Subsection 141.01(2) of the Excise Tax Act (“ETA”) deems a property or service acquired for use in a business to be for use in commercial activities only to the extent that it is used in the making of taxable or zero-rated supplies. On the other hand, subsection 141.1(3) provides that any action of a person in connection with the acquisition, establishment, disposition, or termination of a commercial activity is deemed to occur in the course of commercial activities. An apparent conflict therefore exists where a property or service is acquired by a registrant in connection with the acquisition, establishment, disposition or termination of a commercial activity, but where taxable supplies have not yet been made or have ceased: a registrant is deemed to have incurred the property or service in the course of commercial activities by subsection 141.1(3), but also deemed to have incurred same in the course of non-commercial activities by subsection 141.01(2).
Tax & Trade Blog
A New Housing Rebate (“NHR”) is available under ss. 254(2) of the Excise Tax Act (“ETA”) to enable those who qualify to obtain a rebate of GST/HST paid on the purchase of a new residential property. To qualify para. 254(2)(b) says a “particular individual” must acquire a property for use as a primary place of residence of that individual or a family member.
In Cheema v. The Queen, 2016 TCC 251, the Tax Court of Canada (“TCC”) held that based on the general principle that a bare trust is considered a non-entity for tax purposes, a guarantor that signs an agreement of purchase and sale as a bare trustee for the beneficial owners was not a “particular individual”.
The TCC decision was recently overturned by the Federal Court of Appeal (“FCA”) in Cheema v. The Queen, 2018 FCA 45 (“Cheema”) where a 2-1 majority held that a bare trustee was a “particular individual”.
The term "arranging for", which is not statutory defined, is generally interpreted to include activities performed by financial intermediaries such as agents, brokers and dealers in financial instruments. If it is determined that an intermediary is providing a supply of a financial service under paragraph (l) of "arranging for" a service (and not excluded by any of paragraphs (n) to (t)) of the definition of “financial service” under section 123(1) of the Excise Tax Act (“ETA”)), the service is exempt under Part VII of Schedule V of the ETA. In Barr v. The Queen (2018 TCC 86), the Tax Court of Canada (“TCC”) determined that the activities performed by the brokers in relation to a private sale of a business were not exempt from GST/HST as “arranging for” services and, therefore, the commission received by the brokers was subject to GST/HST.
In Canada, most financial services are exempt from tax under the Excise Tax Act (“ETA”). This means that financial institutions cannot charge GST/HST and cannot claim input tax credits (“ITCs”) to recover the GST/HST that they have paid to provide these exempt financial services.
The inability to claim ITCs could incentivize financial institutions to purchase goods and services in non-harmonized provinces (where only the 5% GST would normally apply) to the detriment of harmonized provinces. To prevent this from happening the ETA and the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations(“SLFI Regulations”) outline special attribution method rules (the “SAM rules”) under which Selected Listed Financial Institutions (“SLFIs”) must determine their provincial HST component based on where they supply the exempt financial services rather than where they purchase their inputs. In this context, net tax is calculated using “attribution percentages” that are based on the type of financial institution.
The Federal Court of Appeal (“FCA”) recently dealt with these complex SAM Rules in Farm Credit Canada v. Canada, 2017 FCA 244. In this case, the Appellant was a federal Crown corporation that provided specialized financial services to the farming industry. Unlike most of its private financial institution competitors, the Appellant did not accept or fund its loans from public deposits.
When a corporation finds itself in the midst of huge potential tax liability, that is often not the end of the story for the various parties involved. Directors may find themselves pursued for civil director’s liability for any taxes, interest or penalties remaining unpaid by the corporation, and directors, officers, employees and other involved parties may also find themselves being pursued by the CRA for possible criminal offences, and being charged criminally pursuant to section 327(1)(c) of the Excise Tax Act (the “ETA”). Criminal charges will generally follow any situation where the CRA is of the view that the corporation by dishonest means, sought to evade payment or remittance of the GST/HST and/or repurposed the funds to serve its own uses. In these instances, the CRA will be looking to the operating minds of the corporation, and any other persons (e.g., directors, officers, employees, agents, aiding and abetting parties) having a hand in the criminal activities (the “Underlying Parties”).
If convicted, the Underlying Parties are subject to their own fines, and could also face both a fine and imprisonment.
While the CRA often has a very low threshold for what it considers “criminal activity”, a recent Nova Scotia Provincial Court (the “NSPC”) decision appears to confirm that a person’s “suspicious conduct” alone may be insufficient to ground a criminal conviction for “tax evasion”.
When an aircraft that is owned by a corporation primarily for business purposes is used by an employee or shareholder for personal purposes, the resulting benefit is taxable and must be included in computing the income of the employee or shareholder.
Over the past few years the Canada Revenue Agency (“CRA”) has been increasingly auditing not only the owners of corporate aircraft, but also their employees and shareholders for the GST/HST and income tax treatment of the personal use of corporate aircraft. Many of these audits have resulted in reassessments under which the CRA has assessed or increased the taxable benefits attributable to the employees and shareholders while also deducting a corresponding portion of operating expenses and denying input tax credits to the corporation.
