News of Note
CRA indicates that stock options may not generate business income until they vest
Email this ContentA Canadian-controlled private corporation (“CCPC”) is granted an option to acquire shares of an arm’s length CCPC. The option will only vest upon completion of a medical research project in which it is engaged in the course of its business. Such vesting occurs at the end of the third year, and the corporation exercises its option to purchase the shares at the beginning of the fourth year.
Regarding the timing of the recognition of any business income, CRA stated:
[Here] the vesting of the option is linked to the completion of the long-term research project. As such, it may be difficult to conclude that the income is earned before the vesting date under the particular arrangement. … [G]enerally, it is at the time where the services have been rendered and the contingency has been fulfilled, that the FMV of the underlying share over the aggregate of the exercise price of the option should be included in income under subsection 9(1).
Neal Armstrong. Summary of 7 June 2022 External T.I. 2019-0796641E5 under s. 9 – timing.
Potash Corp. – Tax Court of Canada denies the deductibility of Saskatchewan potash tax “base payments” on the basis that they were not incurred to produce income
The taxpayer, which produced and sold potash from mines in Saskatchewan, was subject to both a profit tax and to the making of “base payments” under the Mineral Taxation Act, 1983 (Saskatchewan). In finding that the base payments made in its 1999 to 2002 taxation years did not satisfy the requirement under s. 18(1)(a) of having been incurred for the purpose of producing income from the taxpayer’s business, Owen J applied the principle that since an income tax is imposed on the profits generated by a business rather than being incurred to generate those profits, it cannot satisfy this purpose test. Although the base payments in fact were computed in substantial part based on potash sales made in the year, he indicated that such sales had been chosen “as a proxy for income to ensure that a minimum amount of tax would be collected in respect of such potash even if the producer did not have profits for the year.”
Owen J went on to find that deduction of the base payments was also denied for those taxation years by former s. 18(1)(m) – on the basis that this provision essentially denied deductibility of a tax that could "reasonably be regarded as being in relation to” mineral production, and on his view that the potash sales on which the base payment tax actually focused “related” to the antecedent production.
Neal Armstrong. Summaries of Potash Corporation of Saskatchewan Inc. v. The Queen, 2022 TCC 75 under s. 18(1)(a) – income-producing purpose and s. 18(1)(m).
GST/HST Severed Letters March 2022
Yesterday's release of 11 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their March 2022 releases) is now available for your viewing.
Income Tax Severed Letters 3 August 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that the ETA s. 150 election can accommodate a minority interest of management employees
An LP fund structure entailed a manager charging management fees to a carried interest corporation (CIP Inc.) in which it held 50% of the equity but 100% of the voting shares, with most of the balance of the equity (all non-voting shares) held by management employees of the parent of the manager (a credit union). CIP Inc. received “carried interest fees” from the LP. Could such fees be exempted using the ETA s. 150 election given that the credit union was a financial institution?
The credit union and manager clearly were closely related. However, the manager was also closely related to CIP Inc. given that it held 100% of the fully-voting shares of CIP Inc. Thus, the management fees paid by CIP Inc. could be exempted by the election.
CRA further noted that even if the manager held as few as 50% of the voting shares of CIP Inc., but at least 90% of the total value and number of the CIP Inc. shares, having full voting rights under all circumstances, were owned by the manager and the employees collectively, the manager and CIP Inc. would be closely related pursuant to s. 128(1)(b) and s. 3(a) of the Closely Related Corporations (GST) Regulations, which accommodate employee incentive shares to that extent.
However, CRA indicated that the definition of a closely related group is restricted to a group of corporations, so that the LP could not make the s. 150 election to exempt the “carried interest fees” paid by it to CIP Inc.
Neal Armstrong. Summaries of 18 November 2021 GST/HST Interpretation 232687 under ETA s. 128(1)(a)(i) and s. 150(6).
CRA finds that an amendment of a lease to extend its term would result in a new agreement for GST/HST purposes
An unregistered non-resident lessor leases equipment to a registered resident for use in the course of its commercial activities in Canada. At the start of the lease, the lessee takes possession of the equipment at the lessor’s premises outside Canada, and pays GST on its subsequent importation of the equipment into Canada.
Before the end of the lease, the lessor and lessee negotiate a lease renewal to extend the lease term. CRA indicated that this would result in a new lease agreement, even if it was only the lease term that was amended rather than any other terms such as the monthly rent, stating:
[T]he modification of the lease in respect of any of its essential elements, such as the rent or the term of the lease, would be considered a significant change that goes to the root of the agreement. These types of fundamental changes result in a new agreement between the parties and a new supply for GST/HST purposes. Accordingly, the place of supply must be established for this new supply, based on where possession or use of the tangible personal property is given or made available to the Lessee under the lease renewal agreement.
Thus, if the situs of the equipment was inside Canada at the time of the lease renewal, the place of supply of the equipment under the lease would commence to be in Canada pursuant to ss. 142(1)(b) and 136.1(1)(d), and the lease payments would commence to be taxable.
CRA did not mention the General Electric case, which most would interpret as indicating that the mere extension of the term of an agreement (in that case, a loan agreement) would not give rise to a new agreement, or the position of the Income Tax Rulings Directorate also emphasizing the question of whether, under the applicable provincial law, there is a novation, or a mere amendment (e.g., Folio S3-F9-C1, para. 1.9 and 2012-0451431R3; see also 2000-0050255).
Neal Armstrong. Summaries of 25 May 2019 GST/HST Interpretation 185880 under ETA s. 142(2)(b) and s. 136.1(1)(d).
Our translations of CRA interpretations go back over 18 years
We have published a further 8 translations of CRA interpretations released in July of 2004. Their descriptors and links appear below.
