystallize the capital gains deduction without triggering any tax other than a small amount of AMT. However, the transactions for first "purifying" the CCPC of investment assets entailed the issuance of some preferred shares, which caused the shareholding in the CCPC of three of the holding companies to be diluted from 10% to below 10%, so that the CCPC was no longer connected to them and so that they were subject to significant Part IV tax on dividends received from the CCPC.
Before granting the requested order to rectify the implementing documents, Blanchard J stated:
The de-connection of the corporations prevented the accomplishment of the will of the parties in implementing the reorganization, which was to crystallize the CGD and not pay any tax, other than minimum tax, while benefiting from the CGD. ...
In the circumstances, it is appropriate to grant the request and to correct the documents in order to conform them to what the parties had conceived. This is not the Shareholders attempting to rewrite the tax history of the file.
See also Samson.
Neal Armstrong. Summary of Les Structures G.B. Inc. v. A.G. Canada, 100-17-002228-205 (5 June 2023, Quebec Superior Court) under General Concepts - Rectification.
CRA indicates that digital marketing services were not zero-rated
A resident registrant (CanCo) provided, to non-resident clients from a location in Canada, digital advertising, digital marketing, content marketing strategy and social media services.
CRA ruled that such services were not zero-rated under ETA Sched. VI, Pt. V, s. 8 as supplies of an advertising service made to an unregistered non-resident person, given that those services did not themselves entail creating advertising messages, and did not directly relate to communicating such messages. However, it noted that such services might be zero-rated under Sched. VI, Pt. V, s. 7 or s. 23 (the more general provisions for services or professional services).
Neal Armstrong. Summary of 8 December 2022 GST/HST Interpretation 222719 under ETA Sched. VI, Pt. V, s. 8, s. 7 and s. 23.
We have translated 7 more CRA interpretations
We have translated an interpretations released by CRA last week and a further 6 translations of CRA interpretations released in May of 2003. Their descriptors and links appear below.
These are additions to our set of 2,494 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2023-06-07 | 15 February 2023 External T.I. 2022-0934821E5 F - Paragraphes 1103(1) et 1101(5b.1) | Income Tax Regulations - Regulation 1103 - Subsection 1103(1) | Reg. 1103(1) election by partnership cannot extend to property included in a separate class under Reg. 1101(5b.1) election |
| Income Tax Regulations - Regulation 1101 - Subsection 1101(5b.1) | Reg. 1101(5b.1) separate class status cannot be overridden by Reg. 1103(1) election | ||
| 2003-05-09 | 23 April 2003 Internal T.I. 2003-0008767 F - Benefits Conferred on Shareholders
Also released under document number 2003-00087670.
|
Income Tax Act - Section 15 - Subsection 15(1) | shareholder benefit where house sold to shareholder at a loss attributable to its having been built to his luxury specifications |
| Income Tax Act - Section 54 - Personal-Use Property | house provided for use of the corporation’s shareholder (giving rise to s. 15(1) benefit) was personal-use property | ||
| Income Tax Act - Section 46 - Subsection 46(4) | policy of s. 46(4) supported the finding of a shareholder benefit when personal-use property of corporation sold at a loss (representing luxury elements that did not add value) to its shareholder | ||
| 6 May 2003 External T.I. 2003-0181495 F - DEDUCTIBILITY DES INTERETS
Also released under document number 2003-01814950.
|
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | post-Ludco, CRA accepts that interest borrowed at a rate higher than the fixed-return for the investment, is generally deductible | |
| 2003-05-02 | 1 May 2003 Internal T.I. 2002-0178347 F - BENEFICES FABRICATION
Also released under document number 2002-01783470.
|
Income Tax Regulations - Regulation 5202 - Qualified Activities | no requirement that the SR&ED be connected to M&P |
| Income Tax Act - Section 9 - Expense Reimbursement | reimbursements of SR&ED labour and other expenses did not reduce cost of labour | ||
| Income Tax Regulations - Regulation 5202 - Cost of Manufacturing and Processing Labour | reimbursements of SR&ED expenses do not reduce cost of manufacturing and processing labour | ||
| 25 April 2003 External T.I. 2002-0171075 F - AVANTAGE-POLICE D'ASSURANCE
Also released under document number 2002-01710750.
|
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | s. 6(1)(a) benefit where employer, as policyholder, pays premiums on policy on life of employee, whose estate is the revocable beneficiary | |
| Income Tax Act - Section 15 - Subsection 15(1) | s. 15(1) benefit where corporate policyholder pays premiums on policy on shareholder’s life where the revocable beneficiary is the shareholder’s estate | ||
| 30 April 2003 External T.I. 2002-0172485 F - LIQUIDATION SOCIETE DE PERSONNES
Also released under document number 2002-01724850.
