News of Note

6 more translated CRA interpretations are available

We have published translations of 2 CRA interpretations released last week and a further 4 released in March 2012. Their descriptors and links appear below.

These are additions to our set of 855 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2019-05-08 18 April 2019 External T.I. 2017-0716451E5 F - Deduction in computing income of a trust Income Tax Act - 101-110 - Section 105 - Subsection 105(1) a distribution by a discretionary trust of a taxable capital gain in excess of the trust’s income could be a s. 105(1) benefit
Income Tax Act - 101-110 - Section 104 - Subsection 104(6) - Paragraph 104(6)(b) s. 104(6)(b) deduction cannot exceed net income
25 February 2019 External T.I. 2019-0793911E5 F - Triangular amalgamation and section 135.1 Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(s) - Subparagraph 87(2)(s)(ii) s. 87(2)(s) inapplicable to triangular amalgamation
Income Tax Act - Section 135.1 - Subsection 135.1(2) potential s. 131.1(2) income inclusion on triangular amalgamation
2012-03-09 22 February 2012 External T.I. 2011-0424601E5 F - Scholarships and bursaries paid by a firm Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) potential qualification under s. 56(1)(n) if bursary paid by employer while student not a summer student or permanent employee
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) employer-reimbursed tuition not considered for its training benefit if incurred before employment commenced
23 February 2012 External T.I. 2011-0423461E5 F - Automobiles de collection Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(e) vintage automobiles of corporation/distinction between benefit qua employee or shareholder also applies in s. 6(1)(e) context
22 February 2012 External T.I. 2011-0421671E5 F - Loss of retirement income benefit - death Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(f) - Subparagraph 110(1)(f)(ii) deduction for WSIB compensation paid to estate of deceased injured worker
Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(v) inclusion under s. 56(1)(v), offsetting deduction under s. 110(1)(f)(ii), for Ontario WSIB lump sum on death
2012-03-02 21 February 2012 External T.I. 2011-0417471E5 F - Changement d'usage - paragraphe 45(3) Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c) s. 45(1)(c) applies where 2nd unit in taxpayer-owned duplex changed from rental to personal use
Income Tax Act - Section 248 - Subsection 248(1) - Property immovable (including a duplex used 2 different ways) is considered a single property unless subdivided
Income Tax Act - Section 45 - Subsection 45(3) s. 45(3) election not available where 2nd unit in taxpayer-owned duplex changed from rental to personal use

Unidisc – Court of Quebec effectively agrees with CRA's view that master recordings are tangible rather than intangible property

Unidisc bought master recordings of music (“masters”), i.e., the magnetic tapes containing the original recordings of the songs or other music for the purpose of having them reproduced in order to make and sell song compilations in CD or electronic form.

The CRA position (e.g., in 2007-0240691I7) appears to be that masters are Class 8(j) tangible capital property. However, the ARQ reassessed Unidisc on the basis that the masters instead were eligible capital property (now Class 14.1). It apparently was thrown off track by the agreements for the purchase of masters, which included an assignment of all the vendors’ rights such as intellectual property rights, copyright and the right to use, reproduce or license the masters.

Gouin, J.C.Q. found that such vendors did not have the copyright of the song writers, performers and publishers to assign and that the only rights under the Copyright Act (“CA”) that were assigned to Unidisc were the more limited rights (albeit, still expressed in misleadingly broad terms) described in s. 18 thereof. Accordingly, whenever Unidisc wished to sell compilations, it was still necessary for it to pay royalties to the song creators and publishers.

In allowing Unidisc’s appeal on the basis that the masters were Class 8 depreciable property, she stated:

The quality of the sound recording had nothing to do with the rights protected under section 3, 13 and 15, or even 18, of the CA. In fact, the quality of the sound recording had everything to do with the quality of the physical medium … .

The evidence at trial demonstrated that the allocation of 100% of the price to the physical medium must be allowed. Unidisc acquired the best sound recording for the purpose of generating revenues from making copies.

The distinction between tangible and intangible property also can be significant for GST/HST purposes, e.g., under the place-of-supply rules – and also for the Part XIII distinction between royalties and purchases of goods.

