News of Note
CRA reverses its longstanding according of the copyright exemption to broadcasting (and perhaps other performance) royalties
Email this Content2011-0404511C6 confirmed CRA’s longstanding position in IT-303SR, so that the exception in s. 212(1)(d)(vi) applied to all payments for copyright in respect of a literary, dramatic, musical or artistic work, unless that payment was for a right referred to in s. 212(5). This would indicate that payments made, for example, by a Canadian broadcaster to acquire the rights from a non-resident to broadcast live sport or artistic events in Canada (“broadcast rights payments”) would fall within s. 212(1)(d)(vi), unless the s. 212(5) exception applied.
However, 2012 ESA decision drew a clear distinction between the right to perform in public and the right to produce or reproduce a copyrighted work. Does this change the CRA view?
CRA noted that the ESA decision dealt with rights under s. 3(f) of the Copyright Act, namely, the according to the copyright holder of the sole right to, “in the case of any literary, dramatic, musical or artistic work, to communicate the work to the public by telecommunication.” There, the Supreme Court found that the enumerated rights in s. 3 essentially protect three basic rights: the right to perform, the right to produce, and the right to reproduce, a work; and found that the communication right under s. 3(f) came within the performance aspect of copyright, and not that of production or reproduction.
CRA indicated that, accordingly the ESA decision established that broadcasting relate to the performance of a work, not to its production or reproduction. The 2011 CRA position therefore ceased to be correct and, as a result, CRA was thereafter required to assess broadcast rights payments as being subject to tax under s. 212(1)(d).
This statement by its logic could very well apply to other performance royalty payments, such as royalties paid to the holder of the copyright to a Broadway theatrical production to mount the production in Canada. Using this as an example, it would be quite inappropriate to treat the longstanding CRA published policy as having been changed retroactively from 2012, given that the statutory reference to a royalty in respect of a copyright in respect of the production (or reproduction) of dramatic, musical or artistic work readily describes the theatrical production situation.
Similar language to that in s. 212(1)(d)(vi) also appears in various Treaties.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.13 under s. 212(1)(d)(vi).
CRA illustrates the counting of the 5-year limitation under the cost recovery method for earnouts
One of the conditions set out in IT-426R for application of the cost recovery method (contained in subpara. 2(d)) in relation to an earnout is that:
The earnout feature in the sale agreement must end no later than 5 years after the end of the first taxation year of the corporation (whose shares are sold) in which the shares are sold. For the purposes of this condition, the CRA considers that an earnout feature in a sale agreement ends at the time the last contingent amount may become payable pursuant to the sale agreement.
Suppose that the shares of the target corporation were sold on October 1, 2022 and that the purchaser chose December 31 as the end of the short year commencing immediately before the acquisition of control. CRA indicated that since the shares of the target thus were acquired in the short taxation year ending on December 31, 2022, under the 5-year rule, the earnout feature was required to end no later than December 31, 2027.
Regarding when the last contingent amount is considered to have become payable, CRA indicated that this referred to the time when there arose a clear legal, but not necessarily immediate, obligation to pay that contingent amount. There was no requirement under subpara. 2(d) that the contingent amount in fact be paid within the 5-year period.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.11 under s. 12(1)(g).
Gestion Roy – Tax Court of Canada finds that a company’s payment of the premiums on whole life policies of which it was the beneficiary but not owner triggered ss. 15(1) and 246(1) benefits
Various whole life policies on the life of a resident individual (Mr. Roy) were owned by (i) a holding company (“Gestion Roy”), controlled by Mr. Roy and which was the majority shareholder of a consulting firm (“R3D”), or by (ii) another holding company (“445 Canada”) which was wholly-owned by Mr. Roy but which was not a shareholder of R3D. However, R3D was the revocable beneficiary of any death benefits under the policies and paid all the premiums.
