News of Note

CRA provides relief from imputed interest on small short-term loans made to employees

CRA has modified its webpage on Loans and Employee Debt to indicate that employees generally will not be required to recognize a taxable benefit from an interest-free (or low-interest) loan received from their employer where:

  • the total amount of all loans received is $10,000 or less per calendar year;
  • the term of the loan(s) is 60 days or less; and
  • the loan is not received by virtue of shareholdings of the employee or others with a specified connection.

Neal Armstrong. Summary of CRA Webpage, “Loans and Employee Debt” 14 November 2023 under s. 80.4(1).

Federal Court of Appeal finds that a Federal Court proceeding should not have been completely closed to the public

Stratas JA found no reversible error in the Federal Court’s dismissal of the appellant’s application for judicial review of the Minister’s refusal to remit tax under the Financial Administration Act. Before so concluding, he observed that the Federal Court had closed its whole hearing to the public because the parties intended to make submissions about an earlier remission case including disclosure of confidential tax information. Stratas JA stated:

The default is that court proceedings are open. Any secrecy must be necessary, justified and minimized … .

… In the Federal Court, the submissions containing confidential information were only a small part of the hearing. At most, it should have closed only a small part of its hearing.

Neal Armstrong. Summaries of Ontario Addiction Treatment Centres v. Canada (Attorney General), 2023 FCA 236 under Federal Court Rule 151(2) and Financial Administration Act s. 23(2).

CRA finds that a rescission fee paid to the vendor of a B.C. residential property generally is not subject to GST

S. 42(1) of the Property Law Act (B.C.) provides that a purchaser of residential real property generally may rescind the contract of purchase and sale for the property by serving written notice of rescission on the seller within three days after the date that the acceptance of the offer was signed. S. 6 requires the rescinding purchaser to promptly pay to the seller an amount equal to 0.25% of the purchase price.

CRA indicated that the fee would not be subject to GST under ETA s. 182 except where the sale had been for a taxable supply of real property by a registrant (e.g., a sale by a builder). It also reiterated its position that generally damages payments not within s. 182 are not consideration for taxable supplies.

Neal Armstrong. Summary of 18 April 2023 GST/HST Interpretation 245056 under ETA s. 182(1).

We have translated 6 more CRA interpretations

We have translated a further 6 CRA interpretations released during July of 2002. Their descriptors and links appear below.

These are additions to our set of 2,668 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 21 1/3 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
2002-07-05 19 June 2002 External T.I. 2000-0020525 F - Article 19 Canada - France Tax Treaty Treaties - Income Tax Conventions - Article 19 question of whether French payer was a governmental instrumentality referred to group which could engage in competent authority matters
14 June 2002 External T.I. 2001-0103755 F - Cumulative Eligible Capital on Amalgamation Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(f) Amalco should not have 2 CEC adjustment times
28 June 2002 Internal T.I. 2002-0132427 F - RDTOH Income Tax Act - Section 129 - Subsection 129(1) RDTOH reduced by dividend refund even if time limit for claiming the dividend refund has passed
18 July 2002 Internal T.I. 2002-0135177 F - TRANSPORT DE MARCHANDISES Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(g) goods include property not intended for sale, such as mail, but do not include securities
25 July 2002 Internal T.I. 2002-0139877 F - ASSURANCE INVALIDITE-PARITE Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) contributions in years 2 and 3 could be deducted from subsequent parity adjustment to contribution made in year 1
10 September 1997 External T.I. 9704715 F - RÉCOMPENSE - PRIX D'EXCELLENCE EN XXXXXXXXXX Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) prize excluded because received in respect of employment

2437299 Ontario – Tax Court of Canada finds that major renovations that did not largely “gut” the buildings were not “substantial renovations”

Russell J found that the appellant had not substantially renovated two Ontario properties, so that their sale was not made by it as a “builder” and were not subject to HST under ETA Sched. V, Pt. I, s. 2.

In determining whether there was substantial renovation of each property, both parties accepted the use of the second of the three methods referred to in GST/HST Technical Information Bulletin B-092 for measuring “substantial” (with 90% appearing in B-092 as the minimum percentage for a property to be considered as having been “substantially renovated”). That method was comparing the total area of renovated floor and wall spaces to the building’s total area of floor and wall spaces.

In applying this method, Russell J accepted that:

“[F]looring” in the definition must mean “sub-flooring” as distinguished from whatever flooring was installed covering over the sub-flooring. … Putting down a new carpet, or new laminate wood flooring … [is not] sufficiently significant to contribute to whether a building might be said to have been “gutted.”

He went on to find in light of these findings (including that the buildings had not been “gutted”) and a further finding that some of the rooms in the buildings had been left largely untouched, that neither building had been substantially renovated.

Neal Armstrong. Summary of 2437299 Ontario Inc. v. The King, 2023 TCC 165 under ETA s. 123(1) – substantial renovation.

CRA finds that s. 39(1.1) extends to individuals’ FX bank deposits

CRA reversed its position in 2017-0712621C6 F that s. 39(1.1) was essentially restricted to bills and coins and did not extend to dispositions of foreign currencies held on deposit at a financial institution by an individual. After noting that, in addition to a more technical meaning, “currency” also could refer “simply to ‘money’ that is used in a country, with the definition of ‘money’ including sums in a bank account,” CRA stated:

[I]n the context of subsection 39(1.1), the phrase “dispositions of currency other than Canadian currency” includes situations where foreign currency funds in a chequing or current deposit account, which entitles the depositor to withdraw the currency on deposit at any time, are converted into another currency or used to make a purchase or a payment.

Neal Armstrong. Summary of 27 October 2023 Internal T.I. 2020-0868031I7 under s. 39(1.1).

