News of Note
CRA indicates that an election deadline cannot be extended through the back door under the s. 220(2.1) waiver provision
Email this ContentInterest paid in 2011 and 2012 by a foreign affiliate (USOpco) of Canco to an LLC that was held by Canco through a subsidiary US partnership (USP) of Canco could only be recharacterized as active business income for purposes of being excluded from the FAPI computation of USP if USP was deemed by ss. 93.1(5) and (6) to have a qualifying interest (QI) in USOpco. Ss. 93.1(5) and (6) could only apply to such interest if, pursuant to the coming-into-force (CIF) provision for ss. 93.1(5) and (6) (which otherwise applied only to the 2013 and subsequent taxation years), it could be considered that the taxpayer (USP) had “elected[ed] in writing” and timely “file[d] the election with the Minister” to have ss. 93.1(5) and (6) apply to those earlier years. In rejecting Canco’s position that USP (which otherwise never made the election), should be treated as having made the election by virtue of Canco not reporting any FAPI of USP from the interest, the Directorate indicated that:
- Canco’s filing position did not constitute notice to CRA that the election was made.
- No extension for making the election could be allowed under s. 220(3.2), as the CIF provision was not listed in Reg. 600.
- It was “Rulings’ view that allowing subsection 220(2.1) to waive a taxpayer’s requirement to file an election not listed in Regulation 600 would negate the specific intention of Parliament in limiting late elections to only those that are prescribed in [Reg.] 600” – and, in any event, the CIF provision was not a provision of the Act itself, as required by s. 220(2.1).
Accordingly, ss. 93.1(5) and (6) did not apply in respect of the interest payments.
Neal Armstrong. Summary of 21 September 2021 Internal T.I. 2019-0807491I7 under s. 93.1(5), s. 220(3.2) and s. 220(2.1).
Adboss – Tax Court of Canada strikes the Minister’s pleading of an assumption that a company’s “controlling mind and management” was in Canada as a mixed statement of fact and law
The Minister’s reply, to the taxpayer’s appeal of an assessment of it to deny zero-rating of taxable supplies made by it to a mooted non-resident (“Lowfroc”) on the basis that Lowfroc was a resident of Canada, pleaded “assumptions” including that Lowfroc was incorporated in Cyprus, that the taxpayer had no correspondence with any Lowfroc-connected persons in Cyprus and that “at all material times, the controlling mind and management of Lowfroc was in Canada.” Lafleur J found that the quoted phrase referenced the jurisprudential test of “central management and control,” and further noted that the “location of the ‘central management and control’ of a corporation … is actually the legal test that must be applied to determine the residency of a corporation.” In explaining the decision to strike under Rules 53(1)(a) (“delay … fair hearing”) and (c) (“abuse of … process”), she stated:
[B]ecause the Appellant will have to speculate as to the facts underlying the conclusion of mixed fact and law of the Minister that the “controlling mind and management” of Lowfroc was in Canada, and because the Appellant therefore cannot be properly prepared for and proceed with discoveries, this will prejudice or delay the fair prosecution of the appeal and constitutes an abuse of the Court’s process.
Neal Armstrong. Summary of Adboss, Ltd. v. The King, 2022 TCC 125 under Rule 53(1)(c).
1410109 Ontario – Tax Court of Canada finds that a “gratuity” that was required to be paid was subject to HST
The contract of an incorporated banquet hall with its event customers stipulated: “All Pricing is Subject to 13% HST and 15% Gratuities.” Before agreeing with the position of the Minister that the “gratuity” was part of the consideration for the supply under the contract, Bocock J referred inter alia to U.K jurisprudence that
[V]oluntary gratuities are not subject to VAT because voluntary gratuities are: ‘[N]o part of the contract that the customer should pay a charge for service … .’
He dismissed the taxpayer’s appeal, on the basis that the gratuities were not voluntary, stating:
Subsection 133(b) combined with subsection 138(a) … suggests that tips included in an agreement are part of the overall supply of prepared meals, which is subject to HST. …
The ETA defines “consideration” as “any amount that is payable for a supply by operation of law.” The almost mandatory tip is enforceable by operation of contract law whereas a voluntary tip is not “consideration” because it is not payable by operation of law… .
Neal Armstrong. Summaries of 1410109 Ontario Ltd. v. The King, 2022 TCC 141 under ETA – 123(1) – consideration.
