News of Note
GST/HST Severed Letters December 2023
Email this ContentThis morning's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their January 2023 release) is now available for your viewing.
Davis Dentistry – Federal Court of Appeal finds that the single-supply doctrine should not be applied to orthodontic supplies
Davis Dentistry had claimed input tax credits (ITCs) 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, whereas CRA had disallowed its ITC claims on the basis that under the single-supply doctrine, as enunciated in O.A. Brown, there was a single supply of exempt orthodontic services.
In dismissing the Crown’s appeal, Woods JA stated that “Parliament’s intent must override O.A. Brown where legislative intent is clear as it is in the provisions applicable in this case.” Indicators of such intent included:
In the case of a supply of orthodontic appliances and orthodontic services, which are typically supplied together, the fact that one has zero-rated status and the other has exempt status strongly suggests that this was intentional and that a supply of an orthodontic appliance is intended to be zero-rated even when accompanied by orthodontic services. …
It is highly unlikely that Parliament would explicitly provide that any supply of an orthodontic appliance is zero-rated if the intention is that the supply is restricted to the wholesale level.
Thus, the single-supply doctrine should be applied as an interpretive aid, rather than as a blunt instrument.
Neal Armstrong. Summary of Canada v. Dr. Kevin L. Davis Dentistry Professional Corporation, 2023 FCA 76 under ETA Sched. VI, Pt. II, s. 11.1.
CRA finds that employment income does not arise in the U.S. for Treaty purposes to the extent the duties are performed in a Canadian home office
A portion of the employment duties of a cross-border employee (with a hybrid work arrangement) was exercised from Canada in the year but the individual made contributions under the U.S. Federal Insurance Contributions Act (“FICA contributions”). In finding that the FICA contributions made in respect of the duties exercised in Canada would not be eligible for a foreign tax credit, the Directorate referenced the rule in Art. XXI:2(a) requiring that the tax be paid on income “arising” in the U.S. and indicated that generally it would regard only that proportion of the employment income that corresponded to the days in which the employee was performing duties of employment while “physically present” in the U.S. as compared to the days of physical presence in both jurisdictions while performing those duties, would satisfy this “arising” test.
The Directorate took the same approach to the deductibility of contributions made to a 401(k) plan by such an employee having regard to a requirement under Art. VIII:10 that the contributions be attributable to services “performed” by the individual in the U.S., so that the deductible amount of the 401(k) contributions for a year generally would be the proportion thereof based on the relative number of working days the individual was physically present in the U.S. The Directorate also noted that Art. VIII:11 essentially limited the 401(k) deduction to the individual’s RRSP contribution room.
Neal Armstrong. Summaries of 11 April 2023 Internal T.I. 2023-0964101I7 under Treaties – Income Tax Conventions – Art. 24, Art. 8.
Income Tax Severed Letters 12 April 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a PSB rebate for purchased real estate can be deducted from the GST/HST remittance for the purchase by filing the rebate and purchase returns together
A (GST/HST-registrant) public service body which acquires real property not primarily in the course of its commercial activities is required pursuant to s. 228(4)(b) to report the GST/HST on the acquisition on a separate real estate return (GST60).
CRA indicated, however, that provided that the GST60 return is filed together with the return (e.g., GST 66) in which a PSB rebate is claimed for the GST/HST payable on the real estate acquisition then, pursuant to ETA s. 228(6), the PSB may reduce the GST/HST otherwise remittable with the GST60 return by the claimed rebate amount.
Although CRA noted that in the above circumstance, where a separate (GST60) return was required to report the acquisition, an ITC for the GST/HST on that purchase could not be recovered by filing the regular (GST34) and special (GST60) returns together given that s. 169(4)(b) would require the GST60 return to be filed first before the ITC claim could be made.
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.12 under ETA s. 228(6).
Hootsuite – Supreme Court of BC finds that the purchase of Amazon cloud infrastructure services was not subject to BC PST
Hootsuite, which provided its customers with an online social media management system, did not itself have the servers and storage facilities to host its platform, and instead accessed those of Amazon Web Services (“AWS”). The Ministry of Finance assessed BC provincial sales tax on the basis inter alia that Hootsuite’s access to AWS software allowing it to access the remote AWS hardware virtually constituted the provision to Hootsuite of software. The PSTA definition of software referenced the delivery, accessing, or the right to use, a software program.
In finding that there was no use by Hootsuite of “software,” Thomas J stated:
[T]he fundamental nature of … [this] product is to provide an on-demand computer infrastructure service. As such, the products are not subject to PST.
