News of Note
Les Structures G.B. - Quebec Superior Court rectifies transaction documents because they did not implement the parties' intention to not trigger Part IV tax
Email this ContentThe shareholders of a CCPC implemented a reorganization that was intended to crystallize the capital gains deduction without triggering any tax other than a small amount of AMT. However, the transactions for first "purifying" the CCPC of investment assets entailed the issuance of some preferred shares, which caused the shareholding in the CCPC of three of the holding companies to be diluted from 10% to below 10%, so that the CCPC was no longer connected to them and so that they were subject to significant Part IV tax on dividends received from the CCPC.
Before granting the requested order to rectify the implementing documents, Blanchard J stated:
The de-connection of the corporations prevented the accomplishment of the will of the parties in implementing the reorganization, which was to crystallize the CGD and not pay any tax, other than minimum tax, while benefiting from the CGD. ...
In the circumstances, it is appropriate to grant the request and to correct the documents in order to conform them to what the parties had conceived. This is not the Shareholders attempting to rewrite the tax history of the file.
See also Samson.
Neal Armstrong. Summary of Les Structures G.B. Inc. v. A.G. Canada, 100-17-002228-205 (5 June 2023, Quebec Superior Court) under General Concepts - Rectification.
CRA indicates that digital marketing services were not zero-rated
A resident registrant (CanCo) provided, to non-resident clients from a location in Canada, digital advertising, digital marketing, content marketing strategy and social media services.
CRA ruled that such services were not zero-rated under ETA Sched. VI, Pt. V, s. 8 as supplies of an advertising service made to an unregistered non-resident person, given that those services did not themselves entail creating advertising messages, and did not directly relate to communicating such messages. However, it noted that such services might be zero-rated under Sched. VI, Pt. V, s. 7 or s. 23 (the more general provisions for services or professional services).
Neal Armstrong. Summary of 8 December 2022 GST/HST Interpretation 222719 under ETA Sched. VI, Pt. V, s. 8, s. 7 and s. 23.
We have translated 7 more CRA interpretations
We have translated an interpretations released by CRA last week and a further 6 translations of CRA interpretations released in May of 2003. Their descriptors and links appear below.
These are additions to our set of 2,494 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 20 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 |
|---|---|---|---|
| 2023-06-07 | 15 February 2023 External T.I. 2022-0934821E5 F - Paragraphes 1103(1) et 1101(5b.1) | Income Tax Regulations - Regulation 1103 - Subsection 1103(1) | Reg. 1103(1) election by partnership cannot extend to property included in a separate class under Reg. 1101(5b.1) election |
| Income Tax Regulations - Regulation 1101 - Subsection 1101(5b.1) | Reg. 1101(5b.1) separate class status cannot be overridden by Reg. 1103(1) election | ||
| 2003-05-09 | 23 April 2003 Internal T.I. 2003-0008767 F - Benefits Conferred on Shareholders
Also released under document number 2003-00087670.
|
Income Tax Act - Section 15 - Subsection 15(1) | shareholder benefit where house sold to shareholder at a loss attributable to its having been built to his luxury specifications |
| Income Tax Act - Section 54 - Personal-Use Property | house provided for use of the corporation’s shareholder (giving rise to s. 15(1) benefit) was personal-use property | ||
| Income Tax Act - Section 46 - Subsection 46(4) | policy of s. 46(4) supported the finding of a shareholder benefit when personal-use property of corporation sold at a loss (representing luxury elements that did not add value) to its shareholder | ||
| 6 May 2003 External T.I. 2003-0181495 F - DEDUCTIBILITY DES INTERETS
Also released under document number 2003-01814950.
|
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | post-Ludco, CRA accepts that interest borrowed at a rate higher than the fixed-return for the investment, is generally deductible | |
| 2003-05-02 | 1 May 2003 Internal T.I. 2002-0178347 F - BENEFICES FABRICATION
Also released under document number 2002-01783470.
|
Income Tax Regulations - Regulation 5202 - Qualified Activities | no requirement that the SR&ED be connected to M&P |
| Income Tax Act - Section 9 - Expense Reimbursement | reimbursements of SR&ED labour and other expenses did not reduce cost of labour | ||
| Income Tax Regulations - Regulation 5202 - Cost of Manufacturing and Processing Labour | reimbursements of SR&ED expenses do not reduce cost of manufacturing and processing labour | ||
| 25 April 2003 External T.I. 2002-0171075 F - AVANTAGE-POLICE D'ASSURANCE
Also released under document number 2002-01710750.
