News of Note

1351231 Ontario – Tax Court of Canada finds that an Airbnb rental 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).

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 2,780 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 12 March 2002 Internal T.I. 2001-0094067 F - DEDOMMAGEMENT - TITRE DE PROPRIETE Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees legal fees incurred in ownership dispute were capital expenditures
Income Tax Act - Section 54 - Proceeds of Disposition damages received for use of a property contrary to the recipient’s co-ownership right were tax-free receipts
Income Tax Act - Section 3 - Paragraph 3(a) damages received for separated spouse’s unlawful use of taxpayer’s property were tax-free receipts
21 March 2002 Internal T.I. 2001-010133A F - VALIDITE D'UN JUGEMENT - PENSION ALIMENTAIRE Income Tax Act - Section 56.1 - Subsection 56.1(4) - Support Amount where couple reconcile and then separate a second time, child custody thereafter paid will not qualify as support amounts if no new agreement or judgment
20 March 2002 External T.I. 2001-0113815 F - TVQ SUR PRIMES D'ASSURANCE - SALAIRE Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) employee would not be credited with a contribution on paying Quebec sales tax on wage loss plan premiums/ the employer paying them would not be a contribution
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) employee would not be credited with a contribution on paying Quebec sales tax on wage loss plan premiums/ the employer paying them would not be a contribution
25 March 2002 Internal T.I. 2001-0113497 F - REMBOURSEMENT DE PRESTATIONS ASS. EMPLOI Income Tax Act - Section 60 - Paragraph 60(n) - Subparagraph 60(n)(iii) repayment of EI benefits due to award of wrongful dismissal damages was deductible under s. 60(n)(iii)
Income Tax Act - Section 60 - Paragraph 60(v.1) repayment of EI benefits due to award of wrongful dismissal damages was deductible under s. 60(n)(iii) rather than s. 60(v.1)
14 March 2002 External T.I. 2002-0119695 F - Income & Losses/Business or Property General Concepts - Agency criteria applied for determining presence of agency
12 March 2002 External T.I. 2002-0125885 F - Section 55(3)(a) - Exception55(3)(a) Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) s. 55(3)(a) applies where Opco redeems 50% shareholder (Holdco A) where other shareholder is owned by the son respecting the spousal trust owning Holdco A

CRA confirms that the s. 115.2 safe harbour can extend to lending and that administrative services by themselves may be excluded on general principles

A limited partnership (“Foreign LP”) has exclusively non-resident partners and its Canadian corporate general partner has delegated the management of its activity of making loans to an affiliated Canadian-resident manager. Regarding the application of the safe-harbour rule as to the limited partners being considered to carry on business in Canada through the Manager, CRA indicated that the making of loans by the Manager on behalf of Foreign LP would generally qualify as “designated investment services” given that “there is no indication that an acquisition, holding and disposition of a debt acquired on original issue through the services of a Canadian service provider are meant to be excluded from the application of subsection 115.2(2).”

Although the definition of “designated investment service” relevantly excluded only investment management and advice, CRA indicated that mere administrative services performed by the Manager would not by themselves cause the limited partners to be considered to be carrying on business in Canada (and similarly regarding any administrative services of the GP.)

Neal Armstrong. Summaries of 17 November 2023 External T.I. 2023-0965891E5 under s. 115.2(1) – Designated investment services, paras. (b), (a).

Verrier - Quebec Court of Appeal finds that reimbursements for life insurance policy premiums should be prorated between portions taxable under s. 12(1)(x), and non-taxable portions

Verrier participated in a scheme of an insurance broker (Chabot) to defraud life insurance companies which rested on the commissions generated to Chabot from the sale of universal life policies substantially exceeding the premiums payable under those policies during the first two years of their term (beyond which, they could be cancelled without Chabot being required to repay his commissions). Chabot sold a large policy to Verrier, and after Chabot subsequently ceased making reimbursement payments to Verrier, the policy was subsequently cancelled by the insurer for the resulting non-payment of premiums by Verrier.

At issue in this appeal was whether the reimbursement payments qualified under the Quebec equivalent of s. 12(1)(x) as being “received by the taxpayer in the year, in the course of earning income from a business or property”.

Mainville JCA found that the insurance coverage provided under the policy did not constitute income from property and instead represented a non-taxable benefit. However, the investment account provided for by the policy was property exploited for the purpose of deriving income therefrom and, therefore, came within the s. 12(1)(x) equivalent. However, although the income generated on the investment account was exempted, it effectively would be subject to deferred taxation when the policy was redeemed for its cash surrender value under the Quebec equivalent of s. 148(1). Approximately 1/3 of the premiums were used by the insurer to purchase the (non-taxable) insurance coverage and 2/3 were used to purchase investments chosen by Verrier (a source of deferred taxable income). Mainville JCA found that the reimbursement payments should be apportioned on the same basis, so that 2/3 of each payment was taxable under the Quebec s. 12(1)(x) equivalent.