Furthermore:
[T]he key distinction between “software” and a “software program” for the purposes of the PSTA is that a “software program” requires the purchaser to utilize the software as an “application”; that is, the user must be able to interact with the software and create an output based in part on those interactions with the program.
Applying this distinction, there was no use by Hootsuite of a “software program” because the AWS programs were opaque to it rather than something it interacted with.
A similar analysis indicated that technical support provided by AWS through an online chat feature provided through a web interface (the “Console”), which was opaque to Hootsuite, did not entail the use by Hootsuite of a “software program” – and, in any event, the fundamental nature of what was being provided here was AWS technical expertise rather than software.
The Ministry also assessed on the basis that the above technical support service, as well as Hootsuite’s access to dedicated telecommunication service in the U.S. allowing AWS to maximize the efficiency of its virtual hardware, constituted a taxable communication service. Thomas J found that these services came within an exemption in the Regulations for telecommunication services that were “merely incidental” to a contract for non-taxable services.
Neal Armstrong. Summaries of Hootsuite Inc. v British Columbia (Finance), 2023 BCSC 358 under the Provincial Sales Tax Act, (B.C.), s. 1 – software, telecommunication service.
We have translated 8 more CRA severed letters
We have published translations of a CRA interpretation and ruling released last week and a further 6 translations of CRA interpretations released in August and July of 2003. Their descriptors and links appear below.
These are additions to our set of 2,432 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 19 ¾ 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 |
|---|---|---|---|
| 2023-04-05 | 2021 Ruling 2020-0847671R3 F - Transfert d'un immeuble | General Concepts - Fair Market Value - Land | no demurral re a property’s FMV being suppressed by long-term leases with nil net rents |
| Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(l) | corporation governed by CBCA presented to CRA as an NPO | ||
| Income Tax Act - Section 15 - Subsection 15(1) | no s. 15(1) benefit on property transfer to shareholders for its nominal appraised FMV if indeed such FMV was suppressed by the low-rent long-term leases to the shareholders | ||
| 4 January 2022 External T.I. 2015-0607531E5 F - Action admissible de petite entreprise | Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share - Paragraph (e) | s. 110.6(1)(e) applies to successive share substitutions (including an amalgamation) | |
| Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(i) | s. 110.6(14)(f)(i) can apply to an amalgamation | ||
| 2003-08-01 | 21 July 2003 External T.I. 2002-0180465 F - CATEGORIES 8 ET 43
Also released under document number 2002-01804650.
|
Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(b) | “solely” has a narrow meaning and might not be satisfied where the improvement was to comply with health standards regulation |
| 10 July 2003 Internal T.I. 2003-0018897 F - INTERET-REVENU RAJUSTE TIRE ENTREPRISE
Also released under document number 2003-00188970.
|
Income Tax Regulations - Regulation 5202 - Adjusted Business Income | interest on tax refund generated from active business was active business income/ Ensite principle generally does not apply to inter-affiliate interest | |
| 2003-07-25 | 14 July 2003 Internal T.I. 2003-0016677 F - BONIS A PAYER ET BENEFICES MARGINAUX
Also released under document number 2003-00166770.
|
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense | obligation of corporation to pay bonuses out of annual profits could be established by oral agreement and book entries |
| 9 July 2003 External T.I. 2003-0183675 F - VENTE D'UNE LISTE DE CLIENTS
Also released under document number 2003-01836750.
|
Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) | application of s. 12(1)(g) only to excess participating sales price for client list over minimum, or where there is a maximum equaling the client list’s FMV | |
| Income Tax Act - Section 24 - Subsection 24(1) | loss under s. 24(1)(a) where maximum sales price (equaling FMV) for sold client list is not achieved | ||
| 15 July 2003 Internal T.I. 2003-0023177 F - DATE D'EXECUTION
Also released under document number 2003-00231770.
|
Income Tax Act - Section 56.1 - Subsection 56.1(4) - Commencement Day - Paragraph (b) - Subparagraph (b)(iv) | ascertainment of whether a commencement day based on the parties’ apparent intentions | |
| 2003-07-11 | 30 June 2003 External T.I. 2003-0182875 F - TRANSFERT DE POLICE D'ASSURANCE
Also released under document number 2003-01828750.
|
Income Tax Act - Section 15 - Subsection 15(1) | benefit where permanent life or critical illness policy transferred gratuitously to shareholder as new policyholder |
| Income Tax Act - Section 148 - Subsection 148(9) - Adjusted Cost Basis | ACB bump on policy distribution to shareholder equal to s. 15 benefit excess over CSV | ||
| Income Tax Act - Section 52 - Subsection 52(1) | ACB bump on policy distribution to shareholder equal to s. 15 benefit in excess of ACB otherwise determined – even in absence of s. 52(1) |
No CRA demurral re a property’s FMV being suppressed by long-term leases with nil net rents
A corporation governed by the CBCA which nonetheless was intended to qualify as an NPO under s. 149(1)(l) owned an apartment building which it leased to tenants who also held all its common shares in proportion to the relative size of their apartments. The leases were rent-free except for an obligation to pick up a proportionate share of property costs (described as being economically analogous to condo fees), and presumably were very long-term leases. A third-party appraisal indicated that the property had a nominal value because of the effect of the leases.
