News of Note
CIBC – Tax Court of Canada finds that the predominant element supplied by PC Bank to CIBC was a right to access Loblaw customers, engaging the (r.5) HST financial service exclusion
Email this ContentA subsidiary ("PC Bank") of Loblaw (“LCL”) had agreed with CIBC for CIBC to provide retail banking services under LCL's President's Choice trademark. Hogan J found that the predominant element of the supply made by PC Bank to CIBC was the provision of a “bundle of rights” consisting mainly of the right to solicit LCL’s clients in LCL’s stores, the right to use trademarks, and the right to issue points under the LCL Loyalty Program, and that “the Bundle of Rights … enabled CIBC to sell financial products and services” by “allow[ing] CIBC to tap into LCL’s loyal and extensive customer base.”
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.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. The Queen, 2022 TCC 83 under ETA s. 123(1) – financial service, para. (r.5), para. (r.4).
CRA elaborates that a limited partnership selling shares on an earnout basis cannot utilize the cost-recovery method
CRA provided a more elaborate version of its position (also stated at the 2021 APFF Roundtable) regarding whether use of the cost-recovery method for a share earnout satisfies the conditions of IT-426R, para. 2:
[T]he conditions for the application of the cost recovery method described in paragraph 2 … were not designed to apply to limited partnerships. Therefore, neither a partnership nor the partners of a partnership … may use the cost recovery method [as described in IT-426R, para. 2, regarding earn-outs].
The particular context was a limited partnership with both resident and non-resident partners selling a somewhat small (under 5%) shareholding of a US target company on terms that included an earnout. Although CRA considered that other requirements of IT-426R, para. 2 would not be satisfied in this situation, it made a helpful comment to the effect that the requirement of subpara. 2(c) – that “[i]t is reasonable to assume that the earnout feature relates to underlying goodwill the value of which cannot reasonably be expected to be agreed upon by the vendor and purchaser at the date of the sale” — can be satisfied where (as here) “a particular vendor is not directly involved in the negotiations for the sale of shares.”
Neal Armstrong. Summaries of 17 May 2022 External T.I. 2021-0884651E5 under s. 12(1)(g), s. 96(1)(a) and Reg. 229(1).
Income Tax Severed Letters 20 July 2022
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Duhamel – Tax Court of Canada finds that earnings from winning poker tournaments were not the result of a serious and systematic approach, and were tax-free
In 2010, 2011 and 2012, the net winnings of the taxpayer from participating in in-person poker tournaments were $4.87 million, $0.38 million and $0.11 million, respectively. In particular, he was the winner at the no-limit Texas Hold ‘Em tournament at the World Series of Poker held in Las Vegas in November 2010, winning a multi-million dollar purse at the age of 23. In finding that such earnings were not from a business or other source and, therefore, were not taxable, Lafleur J stated:
[T]he Court finds … that Mr. Duhamel did not employ any system or strategy to manage or mitigate the risks associated with his poker business. … Mr. Duhamel was not acting as a serious businessman in his poker activities.
[T]here was no evidence that Mr. Duhamel had any systematic and serious means of winning tournaments. Mr. Duhamel does not employ any method of gathering information about his gambling opponents. …
… Mr. Duhamel partied very often and sometimes arrived at the various tournaments in a "morning after" state. …
Neal Armstrong. Summary of Duhamel v. The Queen, 2022 CCI 66 under s. 3(a) – business source.
CRA indicates that the s. 110(1)(d) deduction can now apply to stock option benefits realized on death
On death, an individual holding stock option rights is deemed pursuant to s. 7(1)(e) to have disposed of them immediately before death for their value. Although 2009-0327221I7 and 2011-0423441E5 indicated that the 50% deduction under s. 110(1)(d) is not permitted to a deceased taxpayer, s. 110(1)(d) was since amended to make specific reference to s. 7(1)(e).
CRA indicated that, as a result of this amendment, the deduction is now available to a deceased taxpayer in circumstances where s. 7(1)(e) applies, provided that all of the conditions of s. 110(1)(d) are met.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.17 under s. 110(1)(d).