The CRA’s policy on the taxation of corporate aircraft used for personal purposes used to be clearly outlined in interpretive bulletin IT160R3. Under IT160R3, the applicable taxable benefit was generally assessed at the cost of a first class airline ticket for a regularly scheduled flight to the same destination.
That said, since IT160R3 was cancelled on September 30, 2012, the CRA has not yet finalized a clearly articulated policy on the personal use of corporate aircraft. A draft CRA interpretation has however been released which if adopted would dramatically change the way that these taxable benefits have historically been calculated.
Under the new proposed CRA interpretation, where an employee or shareholder of a corporation can control access and use of the corporate aircraft for personal use, the applicable taxable benefit to the employee or shareholder would be calculated as the sum of an attributable “Operating Benefit” and an “Available For Use Benefit” as follows:
- Operating Benefit: Proportionate share of the calendar year operating costs (i.e. variable & fixed costs) of an aircraft (excluding depreciation, capital cost allowance & interest); plus
- Available For Use Benefit: Pro-rated share of the original capital cost of the aircraft based on a prescribed rate of interest and the number of flying hours for personal use versus the number of flying hours for business use during the calendar year.
Since this new draft interpretation was released the Canadian Business Aviation Association (“CBAA”) has been in talks with the CRA to address its concerns over the new proposed CRA interpretation. To illustrate the potential impact of the new interpretation, the CBAA has used theexample of an aircraft with an original capital cost of $30 million, annual operating costs of $1 million, and a 6% prescribed rate of interest, that is flown for 80 hours of business use and 20 hours of personal use by a single employee or shareholder.
Under the CRA’s new proposed interpretation a total of $560,000 would need to be included in the income of the employee or shareholder as a taxable benefit: 20% of $1,000,000 ($200,000) plus 20% of 6% of $30,000,000 ($360,000).
Under this hypothetical scenario, no corporate deduction would be available for the available for the “Available For Use Benefit” portion which is meant to approximate the opportunity cost to the corporation of the capital used to purchase the aircraft, which the CRA believes is a personal benefit to the employee or shareholder. The “Operating Benefit” portion on the other hand should be deductible in the hands of the corporation to the extent that an employee receives the benefit as part of their employment agreement with the corporation. However, this “Operating Benefit” portion would likely not be deductible where it is received by an individual in his/her capacity as a shareholder.
While the CRA’s proposed interpretation has not yet been finalized, this proposal appears to have already spooked the corporate aircraft industry. In fact, the CBAA has estimated that uncertainty surrounding the taxation of the personal use of corporate aircraft has led to between $300-500 million in new corporate aircraft purchases being put on hold.
On the substantive application of income taxes and the GST to these situation, the CRA’s aggressive auditing in this area has yet to be fully tested in the courts, and there is substantial reason to believe that it is far too aggressive in the circumstances.
Have you been audited by the CRA for corporate aircraft use? If so contact us here.
On December 13, 2017, the CRA released GST/HST Memorandum 16-5 outlining its new GST/HST Voluntary Disclosure Program (“GST/HST VDP”) (IC00-1R6, Voluntary Disclosures Program which was released around that same time outlines the new Income Tax VDP). The new GST/HST VDP is a marked departure from the present VDP that it will replace as of March 1, 2018.
A taxpayer who ceases to be GST/HST registrant can be hit with a hefty tax bill due to subsection 171(3) of the Excise Tax Act (the “ETA”), which in effect triggers a deemed disposition, which with other provisions in the ETA, forces the person ceasing to be a registrant to self-assess GST/HST on the fair market value of any remaining property.
This is an often over-looked consequence of the wind-up of commercial activities, and is aimed at putting such a business on the same footing as any other person acquiring property for non-commercial activities: to effectively have acquired that property on a fully GST/HST paid basis.
A recent case illustrates this concept, as well as the trouble that can come with pre-mature cancellation of one’s GST/HST registration number (which does not necessarily equate to ceasing to be a “registrant”).
After the recent decision of the Federal Court of Appeal (“FCA”) in Canada v. Callidus Capital Corporation, 2017 FCA 162 (“Callidus”), any secured creditors dealing with debtors that also have CRA issues, should immediately seek professional advice about the implications of this case before acting on their security interests to seize funds or property.
The reason for this gratuitous advice follows!
Subject to a few narrow exceptions, there are special income tax and GST/HST provisions giving the CRA super-priority to certain tax amounts in the possession of a tax debtor. Specifically, unremitted GST/HST and unremitted income tax withholdings are both subject to a “deemed trust” in the hands of the taxpayer under special provisions in Excise Tax Act (ETA) and the Income Tax Act (ITA). When funds or property of a tax debtor are paid over or seized by a tax debtor’s secured creditors that deemed trust remains intact, and the CRA holds a “super-priority” over those funds and that property.
