News of Note
CIBC – Federal Court of Appeal confirms that the predominant element supplied by a Loblaw banking sub to CIBC was a right to access Loblaw customers, rather than a financial service
Email this ContentA subsidiary ("PC Bank") of Loblaw had agreed with CIBC for CIBC to provide retail banking services under Loblaw’s President's Choice trademark. Webb JA noted that Hogan J in the Tax Court had “found that the predominant element of the single compound supply [by PC Bank to CIBC] was a “Bundle of Rights” [i.e., property] that allowed CIBC to solicit Loblaw’s existing and future customers for the purchase of President’s Choice Financial products.” Hogan J had gone on to find that, given that para. (r.5) of the financial service definition provided an exclusion from financial service for “property … that is delivered or made available to” CIBC “in conjunction with” CIBC selling financial products of PC Bank, the supply made by PC Bank to CIBC was taxable.
Webb JA had earlier noted that although it might seem unnecessary for (r.5) to exclude a supply of property from the supply of a financial “service,” “Parliament must have been concerned that, without the addition of this exclusion, certain supplies of property could be considered to be a financial service.”
He then concluded:
CIBC has failed to establish that the Tax Court Judge committed any palpable and overriding error in his finding that PC Bank supplied the “Bundle of Rights” to CIBC.
He also indicated that there was nothing wrong with Hogan J having made a mixed finding of fact and law (as to the nature of the supply made by PC Bank to CIBC) that was on a basis different than that argued by either party.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. Canada, 2023 FCA 195 under General Concepts – Res Judicata, ETA s. 309(1) and s. 123(1) – financial service – (r.5).
CRA clarifies that the provision of goods is not incidental to services for TOSI purposes where the customer acquires property of significant value
A CRA webpage provides examples for computing the 90% services exclusion in s. (a)(i) of the "excluded share" definition in the tax on split income (TOSI) rules. These include:
- Where a corporate cleaning business consumes cleaning supplies in performing its cleaning services, such supplies will be included in its services revenue even if charges therefor are separately identified in its invoices (Example 4);
- Or where it also “separately” sells cleaning supplies to some of its customers, such sales will be respected as not belonging to its services revenue (Example 5);
- Where a corporation, that constructs and repairs decks, charges for its materials and labour for each job, its services revenue is determined by backing out its charges for materials from its total revenues (Example 6).
In commenting further on these examples, CRA stated:
Example 4 demonstrates incidental use or consumption of goods in the provision of services. In this example, the cleaning products are incidental to the services, since they were used or consumed in providing the services. Ultimately, in this situation, the customer is seeking to have their premises cleaned.
Example 5 describes a situation where the corporation, in addition to providing cleaning services, sells cleaning supplies and equipment, perhaps to other businesses providing cleaning services, or to its own customers but separate and apart from the cleaning services. In this example, the goods are not incidental to the service as they are acquired by the customer for their own use.
In example 6, a contractor is engaged to supply the materials for and carry out the construction of a deck. In this situation, the materials are significant enough of an element in the construction of the deck that the business provides both a service and non-service component. The corporation supplied all materials and labour when constructing and repairing decks. The service component was the labour provided. Given that customer is acquiring an improvement to their property in the form of the deck which is a tangible improvement affixed to the customer’s property, to the extent that the revenues reflect the provision of the materials, they are considered a non-service component provided together with, as opposed to incidental to, the services.
Neal Armstrong. Summary of 2021 Alberta CPA Roundtable under “Tax on Split Income – Services Restriction to Excluded Shares” under s. 120.4(1) – excluded share – s. (a)(i).
CRA indicates that s. 51 could not apply on the conversion of a share corp to non-share corp
A corporation (the DLCC), which had been operating a club for the purposes of pleasure and recreation of the members and of the community was, as a result of the repeal of its governing Act, continued under a Corporations Act as a non-share capital corporation, so that the DLCC shares were exchanged for membership interests. CRA indicated that:
- such conversion would not cause a share disposition if no shares were cancelled and the rights of the shareholders were not substantively altered; and
- if there otherwise was a disposition, s. 51 would not apply, given CRA’s position that a person who has a membership interest in a non-share capital corporation does not hold a “share,” so that, here, there could be no share-for-share exchange.
The first point, which proffers the possibility that the conversion could occur without the cancellation of shares, may be at odds with the second point that, after the conversion, the shares would be gone.
Neal Armstrong. Summaries of 1 May 2023 External T.I. 2021-0921101E5 under s. 149(1)(l), s. 149(12), s. 248(1) – disposition and s. 51.
Income Tax Severed Letters 27 September 2023
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that distributions of trust income for a year deemed to be paid to a non-resident beneficiary 90 days after the year must still be reported on the NR4 for that year
CRA indicated that, where an estate or trust had income payable at its year end of, say, December 31, 2020, to a non-resident beneficiary, but that amount remained unpaid 90 days after that year-end, such amount would be deemed by s. 214(3)(f) to be paid at that time (March 31, 2021), so that the Part XIII withholding tax thereon would be due by April 15, 2021, and both the income and withholding tax would be required to be reported on an NR4 slip issued for the 2020 taxation year.
CRA also noted that this situation could result in late-remittance penalties being levied in error – but that “these late-remitting penalties can be cancelled once the CRA is provided additional information regarding the timing of the payments made to the non-resident.”
Neal Armstrong. Summary of 2021 Alberta CPA Roundtable under “Estates/ Trusts and Nonresident Withholding Tax” under s. 214(3)(f).
