Author: Kathryn Walker

Employee Home Office Expenses – Allowances, Reimbursements and Deductibility

With the increase in working at home arrangements due to current events, employers and their employees may have questions about the tax treatment of home office expenses for these employees.

Generally, an employer can compensate an employee for home office expenses by way of an allowance or a reimbursement. An employee can also be given an “accountable” advance which is treated as a reimbursement assuming that the employee can provide itemized receipts and the balance is returned to the employer.

If an employee receives an allowance or if he or she pays for the expenses out-of-pocket, then the expenses may be deductible subject to certain requirements discussed below. If an allowance or reimbursement is considered a taxable benefit and not deductible to the employee, the employer can mitigate the cost to the employee by compensating the employee for the additional tax but will have to do so on a “gross up” basis as paying an employee’s tax is also itself a taxable benefit.

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Alta Energy: FCA Confirms that Treaty Shopping is not Abusive (for now …)

On February 12, 2020, in Canada v Alta Energy Luxembourg S.A.R.L. (2020 FCA 43), the Federal Court of Appeal (“FCA”) unanimously held that the general anti-avoidance rule (“GAAR”) did not deny a capital gains exemption claimed by a Luxembourg holding company under the Convention between the Government of Canada and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (the “Treaty”) following a disposition of “taxable Canadian property” that consisted of shares of a wholly-owned Canadian subsidiary that principally derived its value from “Canadian resource property”.

Although the formation of the Luxembourg holding company and its subsequent acquisition of the subsidiary’s shares were tax-motivated, the FCA stated that treaty shopping, in itself, does not trigger the application of the GAAR. It found that the text, context and purpose of the relevant Treaty provisions,[1] as mutually chosen by Canada and Luxembourg, were not frustrated by the avoidance transactions at issue. It concluded that the tax-free result was therefore appropriate in the circumstances.

Background Facts

Alta Energy Partners, LLC (“Alta US Holdco”), a Delaware limited liability company, formed Alta Energy Partners Ltd. (“Alta Canada”) for the purpose of developing shale oil and natural gas properties in Alberta.

A restructuring was implemented after it was discovered that the US holding company structure exposed foreign investors to Canadian income tax. To fix this, ownership of Alta Canada was transferred to a newly-formed Luxembourg holding company, Alta Luxembourg S.A.R.L. (“Alta Lux”).[2] A year later, Alta Lux sold the shares of Alta Canada to a third party at a substantial gain.

It was not disputed that the shares of Alta Canada principally derived their value from Canadian resource property and, as a result, were “taxable Canadian property”. However, Alta Lux took the position that the capital gain was not taxable in Canada due to the exemption set out in Article 13(4) of the Treaty, which provides as follows:

4. Gains derived by a resident of a Contracting State from the alienation of:

(a) shares (other than shares listed on an approved stock exchange in the other Contracting State) forming part of a substantial interest in the capital stock of a company the value of which shares is derived principally from immovable property situated in that other State; […]

may be taxed in that other State. For the purposes of this paragraph, the term “immovable property” does not include property (other than rental property) in which the business of the company […] was carried on; and a substantial interest exists when the resident and persons related thereto own 10 per cent or more of the shares of any class or the capital stock of a company.

The Canada Revenue Agency reassessed Alta Lux on the basis that the Treaty exemption did not apply and raised the GAAR in the alternative.

Tax Court of Canada

At the Tax Court of Canada, the Crown argued that the Treaty exemption did not apply because Alta Canada did not carry on activities in its shale property, as it was generally set aside for future drilling and extraction. Failing that, it argued that the exemption should be applied on a licence-by-licence basis[3], with the exemption only qualifying for those sections of the resource reserve that had drilling and extraction activities.

The Court dismissed these arguments, largely on the basis of a government position paper that contradicted the Crown’s restrictive interpretation, and the commercial reality of resource exploration and development. Accordingly, it held that Alta Lux was entitled to claim the exemption under Article 13(4) of the Treaty.

With respect to the GAAR, the parties agreed that the restructuring of Alta Canada under Alta Lux resulted in a tax benefit and was an avoidance transaction in the sense that it could not be said to have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit. The only dispute was whether the restructuring resulted in a misuse or an abuse of the Income Tax Act (Canada) (the “Act”) and/or the Treaty.

The Crown argued in the affirmative because Alta Lux (i) was created for the sole purpose of avoiding Canadian income tax on the capital gain; (ii) was merely a conduit used to pass on the tax exemption to its ultimate shareholders who were not entitled to claim Treaty benefits themselves; and (iii) paid no tax in Luxembourg.

The Court ruled that there was no misuse or abuse of the Act because, having found that the Treaty exemption applied, the Act operated as intended (i.e., the Alta Canada shares were “treaty-protected property” and therefore not taxable in Canada).

The Court also held that the Treaty provisions were not misused or abused. It stated that there could be no misuse or abuse of the Treaty exemption in Article 13(4) if Alta Lux was a resident of Luxembourg for the purposes of the Treaty (which the Crown did not challenge) and all of the other requirements of the exemption were met. The Court also stated that the absence of foreign tax paid was not relevant to the GAAR analysis, and there was no evidence to support the Crown’s claim that Alta Lux was acting as agent (i.e., a conduit) for its ultimate shareholders.

Federal Court of Appeal (“FCA”)

The only issue before the FCA was whether the GAAR applied to Alta Lux’s use of the Treaty exemption.

The FCA rejected the Crown’s suggestion that there had been an abuse of the Treaty, on the basis that the purpose of the Treaty exemption was to encourage entities who have the potential to realize income and have commercial and economic ties in Luxembourg to invest in Canada.