We have translated 8 more CRA severed letters
We have published translations of a ruling and interpretation released by CRA last week and a further 6 translations of CRA interpretations released in April and January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,279 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 18 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 |
|---|---|---|---|
| 2022-11-09 | 18 May 2022 Internal T.I. 2018-0788761I7 F - Amortissement – Travaux sur un bien loué et F&T | Income Tax Regulations - Regulation 1102 - Subsection 1102(5) - Paragraph 1102(5)(a) - Subparagraph 1102(5)(a)(iii) | rendering of an empty shell suitable for manufacturing constituted substantially changing its nature |
| Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(b) | property does not satisfy the “solely” test in Class 8(b) where it was necessary for the proper functioning of the building | ||
| Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | cost of installing property part of that property’s cost | ||
| Income Tax Regulations - Regulation 1102 - Subsection 1102(4) | to be improvements or alterations to leasehold interest, property acquisitions must be assimilated to landlord’s property | ||
| General Concepts - Ownership | leasehold improvements are assimilated to the landlord’s property unless the lease specifies otherwise | ||
| Income Tax Regulations - Regulation 1102 - Subsection 1102(5) | building shell was a building or structure/ addition refers to extension of structure | ||
| 2021 Ruling 2021-0916821R3 F - Continuance corporation from CBCA to Co-operative | Income Tax Act - Section 86 - Subsection 86(1) | application of s. 86 reorganization rule to a continuance from the CBCA to a Co-operatives Act | |
| Income Tax Act - Section 248 - Subsection 248(1) - Disposition | continuance from the CBCA to a Co-operatives Act did not entail disposition of assets, but s. 86 applied at the shareholder level | ||
| 2004-04-30 | 28 April 2004 Internal T.I. 2004-0071331I7 F - Régime d'investissement coopératif du Québec | Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(k) | listed assistance does not include a deduction from taxable income |
| 2004-04-23 | 15 April 2004 Internal T.I. 2004-0062451I7 F - Résidence principale | Income Tax Act - Section 54 - Principal Residence - Paragraph (c) | no need to file form for principal residence portion of disposed-of property if it was fully exempted |
| 2004-01-23 | 14 January 2004 External T.I. 2003-0046131E5 F - Convention de retraite - dépositaire | Income Tax Act - Section 207.6 - Subsection 207.6(2) | employer is deemed custodian under s. 207.6(2) |
| Income Tax Act - Section 248 - Subsection 248(1) - Retirement Compensation Arrangement | life insurance company can be a custodian | ||
| 2004-01-16 | 9 January 2004 External T.I. 2003-0049195 F - Winding Up or a Contractor Subco | Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(e.1) | s. 88(1)(e.1) would permit parent to step into shoes of sub re s. 12(1)(a) inclusion and s. 20(1)(m) reserveIdentical to 2003-00491950 |
| 9 January 2004 External T.I. 2003-0047341E5 F - Coût indiqué - Biens étrangers | Income Tax Act - Section 54 - Adjusted Cost Base | distribution of shares out of MFT and exchange for new MFT units would reset the ACB/ cost amount | |
| 9 January 2004 External T.I. 2003-00491950 F - Winding Up or a Contractor Subco | Income Tax Act - Section 9 - Timing | exclusion of contract holdbacks and unapproved invoices from construction contractor’s income is unaffected on s. 88(1) wind-up and flows through to parent | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) | deferred revenue of construction contractor would not be triggered on its s. 88(1) wind-up and parent would be put to claiming any available new s. 20(1)(m) reserve |
CRA indicates circumscribed acceptance of using average exchange rates
When and for what length of period is it acceptable to use an average exchange rate? CRA responded:
[F]or purposes of determining a taxpayer's income, the CRA will generally accept the use of an average exchange rate over a given period of time (e.g., annual, quarterly or monthly) to convert amounts arising from foreign currency transactions, if all of the following conditions are met:
the amounts (as determined in foreign currency) are relatively stable and evenly distributed over the given period
the amounts arising in the particular period are sufficiently frequent that they do not distort income
the relevant exchange rate does not fluctuate significantly over the period; and
the chosen approach is used consistently from year to year.
… As a general rule, the CRA will not accept the conversion of a gain or loss on the disposition of a capital property using an average exchange rate. … Consequently, the daily exchange rate for the particular dates should be used to determine, in Canadian dollars, the adjusted cost base ("ACB") of such property and any proceeds of disposition from its disposition.
Thus, CRA did not indicate any general accommodation for computing capital gains from a stock portfolio with a large volume of transactions using an average exchange rate.
Neal Armstrong. Summary of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.3 under s. 261(1) – relevant spot rate – (a), s. 39(1.1) and s. 40(1)(a)(i).
CRA finds that property added to a building shell for it to function for housing an M&P operation did not qualify as Class 29 property
The taxpayer, which subleased premises containing “Shells” consisting essentially of foundations, walls and roofs, installed wall and floor coverings and performed electrical, ventilation and plumbing work to make the premises suitable for use in its manufacturing and processing operations. It took the position that the costs of the property added to the Shells for this work should be included in Class 29 rather than Class 13.