CRA indicates that the classification of civil law foundation is determined on a case-by-case basis
CRA indicated that it will apply its usual two-step approach to foreign entity classification in determining whether a foundation created under the laws of a country where civil law applies is treated as a trust under the Act – and since this is done on a case-by-case, it is not making any blanket pronouncement that such foundations are trusts for such purposes. It will consider detailed ruling requests in this regard.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.16 under s. 104(1).
We have translated 9 more CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 8 translations of CRA interpretations released in August of 2004. Their descriptors and links appear below.
These are additions to our set of 2,143 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 17 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Hunt – Tax Court of Canada finds that the advantage tax is a tax, not a penalty
S. 207.05 imposes the 100% advantage tax on the controlling individual of a registered plan, and s. 207.06 authorizes the Minister to waive such tax having regard to listed criteria. The following Rule 58 question was posed to Bocock J:
Is the charge imposed by either or both of sections 207.05 and 207.06 of the Act in law a penalty or a tax?
Bocock J appeared to accept that the relevant context for this question was that “[i]f section 207.05 were a penalty, a due diligence defence applies, and a successful defence renders non-qualified income free of tax,” i.e., if the provision imposed a penalty there would be a due diligence defence rather than any relief being confined to that potentially provided under s. 207.06. However, he went on to find that the provisions did not impose a penalty given inter alia that the “tax” was labelled as such and given that although “a tax may have characteristics so clearly coercive and disproportionate that one concludes it is a penalty … this case does not meet that standard.”
He also found that the discretion accorded to the Minister under in s. 207.06 (being a constrained rather than unfettered discretion) did not have the effect of improperly delegating to the Minister a tax-rate setting discretion contrary to s. 53 of the Constitution Act, 1867.
Neal Armstrong. Summaries of Hunt v. The Queen, 2022 TCC 672022 TCC 67 under s. 207.05(2) and Constitution Act, 1867, s. 53.
CRA accepts that interest-free loans by a limited partner to the LP, or to wholly-owned subs which directly or indirectly hold such LP, can be a good s. 20(1)(c)(i) current use
Folio S3-F6-C1, para. 1.55 states that, generally, a deduction for interest will be allowed if borrowed money is used to make an interest-free loan to a wholly-owned corporation or in cases of multiple shareholders, where shareholders make an interest-free loan in proportion to their shareholdings and the proceeds of the interest-free loan have an effect on the corporation's income-earning capacity. CRA has acknowledged extensions of this policy, for instance where a corporation uses proceeds of a bank loan to make an interest-free loan to limited partnerships carrying on business of which it is the 99.9% limited partner and a wholly-owned subsidiary is the general partner (provided it is shown that such loans “to the LPs affect [its] ability to earn income from the LPs”).
Second, regarding where the bank loan is received by a corporation at the top of a stack of corporations (e.g., by Aco, which holds Bco, which holds Cco, which holds Dco, the holder of the limited partnership interests) and Aco uses the loan proceeds to directly or indirectly make an interest-free loan to the LPs (e.g., making such loan to Dco which, in turn, makes interest-free loans to the LPs, or to Bco, with back-to-back interest free loans made all the way down the stack), CRA stated:
[I]n light of … Canadian Helicopters, the fact that the taxpayer's income is derived from dividends from stacked corporations should not be a factor that … prevents a taxpayer from relying on the direct use of borrowed funds exception to make an interest-free loan.
[I]t would be necessary to assess … whether the interest-free loans made by Aco to the LP, Bco or Dco … affect Aco's ability to earn income.
Neal Armstrong. Summary of 10 February 2022 External T.I. 2021-0912581E5 F under s. 20(1)(c)(i).
CRA indicates that a s. 164(6) amendment must be made through filing an amended return, not a T1 Adjustment Request
The conditions for allowing capital losses of a graduated rate estate in its first taxation year to be considered capital losses of the deceased pursuant to s. 164(6) include that an election is filed, and the legal representative amend the deceased’s final T1 return of income. CRA indicated that to make the election, s. 164(6)(e) requires the legal representative to file an amended final T1 return of income for the deceased taxpayer to give effect to the election made under s. 164(6)(c). Filing a T1 adjustment request is not sufficient.
Neal Armstrong. Summaries of 15 June 2022 STEP Roundtable, Q.13 under s. 164(6)(e) and s. 164(3).