News of Note

A claimant of the new residential rental property rebate (NRRPR) is required under ETA s. 256.2(3)(a) to be the “recipient” of the supply of the property meaning, generally, that it is liable for the consideration for the supply under the purchase agreement. A corporation which took title to newly-constructed residential properties which it paid for with its own funds and rented out, was denied the NRRPR because it was not named in the purchase agreement (the builder required that individuals be named as the purchasers, so that the individual shareholders of the corporation were so named).

McPhee J noted that Cheema (dealing with the new housing rebate under s. 254) made a similar finding, and stated:

Similar to section 254, subsection 256.2(3)(a) does not distinguish between beneficial and legal ownership, so it is of no consequence that the three related individuals acquired the Subject Properties as bare trustees of the Appellant. …

Similar to the Cheema decision, it is the relationship between the purchaser and the seller that is relevant to the entitlement to the NRRPR rebate, not the relationship between the co-purchasers.

Neal Armstrong. Summary of Garg Investments Inc. v. The King, 2023 TCC 67 under ETA s. 256.2(3)(a).

A public foundation made gifts without strings attached to certain U.S. 501(c)(3) organizations during taxation years ending prior to 2022. Art. XXI(7) of the Canada-U.S. Treaty provided that, for purposes of Canadian taxation, a gift made by a resident of Canada in a taxation year to an organization - that was resident in the U.S., was generally exempt from U.S. tax, and could qualify in Canada as a registered charity if it were created or established and resident in Canada - as a gift to a registered charity, subject to potential numerical limitations.

Although the scope of what IRC s. 501(c)(3) encompasses is broad, CRA indicated that it accepted that a gift made by a Canadian resident to a U.S. 501(c)(3) organization will be an eligible gift for purposes of the s. 110.1 corporate deduction or the s. 118.1 individual credit.

However, the U.S. 501(c)(3) organizations generally would not be “qualified donees” given that, under the definition of that term in s. 149.1, “other than the United Nations or its agencies, only foreign entities that have applied for and were registered by the Minister are a qualified donee.” Accordingly, making such gifts were grounds for revocation of the registered charity status of the public foundation. The rationale for this narrow interpretation of Art. XXI(7) was that “the Canada-U.S. Treaty provides limited tax relief to residents of Canada and the U.S. who may be subject to double taxation on income and on capital imposed on behalf of each country” and Art. XXI(7) by its terms did not extend to the requirements for being a Canadian registered charity.

The same analysis applied to gifts made to U.S. 501(c)(3) organizations by a private foundation or a charitable organization.

Neal Armstrong. Summary of 15 February 2023 Internal T.I. 2022-0925731I7 under Art. 21.

2011-0404521C6 indicated that in the situation where the Canadian target holding a foreign affiliate (FA) is wound up into the Canadian acquisition company (resulting in a "bump" to the ACB of the shares of FA under s. 88(1)(d)) and those shares of FA are then distributed by the acquisitionco to its foreign parent within a reasonable time of the acquisition of the Canadian target and before any dividends are received or deemed to be received by the Canadian target or the acquisitionco, the surplus balances of FA will be irrelevant. Accordingly, in these circumstances, CRA will not challenge the bump by raising the absence of a calculation of the tax-free surplus balance of FA.

After confirming this position, CRA stated that it was consistent with its position in 2019-0798761C6 and 2022-0928101C6 that, as a more general matter, surplus calculations were required, because in the above circumstances, the determination of Canco’s surplus balances was rendered “irrelevant for Canadian tax purposes upon that [FA] transfer.”

Neal Armstrong. Summary of 17 May 2023 IFA Roundtable, Q.8 under Reg. 5905(5.4).

Two long-time residents of Hong Kong (Mr. and Mrs. A) each transferred 50% of the shares of Canco to a new Hong Kong company. Leaving aside the avoidance provisions, this reduced the dividend withholding tax rate on dividends paid by Canco from the 15% general Treaty-reduced rate to a 5% rate (under Art. 10(2)(a) of the Canada-Hong Kong Treaty).

CRA noted that for dividends paid after 2023, it was no longer necessary to satisfy the “one of the main purposes” test in Art. 10(7) of the Treaty in order for such rate reduction to occur, and that instead the relevant test was the principal purpose test (PPT) in Art. 7(1) of the MLI.

CRA emphasized that even if the purpose test in Art. 7(1) was satisfied, Art. 7(1) nonetheless states that it does not apply to deny a Treaty benefit if “it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.” CRA then briefly stated:

Article 7(1) of the MLI will generally not apply to deny the benefits of Article 10(2)(a) of the Agreement on such dividends paid on or after January 1, 2024.

Accordingly, CRA appeared to accept that it would accord with the “object and purpose” of the Treaty for individuals resident in HK to access a lower withholding tax rate by transferring their shares to their HK corporation.

There was no similar object-and-purpose exception in Art. 10(7) of the Treaty so that, for dividends paid before 2024, it was necessary that one of the main purposes of transferring to the HK corporation was not accessing a rate reduction under Art. 10. If there was such a main purpose, the effect would be to increase the dividend withholding rate from 15% to 25%.

Neal Armstrong. Summary of 17 May 2023 IFA Roundtable, Q.7 under Treaties – Income Tax Conventions – Art. 10.