News of Note
Taxpayers are now grappling with the new stock option rules in practice
Email this ContentComments on the revised stock-option rules include:
- S. 110(1.1) has been amended to replace the reference to “rights” by “right” - so that a qualifying person’s election can be in respect of less than all of the rights under a specific option agreement.
- In the common situation where the Canadian subsidiary is the employer and the issuer is its parent whose human resources function is the one involved in the option administration, it may be most expedient for such global plan administrator to provide the required notice under s. 110(1.9) (that the optioned shares are non-qualified securities) within the required 30 days of the agreement as agent for the Canadian employer.
- In order for a s. 110(1)(e) deduction to be available to the employer where there is a s. 7(1) benefit to the employee respecting a non-qualified security, an employment relationship must have existed at the time of grant, so that where a non-resident employee of a qualifying person that is non-arm’s length to the taxpayer is transferred to Canada after grant, no such deduction is available, even though the original grant made by the related foreign employer would be subject to s. 7(1).
- There is no requirement under s. 110(1)(e) that the employer have incurred any expense and, in fact, there would be no such expense where the grantor was another non-arm’s length qualifying person and there was no recharge agreement.
- The apparent requirement for the entirety of the s. 7(1) benefit to be included in the employee’s income, would deny the s. 110(1)(e) deduction where the benefit is partially sourced to another jurisdiction.
- The 2021 Explanatory Notes indicate that corporate partners may claim the s. 110(1)(e) deduction in some circumstances involving employees of partnerships, which appear to be those referred to in 2001-0115933, where CRA noted that there were no agreements in place which limited any of the employees’ employment relationship to any of the partners and that "[c]onsequently, each of the employees of the partnership are considered to be employees of each of the partners of the partnership for the purposes of section 7" - so that it should be possible to allocate the deduction among the corporate partners who are treated as employers under such policy.
- An exchange of an option agreement under s. 7(1.4) would appear to give rise to a new option agreement, so that s. 110(1.3) likely would require the re-application of the annual vesting limit.
Although in 2020-0864831I7, CRA seemed to indicate that RSUs granted to an employee early in a year would generally be regarded as representing compensation for services rendered in a prior year (so that the 3-year bonus exception period would start running one earlier) “unless all the facts and circumstances established that the grant was wholly unrelated to past services,” it would appear reasonable to consider this exception to be satisfied where a signing bonus or a retention bonus is paid by way of the grant of RSUs.
Neal Armstrong. Summaries of Paul Carenza and Chirs D’Iorio, “Update on Equity-Based Compensation in Canada: Market Trends and Technical Developments,” draft 2021 Conference Report paper (Canadian Tax Foundation) under s. 110(0.1) – specified person, s. 110(1.42), s. 110(1.44), s. 110(1.1), s. 110(1.9), s. 110(1)(e), s. 110(1.3) and s. 248(1) - SDA – (k).
CRA considers that an agreement of a municipality to provide faster service was HST-taxable
In another ruling dealing with an Ontario conservation authority, that was a deemed municipality, providing services (here the provision of environmental permits) to a member municipality, CRA ruled that funding provided by the municipality in consideration for getting a dedicated staff at the authority to provide prompter permit service, was consideration for a taxable supply for HST purposes.
This result seems quite form driven. If the municipality had agreed to pay higher permit fees for the faster service, those fees presumably would have been exempted under Sched. V, Pt. VI, s. 20(c)(i).
Neal Armstrong. Summary of 29 September 2020 GST/HST Ruling 175147 under ETA Sched. V, Pt. VI, s. 20(c)(i).
CRA confirms that amended invoices can be issued to evidence the HST payable
CRA found that water level and flow information provided by an Ontario conservation authority (which had been designated as a municipality for HST purposes) to a municipality for the latter’s planning purposes was a taxable supply (because this type of service supplied by a municipality was not specifically enumerated in Sched. V, Pt. VI), so that the fees were subject to HST.
Regarding the documentary requirements for the recipient municipality to claim a rebate, CRA then stated:
A supplier may issue an amended invoice or an additional invoice to account for the uncollected tax and to meet the disclosure requirements in the ETA. Where there are no contractual or common law restrictions to prevent the issuance of amended or additional invoices, the … CRA … will accept that the disclosure of an amount of tax payable may be met after the fact.