|
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | s. 6(1)(a) benefit where employer, as policyholder, pays premiums on policy on life of employee, whose estate is the revocable beneficiary | |
| Income Tax Act - Section 15 - Subsection 15(1) | s. 15(1) benefit where corporate policyholder pays premiums on policy on shareholder’s life where the revocable beneficiary is the shareholder’s estate | ||
| 30 April 2003 External T.I. 2002-0172485 F - LIQUIDATION SOCIETE DE PERSONNES
Also released under document number 2002-01724850.
|
Income Tax Act - Section 85 - Subsection 85(3) | taking back note for receivables transferred under s. 22 rather than s. 85(2) precludes s. 85(3) application to wind-up | |
| 29 April 2003 External T.I. 2002-0177065 F - CONFISCATION DE LA SOLDE
Also released under document number 2002-01770650.
|
Income Tax Act - Section 5 - Subsection 5(1) | salary that is forfeited by RCMP officer for misconduct nonetheless is includible as salary which was constructively received | |
| General Concepts - Payment & Receipt | forfeited salary nonetheless includible as salary received |
River Cree Resort – Federal Court of Appeal finds that a supply to an ATM owner was the location rather than cash loaded onto the ATM
The owner and operator of a casino resort (“River Cree”) agreed with the owner of ATMs (“Access Cash”) which, in turn, had access to the Interac payment network of a network operator, that it would make various locations on its resort available for the siting of Access’ ATMS, load those ATMs with its own cash (for the later reporting periods at issue) or with money borrowed by it from Access Cash (for the earlier periods) and provide the utilities, security, routine maintenance and customer support necessary to operate the ATMs.
Webb JA found no reversible error by the Tax Court that the predominant element in the supply by River Cree was of the exclusive right to place and operate ATMs at the Resort and to process all transactions arising therefrom, which was a taxable supply.
There was also no such error in the Tax Court’s rejection of River Cree’s contention that there was a joint venture between River Cree and Access Cash for the provision of a financial service, given that it was not evident under the terms of their agreement that they intended to associate themselves in such a joint venture.
Neal Armstrong. Summary of River Cree Resort Limited Partnership v. Canada, 2023 FCA 130 under ETA s. 123(1) – financial service – (a).
CRA considers that Reg. 1101(5b.1) separate class status cannot be overridden by a Reg. 1103(1) election
Reg. 1103(1) allows a taxpayer to elect to include, what otherwise would be Class 2 to 12 properties of the same business, in Class 1, thereby reducing its potential CCA claims but also potentially avoiding (or deferring) recapture of depreciation. An additional 2% CCA claim is potentially available under Reg. 1100(1)(a.2) respecting an eligible non-residential building (potentially including a building addition) for which a Reg. 1101(5b.1) election has been made for it to be included in a separate class.
Regarding a partnership (SENC) holding Class 1 buildings along with additions thereto included in a separate class pursuant to a Reg. 1101(5b.1) election, and also holding property in Classes 8 and 10, CRA stated:
[T]he making of an election under subsection 1103(1) by a taxpayer does not override the election under subsection 1101(5b.1) and will not nullify its effects. … Consequently … SENC could elect, under subsection 1103(1), to include in Class 1 of Schedule II, the properties in Classes 8 and 10, but could not include those covered by the election under subsection 1101(5b.1).
Neal Armstrong. Summary of 15 February 2023 External T.I. 2022-0934821E5 F under Reg. 1103(1).
The Joint Committee comments on the draft GAAR amendments
Comments of the Joint Committee on the draft GAAR rules released with the March 2023 Budget include:
- The GAAR proposals should apply prospectively so that they would not apply to a series of transactions that commenced before the effective date.
- The test in s. 245(4.1)(b) - of comparing expected tax benefits and expected non-tax economic return - will be difficult to apply where the latter are difficult to quantify.
- Taxpayers who are assessed under s. 245 after the time has passed for reporting a transaction or series under proposed s. 237.3(12.1) - but there were intervening developments, such as cases or new published CRA positions, that changed the GAAR profile of the transaction or series - should be allowed to file a late disclosure or have the penalty under draft s. 245(5.1) waived as part of the s. 245 rules in appropriate circumstances.
- Calculations of the penalty amount (referencing the amount of the tax benefit resulting directly or indirectly from the transaction or series) could be uncertain or harsh where multiple taxpayers are involved with different benefit amounts or where the series produced tax deferrals rather than absolute tax savings.
- There should be a s. 245 rule stating that a disclosure filed under proposed s. 237.3(12.1) cannot be used as a factor in any way when determining whether GAAR applies.
Neal Armstrong. Summaries of Joint Committee, Summary of Comments and Recommendations Provided to the Department of Finance on the General Anti-Avoidance Rule Proposals Released on March 28, 2023, 7 June 2023 under s. 245(4.1). s. 245(5.1) and s. 237.3(12.1).