In the past, secured creditors took the position that these rules and the “super-priority” disappeared on the subsequent bankruptcy of a debtor.
However, the Federal Court of Appeal in Callidus held that a tax debtor’s bankruptcy does not extinguish the Crown’s deemed trust over assets that were received or obtained by a secured creditor prior to the tax debtor’s bankruptcy. More importantly, the FCA confirmed that secured creditors in these situations remained personally liable to the CRA for the tax debtor’s unremitted GST/HST and unremitted source withholdings, up to the value of the assets received or realized upon.
In Canada, the CRA can often pursue a corporation’s directors for unpaid tax debts of the corporation. But there are certain “pre-conditions” that must be met.
One of these, which rarely gets any attention at all is the requirement that “a certificate for the amount of the liability of the corporation [be] registered in the Federal Court… and execution for that amount [be] returned unsatisfied in whole or in part”: see section 323(2)(a) of the Excise Tax Act (ETA) and section 227.1(2)(a) of the Income Tax Act (ITA).
Historically, the Courts have considered that these provisions do not impose an obligation upon the CRA to make reasonable efforts to search for assets of a corporate debtor; rather, all the CRA needs to do is “act in good faith”: see Barrett (2012 FCA 33).
In Tjelta (2017 TCC 187), the Tax Court of Canada (TCC) was asked to determine what the FCA meant in respect of the CRA’s good faith requirement.
Not much it seems!
A director can defeat personal liability for his/her corporation’s tax debt by establishing that the director’s assessment was made more than two years after he/she has ceased to be a director of the corporation (section 325(5) of the Excise Tax Act (“ETA”); section 227.1(4) of the Income Tax Act). What a director needs to do in order to demonstrate that there was an effective resignation? As discussed in the following cases, an objectively verifiable communication of a resignation to the corporation is required and that any mess up in the requirements of Ontario’s Business Corporations Act (“OBCA”) will affect the efficacy of the resignation. When in doubt, it is advisable for directors to seek legal advice.
The TCC applied fundamental principles of statutory interpretation to conclude that the supply of police services by the Ontario Provincial Police (“OPP”) to the 407 ETR Concession Company Limited (“407 ETR”) constituted an exempt supply of a “municipal service” under section 21.
In The Great-West Life Assurance Company v The Queen (2016 FCA 316) [“Great-West Life”], the Federal Court of Appeal upheld the TCC’s decision that services related to processing claims for drug benefits were not financial services, and so not exempt from GST/HST.
Section 141.1(3) of the of Excise Tax Act (“ETA”) broadens the scope of what is considered to be in the course of commercial activities to activity done “in connection with” extraordinary transactions such as starting and winding-up commercial activities. The Tax Court of Canada (“TCC”), in Onenergy Inc. v. The Queen (2016 TCC 230), discussed how the section should be interpreted.
The TCC concluded in Rojas (2016 TCC 177) that the taxpayer’s mortgage-related services were exempt from HST as financial services under ETA subsection 123(1) and not taxable as administrative services provided to a brokerage firm.
The taxpayer was a real estate agent and also assisted clients in obtaining mortgages on the properties they wished to purchase. Because she provided mortgage services, Ontario required her to be licensed as a mortgage broker and also to obtain registration under a mortgage brokerage firm’s umbrella.
For years, the CRA has consistently assessed taxpayers for GST/HST and interest in circumstances where although there was technical non-compliance with the rules, there was no true financial impact to the government. Examples of such situations (e.g. so called “wash transactions”) would include the wrong person collecting and remitting the GST/HST in a closely related group, or GST/HST not being collected in circumstances where the recipient would have been entitled to a full Input Tax Credit (“ITC”) in any event.
The practice of demanding interest for monies that the CRA already had in its possession, albeit received from another person, is viewed as patently unfair by many of the taxpayers so assessed. In the recent GST/HST case Gordon v AGC (2016 FC 643), the Federal Court put into issue the fairness of the CRA’s approach, and found that the CRA must consider waiving interest in these circumstances on a case by case basis.
In light of the inherent risks of serving as director of a corporation, business owner-operators may be tempted to appoint their spouse or family member as the sole director of their corporation, despite the fact that that person may be completely uninvolved with or unknowledgeable about the corporation’s operations. This is primarily done with a view to “creditor-proofing”. However, as the Federal Court of Appeal (FCA) decision of Constantin v. The Queen (2013 FCA 233) illustrates, this strategy is far from invincible when it comes to GST/HST remittances.
Input Tax Credits (“ITCs”) are typically not available for “holding companies” that exist solely to hold shares or indebtedness of another company due to the fact that taxpayers are only entitled to ITCs in respect of tax paid on property or services acquired in the course of commercial activities. However, section 186(1) of the Excise Tax Act contains a special rule allowing a company to claim ITCs in respect of expenses “that can reasonably be regarded as having been so acquired for consumption or use in relation to shares of the capital stock, or indebtedness, of another corporation that is at that time related to” the company, in certain instances.