It was proposed that the corporation transfer undivided interests in the property to its shareholders in proportion to their relative shareholdings so that each would acquire a co-ownership interest proportionate to the relative size of that transferee’s apartment. Such transfer would result in an extinguishing of the leases. The consideration paid by the shareholders would be a proportionate fraction of the property’s nominal appraised value.
CRA gave a ruling (albeit, apodictic) that there would be no s. 15(1) (or 246(1)) benefit to the extent that the FMV of the share of the real property so transferred to each shareholder was equal to or less than the FMV of the consideration paid therefor and, on a similar assumption that the aggregate consideration and the property’s FMV did not exceed its ACB, the corporation would not realize a gain. CRA did not rule at all on whether the corporation qualified as an NPO.
Neal Armstrong. Summary of 2021 Ruling 2020-0847671R3 F under s. 15(1).
CRA indicates that s. 110.6(14)(f)(i) can apply to an amalgamation and that s. 110.6(1)(e) applies to successive share substitutions (including an amalgamation)
S. 110.6(14)(f)(i) provides that, for purposes of the requirement in s. 110.6(1)(b) that mooted qualified small business corporation shares ("QSBCSs") must not have not been owned during the 24 months preceding their disposition (the “determination time”) by anyone other than the disposing individual or a related person or partnership, such shares will be considered to have been so owned prior to their issuance by a “bad” owner unless they were issued as consideration for other shares (the “original shares”).
However, s. 110.6(1)(e)(i) requires that throughout the period beginning 24 months before the determination time and ending at the time of the share exchange (the “substitution”), the original share was not owned by anyone other than the individual or a related person or partnership.
Furthermore, s. 110.6(1)(e)(ii) requires that the original share had qualified under the asset and activity test described under para. (c) during such initial (pre-substitution) period.
Regarding the situation where an individual (Mr. X) exchanges his majority shareholding of Opco for shares of a new personal holding company Holdco) and then, around a year later, receives replacement shares of Amalco on an amalgamation of Holdco with Opco followed by a sale by him (and the minority shareholder) of their Amalco shares to a third party, CRA accepted that s. 110.6(14)(f)(i) applied on the amalgamation, i.e., that the Amalco shares could be regarded under the scheme of the Act as being “issued” in consideration for the shares of the relevant predecessor (Holdco).
CRA further indicated that s. “110.6(1)(e) can apply respecting multiple substitutions” so that, under s. 110.6(1)(e)(ii), it would be necessary both for Holdco to satisfy the s. 110. 6(1)(c) test for the period from its issuance of shares in exchange for Opco shares through to the amalgamation, and for Opco to satisfy that test the portion of the period beginning 24 months before the sale ending and ending with such share exchange.
Neal Armstrong. Summary of 4 January 2022 External T.I. 2015-0607531E5 F under s. 110.6(1) - qualified small business corporation share - para. (e),
A-Supreme Nursing – Tax Court of Canada finds that the provision of agency nurses to seniors’ homes qualified as exempt nursing services
The appellant, in addition to providing nurses directly to individuals, placed nurses in the Ontario long-term care facilities and nursing homes of other clients and did not charge GST/HST on the related fees in reliance on the exemption for nursing services in Sched. V, Pt. II, s. 6.
In confirming such exemption, MacPhee J distinguished Hôpital Santa Cabrini (which found that a hospital which contracted for the services of nurses employed by a personnel-services agency was receiving a taxable supply of personnel services) on the basis that, here, the nurses had significant operational control over the manner of their provision of the nursing services to the residents and such delegation of day-to-day control by the facility operators to agency nurses was permitted by the Regulations under the Long-Term Care Homes Act, 2007. It did not matter that the home operators retained general responsibility over the provision of health care services at their facilities.
Neal Armstrong. Summary of A-Supreme Nursing & Home Care Services Inc. v. The King, 2023 TCC 39 under ETA Sched. V, Pt. II, s. 6.