In further finding that it was irrelevant that in fact Verrier did not generate any income from the policy under s. 148(1), Mainville JCA stated:

If the property in question is reasonably likely to generate income, [the s. 12(1)(x) equivalent] can apply, regardless of whether the property actually generates income or whether the taxpayer decides to dispose of it before it generates income.

Neal Armstrong. Summary of Verrier v. Agence du revenu du Québec, 2024 QCCA 298 under s. 12(1)(x) and Statutory Interpretation - Provincial Law.

Suncor Energy – Tax Court of Canada finds that a s. 13(31)(a) deemed property acquisition by an LP did not accord it a corresponding deemed taxation year under the 2-year rolling start rule

Suncor acquired a Class 41 property in January 2005, then on January 1, 2006 transferred it on a s. 97(2) rollover basis to a limited partnership (the “LP”) of which it was the 99.9% general partner and whose first taxation year extended from February 1, 2005 to January 31, 2006 and second taxation year ended on January 31, 2007 (the “2007 taxation year”). S. 13(31)(a) deemed the LP to have acquired the property for purposes of s. 13(27)(b) at the time of its acquisition by Suncor, i.e., in January 2005. The LP claimed CCA in its 2007 taxation year on the basis that s. 13(31)(a) deemed it to have acquired the property on the first day of that taxation year, i.e., it was effectively deemed by s. 13(31)(a) to have a notional taxation year beginning on February 1, 2004 and ending on January 31, 2005, so that on the beginning of its 2007 taxation year it satisfied the test in s. 13(27)(b) that such time followed the end of a taxation year of more than 357 days which, in turn, followed the taxation year in which the taxpayer had acquired the property.

In rejecting this position, so that the LP could not claim CCA on the property in its 2007 taxation year, D’Arcy J stated:

Subsection 13(31) deems an acquisition of property to occur on a different day than the day that the property was actually acquired. However, that is all it does … .

There is nothing in the wording of subsection 13(31) that creates the fiction of the Limited Partnership having a year-end prior to February 1, 2005 … .

[T]he Appellant’s position defeats the purpose of the two-year rolling start rule by shortening the length of time that the Limited Partnership is required to have held the property to one completed taxation year.

Neal Armstrong. Summary of Suncor Energy Inc. v. The King, 2024 TCC 31 under s. 13(31)(a).

CRA indicates that it would continue to be bound by a ruling regarding the deductibility of interest accruing to a US parent notwithstanding s. 69(2) being supplanted by s. 247(2)

In the early 1980s, Holdco received a ruling as to the deductibility (subject to s. 18(4)) of its interest expense on a 40-year U.S. $15 million debenture (“Debenture”) issued by it to Parent, which bore interest for each year of the lesser of 11% per annum and Holdco’s profits in that year. The principal was payable on demand, but only if Holdco satisfied a net-worth test. Holdco currently has 14 subordinated income instruments (“SIIs”) owing in an aggregate amount of C$1.6 B to a related non-resident entity.

Headquarters indicated that CRA would continue to be bound by the ruling notwithstanding the replacement of s. 69(2) by s. 247(2). The ruling did not apply to the other SIIs.

Regarding whether the terms of those SIIs complied with s. 247(2), it summarized statements in Chapter X of the current OECD Transfer Pricing Guidelines, and then stated:

In the case of any particular SII, the economically relevant characteristics include those that were in existence at the time the instrument was executed. Thus, for transfer pricing purposes, the expected yield to maturity of a particular SII is a relevant factor in determining whether the interest rate of the SII is consistent with the arm’s length principle.

Neal Armstrong. Summary of 7 July 2022 Internal T.I. 2021-0893791I7 under s. 247(2).

CRA indicates that it will not impose penalties for late-filed 2023 bare-trust returns except in extreme circumstances

Absent CRA relief (and ignoring any due diligence defence), a bare trust which fails to timely file a T3 return and Sched. 15 for its 2023 taxation year will be subject to a s. 162(7) penalty of $25 per late-filing day up to a maximum of $2,500, and also might be exposed to a gross negligence penalty equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the trust property.