Neal Armstrong. Summaries of 27 July 2021 GST/HST Ruling 175140 under ETA s. 223(1) and Sched. V, Pt. VI, s. 22.
CRA requires proof that a Barbados remittance-based resident has borne tax on Canadian dividend income before providing the Treaty rate reduction
Dividends sourced from a Canadian corporation and received by a beneficiary of a resident trust (“NR-Beneficiary”) that was resident, but not domiciled, in Barbados and which was deemed to have received the dividends pursuant to a s. 104(19), was considered by CRA to qualify as a Treaty resident (i.e., under the Crown Forest test, it was “subject to the most comprehensive form of taxation” existing in Barbados) even though it was subject to tax on its income from non-Barbados sources only to the extent that such income was remitted to Barbados. CRA stated:
[E]ven if … the taxation of the Trust Income may be deferred until a benefit is obtained in the form of a remittance of money or an importation of property in Barbados, it is our understanding that the NR-Beneficiary remains, nonetheless, “liable to tax” in Barbados in respect of its worldwide income.
Although the dividends thus would otherwise be eligible for a Treaty-reduced rate of 15%, CRA noted that Art. XXX(5) generally permitted the application of the provisions of the Treaty to income received by a remittance basis Barbados taxpayer only if that income was taxed by Barbados in its hands. The Directorate then stated:
If a person who is subject to remittance basis taxation in Barbados files a return of income in Barbados contrary to the application of the law in force in Barbados, it is our view that the income reported on that return (the “Income”) would not be considered “taxed” in Barbados for the purposes of Article XXX(5) such that the benefits of the Treaty would not apply to the Income. Such would be the case if, for example, the Income is erroneously or mistakenly taxed or if taxes are gratuitously paid in respect of the Income in Barbados, without legal basis.
Accordingly, to receive the Treaty-rate reduction on the dividend income, NR-Beneficiary would be required to establish that such income was taxed in Barbados in conformity with Barbados tax law.
Neal Armstrong. Summaries of 5 October 2021 Internal T.I. 2021-0903361I7 under Treaties – Income Tax Conventions – Art. 4, Art. 29.
Income Tax Severed Letters 14 September 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Distributions Maroline – Quebec Court of Appeal finds that a Quebec employer must pay Quebec health and QPP premiums on rewards paid to a 3rd-party’s Ontario employees
The taxpayer (“Maroline”) was assessed for failure to include rewards that it paid to salespersons employed by independent retailers in Ontario in the payroll total on which it reported Quebec health premiums (“contributions”) payable by it pursuant to the Act respecting the Régie de l'assurance maladie du Québec (the “LRAMQ”). Those employees never reported to any establishment of Maroline in Quebec.
The Court noted that the literal wording of the relevant provisions (which were similar in this regard to ITA Regs. 100(1) – “employee” and 100(4)) had the effect of deeming those salespersons to be employees of Maroline who reported for work at the Quebec Maroline office out of which the rewards were paid. In affirming the assessments and reversing the decision below, the Court stated:
Ontario salespersons are deemed to be employees within the meaning of the LRAMQ, even though they do not perform services in Quebec. The liability arises from the fact that the wages are paid by the respondent from an establishment in Quebec.
… [T]he judge was of the view that the interpretation advocated by the appellant accords the LRAMQ extraterritorial application. This point must be qualified because, in reality, the legislator assesses employers on their entire payroll paid from their establishment in Quebec. The fact that Ontario salespersons are not eligible for the benefits of the province's health care plan is of little relevance to this analysis.
Assessments based on similar provisions of the Quebec Pension Plan Act were also confirmed.
Neal Armstrong. Summary of Agence du revenu du Québec v. Distributions Maroline Inc., 2022 QCCA 1208 under Reg. 100(4).
There are uncertainties as to how to apply GAAR to reduce unutilized tax attributes where they could be used non-abusively
Draft amendments to override the Wild line of cases would extend the concept of “tax benefit” in s. 245 to include inter alia increasing or preserving a tax attribute that “could” be utilized at a future juncture, with a similar change to be made to the “tax consequences” definition. Although the intent is to permit the GAAR to apply to transactions that affect tax attributes that have not yet become relevant to computing tax, there are uncertainties as to when this is appropriate.
