News of Note
CRA rules that per diem damages received by a construction-services recipient for construction delays were free of HST
Email this ContentThe City’s construction agreements contained a liquidated damages clause, which required the contractor to compensate the City when work was not completed within specified timelines through the payment of “Damages” at a specified per diem rate per calendar day of the delay. The Damages were to be paid by the City reducing its payments for amounts that were invoiced to it by the contractor.
CRA ruled that GST/HST did not apply to the Damages amounts given that they were compensation for damages rather than consideration for any supply by the City, and given that s. 182(1) (which can apply to damages received by a supplier from the recipient, but not generally to damages flowing the other way) did not apply.
Thus, it did not matter that the Damages were computed on a per diem, rather than lump sum, basis and that, in a broad sense, they were an adjustment to a taxable sale price.
It might have been more tax efficient for the City to have instead required the contractor to adjust the sale price charged to it, so that the City could reduce its net HST outlay pursuant to the s. 232 rebate mechanism.
Neal Armstrong. Summary of 26 July 2022 GST/HST Ruling 232189 under ETA s. 182(1).
Abedipour – Tax Court of Canada finds that a house construction not being an adventure in the nature of trade was corroborated by its custom design features
Whether the taxpayers were required to charge HST on the sale of their newly-constructed home turned, under para. (f) of the ETA “builder” definition, on whether such sale occurred “in the course of a business or an adventure or concern in the nature of trade.” In addition to accepting their explanation of changed personal circumstances for the sale, Spiro J. noted that their professed intention of holding for the long term as their home was corroborated by their idiosyncratic choices in customizing the home’s details:
… Rather than installing multiple televisions, the Appellants installed multiple fireplaces. This strongly suggests that they built the home only for themselves.
… [T]he Appellants left nothing for a potential purchaser to customize. … The fact that the Appellants finished everything to their own personal taste strongly suggests that they built the home only for themselves. The fact that it took the Appellants six months to sell the property after several price reductions supports this conclusion as do the extensive renovations performed by the buyers.
Neal Armstrong. Summary of Abedipour v. The King, 2022 TCC 155 under ETA s. 123(1) – builder – para. (f).
CRA finds that the GST/HST self-supply rule for a MURC did not apply where it was used as a place of “lodging” rather than a place of residence
A farmer constructed a 600 square-feet bunkhouse (with 2 bedrooms, a kitchen and bathroom) to provide accommodation to two temporary foreign workers for each annual 10-week harvest period. CRA found that self-supply rule in s. 191(3) did not apply since the bunkhouse was first occupied as a place of lodging, rather than as a “place of residence” as required by s. 191(3)(b)(i). In this regard, CRA stated that the workers likely would regard their stay as a “transient” one and, due to the cramped accommodation, would not “view it as a place where a person is … intended to settle into or maintain an ordinary mode of living.”
Even though the units were places of lodging rather than places of residence, CRA nonetheless considered the bunkhouse to qualify as a residential complex and as a multiple unit residential complex.
The supplies to the workers of the accommodation would be exempted under Sched. V, Pt. V, s. 6. There also was relatively “minimal” use of the bunkhouse in commercial activities while the temporary workers were not there. Accordingly, having regard to the rule in s. 141(4) - that if substantially all (90% or more) of the intended consumption or use of property or service is for activities that are not commercial activities, then the consumption or use is deemed to be in those activities that are not commercial activities - it appeared likely that the farmer could not claim any input tax credits for the construction costs.
Neal Armstrong. Summaries of 22 March 2022 GST/HST Interpretation 238955 under ETA s. 191(3), s. 123(1) – residential complex and s. 141(4).
We have translated 6 more CRA interpretations
We have published a further 6 translations of CRA interpretations released in January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,299 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 |
|---|---|---|---|
| 2004-01-09 |
16 December 2003 Internal T.I. 2003-0046167 F - Section 50- Shares of Insolvent Corporation50(1) Also released under document number 2003-00461670.
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Income Tax Act - Section 50 - Subsection 50(1) - Paragraph 50(1)(b) - Subparagraph 50(1)(b)(iii) | corporation not insolvent if affiliates intend to pay its creditors, and its shares have value if it has non-capital losses |
| Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | sale of Lossco with no assets but non-capital losses for nil consideration to another subsidiary generated a gain under s. 69(1)(b) | ||
| General Concepts - Fair Market Value - Shares | shares of corporation that had ceased business and had no assets but had non-capital losses had a significant value | ||
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8 December 2003 Internal T.I. 2003-0042537 F - CIEE & SRAS Also released under document number 2003-00425370.