Neal Armstrong. Summary of Unidisc Musique Inc.v. Agence du revenu du Québec, 2019 QCCQ 1818 under Schedule II – Class 8(j).

Arora Trading – Tax Court of Canada finds that a fake business could not be denied its small business deduction

Ms. Singh was a full-time employee doing administrative work for her husband’s gasoline products wholesaler (“Econo”). A new company was incorporated (“Arora”) at the end of 2008 that was 76% owned by her (so that it was not associated with Econo) and that started earning management fees from Econo. However, Ms. Singh, along with four other full-time employees of Econo, did not transfer over to Arora until the beginning of 2010, and Econo also hired a 6th individual then as an independent contractor. CRA assessed both the 2009 and 2010 taxation years of Arora on the basis that it was carrying on a personal services business (PSB) – so that various expenses were denied under s. 18(1)(p) and Arora’s small business deduction claims for both years were denied.

Visser J found that Arora was carrying on a PSB in 2010 given that nothing much had changed from before its incorporation and given that the services of the 6th individual (the independent contractor) could not be counted towards satisfying the “more than five full-time employees” test contained in the PSB definition. Although unclear, his reasoning suggests that the whole business of Arora (entailing six individuals’ activities) could have been tainted as a PSB on the basis only of the role of Ms. Singh.

However, he allowed Arora’s appeal for its 2009 year. Because it was not carrying on a business (Arora had no employees for its purported management business), it therefore could not be reassessed on the basis that it had a PSB. Although this sounds a bit like a taxpayer succeeding because its business was a sham, this probably is more a matter of CRA not minding the store – it likely should have assessed Econo for the income in question (e.g., denying the management fee deduction under s. 18(1)(a) or 67).

Neal Armstrong. Summary of Arora Trading Ltd. v. The Queen, 2019 TCC 98 under s. 125(7) - personal services business.

CRA indicates that constructive receipt does not accelerate T4 reporting obligations

A retired employee, who had a right to receive a bonus payment (a restricted share unit) in 2017 and in 2018, died in 2017 which, under the terms of the plan, resulted in all entitlements becoming payable immediately. However, the employer did not make the payment to the deceased’s estate until 2018, when it became aware of the death. CRA stated:

The T4 prepared by the employer would reflect the year of payment, which in your example occurred in 2018 and the amounts received by the estate should be reported on the final return of the deceased in 2017, the year of death.

You might wonder why there was constructive receipt in 2017 under s. 5(1) but not constructive payment in 2017 under Reg. 200. CRA did not comment on this but presumably had in mind source deductions under Reg. 102, which generally are made only on (actual) payments.

Neal Armstrong. Summaries of 26 June 2018 External T.I. 2018-0746971E5 under Reg. 200(1) and s. 5(1).

CRA states that a distribution by a discretionary trust of a taxable capital gain in excess of the trust’s income could be a s. 105(1) benefit

A discretionary family trust realized a taxable capital gain of $200,000, as well as a rental loss from a building of $100,000, with no other items of income or expenses for that year. The trust distributed the $200,000 taxable capital gain to a beneficiary at year end in cash.

CRA rejected the suggestion that the trust could take a s. 104(6)(b) deduction for $200,000, thereby generating a $100,000 loss.

Respecting the status of the distribution in excess of the trust income of $100,000, CRA did not simply indicate that it was a capital distribution, and instead stated:

Depending on the circumstances and terms of the trust deed, where an amount paid to a beneficiary exceeds the trust's taxable income for the year and does not represent a distribution of property as capital by virtue of the trust deed, the excess could be a benefit conferred by the trust to be included in computing the income of the beneficiary under subsection 105(1).

Neal Armstrong. Summary of 18 April 2019 External T.I. 2017-0716451E5 F under s. 104(6)(b).

Hoch – Tax Court of Canada finds that “or” is generally disjunctive

The principal rabbi at a Toronto schul beneficially owned (together with his wife) 3/8ths a Toronto home, and the schul beneficially owned the other 5/8ths. The schul T4’d him for a s. 6(1)(a) benefit for his free use of the 5/8ths of the home, and he claimed an off-setting deduction under s. 8(1)(c)(iii). Respecting the 3/8ths of the home, he claimed a deduction under s. 8(1)(c)(iv) from his employment income equal to the fair rental value of that portion of the home.