Husky Energy – Tax Court of Canada finds that a securities loan between residents of two Treaty countries eliminated access to Treaty benefits on the dividend payments

Before a Canadian public corporation (“Husky”) paid a dividend on its shares, two significant shareholders of Husky resident in Barbados (the “Barbcos”) transferred their shares under securities lending agreements to companies resident in Luxembourg with which they did not deal at arm’s length (the “Luxcos”). On payment to the Luxcos of the dividends on those shares, Husky withheld at the Luxembourg treaty-reduced rate of 5% (based on the Luxcos being the beneficial owners of the dividends and controlling at least 10% of the voting power in Husky).

Owen J found that Husky was liable under s. 215(6) for not having withheld at the non-Treaty rate of 25% (although he had no power to increase the assessment of the Minister, which had imposed tax based on the Barbados Treaty-reduced rate of 15%). S. 212(2) imposed tax at 25% on the basis of the persons to whom the dividends had in fact been paid (the Luxcos). Since the dividends had not been paid to Barbados residents (the Barbcos), the Barbados treaty rate of 15% was unavailable. Furthermore, the Luxembourg Treaty rate was unavailable because the Luxcos were not the beneficial owners of the dividends, given that they were required to make matching dividend compensation payments to the Barbcos. In this regard, Owen J stated:

Under the securities lending arrangements, [the Luxcos] enjoyed nothing more than temporary custodianship of the funds received in payment of the Dividends. The compensation payments were preordained by the terms of the borrowing requests, and this preordination ensured that at all times, the Barbcos retained their rights to the full economic value of the Dividends.

Although Husky was thus liable under s. 215(6), Owen J went on to consider the GAAR assessments of the successors to the Barbcos for the difference between the 15% withholding tax they would have borne without the securities loans, and the claimed rate of withholding at the 5% rate.

As to whether there were avoidance transactions, he rejected submissions that the transactions were carried out primarily to avoid the risk of Barbados tax on the dividends, and found that the purpose of the arrangements was primarily to reduce Part XIII tax.

The transactions were not an abuse, because they did not reduce Part XIII tax, and instead increased the rate from 15% to 25%. However, if for completeness, one assumed that the conditions for the 5% rate under the Barbados Treaty had been satisfied, then under this hypothesis there would appear to be no abuse. After referring to the similar analysis in Alta Energy, he stated:

Given the absence of any rule in Article 10 or elsewhere in the Luxembourg Treaty to supplement the residence requirement, the beneficial owner requirement, and the voting requirement, it is reasonable to conclude that Canada and Luxembourg were satisfied with the protection against “conduits” and flow-through arrangements afforded by the inclusion in Article 10(2) of those requirements. In other words, the true intentions of Canada and Luxembourg are fully reflected in the scope of the concepts of residence, beneficial owner and voting power adopted in Article 10(2).

Neal Armstrong. Summaries of Husky Energy Inc. v. The King, 2023 TCC 167 under s. 212(2), Treaties – Income Tax Conventions – Art. 10, s. 245(1) – tax benefit, s. 245(4).

Pinnacle International – Tax Court of Canada reallocates partnership profit under s. 103(1) based on relative contribution

The taxpayer and another wholly-owned subsidiary (“Taylor”) of the same corporation (“PIRG”) were the 5% and 95% partners, respectively, of a partnership, with an October 31 year end, which was engaged in developing a Vancouver condominium project. In October 2006, after virtually all of the profits from the development had been realized, PIRG transferred the shares of Taylor to a “Lossco” with which it dealt at arm’s length (“Meston”), with Taylor then being wound-up into Meston.

D’Arcy J noted that the taxpayer accepted that s. 103(1) applied because the allocation to Meston “was principally motivated by tax”. In applying s. 103(1) to confirm a CRA assessment which allocated 95% of the partnership profit for that year (minus the amount of a “deal fee” paid to Meston) to the taxpayer, D’Arcy J found:

  • As Meston became a partner after over 99% of the partnership profits had been earned, so that it would be unreasonable to allocate 95% of those profits to Meston, the question then became as to how the 95% of the profits should be allocated as between Taylor and the taxpayer.
  • Taylor was a “shell corporation” with “no physical assets, employees, or bank accounts” and which had not made “any significant financial contributions to the Partnership”.
  • The taxpayer was “a corporation of substance” with employees who managed the development; and it also helped finance the development.
  • Although the individual shareholder of PIRG testified that he provided his services on behalf of Taylor, he was paid millions in salary by the taxpayer, and nothing by Taylor.

Neal Armstrong. Summary of Pinnacle International Realty Group II Inc. v. The King, 2023 TCC 161 under s. 103(1).

Income Tax Severed Letters 13 December 2023

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Walby – Tax Court of Canada finds that s. 248(30) provided no credit for the cash component under a gifting program

MacPhee J applied Maréchaux to find that since the gifting program participated in by the taxpayers was a single interconnected arrangement with a view to profiting from large charitable receipts, none of the “gifts” made by the taxpayers including their cash contributions, qualified as gifts for s. 118.1 purposes, so that no credit could be claimed for even the cash components, as now argued by the taxpayers.

He further found that since s. 248(30) only operated to cure for certain advantages where there was a “gift,” their lack of donative intent also meant no relief under s. 248(30). Furthermore, even if there were a cash “gift”, the amount of the related advantages (being the dollar amount of the software licences that were to be received and donated or, alternatively, the inflated tax credits to be received or, in the further alternative, the value of the “pretence” documents to be received) should be valued for s. 248(32) purposes based on the value of what was expected to be received at the time of the “donation” rather than on what in fact was received under a bogus arrangement. So valued, the advantage amount exceeded the cash contribution amount and, thus, exceeded the 80% threshold under s. 248(30).

Neal Armstrong. Summary of Walby v. The King, 2023 TCC 164 under s. 248(30).