News of Note
CRA concludes that GST/HST should be backed out of the appraised value of newly constructed residence for GST/HST self-assessment purposes
Email this ContentETA s. 191(3) requires the builder of a multiple unit residential complex to self-assess itself for GST/HST on the fair market value of the complex at the later of substantial completion and first occupation by a tenant, and a similar rule applies to other residential complexes. CRA has now accepted that the appraised value in this context should be treated as including GST/HST, and that such GST/HST should be backed out before determining the amount of GST/HST payable by the builder. This FMV reduction thus will reduce the self-assessed GST/HST (and any associated new residential rental property rebate).
Neal Armstrong. Summary of CRA internal communiqué dated May 17, 2023 “Updated guidance relating to embedded amount of GST or HST in Fair Market Value (FMV) under the Excise Tax Act (ETA) as it pertains to New Residential Housing” as described in PwC, “Tax Insights: Canada Revenue Agency confirms that fair market value of newly constructed residential complexes includes GST/HST,” Issue 2024-10, 22 March 2024 under ETA s. 191(3).
CRA finds that the flipped property rule does not apply to a sale to avoid future insolvency
Although s. 13(12) deems the gain of a taxpayer from the disposition of a housing unit within 365 days of its acquisition to be an inventory gain, s. 12(13)(b)(viii) provides an exception for a disposition which inter alia can reasonably be considered to occur in anticipation of the taxpayer’s insolvency. CRA indicated that this exception might apply where an individual disposed of a housing unit to improve a declining financial situation (the costs associated with the housing unit caused the individual to have severe cash outflows resulting in maximizing credit cards in order to pay for basic needs). It stated that the exception applied where the taxpayer disposed of the housing unit “due to or in anticipation of the inability or lack of means to pay their debts as they become due” and that:
This could include circumstances where a taxpayer is relying on other forms of debt (such as credit cards) to pay for their basic personal expenses, the situation is expected to continue or has been ongoing for some time, and disposing of the housing unit would allow them to significantly improve their financial situation, thereby avoiding insolvency or becoming insolvent.
In other words, “anticipation” of insolvency includes reasonable “avoidance” of insolvency – even where the individuals concerned may have been the authors of their own misfortune.
Neal Armstrong. Summary of 30 January 2024 External T.I. 2023-0991461E5 under s. 12(13)(b)(viii).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released in March of 2002. Their descriptors and links appear below.
These are additions to our set of 2,786 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 22 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 |
|---|---|---|---|
| 2002-03-01 | 5 March 2002 Internal T.I. 2001-0102757 F - PERTE FINALE | Income Tax Act - Section 54 - Adjusted Cost Base | cost of moving rental building off land for subsequent sale, in order to construct parking lot and create more space for existing rental buildings, was addition to ACB of land |
| Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) | a rental building that was acquired with a view to then moving it off the subjacent land and then selling it, was not a depreciable property | ||
| 6 March 2002 Internal T.I. 2001-0108587 F - AIDE A DOMICILE DE LA SAAQ | Income Tax Act - Section 152 - Subsection 152(4) | refunds not issued beyond Objection period based on favourable judgment rendered to another taxpayer | |
| Income Tax Act - Section 3 - Paragraph 3(a) | in cases similar to Maurice, parent caregivers may be exempted on compensation received | ||
| 2002-02-15 | 7 March 2002 External T.I. 2001-0106275 F - BOURSE D'ETUDES ET DE PERFECTIONNEMENT | Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) | general discussion regarding foreign internship sponsored by Foreign Affairs |
| 4 March 2002 External T.I. 2001-0106325 F - ALLOCATION POUR UNE AUTOCARAVANE | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(vii.1) | allowance for motorhome must be for its use in travelling rather than as accommodation to come within s. 6(1)(b)(vii.1) | |
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(r) | motor home is not an automobile and thus not within s. 18(1)(r) | ||
| 1 March 2002 External T.I. 2002-0118215 F - ACTIONS EMISES GRATUITES AUX EMPLOYES | Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) | s. 7 rules applicable to shares issued for no consideration to employees | |
| Income Tax Act - Section 7 - Subsection 7(1.1) | s. 7(1.1) continues to apply after issuing employer ceases to be a CCPC | ||
| 8 March 2002 External T.I. 2002-0123095 F - TRANSFERT - CREDIT DEFICIENCE | Income Tax Act - Section 118.2 - Subsection 118.2(3) | overview of requirements for transfer of severe impairment credit to parent |
CRA provides guidance on the UHTA amendments
CRA has published a further Underused Housing Tax Notice providing some basic illustrations of the application of the proposed UHTA amendments released on November 21, 2023.