|
Income Tax Act - Section 85 - Subsection 85(3) | taking back note for receivables transferred under s. 22 rather than s. 85(2) precludes s. 85(3) application to wind-up | |
| 29 April 2003 External T.I. 2002-0177065 F - CONFISCATION DE LA SOLDE
Also released under document number 2002-01770650.
|
Income Tax Act - Section 5 - Subsection 5(1) | salary that is forfeited by RCMP officer for misconduct nonetheless is includible as salary which was constructively received | |
| General Concepts - Payment & Receipt | forfeited salary nonetheless includible as salary received |
River Cree Resort – Federal Court of Appeal finds that a supply to an ATM owner was the location rather than cash loaded onto the ATM
The owner and operator of a casino resort (“River Cree”) agreed with the owner of ATMs (“Access Cash”) which, in turn, had access to the Interac payment network of a network operator, that it would make various locations on its resort available for the siting of Access’ ATMS, load those ATMs with its own cash (for the later reporting periods at issue) or with money borrowed by it from Access Cash (for the earlier periods) and provide the utilities, security, routine maintenance and customer support necessary to operate the ATMs.
Webb JA found no reversible error by the Tax Court that the predominant element in the supply by River Cree was of the exclusive right to place and operate ATMs at the Resort and to process all transactions arising therefrom, which was a taxable supply.
There was also no such error in the Tax Court’s rejection of River Cree’s contention that there was a joint venture between River Cree and Access Cash for the provision of a financial service, given that it was not evident under the terms of their agreement that they intended to associate themselves in such a joint venture.
Neal Armstrong. Summary of River Cree Resort Limited Partnership v. Canada, 2023 FCA 130 under ETA s. 123(1) – financial service – (a).
CRA considers that Reg. 1101(5b.1) separate class status cannot be overridden by a Reg. 1103(1) election
Reg. 1103(1) allows a taxpayer to elect to include, what otherwise would be Class 2 to 12 properties of the same business, in Class 1, thereby reducing its potential CCA claims but also potentially avoiding (or deferring) recapture of depreciation. An additional 2% CCA claim is potentially available under Reg. 1100(1)(a.2) respecting an eligible non-residential building (potentially including a building addition) for which a Reg. 1101(5b.1) election has been made for it to be included in a separate class.
Regarding a partnership (SENC) holding Class 1 buildings along with additions thereto included in a separate class pursuant to a Reg. 1101(5b.1) election, and also holding property in Classes 8 and 10, CRA stated:
[T]he making of an election under subsection 1103(1) by a taxpayer does not override the election under subsection 1101(5b.1) and will not nullify its effects. … Consequently … SENC could elect, under subsection 1103(1), to include in Class 1 of Schedule II, the properties in Classes 8 and 10, but could not include those covered by the election under subsection 1101(5b.1).
Neal Armstrong. Summary of 15 February 2023 External T.I. 2022-0934821E5 F under Reg. 1103(1).
The Joint Committee comments on the draft GAAR amendments
Comments of the Joint Committee on the draft GAAR rules released with the March 2023 Budget include:
- The GAAR proposals should apply prospectively so that they would not apply to a series of transactions that commenced before the effective date.
- The test in s. 245(4.1)(b) - of comparing expected tax benefits and expected non-tax economic return - will be difficult to apply where the latter are difficult to quantify.
- Taxpayers who are assessed under s. 245 after the time has passed for reporting a transaction or series under proposed s. 237.3(12.1) - but there were intervening developments, such as cases or new published CRA positions, that changed the GAAR profile of the transaction or series - should be allowed to file a late disclosure or have the penalty under draft s. 245(5.1) waived as part of the s. 245 rules in appropriate circumstances.
- Calculations of the penalty amount (referencing the amount of the tax benefit resulting directly or indirectly from the transaction or series) could be uncertain or harsh where multiple taxpayers are involved with different benefit amounts or where the series produced tax deferrals rather than absolute tax savings.
- There should be a s. 245 rule stating that a disclosure filed under proposed s. 237.3(12.1) cannot be used as a factor in any way when determining whether GAAR applies.
Neal Armstrong. Summaries of Joint Committee, Summary of Comments and Recommendations Provided to the Department of Finance on the General Anti-Avoidance Rule Proposals Released on March 28, 2023, 7 June 2023 under s. 245(4.1). s. 245(5.1) and s. 237.3(12.1).