News of Note
CRA finds that having a trust interest vest indefeasibly in a minor is consistent with the minor not receiving or having any use of the trust capital
Email this ContentA discretionary inter vivos family trust, which was approaching its 21st anniversary, had provisions in its declaration of trust which contemplated that, prior to that anniversary, the trustee would make an irrevocable declaration establishing the respective shares to the trust fund of the family beneficiaries, so that the trust fund would be distributed to those beneficiaries except those who were “designated persons” (i.e., grandchildren who were minors), whose respective shares as so determined would be held for them until they attained the age of majority. Designated person status was relevant under s. 74.4 because of some previous estate freeze transactions.
However, there were “ambiguities” in the declaration of trust respecting this supposedly irrevocable designation. The solution was to get a declaration from the Quebec Superior Court declaring that the ambiguities were resolved as sought by the trustee, and to then transfer all the assets of the old trust to a new trust with the same trustee, and whose terms would “for all practical purposes” be the same as for the old trust but “adjusted to take into account the conclusions of the declaratory judgment rendered.”
CRA ruled that this transfer was deemed not to be a disposition under the exception in para. (f) of the disposition definition (and so that s. 248(25.1) deemed the new trust to be a continuation of the old). CRA also provided an opinion that the making by the trustee of the beneficiary-shares designation (which became irrevocable immediately before the 21st anniversary of the old trust or when he ceased to be a trustee), thereby causing all the interests in the new trust to indefeasibly vest in the beneficiaries in accordance with their declared shares (but with the minor grandchildren’s shares being held in trust for them until 18) did not detract from the minor grandchildren continuing to comply with s. 74.4(4)(b), which requires that the child “may not receive or otherwise obtain the use of any of the income or capital of the trust while being a designated person.” CRA also opined that the 21 year rule did not apply to the new trust notwithstanding that it still held trust property for the minor grandchildren on the 21st anniversary of the settling of the old trust (based on the indefeasible vesting exception to this rule in (g) of the s. 108(1) trust definition.)
Neal Armstrong. Summaries of 2016 Ruling 2014-0552321R3 F under s. 248(1) – disposition – (f), s. 74.4(4) and s. 108(1) - trust - (g).
Reiss – Tax Court of Canada denies ITCs because purchases were evidenced by invoices not issued in the actual supplier’s name
Lafleur J found that because invoices received by a Quebec taxpayer, corresponding to purchases made by it, were issued in the name of suppliers it had not dealt with, the invoices did not satisfy the ETA documentary requirements, so that its ITC claims were properly denied. Although this issue arose in what appears to have been a fraudulent invoicing scheme, this finding is problematic in situations where the supplier name shown on the invoice is incorrect for innocent reasons, e.g., naming the wrong company in the vendor group of companies.
Neal Armstrong. Summary of Les Ventes et Façonnage de Papier Reiss Inc. v. The Queen, 2016 TCC 289 under Input Tax Credit Information (GST/HST) Regulations, s. 3(a).
CRA confirms that there is no GST/HST on a fee charged for the cancellation of an exempt supply agreement
Although there is no general rule that deems a fee charged for the cancellation of an agreement to make an exempt supply to also be consideration for an exempt supply, this is not a problem. CRA acknowledges that compensation or indemnification for damages is not consideration for a supply, so that there is no GST/HST on general principles. ETA s. 182, which deems the compensation received by the supplier of taxable supplies for the termination of the related agreement to be taxable, does not apply to the termination of an agreement for making an exempt supply.
Neal Armstrong. Summary of 7 December 2016 Ruling 158637 under ETA s. 123(1) – supply, s. 182(1), and s. 232(1).
CRA confirms that the derivation of estate property from Cdn real property of the deceased does not cause the interests in the estate to be taxable Cdn property
CRA confirmed that an interest of a non-resident in an estate which held nothing but public company shares which had been acquired exclusively from the proceeds of sale by the Canadian deceased of Canadian real property was not taxable Canadian property, given that the estate itself had never held taxable Canadian property
Neal Armstrong. Summary of 6 December 2016 External T.I. 2014-0542551E5 under s. 248(1) - taxable Canadian property – (d).