In a March 12 update to its webpage on bare trust reporting, CRA stated:

As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing relief to bare trusts by waiving the penalty payable under subsection 162(7) … for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline for reasons other than gross negligence. …

While the Act also includes a gross negligence penalty under subsection 163(5), as part of the CRA’s education-first approach, the CRA will only apply this penalty in the most egregious cases where a bare trust fails to file. Imposing such penalty would only occur in the context of a compliance action, such as an audit, where all factors and circumstances of the taxpayer’s particular situation are considered together. A gross negligence penalty for failing to file will be subject to oversight and approval by Headquarters, following a mandatory referral.

Neal Armstrong. Summaries of CRA Webpage, New reporting requirements for trusts: T3 returns filed for tax years ending after December 30, 2023, updated on 12 March 2024 under s. 162(7), s. 163(5) and s. 150(1.2).

Income Tax Severed Letters 13 March 2024

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

STEP Canada submits that the names of individuals with significant control of CBCA corporations should not be posted on-line (and that their names not be searchable)

Since January 2024, the on-line corporate register for federally incorporated (CBCA) companies. has been posting the names of individuals who are the ultimate beneficial owners and controllers of CBCA companies. STEP has submitted that this represents an unjustified invasion of privacy to persons involved with companies.

The submission supports a stated goal for the register of combatting tax evasion and money laundering, but suggests that the information can be submitted to the government without there being a requirement to post the information on-line (as is the case in the US under their federal Corporate Transparency Act in force there since January 1, 2024). The submission requests that the government reverse its decision to post on-line the beneficial owners (called individuals with significant control in the legislation) but, failing that, there should only be the ability for the public to search by company name, and not the implementation of a search by name of individuals so as to obtain a list of all companies in which they are involved: this would constitute a serious invasion of privacy.

Neal Armstrong. Summary of STEP Canada, 21 February 2024 submission to Genevieve Gobeil, Acting Senior Policy Manager, Innovation, Science and Economic Development Canada entitled “Re: Bill C-42, Canada Business Corporations Act amendments (public disclosure of the beneficial ownership register)” under CBCA, s. 21.303.

Singapore Telecom – Federal Court of Australia, Full Court finds that an independent enterprise would have agreed to allow cross-border interest to be capitalized, but not to make it contingent on cash flow

The taxpayer (“STAI”) - a wholly-owned Australian subsidiary of a Singapore public company - purchased in June 2002 all the shares of an Australian telecommunications company from a Singapore sister company (“SAI”). SAI provided $5.2 billion of vendor financing pursuant to a note facility that had a term of 10 years and provided for interest at the one year bank bill swap rate from time to time plus 1%. However, SAI had the right to choose to defer the payment of the interest, which it did for the first tax year given the initial low cash flow of STAI.

Under a loan amendment made at the end of the first taxation year (on March 31, 2003), the accrued interest was forgiven, a profitability benchmark was introduced so that no interest would be payable unless that benchmark was met and the (now contingent) rate of interest was increased by a further 4.552% per annum of the principal. A further amendment made on March 30, 2009 replaced the variable interest rate with a fixed rate of 13.2575% for the balance of the loan term.

The Commissioner applied the Australian transfer-pricing rules (which referenced the related-person Article of the Singapore-Australia Treaty, and tested whether conditions operated between the two enterprises (STAI and SAI) in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another) to substantially reduce the interest claims of STAI for its tax years ending on 31 March 2011, 2012 and 2013.

The primary judge had found that independent enterprises in the positions of SAI and STAI might have been expected to have agreed at the time of the notes’ issuance that the interest rate applicable to the notes would be the rate actually agreed (the swap rate plus 1%) and that such interest rate could be deferred and capitalized. This interest rate took into account that, in such circumstances, there would be a guarantee by the parent, given that it would not be commercially rational to bear the significantly higher interest rate that would have been required without such a guarantee, and it would have been reasonable for a party like SAI to seek security. Furthermore, no guarantee fee should be imputed as there was no evidence that under the hypothetical conditions the parent would have charged such a fee.

In addition, an independent party in the position of SAI would not have agreed to make the changes contained in the two amendments.

The Full Court found no reversible error in the findings of the primary judge. It rejected the contention of STAI that the amount of interest actually paid over the 10 year period was equal to or less than that which might be expected to have been paid between independent parties in similar circumstances over the same period, as the transfer-pricing standard was required to be met on a tax year by tax year basis – and the Commissioner had the discretion to adjust the interest for earlier years upwards. Regarding the 2003 amendment, it noted the primary judge’s finding that there did not appear to be any commercial rationale for it, and that it had been implemented to avoid withholding tax. It noted that it was consistent with applying the independent enterprises hypothesis having regard to the circumstances of each enterprise to impute that the creditor (SAI) would have required a parent guarantee for a $5.2 billion loan.

Neal Armstrong. Summary of Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29 under Treaties – Income Tax Conventions – Art. 9.

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