It notes that where, for example, a Canadian parent and Canadian adult child both hold title to a Canadian residential property, it now will not matter whether they are co-owners or whether one is holding in trust for the other because, either way, they will be excluded owners (i.e., not required to file a return). Similarly, it will no longer matter regarding exempt owner status whether two Canadian individuals are holding title as co-owners or partners.
Due to the addition of a Canadian corporation whose shares are listed on a designated Canadian stock exchange to the excluded owner definition, a Canadian subsidiary of such a listed corporation will now be an excluded owner even if there is substantial foreign ownership of the listed corporation.
Section 4.1 will require an owner to account separately for each capacity in which it holds title (as trustee, partner or for its own account). For example, a foreign national holding title to a Canadian residential property as to 10% as trustee for a specified Canadian trust and as to the other 90% in her individual capacity will, in her capacity of trustee, be an excluded owner, but will be required to file a UHT return as to the 90% interest.
CRA notes that the amended definitions of specified Canadian partnership and specified Canadian trust essentially provide a look-through rule to an upper-tier partnership or trust, so that, for example, a lower-tier partnership will be tainted if any of the members of the upper-tier partnership is not one of the listed Canadian entities. (in fact, these definitions are broader than this, and deal with multi-tier arrangements.)
None of the UHT Notices discuss bare trusts or Quebec nominees.
Neal Armstrong. Summaries of Underused Housing Tax Notice UHTN16 Proposed Amendments to the Underused Housing Tax, 8 March 2024 under UHTA, s. 2, excluded owner – (a)(i), (b). (c)(iii), specified Canadian partnership – (a), specified Canadian trust – (a), s. 4.1, and Underused Housing Tax Regulations – s. 2(3).
CRA indicates that the flipped property rule may not apply where a beneficiary receives the devise of a house of a deceased parent and promptly sells it
Although s. 13(12) deems the gain of a taxpayer from the disposition of a housing unit within 365 days of its acquisition to be an inventory gain, s. 12(13)(b)(i) provides an exception for a disposition which inter alia can reasonably be considered to occur due to the death of a person related to the taxpayer. CRA seemed to accept that this exception might be available, depending on the circumstances, where an estate distributed a housing unit of the deceased to a child beneficiary and such child then sold the unit within 365 days of the distribution.
Neal Armstrong. Summary of 29 January 2024 External T.I. 2023-0990101E5 under s. 12(13)(b)(i).
Darmos Family Trust – Ontario Superior Court of Justice finds that “Alberta” family trusts whose major decisions were made in Ontario, were resident there
The assets of the two Darmos family trusts were mostly shares of corporations holding the investments derived from the sale of a company of which Mr. Darmos had been the principal. Two of the three trustees of each trust were an Alberta lawyer and Alberta trust company, and the third was an Ontario-resident lawyer (Alexopoulos), who had provided longstanding legal counsel to Mr. Darmos.
Ramsay J found that that the central management and control of the two trusts was in Ontario rather than Alberta. Most of the documentation demonstrated that the role of the trustees (other than Alexopoulos) was simply to implement and document the decisions of others, all based in Ontario, i.e., Mr. Darmos (who was actively involved with and directed the management of the trust property, and the assets of the corporations), the accountants for Darmos (KPMG, whose recommendations as to distributions were implemented when these decisions did not originate with Mr. Darmos), Alexopoulos (who handled dealing with the professional advisors) and RBC Dominion Securities (to whom Mr. Darmos had delegated significant investment management functions).
Neal Armstrong. Summary of Theodoros Darmos Family Trust v. Minister of Finance, 2023 ONSC 6431 under s. 2(1).