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Income Tax Act - Section 122.3 - Subsection 122.3(1) | lay-off due to SARS did not qualify as an absence | |
| 2004-01-02 |
22 December 2003 External T.I. 2003-0000125 F - TITRE DE CREANCE INDEXE Also released under document number 2003-00001250.
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Income Tax Regulations - Regulation 7001 - Subsection 7001(1) | detailed illustration |
| Income Tax Act - Section 248 - Subsection 248(1) - Indexed Debt Obligation | stripped indexed coupons were indexed debt obligations but would not give rise to excluded payments | ||
| Income Tax Regulations - Regulation 7001 - Subsection 7001(7) - Excluded Payment | stripped indexed coupons did not give rise to excluded payments because no single fixed rate | ||
| Income Tax Regulations - Regulation 201 - Subsection 201(4.1) | reporting of inflation adjustments on indexed bonds | ||
| Income Tax Act - Section 20 - Subsection 20(14) | application of s. 20(14) to indexed debt obligation | ||
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11 December 2003 External T.I. 2003-0015975 F - calcul du gain/perte sur disposition Also released under document number 2003-00159750.
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Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) | portion of share sales proceeds required under a Bankruptcy Act proposal to be paid to the unsecured creditors, not a disposition expense | |
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16 December 2003 External T.I. 2003-0027245 F - MCIA-ACQUIS. D'UNE PERSONNE LIEE Also released under document number 2003-00272450.
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Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital - Element A - Element A.1 | subsequent arm’s length acquisition does not vitiate application of A.1 | |
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22 December 2003 External T.I. 2003-0053005 F - transfert d'un reer a un ferr Also released under document number 2003-00530050.
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Income Tax Act - Section 146 - Subsection 146(16) - Paragraph 146(16)(b) | shares may not be transferred from maturing RRSP to RRIF if they will not provide the annuity to make the minimum payments |
CRA reverses its longstanding according of the copyright exemption to broadcasting (and perhaps other performance) royalties
2011-0404511C6 confirmed CRA’s longstanding position in IT-303SR, so that the exception in s. 212(1)(d)(vi) applied to all payments for copyright in respect of a literary, dramatic, musical or artistic work, unless that payment was for a right referred to in s. 212(5). This would indicate that payments made, for example, by a Canadian broadcaster to acquire the rights from a non-resident to broadcast live sport or artistic events in Canada (“broadcast rights payments”) would fall within s. 212(1)(d)(vi), unless the s. 212(5) exception applied.
However, 2012 ESA decision drew a clear distinction between the right to perform in public and the right to produce or reproduce a copyrighted work. Does this change the CRA view?
CRA noted that the ESA decision dealt with rights under s. 3(f) of the Copyright Act, namely, the according to the copyright holder of the sole right to, “in the case of any literary, dramatic, musical or artistic work, to communicate the work to the public by telecommunication.” There, the Supreme Court found that the enumerated rights in s. 3 essentially protect three basic rights: the right to perform, the right to produce, and the right to reproduce, a work; and found that the communication right under s. 3(f) came within the performance aspect of copyright, and not that of production or reproduction.
CRA indicated that, accordingly the ESA decision established that broadcasting relate to the performance of a work, not to its production or reproduction. The 2011 CRA position therefore ceased to be correct and, as a result, CRA was thereafter required to assess broadcast rights payments as being subject to tax under s. 212(1)(d).
This statement by its logic could very well apply to other performance royalty payments, such as royalties paid to the holder of the copyright to a Broadway theatrical production to mount the production in Canada. Using this as an example, it would be quite inappropriate to treat the longstanding CRA published policy as having been changed retroactively from 2012, given that the statutory reference to a royalty in respect of a copyright in respect of the production (or reproduction) of dramatic, musical or artistic work readily describes the theatrical production situation.
Similar language to that in s. 212(1)(d)(vi) also appears in various Treaties.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.13 under s. 212(1)(d)(vi).