CRAs disallowed the s. 8(1)(c)(iv) deduction on the basis that a deduction could not be claimed under both ss. 8(1)(c)(iii) and (iv). It likely was bothered by how the taxpayer’s approach effectively undercut the rule in ss. 8(1)(c) (iv) which limits the fair rental value deduction to 1/3 of the taxpayer’s compensation.

MacPhee J agreed with CRA that the “or” separating ss. 8(1)(c)(iii) and (iv) was disjunctive. He indicated that “or … in the ordinary sense is prima facie disjunctive” but “can also be conjunctive in limited circumstances,” – and such limited circumstances were not made out here. Instead:

It is unlikely that Parliament intended for a person to avoid the limitations imposed by subparagraph 8(1)(c)(iv) by simply claiming amounts under both subparagraphs (iii) and (iv).

Neal Armstrong. Summary of Hoch v. The Queen, 2019 TCC 99 under s. 8(1)(c)(iv).

CRA finds that Art. IV(6) of the Canada-US Treaty works to reduce Canadian branch profits tax earned through multiple stacked LLCs

Two U.S. corporations that were “qualifying persons” for purposes of the Canada-U.S. Treaty (USCo1 and USCo2) held 58% and 42%, respectively, of LLC1 which held LLC2 which, in turn, held LLC3. LLC3 operated a Canadian branch business.

Headquarters stated:

[T]he fact that there may be more than one fiscally transparent entity in the corporate chain does not alter the fact that the condition of there being an entity that is fiscally transparent and through which a U.S. resident person derives income is already met.

Accordingly, if all the LLCs were fiscally transparent for U.S. income tax purposes (so that LLC1 was a partnership for U.S. purposes), USCo1 and USCo2 would be considered to be deriving income through LLC3 that met the same tax treatment condition in Art. IV(6) – and, similarly, LLC1 Itself would be considered to be deriving such income as a qualifying person if it had chosen to be treated as a corporation. Thus, in both scenarios, such income would be entitled to the branch profits rate reduction in Art. X(6).

Neal Armstrong. Summary of 4 April 2019 Internal T.I. 2017-0736531I7 under Treaties – Income Tax Conventions – Art. 4.

Owen J finds that it was costly for Justice to pursue its allegations of sham in the Cameco transfer-pricing litigation

Owen J made a lump sum award for legal fees of Osler borne by Cameco in its successful appeal of transfer-pricing adjustments for three of the years in dispute (2003, 2005 and 2006) of $10.25M, which represented about 35% of the Osler fees charged for those years. Factors mentioned by Owen J included:

  • Settlement offers made by Cameco (one less than 30 days before trial, and one after trial) did not have any real bearing on his award given their “de minimis nature” (i.e., although Cameo offered “$32 million of additional taxable earnings in 2006 … no additional tax in any of the three years under appeal” was offered.
  • The “volume of work was significantly increased by the Respondent’s reliance on sham, i.e., Cameco had “to address minute administrative details of how it and its subsidiaries carried on business.”
  • He did “not accept the Respondent’s submission that it could not have anticipated the costs incurred by the Appellant given the Respondent’s vigorous pursuit of the allegation of sham.”

Neal Armstrong. Summary of Cameco Corporation v. The Queen, 2019 TCC 92 under Tax Court of Canada Rule 147(3).

CRA confirms that there is no rollover for tax deferred cooperative shares on a triangular amalgamation

Where s. 87(2)(s) applies to an amalgamation of agricultural cooperative corporations, then shareholders will not be considered to have realized income as a result of the disposition of their “old” tax deferred cooperative shares for equivalent new shares, there will be no withholding required under s. 131.1(7) and their new shares will be treated as tax deferred cooperative shares until such time as they are disposed of. CRA has confirmed that s. 87(2)(s) will not apply to shares that are exchanged for shares of the parent on a triangular amalgamation, so that the exchanging shareholders will be required to recognize proceeds of disposition under s. 131.1(2).

Neal Armstrong. Summary of 25 February 2019 External T.I. 2019-0793911E5 F under s. 87(2)(s)(ii).

Income Tax Severed Letters 8 May 2019

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