Mold Leaders – Tax Court of Canada finds that challenging engineering involving standard procedures was not SR&ED
ML was engaged in the custom designing and making of injection moldings. CRA disallowed all of ML’s SRED claims (which were for its eight most-difficult projects). In finding that the first four of the five criteria for SR&ED, as listed in National R&D, were not satisfied, Russell J stated (at paras. 6, 65):
… ML’s success or advancement as to those projects involved a routine engineering and standard practices approach, using methodology familiar to ML. [The president’s] answers did not reveal or identify technological uncertainties being addressed in a scientific manner. …
ML’s favoured approach … was to basically try various options, anticipating that one likely would work. For me that is indicative of routine engineering or standard procedures.
Neal Armstrong. Summary of Mold Leaders Inc. v. The King, 2023 TCC 127 under s. 248(1) – SRED.
Fiera – Tax Court of Canada confirms that no particular form of supplier documentation is required for ITC purposes
Two bakery plants of Fiera were staffed in significant part by temporary workers (“TWs”), who were sourced from third parties (the “Agencies”), which solicited for the TWs and directed them to Fiera and used part of the payments from Fiera on their invoices to pay the TWs in cash without taking or remitting source deductions. They pocketed rather than remitting the HST collected by them. CRA denied Fiera’s ITC claims.
Owen J found that Fiera “chose to ignore the obvious signs that the Agencies were not treating the TWs as employees and/or were not meeting the obligations of an employer” - but nonetheless concluded that Fiera was entitled to its ITC claims given his finding that Fiera in fact was the recipient of a taxable supply of the TW services from the Agencies.
The Crown also took the position that the invoices received by Fiera did not satisfy the documentary requirements of ETA s. 169(4)(a) and the related Regulations, apparently on the grounds that the invoices were issued, not by the Agencies but, rather, by unauthorized “representatives” of the Agencies who in fact were not “linked” to the Agencies. Before finding that such documentary requirements were met, Owen J indicated that:
- S. 169(4)(a) did not require information to enable a determination of the ITCs to be in any particular form.
- However, the specific information listed in s. 3 of the Regulations was required to be obtained by the ITC claimant in some form (para. 289), a requirement which was satisfied here.
- If (contrary to his view), the definition of “supporting documentation” in the Regulations had a significant role to play, para. (h) of that definition “does not impose a requirement that all forms in which information prescribed by section 3 is contained be validly issued or signed by a registrant in respect of a supply made by the registrant.”
Neal Armstrong. Summaries of Fiera Foods Company v. The King, 2023 TCC 140 under ETA s. 169(1) and Input Tax Credit Information (GST/HST) Regulations, s. 2 – supporting documentation.
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released during December and November of 2002. Their descriptors and links appear below.
These are additions to our set of 2,591 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 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
The AMT changes will adversely affect charitable giving and inter vivos trusts incurring interest expense
PwC provided the following examples illustrating the impact of the harsher proposed federal AMT rules (provincial tax is not factored in):
Example 1
An individual earning ordinary income of $250,000 disposes of capital property in the year at a capital gain of $1,500,000 would compute regular federal income tax of $304,778 and federal AMT of $322,271 [the AMT inclusion rate for capital gains will increase to 100%].
Example 2
An individual earning ordinary income of $450,000 donates a capital property that is not a publicly listed security, with an ACB and FMV of $100,000 and $1,000,000 will compute regular federal income tax of $49,483 and federal AMT of $129,123 [the capital gains inclusion rate for the donated security will increase, and the donation tax credit will be limited to 50%].
Example 3
An inter-vivos trust (that is neither excluded from AMT, nor qualifies for a basic exemption amount) which borrows $1,000,000 at 1% to earn interest income at 3% and distributes the resulting net income of $20,000 to the trust beneficiaries would compute regular federal income tax of nil and federal AMT of $1,025 [50% of the interest expense deduction will be denied, an inter‑vivos trust will not generally benefit from the basic AMT exemption, and the $20,000 distribution does not fully eliminate the higher income for AMT purposes]
Neal Armstrong. Summary of PwC, “Tax Insights: Proposed changes to the alternative minimum tax ─ How will it affect individuals and trusts?” Issue 2023-31, 22 September 2023 under s. 127.52(1).
Galaxia – Court of Quebec finds that a company whose shareholder was named as a VP of its only client did not have a personal services business
For the three taxation years in issue, the ARQ assessed Galaxia on the basis that it was carrying on a personal services business. Galaxia’s shareholder was engaged, through Galaxia, by Galaxia’s sole client during those years (“SM”) to canvas her extensive network of overseas contracts to obtain contracts for SM’s business of providing security-related services. Before concluding that Galaxia was not engaged in a personal services business, Riverin JCQ found:
- The shareholder was not under the control of SM, so that, for instance, she had no marketing plans to meet, and she did not inform SM of her travels.
- The only revenues of Galaxia were commissions calculated and collected as a percentage of the billings received by SM from the contracts generated by Galaxia – so that its revenues were highly variable.
- Galaxia incurred significant expenses, and thus was significantly at risk of generating losses.
- Although the shareholder was named as a vice-president of SM with an SM email address, this was done only for marketing reasons and her title was honorific.
Neal Armstrong. Summary of Consultants Galaxia Inc. v. Agence du revenu du Québec, 2023 QCCQ 5871 under s. 125(7) - personal services business.