Smith J confirmed CRA’s inclusions in Gestion Roy’s income under s. 15(1) of the annual premium amounts paid on Gestion Roy’s policies given that it was the owner of such policies (entitling it to the cash surrender value of the policies at any time), so that it was “enriched” when the premiums were paid by R3D – and indicated that it was irrelevant to this point that, in fact, Gestion Roy never received any distribution on its policies. (What in fact occurred a number of years later was that, on the sale of R3D and R3D assets to a third-party purchaser, R3D received the cash surrender value of most of the policies on their termination.) His reasoning suggests that he could have reached the same conclusion even if the designation of R3D as the beneficiary was irrevocable.
He went on to find that it followed that the payment by R3D of the premiums on the policies of 445 Canada resulted in corresponding inclusions under s. 246(1) to 445 Canada.
Neal Armstrong. Summaries of Gestion M.-A. Roy Inc. v. The King, 2022 CCI 144 under s. 15(1) and s. 246(1).
CRA indicates that a beneficiary of a trust for CRS purposes includes someone who receives a loan from the trust at a below-market interest rate
Where a resident trust is a “passive non-financial entity” and has a “financial account” with a “reporting financial institution” (RFI), such RFI will have reporting obligations under Pt. XIX if one or more “controlling persons” are “reportable persons.” The s. 270(1) definition of “controlling persons” refers inter alia to the trust’s “settlors” and to a discretionary beneficiary to whom a distribution has been paid or made payable in the calendar year. The CRA’s Guidance on the Common Reporting Standard states that a “person is treated as a beneficiary if … they receive, directly or indirectly, a discretionary distribution from the trust … in the calendar year … .”
Regarding what constitutes an indirect contribution for these purposes, CRA referred approvingly to OECD guidance which, in addition to perhaps more obvious examples such as a trust paying tuition fees or paying off someone’s loan, also indicated that there would be an indirect distribution to someone who received a loan at a below-market rate of interest “or at other non-arm’s length conditions” or whose loan is written off.
CRA also suggested that a “settlor” could include not only the person who initially settled the trust but also anyone who has made a “substantive” contribution to the trust.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.10 under s. 270(1) – controlling persons.
Finance indicates that the pending GAAR changes will be in the nature of a tune-up
In brief oral comments on the GAAR consultation paper, Shawn Porter indicated that Finance thinks that the GAAR is working reasonably well, but could do with a tune-up.
He noted that the paper stated the government’s intention to add an explicit economic substance rule to the GAAR in accordance with the PMO mandate letter to the Minister. Although the judicially developed analytical framework was reasonably sound, there are some cases that may benefit from a further statutory “nudge” with regard to economic substance, but Finance did not wish to undo 30-plus years of experience by all in working with the GAAR, and the precedents established in a significant volume of decided cases.
GST/HST Severed Letters August 2022
This afternoon's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their August 2022 release) is now available for your viewing.
CRA indicates that there is only one estate (and one T3 return) for a deceased, even if there are multiple wills
Where an individual has two wills (one of them not being subject to probate) so that the two wills are administered separately, does s. 104(2) apply so that one T3 return is filed for the estates created under both wills?
CRA responded that, even though the wills could be administered separately, the individual would be regarded as having only one estate and thus (since a trust is defined in s. 248(1) to include an estate unless the context otherwise required), there would only be one trust. There being only one trust, the postamble to s. 104(2) could not apply, and only one T3 would be filed for each taxation year.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.9 under s. 104(2).
CRA indicates that crypto-mining GPUs and ASICS could qualify as Class 50 assets
Regarding the use in commercial crypto-asset mining operations of graphics processing units (GPUs) or application-specific integrated circuit (ASIC) miners to generate computing power (hash power), CRA noted that Class 50 refers to general-purpose electronic data processing equipment, and includes desktop and laptop computers, and that the GPU and ASIC mining rigs could meet the detailed conditions set out in Class 50.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.8 under Schedule II, Class 50.
CRA publishes the official version of the 2022 STEP Roundtable
CRA has now published the official version of its responses to the questions posed at the 15 June 2022 STEP Roundtable. For convenience, we provide the links below to these responses and our summaries.
Income Tax Severed Letters 7 December 2022
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.