Income Tax Severed Letters 20 March 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
FU2 – Federal Court of Appeal confirms that Senate vacancies do not invalidate ITA bills passed by it
The taxpayer appealed a reassessment of its 2011 taxation year, which was adversely affected by subsequent retroactive legislation, on the grounds that such legislation was passed by a Senate that had substantial vacancies, contrary to Part IV of the Constitution Act, 1867 (which has detailed provisions respecting the appointment of specified numbers of senators from each province). In confirming the decision below that this claim should be struck, Biringer JA stated:
Crucially, section 35 [of the Constitution Act, 1867] makes it clear that the Senate may exercise its powers notwithstanding any vacancies, as long as there is a quorum of senators … .
Accordingly, it was plain and obvious that the appellant’s Senate vacancy argument had no reasonable prospect of success … . [T]he untenable implication of the appellant’s Senate vacancy argument is that any legislation passed by a quorum of the Senate when there are vacancies in the Senate could also be invalid.
Neal Armstrong. Summary of FU2 Productions Ltd. v. Canada, 2024 FCA 45 under Constitution Act, 1867, s. 35.
CRA indicates that the two-year s. 227(6) time limit for requesting a Part XIII tax refund applies to a request based on a Treaty “as if resident” clause that is silent on the timing point
As an example of an “as if resident” (“AIR”) clause, the Directorate referred to Art. 18(2) of the Canada-Italy Treaty which relevantly indicated that the tax which Canada could impose on a periodic pension arising in Canada does not exceed the lesser of (a) 15% of the excess of the annual pension amount over Cdn.$12,000, and (b) the amount of Canadian tax the recipient would have been required to pay on the annual pension amount had the recipient been resident in Canada. CRA indicated that, by virtue of s. 227(6), a taxpayer request for an assessment of tax under this Treaty provision must be made no later than two years after the end of the calendar year in which the pension amounts were paid, stating:
Generally, domestic law must be applied first and treaty provisions may override those provisions. Since subsection 227(6) of the Act is Canadian domestic law, it is applied first, restricting the timeframe for claiming a refund of excess Part XII.5 or Part XIII tax paid to two years from the end of the taxation year in which the income is received. …Article 18, paragraph 2 … does not provide a specific timeline for making such a request. Further, the Canada-Italy Treaty does not have any other provisions extending the timeframe to a request a refund of tax in respect of taxation that is not in accordance with the provisions of the Canada-Italy Treaty … . Other treaties would need to be reviewed on a case-by-case basis to determine if any of the provisions therein affect the application of subsection 227(6) [citing 9402551].
Neal Armstrong. Summary of 20 June 2023 Internal T.I. 2021-0904981I7 under s. 227(6).
1351231 Ontario – Tax Court of Canada finds that an Airbnb rental property is similar to a motel, lodging house etc. so that, with its short-term rentals, it cannot qualify as a residential complex
The Appellant used a condo unit for the first nine years after purchase for long-term residential rentals and then listed it on Airbnb and rented it out for succession of short-term rentals (under 60 days and sometimes for only one night) before its sale.
Before concluding that the condo unit was excluded from being a residential complex, so that its sale was a taxable supply for GST/HST purposes, D’Arcy J found that, at the time of the sale, the unit was similar premises to a hotel, a motel, an inn, a boarding house and a lodging house given that it along with the listed items represented “premises that are regularly supplied as accommodations to third parties on a short‑term basis for a fee” and provided furnished accommodation.
Furthermore, at the time of sale, “all or substantially all of the leases, under which the Condominium was supplied, provided, or were expected to provide, for periods of continuous possession or use of less than 60 days.” In rejecting the Appellant’s submission that this test was satisfied because over the whole period of its ownership, the condo was leased for over 90% of that period in long-term rentals, D’Arcy J found that the substantially all test was a “point in time” test.
The above conclusion was reinforced by the change-in-use rule in s. 206(2), which applied, by virtue of s. 141.1(3)(a), when the property was first listed on Airbnb, so that there was a deemed acquisition by the Appellant of the property. Since the only use after the property’s deemed acquisition was for making short-term rentals, the same conclusion would be reached without applying a point-in-time test.
Neal Armstrong. Summaries of 1351231 Ontario Inc. v. The King, 2024 TCC 37 under ETA s. 123(1) – residential complex, and s. 206(2).