News of Note
Income Tax Severed Letters 18 January 2017
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Bombardier India - Ahmedabad Income Tax Appellate Tribunal finds that technical services under the Canada–India Treaty, Art. 12 must entail know-how transfers
Art. 12(4)(b) of the Canada-India Treaty assimilates to royalties “payments of any kind… in consideration for the rendering of any technical or consultancy services…if such services…make available technical knowledge, experience, skill, know-how, or processes….” Bombardier Canada provided a wide range of administrative and management services to Bombardier India through use of its broad platform of software. In finding that Bombardier India’s payments for these IT-related services were not deemed to be royalties, the ITAT applied a statement in a 2012 decision of the Karnataka High Court that:
[T]o fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end.…
The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider.
Since there was no such transmission of know-how to Bombardier India, the fees paid by it were not royalties under Art. 12, and were free of withholding tax.
Neal Armstrong. Summary of DCIT vs. Bombardier Transportation India Pvt. Ltd, ITA No.555/Ahd/2016 under Treaties – Art. 12.
10 fully translated 2015 APFF Roundtable items are available
Full-text translations of the first 10 questions from the 2015 APFF Roundtable are now available and are listed and briefly described in the table below. Q.5 (respecting the timing of child care deductions) was not answered at the time, so that the table below instead references the answer which was released a few weeks later as a technical interpretation.
These (and the other translations covering the last 13 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
The B2B rules operate in a formulaic and mechanical manner
The formula in s. 212(3.2) for allocating interest to an ultimate funder for purposes of the back-to-back (BTB) loan rules could result in an ultimate funder being allocated a pro-rata portion of the deemed interest even though it has provided a non-interest-bearing loan or it has not provided any loan at all but has granted "specified rights".
The character substitution rules in ss. 212(3.6) and 212(3.92) et seq. are intended to prevent taxpayers from avoiding the BTB loan or royalty rules by substituting a payment of interest or royalties between an intermediary and a non-resident with payments that are economically similar. In the case of shares, this would suggest that the shares should be debt-like. However, given that once a dividend is declared, it generally gives rise to a debt, these rules may potentially apply to ordinary common shares on which dividends have been declared during the relevant period and where the requisite tests are met.
Neal Armstrong. Summaries of Sabrina Wong, "Bill C-29 Amendments to the Back-to-Back Rules," International Tax, Wolters Kluwer CCH, December 2016, Number 91, p. 5 under s. 212(3.2), s. 212(3.9)(b)(ii) and s. 212(3.6)(a).
CRA finds that the multi-disciplinary preparation of health assessment reports was a taxable supply
CRA found that the preparation of assessments of clients which included physical examinations, diagnostic tests, and lifestyle counselling and resulted in a personalized report of findings (being a compilation of the reports from the different service providers) delivered to the client did not qualify as medical care, so that the part of the facility in which these assessments were made did not qualify as a health care facility. This, in turn, meant that the assessment service was not exempted as an institutional health care service. Riverfront, which found that medical reports prepared for supply to legal and insurance company clients qualified as exempt supplies of medical services, was distinguished on the basis that here, a physician did not review the whole report but instead just did her part of the report, and that the report was “a multi-disciplinary assessment conducted by a number of different service providers” rather than a medical report.
Neal Armstrong. Summary of 29 January 2016 Ruling 163020 under ETA Sched. V, Pt. II, s. 1 – health care facility - (a).
CRA indicates that a CPP death benefit potentially could be excluded from estate income under s. 104(6)
After confirming that, by virtue of the new s. 104(13.3), “the option to include [a] CPP/QPP death benefit in income on a T3 return will no longer be available by making a designation under subsection 104(13.1) if the estate’s taxable income (determined as though the designation were valid) for the year is greater than nil,” CRA then reaffirmed an earlier position that:
where the initial taxation year of a testamentary trust coincides with the executor year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor’s year, the CRA will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24).
Accordingly, depending on the terms of the will, CRA would be amenable to considering that such income receipt could be flushed out to the beneficiaries.
Neal Armstrong. Summary of 25 July 2016 External T.I. 2016-0630781E5 under s. 104(24).
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
A 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).