CRA illustrates the counting of the 5-year limitation under the cost recovery method for earnouts
One of the conditions set out in IT-426R for application of the cost recovery method (contained in subpara. 2(d)) in relation to an earnout is that:
The earnout feature in the sale agreement must end no later than 5 years after the end of the first taxation year of the corporation (whose shares are sold) in which the shares are sold. For the purposes of this condition, the CRA considers that an earnout feature in a sale agreement ends at the time the last contingent amount may become payable pursuant to the sale agreement.
Suppose that the shares of the target corporation were sold on October 1, 2022 and that the purchaser chose December 31 as the end of the short year commencing immediately before the acquisition of control. CRA indicated that since the shares of the target thus were acquired in the short taxation year ending on December 31, 2022, under the 5-year rule, the earnout feature was required to end no later than December 31, 2027.
Regarding when the last contingent amount is considered to have become payable, CRA indicated that this referred to the time when there arose a clear legal, but not necessarily immediate, obligation to pay that contingent amount. There was no requirement under subpara. 2(d) that the contingent amount in fact be paid within the 5-year period.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.11 under s. 12(1)(g).
Gestion Roy – Tax Court of Canada finds that a company’s payment of the premiums on whole life policies of which it was the beneficiary but not owner triggered ss. 15(1) and 246(1) benefits
Various whole life policies on the life of a resident individual (Mr. Roy) were owned by (i) a holding company (“Gestion Roy”), controlled by Mr. Roy and which was the majority shareholder of a consulting firm (“R3D”), or by (ii) another holding company (“445 Canada”) which was wholly-owned by Mr. Roy but which was not a shareholder of R3D. However, R3D was the revocable beneficiary of any death benefits under the policies and paid all the premiums.
Smith J confirmed CRA’s inclusions in Gestion Roy’s income under s. 15(1) of the annual premium amounts paid on Gestion Roy’s policies given that it was the owner of such policies (entitling it to the cash surrender value of the policies at any time), so that it was “enriched” when the premiums were paid by R3D – and indicated that it was irrelevant to this point that, in fact, Gestion Roy never received any distribution on its policies. (What in fact occurred a number of years later was that, on the sale of R3D and R3D assets to a third-party purchaser, R3D received the cash surrender value of most of the policies on their termination.) His reasoning suggests that he could have reached the same conclusion even if the designation of R3D as the beneficiary was irrevocable.
He went on to find that it followed that the payment by R3D of the premiums on the policies of 445 Canada resulted in corresponding inclusions under s. 246(1) to 445 Canada.
Neal Armstrong. Summaries of Gestion M.-A. Roy Inc. v. The King, 2022 CCI 144 under s. 15(1) and s. 246(1).
CRA indicates that a beneficiary of a trust for CRS purposes includes someone who receives a loan from the trust at a below-market interest rate
Where a resident trust is a “passive non-financial entity” and has a “financial account” with a “reporting financial institution” (RFI), such RFI will have reporting obligations under Pt. XIX if one or more “controlling persons” are “reportable persons.” The s. 270(1) definition of “controlling persons” refers inter alia to the trust’s “settlors” and to a discretionary beneficiary to whom a distribution has been paid or made payable in the calendar year. The CRA’s Guidance on the Common Reporting Standard states that a “person is treated as a beneficiary if … they receive, directly or indirectly, a discretionary distribution from the trust … in the calendar year … .”
Regarding what constitutes an indirect contribution for these purposes, CRA referred approvingly to OECD guidance which, in addition to perhaps more obvious examples such as a trust paying tuition fees or paying off someone’s loan, also indicated that there would be an indirect distribution to someone who received a loan at a below-market rate of interest “or at other non-arm’s length conditions” or whose loan is written off.
CRA also suggested that a “settlor” could include not only the person who initially settled the trust but also anyone who has made a “substantive” contribution to the trust.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.10 under s. 270(1) – controlling persons.
Finance indicates that the pending GAAR changes will be in the nature of a tune-up
In brief oral comments on the GAAR consultation paper, Shawn Porter indicated that Finance thinks that the GAAR is working reasonably well, but could do with a tune-up.
He noted that the paper stated the government’s intention to add an explicit economic substance rule to the GAAR in accordance with the PMO mandate letter to the Minister. Although the judicially developed analytical framework was reasonably sound, there are some cases that may benefit from a further statutory “nudge” with regard to economic substance, but Finance did not wish to undo 30-plus years of experience by all in working with the GAAR, and the precedents established in a significant volume of decided cases.
GST/HST Severed Letters August 2022
This afternoon's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their August 2022 release) is now available for your viewing.