News of Note

CRA has provided numerous interpretations of underused housing tax issues in a recent notice, including the following:

• A “trust” is viewed as including a bare trust so that, for example, an individual citizen holding as a bare trustee would not qualify as an excluded owner.
• The extension of the definition of an “owner” (which otherwise essentially refers to a registered owner) to a person who “could reasonably be considered to be an owner” does not include the beneficiaries of a trust, but could apply, based on the wording of a deed in a province using a deed-registration, rather than land titles, system.
• A corporation holding title to a residential property in Canada as bare trustee would be required to file a return, but its holding may be exempted if the trust is a specified Canadian trust (no reference was made to the possibility that it alternatively might be excluded as a specified Canadian corporation).
• For purposes of the definition of a residential property (including as it applies to condo units), CRA considers that a property in construction does not become a residential property until “construction of the property is substantially completed (generally 90% or more) so that an individual could reasonably inhabit the property” – so that there is no reporting obligation for the property if on December 31 it has not yet become a residential property.
• Where, for example, the municipally assessed value of a 10 hectare plot of land reflects the value of land (9.5 hectares) that is not necessary for the use of the house on the land as a residence, the taxable value of that property nonetheless is based on that assessed value, unless an election is made to use the FMV of the residential property (which generally would only include the ½ hectare).
• An affected owner of multiple residential properties on December 31 must file a separate return for each property rather than filing a single UHT return and attaching a spreadsheet.
• Having regard to the requirement that the beneficiaries of a specified Canadian trust must all be Canadian (as defined), CRA considers that a beneficiary does not include any contingent beneficiary of the trust (being “a person who may or will benefit if a primary beneficiary dies or otherwise loses rights as beneficiary”).
• As a trust is not a person for UHT purposes, it is likely that where a trust is a beneficiary of another trust, the beneficiaries of the first trust are to be treated as beneficiaries of the second trust.

Neal Armstrong. Summaries of Underused Housing Tax Notice UHTN15, Questions and Answers About the Underused Housing Tax, 17 April 2023 under UHTA, s. 2 – excluded owner – (b), (c), owner, dwelling unit, residential property, taxable value, specified Canadian trust, s. 7(1).

Coréalis entered into “service agreements” with pharmaceutical companies pursuant to which it would develop and manufacture clinical lots of solid oral dosage forms (tablets, capsules and granules) containing an active pharmaceutical ingredient provided by the companies. These along with placebos, which were also manufactured and provided by Coréalis, were used in clinical trials of the drugs by the companies.

Whether equipment that Coréalis had purchased and used in manufacturing the clinical lots qualified for Quebec investment tax credits turned on whether such equipment satisfied the requirement under the description of a Class 29 property that it had been acquired “to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale.” The ARQ argued that Coréalis was not making sales to the companies as it had not established that the manufacturing process regarding the clinical lots was more important than the services furnished by Coréalis to them, and in this regard further argued that the companies were essentially accessing Coréalis’ expertise and noted that the active ingredient (viewed by the ARQ as the key material) remained their property at all times.

Before allowing Coréalis’ appeal, Lachapelle JCQ stated:

The most important element in this case is the manufacture of the physical product, the actual capsule, without which the clinical tests of Coréalis' customers could not take place. Of course, the customers call on Coréalis' knowledge, but ultimately they are ordering and paying for clinical lots and thus purchasing and receiving delivery of those clinical lots, which the customer will then use as it sees fit.

Neal Armstrong. Summary of Pharma Coréalis Inc. v. Agence du revenu du Québec, 2023 QCCQ 156 under Schedule II - Class 29.

After a UK resident (under age 55) became resident in Canada, the commuted value of the individual’s member benefits under a UK defined-benefit pension plan was transferred directly to a UK self-invested personal pension plan (SIPP) of which the individual was the sole beneficiary.

In finding that such commuted value was to be included at the time of the transfer in the individual’s income pursuant to s. 56(1)(a)(i), CRA stated that “the Individual is considered to have constructively received the benefit on the basis that, by virtue of the Transfer, the benefit has been set apart for the Individual” - and found, in the alternative, that s. 56(2) would apply to include the commuted value in the individual’s income on the basis that the individual had directed or concurred in the payment of an amount to a third party (the UK SIPP) and that amount, had it been paid to the individual, would have been included under s. 56(1)(a)(i). This would also mean that the individual had made a “contribution” to the UK SIPP plan.

Neal Armstrong. Summary of 7 November 2022 External T.I. 2022-0926091E5 under s. 56(1)(a)(i).

Emergis financed a U.S. acquisition through a tower structure under which:

• it made an interest-bearing loan to a subsidiary Canadian partnership (“USGP”);
• USGP funded such interest payments out of dividends received from a wholly-owned Nova Scotia ULC (“NSULC”);
• NSULC, in turn, received dividends out of the exempt surplus of a wholly-owned LLC; and
• the LLC received s. 95(2)(a)-recharacterized interest on the acquisition-financing loan made to the successor by amalgamation to the U.S. acquisitionco of Emergis.

Emergis’ 99.9% effective share of the interest deduction of USGP for the loan largely offset its interest income from that loan and, in addition, it claimed the s. 112(1) deduction for its effective share of the dividend income from NSULC. From a U.S. perspective, the interest on the loan owing by USGP was deductible interest paid by a U.S. corporation (USGP) to a Canadian resident (Emergis), and was subject to U.S. withholding tax.

In reversing the finding below that Emergis could not deduct such tax pursuant to s. 20(12) because such tax could (in accordance with the exception at the end of s. 20(12)) “reasonably be regarded as having been paid by a corporation [Emergis] in respect of income from a share … of a foreign affiliate [the LLC],” Webb JA and Goyette JA indicated:

• The text of s. 20(12) was” insufficient to displace the general rule that the assets and income of a corporation are not the assets and income of its shareholders”, i.e., s. 20(12) did not provide “that NSULC’s income from its LLC shares should be treated as the income of Emergis, and hence as the income on which Emergis paid the taxes to the US Government”.
• The interest on which Emergis paid the U.S. withholding tax was calculated as a percentage of the principal of the loan and “was not based on the income from the shares of LLC” nor was it “a distribution or allocation of income earned directly or indirectly by Emergis from the shares of LLC”.

Neal Armstrong. Summaries of Emergis Inc. v. Canada, 2023 FCA 78 under s. 20(12) and General Concepts - Ownership.