For example, in a variant of the Deans Knight situation where the losses had not yet been utilized, should the reasonable tax consequences have included a reduction of those loss balances if they might be utilized by “a same or similar” business? Furthermore, what if there are reasonable arguments that the corporation whose losses had been “preserved” is continuing to carry on the same or similar business, and the “structuring” steps were only undertaken to provide greater certainty?
The authors suggest:
[I]t is far from certain that tax attributes can be successfully eliminated through the new proposals unless it is impossible to articulate a credible non-abusive future use of those attributes … .
Neal Armstrong. Summary of Anthony V. Strawson and Trent J. Blanchette, “GAAR Amendment Targets Tax Attributes Before They Are Used,” Tax for the Owner-Manager, Vol. 22, No. 3, July 2022, p. 6 under s. 245(2).
We have translated 8 more CRA interpretations
We have published 8 translations of CRA interpretations released in April and March of 2004. Their descriptors and links appear below.
These are additions to our set of 2,208 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 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
4432002 Canada – Tax Court of Canada finds that a sale agreement did not have a reverse earn-out so that s. 12(1)(g) applied
The taxpayer and another company sold their rights to software for lump-sum payments plus additional payments (labeled in the sale agreement as “Earn-Out Payments”) calculated as a declining percentage of the software sales made by the purchaser (“MITT”) over the following three years, except that the total payments (to both vendors) were capped at US$8 million. The agreement was later re-negotiated, after some of the payments had been made, to cancel the remaining lump-sum payments and provide that MITT was to pay US$1.734 million to the taxpayer as a prepayment of the remaining Earn-Out Payments (but without any obligation of the taxpayer to repay this amount), so that the taxpayer would be entitled to receive further Earn-Out Payments if this level was exceeded (which, in fact, occurred) - and the cap was reduced to US$7.6 million.
St-Hilaire J confirmed the CRA view that all of the sales-based payment were includible in the taxpayer’s income pursuant to s. 12(1)(g) rather than being governed by the eligible capital amount rules. In rejecting the taxpayer’s principal argument that the purchase price cap established that such payments were received pursuant to a “reverse earnout” arrangement, St-Hilaire J stated:
This is not … a situation where the sale agreement provided that MITT will pay the maximum amount, a portion of which may have to be repaid if certain financial targets are not met. … Rather, what one finds … are clauses providing for the payment of lump sums and the payment of additional amounts based on sales of the Software. … [T]he sales agreements … are clearly "earnout" agreements. …
[T]here is nothing in the wording of paragraph 14(1)(b) to suggest that it should be accorded precedence over paragraph 12(1)(g).
The fact of an additional Earn-Out Payment being made over and above the US$1.734 million prepayment helped to confirm that the prepayment also was an amount based on the software sales.
The taxpayer had been reassessed for Part III tax on the basis that there had been no resulting additions to its capital dividend account. Three months after these reassessments, it made elections pursuant to s. 184(3) and requested that the elections be held in suspense until its appeal was settled. St-Hilaire J stated:
I find that the appellant's subsection 184(3) elections are valid. These elections result in the excess dividends being treated as taxable dividends, resulting in the permitted avoidance of Part III tax.
Neal Armstrong. Summaries of 4432002 Canada Inc. v. The Queen, 2022 CCI 101 under s. 12(1)(g) and s. 184(3).
CRA confirms that Ontario debt retirement charges on electricity bills were subject to the ITC recapture rules
In Ontario, a person’s electricity bill can include a debt retirement charge (DRC) (payable to the Ontario Electricity Financial Corporation (OEFC) to help pay off the remaining debt from the former Ontario Hydro), and the global adjustment (GA) fee (paid to the Independent Electricity System Operator (IESO) to supplement infrastructure development.) During the relevant transitional years, ETA s. 236.01(2) required a large business to make an addition to its net tax of the prescribed percentages of its “specified provincial input tax credits,” which was defined in s. 236.01(2) as the portion of its ITCs in respect of a specified property or service (including electricity) “that is attributable to tax under subsection 165(2)” in respect of the acquisition of the specified supply. In other words, a portion of the provincial portion of the ITCs claimed for Ontario electricity purchases was recaptured.
CRA confirmed that the Ontario ITCs claimed for the HST on the DRC and GA fees were included in these recapture provisions.
Neal Armstrong. Summary of 15 March 2022 GST/HST Interpretation 191075 under s. 236.01(2).