CRA rules that vocational and pscho-vocational assessments performed by an Ontario psychological associate (or psychologist) are GST/HST exempt
CRA found that GST/HST-exempt fees were received by a self-employed registered Psychological Associate with the College of Psychologists of Ontario from rehabilitation companies to conduct psycho-vocational assessments and vocational assessments on individuals who were receiving loss of earnings benefits from an insurer as a result of work-related injury or illness. It stated (respecting the application of the branches of the "qualifying health care supply" definition referencing treating, remediating or assisting with coping with injury, illness disorder or disability) that:
the purpose of the service is to confirm or identify the issues related to an individual's injury or disability for the purpose of vocational rehabilitation planning and the development of the individual's vocational rehabilitation plan.
Neal Armstrong. Summaries of 24 October 2016 Ruling 154036 under ETA Sched. V, Pt. II, s. 1 – practitioner, and qualifying health care supply.
CRA apparently contemplated that a post-amalgamation earnout payment could be applied to increase an s. 88(1)(d) bump of capital property of the amalgamated target
A Canadian Acquisitionco acquired Canadian Targetco for a cash base price plus earnout obligations, and then immediately merged with Targetco under a short-form amalgamation. The Rulings Directorate rejected Amalco’s treatment of the earnout payments subsequently made by it as eligible capital expenditures, stating:
[R]egardless of whether the [Targetco] Shares existed at the time that the Earnout Payments became payable or paid, the Earnout Payments nevertheless are part of the cost of the Shares. Mandel…appears to dictate such a result….
The Directorate went on to note that the cost of the Shares “is only relevant in regards to bump room for the assets of Targetco, if a bump was available under paragraphs 87(11)(b) and 88(1)(c),” - but, of course, there was no bump for eligible capital property, which might have been the principal appreciated asset of Targetco. It then stated:
Allowing…a re-characterization of cost of non-depreciable property to ECE would in effect allow a bump on eligible capital property. Such a result is offensive….
Neal Armstrong. Summaries of 14 March 2016 Internal T.I. 2015-0609671I7 under s. 88(1)(d) and s. 14(5) - eligible capital expenditure.
CRA considers that an executor’s fee of a retired lawyer was free of HST
The ETA definition of a service excludes the services of an officer or employee. However, the position of an executor is not treated as an office “where the person who acts in that capacity is entitled to an amount for doing so that is included in computing… the person’s income from a business.” CRA was prepared to conclude that the fee of a retired lawyer for acting as an executor was not for a supply since it was in respect of an office.
Neal Armstrong. Summary of 28 October 2016 Interpretation 152996 under ETA s. 123(1) – office.
CRA was prepared to accept that a nominee could be a valid GST registrant
CRA quoted with approval the criteria stated in Westcan Malting as to what is a joint venture at law before accepting that a co-ownership arrangement before it likely was a joint venture (so that a joint venture election under ETA s. 273 under which one of the co-owners was appointed as operator was valid).
The co-owned land was held through a nominee, which was registered. CRA stated that its comments were “based on the understanding that the Nominee is engaged in commercial activities as a result of its agency activities on behalf of ACo and BCo and therefore is correctly registered for the GST/HST.”
Quite at odds with the joint venture election, the Nominee was appointed as the co-owners’ agent and was authorized and directed to claim input tax credits on its return on their behalf. Without finding it necessary to discuss the clash between this approach and the GST/HST joint venture election, CRA simply noted that it was contrary to basic tenets of agency law for the agent to treat its purchases as being incurred on its own account, so that the ITCs were only claimable pro rata by the co-owners rather than by the nominee.
Neal Armstrong. Summaries of 14 October 2016 Interpretation 170549 under ETA s. 273(1), s. 240(3)(a), s. 169(1) and General Concepts – Agency.
CRA indicates that a Singapore company recognizing earnings from a foreign branch only on a remittance basis could not measure its “earnings” under Singapore rules
A Singapore company was not required under Singapore income tax law to compute its income from its active business activities carried on through the branches in each of a designated treaty country and one which was not until a subsequent taxation year when the branch profits were remitted to Singapore. Accordingly, the branch “earnings” were to be determined under the income tax law of the designated treaty county (under (a)(ii) of the “earnings” definition in Reg. 5907(1)), or under modified Canadian tax rules (under (a)(iii) of that definition), as the case may be – and not under Singapore tax law (under (a)(i).)
Neal Armstrong. Summary of 24 August 2016 External T.I. 2015-0592921E5 under Reg. 5907(1) – earnings – (a)(i).
Income Tax Severed Letters 11 January 2017
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.