CRA finds that commercial solar equipment and wind turbines were Canadian real estate and, thus, TCP
Were Canadian-situs solar electric power generating projects (consisting of a leasehold interest, solar panels, steel racks and metal posts, and wires, inverters and transformers, collectively the “Solar Equipment”) and wind electric power generating projects (consisting of a leasehold interest, foundation. and wind turbine including tower) taxable Canadian property (TCP)?
In finding that the Solar Equipment consisted of fixtures and, thus, was TCP under para. (a) of the definition (referring to “real … property situated in Canada”), CRA stated:
[A]ny item which is attached even minimally (such as with screws or bolts) is a fixture and if a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture. Solar panels would not lose their essential character nor be useless without the racking system however, they could not effectively function in the context of utility-scale power generation without the racking, which itself serves no purpose unless used with the attached framed solar panels. As all components of the Solar Equipment are attached to the land on which they are situated, it is our view that the Solar Equipment is described in paragraph (a) … .
The wind turbines also (more obviously) constituted fixtures and, thus, TCP.
Neal Armstrong. Summaries of 26 May 2022 External T.I. 2019-0813761E5 under s. 248(1) – TCP – (a) and ETA – s. 123(1) – real property.
Income Tax Severed Letters 7 June 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Finance suggests changing the transfer-pricing rules to focus on transactions’ "economically relevant characteristics"
The consultation paper of Finance on the transfer pricing rules includes draft legislation that is under consideration.
There would be added to s. 247 a definition of "economically relevant characteristics," which will de-emphasize somewhat the contractual terms and refer inter alia to the actual conduct of the parties and their economic circumstances.
A transaction or series of transactions is to be analyzed under draft s. 247(1.1) with reference to its economically relevant characteristics, and (under inter alia draft ss. 247(1.2), (1.3) and (2.02)) if such transaction or series as so analyzed (a “delineated transaction or series”), and taking into account the options realistically available to the participants, differs from the transaction or series that would have been entered into by the particular participants had they been dealing at arm’s length in a commercially rational manner in comparable circumstances, the delineated transaction or series will be disregarded and replaced with an alternative transaction or series that comports with the facts of the delineated transaction or series while achieving an expected result that, had the participants been dealing at arm’s length in comparable circumstances, would have been commercially rational.
Example 3 illustrates how the suggested rules would operate in circumstances similar to Cameco. Canco, the group’s ultimate parent, sells product to Forco under a long-term contract renewable only at the option of Forco using a price that is between the median and the lower end of historical product pricing and is fixed other than for an inflation adjustment. The delineated transaction or series is the purchase of product by Forco from Canco in which Forco takes title to the product and resells it, and Canco performs all significant risk control activities and has the financial capacity to assume such risk. The paper states:
Positing Canco as a commercially rational party dealing at arm's length with Forco in comparable circumstances, it would have expected the opportunity to participate in the market for the product. It would not have agreed to use a fixed price based on a relatively low historical product price thereby exposing itself over a prolonged period to the downside risk that its operating costs would exceed the intra-group selling price, all the while assuming all of the MNE group's economically significant risks. Similarly, it would have retained some autonomy as to the disposition of its product over time. …
[T]he overall result of the application of proposed [s. 247(2.02)] would be the recognition by Canco of significant additional income in line with its functional profile … .
Subject to some exceptions, Finance also suggests bringing the content required in Canada's documentation requirements in line with that laid out in Chapter V (Documentation) of the OECD Transfer Pricing Guidelines, e.g., requiring Canadian members of MNE groups that are also subject to CbC reporting requirements to provide the group’s “Master File” to CRA at CRA’s request.
Neal Armstrong. Summary of Department of Finance, “Consultation on Reforming and Modernizing Canada's Transfer Pricing Rules” 6 June 2023 under s. 247(1.3).
University of New Brunswick – Tax Court of Canada finds that a post-doctoral fellow was not an employee of the University
Bocock J indicated that whether annual awards made to a post-doctoral fellow (PDF) of the University were employee remuneration for CPP and EI purposes turned on a determination of their “dominant purpose,” namely, “whether on balance the payments were made on account of monetary assistance to enhance the PDF’s education and research skills or paid as income in consideration of various services provided by the PDF to the University.” Bocock J concluded that the “annual award was paid with the dominant characteristic of furtherance of the education and learning of … the PDF,” so that the PDF was not an employee.
In this regard, he had found that:
- “PDFs received minimal oversight and supervision” so that they had “free range” in their pursuit of research;
- any teaching tasks taken on were separately remunerated by the University; and
- there was no documented “obligation of the PDF to provide laboratory, tutorial, teaching or research assistance to the University.”
Neal Armstrong. Summary of University of New Brunswick v. M.N.R., 2023 TCC 72 under s. 5(1).