These are additions to our set of 2,159 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 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 |
|---|---|---|---|
| 2004-07-23 | 13 July 2004 External T.I. 2004-0058141E5 F - Transfert du droit aux revenus provenant d'un bien | Income Tax Act - Section 248 - Subsection 248(3) | assignment of the rents from a rental property to a corporation would result in a disposition to a deemed trust under s. 248(3) |
| Income Tax Act - Section 85 - Subsection 85(1) | rollover not available to assignment of the rents from a rental property to a corporation for shares since the transferee was a deemed trust under s. 248(3) | ||
| Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2) applicable to assignment of the rents from a rental property to a corporation giving rise to a deemed trust under s. 248(3) | ||
| 2004-07-16 | 6 July 2004 External T.I. 2004-0081631E5 F - Price Adjustment Clauses | General Concepts - Effective Date | no requirement to notify CRA of price-adjustment clause otherwise than by ticking box on any prescribed form |
| Income Tax Act - Section 51 - Subsection 51(1) | no requirement to notify CRA of price-adjustment clause regarding a s. 86 or 51 exchange | ||
| Income Tax Act - Section 85 - Subsection 85(1) | ticking "yes" box on election form is sufficient notice of price adjustment clause | ||
| 2004-07-09 | 29 June 2004 External T.I. 2004-0065941E5 F - Revenu de bien ou d'entreprise exploitée active | Income Tax Act - Section 129 - Subsection 129(6) | double application of s. 129(6) where active business sub pays interest to its Holdco parent which, in turn, pays interest to its parent |
| 24 June 2004 Internal T.I. 2004-0068381I7 F - Date d'exécution | Income Tax Act - Section 56.1 - Subsection 56.1(4) - Commencement Day - Paragraph (b) - Subparagraph (b)(ii) | change in required support amount triggers commencement day regardless of the number of children covered by the changed support | |
| 28 June 2004 Internal T.I. 2004-0073761I7 F - Dommages-intérêts-perte d'emploi | Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | damages for failure to reinstate the taxpayer were a retiring allowance | |
| Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(l.1) | reimbursement of legal costs incurred to recover damages for failure to reinstate were includible under s. 56(1)(l.1) | ||
| Income Tax Act - Section 60 - Paragraph 60(o.1) | deduction for legal fees incurred to recover damages that were retiring allowance | ||
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) | change regarding pre-judgment interest judicially ordered after 2003 | ||
| 29 June 2004 External T.I. 2004-0078951E5 F - Non Arm's Length Sale of Shares, Surplus Stripping | Income Tax Act - Section 84.1 - Subsection 84.1(1) | s. 84.1 could apply if unrelated purchaser is an accommodation party | |
| 29 June 2004 Internal T.I. 2004-0081901I7 F - Taxable Benefit - Life Insurance Premiums | Income Tax Act - Section 15 - Subsection 15(1) | benefit from payment by corporation of life insurance premiums on policy of which shareholder’s spouse is the beneficiary is based on the premiums so paid | |
| 2004-07-02 | 28 June 2004 External T.I. 2004-0059311E5 F - Associated Corporations | Income Tax Act - Section 256 - Subsection 256(3) - Paragraph 256(3)(a) | "controlled, directly or indirectly in any manner whatever" includes de jure control |
| Income Tax Act - Section 256 - Subsection 256(6) | where s. 256(6) applies, it excludes both de jure and de facto control by the creditor | ||
| Income Tax Act - Section 256 - Subsection 256(5.1) | the defined phrase includes de jure control |
CRA accepts that it must issue a requested notice of determination of loss arising from a taxpayer-requested adjustment provided that the adjustment is only partially accepted
A taxpayer may request a notice of determination of loss for procedural reasons, e.g., to give it the right to object, or to start statute-barring running. CRA commented on the following two conditions in s. 152(1.1) for the Minister to be required to issue such a determination:
1. The Minister ascertained the amount of a taxpayer’s loss for a taxation year.
2. The loss amount ascertained differs from the one reported in the taxpayer’s income tax return.
Regarding the first condition, CRA indicated that the previous CRA interpretation “that no ascertainment occurs when the change is requested by the taxpayer is not supportable,” i.e., the ascertainment can arise in response to a taxpayer request for an adjustment, as well as after an audit.
CRA considers that the second condition is not satisfied if a taxpayer adjustment request is completely denied (i.e., there is no variance from the original return) or if the adjustment request is completely accepted (i.e., there is no variance from the return as amended).
However, if such a request is partially agreed to by the CRA, then a Notice of Determination can be issued if the taxpayer requests one as the amount ascertained by the Minister differs from the amount reported by the taxpayer in the filed return.
Neal Armstrong. Summary of 6 December 2021 Internal T.I. 2019-0792581I7 under s. 152(1.1).
Focus Micro Ondes – Court of Quebec finds that general estimates of SR&ED proportionate time by the company president were insufficient for Reg. 2900(2)(b) purposes
The claim of the taxpayer for the portion of the salaries of its employees that directly related to the prosecution of SR&ED as described in Reg. 230R1(b) pursuant to the Taxation Act (similar to Reg. 2900(2)(b) under the ITA) was determined on the basis of the president’s estimates made after the year of the percentage of their salaries that represented such involvement based on his perception of the efforts of those employees in the various SR&ED projects. No time sheets were kept.
In affirming the ARQ denial of 2/3 of the salary amounts claimed for the purposes of the SR&ED credit, Chalifour JCQ stated:
The arbitrariness of an officer relying on his knowledge of the business is not sufficient to demonstrate the proportion of salaries eligible for a tax credit.
Neal Armstrong. Summary of Focus Micro Ondes Inc. v. Agence du revenu du Québec, 2022 QCCQ 2070 under Reg. 2900(2)(b).