In order to so qualify, such property (before it could be assimilated to Class 29 property) needed to come within the description of a Class 8(b) property (i.e., "tangible property attached to a building and acquired solely for the purpose of (i) servicing, supporting, or providing access to or egress from, machinery or equipment [or] (ii) manufacturing or processing") and not a Class 1(q) property (a building or other structure including component parts). Although the Directorate agreed with the taxpayer that a property which otherwise was a Class 13 (leasehold) property (because at common law the improvements became part of the property of the landlord) could qualify as a Class 8 property, it went on to indicate that the above alterations to the Shells, assuming that they constituted leasehold improvements rather than acquisitions of property that had been agreed to stay separate from the lessor's property, would be sufficient to deem the taxpayer’s such leasehold improvements to be a building or other structure under Reg. 1102(5)(a)(iii), which applies to "alterations to a leased building or structure that substantially changed the nature of the property." It stated:
[A]lterations to a property materially change its nature where the property has no particular purpose before the work is carried out but does have a particular purpose after the work is carried out.
Conversely, it considered that the above alterations to the Shells could not qualify under Class 8(b), stating:
Generally, property is not acquired solely for supporting machinery or equipment and/or to manufacturing or processing for the purposes of paragraph (b) of Class 8 if it is necessary for the proper functioning of the building, such as the walls, roof and electricity of or for a building. …
Neal Armstrong. Summaries of 18 May 2022 Internal T.I. 2018-0788761I7 F under Reg. 1102(5), Reg. 1102(5)(a)(iii), Sched, II, Class 8(b) and s. 13(21) – UCC – A.
CRA rules on applying s. 86 to a corporate continuance
A corporation incorporated under the CBCA (Opco) was continued as a co-operative under the Co-operative Corporations Act (Ontario), so that certificates of discontinuance and continuance were issued under each statute. On the continuance, each common share of Opco was “converted” pursuant to the articles of continuance into a share of the share capital of the co-operative, having the same paid-up capital.
CRA ruled that the continuance did not result in a disposition by Opco of its assets, that there was no deemed dividend under s. 84(1) having regard to the safe harbor in s. 84(1)(c) (i.e., there was no overall increase in PUC), that the s. 86(1) rollover applied to the conversion of the shares on the continuance and that no deemed dividend arose under s. 84(3) having regard to the rule in s. 84(5) (deeming the amount paid for the Opco common shares to be the PUC of the co-operative shares).
Neal Armstrong. Summary of 2021 Ruling 2021-0916821R3 F under s. 86(1).
CRA indicates that a parent paying premiums on a sub’s life insurance policies can engage s. 246(1), and that the premiums are non-deductible even if reimbursed on income account
Two brothers resident in Canada each has a Holdco owning 50% of Opco. In order to fund a buy-sell agreement on the death of an ultimate shareholder, each Holdco has purchased insurance on the life of its sole shareholder, with Opco as the revocable or irrevocable beneficiary of both insurance policies. Suppose further that Opco reimbursed the Holdcos for the premiums. Would the premiums be deductible to the Holdcos? CRA responded:
CRA indicated, consistently with 2010-0359421C6, that it generally considered that s. 246(1) could apply where a parent corporation owns and pays the premiums on a life insurance policy and its subsidiary is designated as the beneficiary so that, here, s. 246(1) could apply in respect of Opco, although the exception in s. 246(2) might apply if the two brothers dealt with each other at arm’s length.
However, CRA indicated that if Opco reimbursed the Holdcos for the premiums, it would become a question of fact as to whether s. 246(1) applies (even in the absence of the s. 246(2) exception) and that such reimbursements potentially could be included in their incomes pursuant to s. 9 or 12(1)(x) – but regardless of whether there was such an inclusion, the premiums would be non-deductible to the Holdcos because “premiums paid under a life insurance policy are not deductible in computing a taxpayer's business income because they are capital expenditures.” Presumably, if the Holdcos charged the premiums through to Opco at cost plus 1%, the premiums would be currently deductible, so that it seems odd that this result changes if there is no markup.
CRA did not discuss the s. 12(2.2) election.
Neal Armstrong. Summaries of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.2 under s. 246(1) and s. 9 - expense reimbursement.
Income Tax Severed Letters 9 November 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA is considering requiring expanded disclosure of crypto-assets
Prior to the October 10, 2022 release by the OECD of its Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard, CRA indicated that it was still considering the question of where a cryptocurrency is located.
It went on to state:
[C]rypto-assets … carry a material risk of tax evasion or non-compliance, regardless of their situs. The CRA believes that, in general, reporting of crypto-assets would facilitate tax compliance in this growing sector. The CRA is currently considering several options, including changes to certain forms, schedules and guides that would increase disclosure for this type of asset and promote tax compliance.
Neal Armstrong. Summary of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.1 under s. 233.3(1) – specified foreign property – (a).