First, it did not accept that a Luxembourg taxpayer must make an investment in a Canadian company in order to claim the exemption. Second, the FCA did not accept that a taxpayer may only access the exemption if it actually pays tax on the relevant capital gain in its country of residence. And third, the FCA did not accept that the exemption should only benefit Luxembourg residents who have commercial or economic ties to Luxembourg.

The FCA held that the object, spirit and purpose of the Treaty exemption are no broader than its text, such that a Luxembourg entity will qualify for the exemption if: (a) it is a resident of Luxembourg for the purposes of the Treaty, (b) it holds a “substantial interest” in the corporation the shares of which are disposed of, and (c) the value of the corporation’s shares is principally derived from immovable property (other than rental property) situated in Canada in which the corporation’s business is carried on. Alta Lux having met all of these conditions, the FCA dismissed the Crown’s appeal.

Of equal importance, the FCA also commented on the Crown’s perceived abuse of Alta Lux’s treaty shopping. Although it acknowledged that the Department of Finance has signalled that it would take steps to curb this practice, it found that no such steps had been formally taken during the period in dispute. The FCA further stated that treaty shopping is not, in itself, abusive. In this regard, it cited with approval the TCC’s decision in MIL (Investments) S.A. (2006 TCC 460, aff’d by 2007 FCA 236), which said in part that “[t]here is nothing inherently proper or improper with selecting one foreign regime over another” and “the shopping or selection of a treaty to minimize tax on its own cannot be viewed as being abusive”. Instead, “[i]t is the use of the selected treaty that must be examined.” Having found that Alta Lux used the Treaty (and, in particular, the exemption under Article 13(4)) as the contracting states had intended, the FCA Court concluded that the application of the GAAR could not be justified in the circumstances.

Commentary

Although this decision is nothing short of a resounding victory for the taxpayer, its long-term practical impact is questionable.

Importantly, this decision was made without reference to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”) and its principal purpose test (“PPT”), neither of which were in effect at the time of the transactions in question.

The PPT is a broad anti-avoidance rule which provides that a benefit under a tax treaty shall not be granted if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the relevant arrangement or transaction, unless it is established that granting the benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.[4]

Furthermore, the MLI provides that all “Covered Tax Agreements” will be amended to include the following text (which expressly prohibits treaty shopping) in their preamble:[5]

“Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions),”. [Emphasis added.]

The MLI became effective for Canada’s tax treaties with many countries, including Luxembourg, (a) for withholding taxes on January 1, 2020, and (b) for other taxes (including capital gains taxes), for taxation years beginning on or after June 1, 2020 (which, for calendar year taxpayers, would be January 1, 2021).

The MLI raises questions about its impact on the outcome of the FCA’s decision and beyond, including the following:

  • If the MLI had been in effect at the time of the Alta Canada sale, would the result have been the same?
  • If not, what if the Luxembourg holding company structure had been implemented from the outset?
  • Will foreign courts and tax authorities apply the PPT in a consistent manner across a common set of facts?

Although the FCA’s decision may significantly curtail the Minister’s ability to challenge treaty shopping under the GAAR moving forward, the same cannot be said with respect to the PPT. The impact of the MLI, however, may not be known until many years from now, once tax assessments make their way through court systems in Canada and abroad.[6] In the meantime, taxpayers may need to rely on rulings and other administrative positions for guidance.


[1]       Article 1 (Persons Covered), Article 4 (Resident) and Article 13 (Capital Gains).

[2]       The transfer was taxable but when it occurred there was no accrued gain on the shares of Alta Canada.

[3]       Each licence gave Alta Canada rights to specific sections of the resource reserve.

[4]       MLI, Article 7(1).

[5]       MLI, Article 6(1).

[6]       The GAAR, which was introduced in Canada in 1988 and was first adjudicated by the Supreme Court of Canada in 2005 in Canada Trustco Mortgage Co., may offer a useful timeline in this regard.

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Award Winning FASKEN TAX

Kathryn Walker a tax associate in Fasken’s Toronto office has received the Canadian Tax Foundation the “Young Practitioner Award” for her 2018 article “Making or Accepting Payment in Crypto: A GST/HST Risk?”.

The award is granted annually to three tax practitioners with less than ten years of tax experience. The award is given for the best newsletter article which appeared in any of the three Canadian Tax Foundation newsletters in a calendar year and was written solely by author(s) who were young practitioners at the time of publication. 

You can read more about the award and find a link to the article on the Canadian Tax Foundation website.

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As Vaping Replaces Tobacco BC Proposes New Legislation

This month, the British Columbia Health Minister announced plans to introduce legislation that will increase the BC’s provincial tax on vaping products from 7% to 20%. In doing so, BC will become the first province to tax e-cigarettes and vaping.

In all other provinces, vaping demonstrates an interesting inconsistency in some provincial legislation: under some provincial public health legislation vaping is regulated like other tobacco use yet under provincial tax legislation vaping is not treated like tobacco and is only subject to either the provincial HST component or provincial sales tax. Thus, vaping actually provides a much more tax-effective way for a user to get a nicotine fix. Put otherwise, vaping is essentially subsidized nicotine consumption.

Vaping involves the use of a handheld electronic device that heats an “e-liquid”—sometimes called e-substance, e-oil, or e-juice—to a point where it becomes an inhalable vapour.

The e-liquid is typically composed of nicotine, a carrier substance such as glycerine, and flavouring. E-cigarettes and e-liquid are tobacco-free. Most Canadian provinces (Alberta and Saskatchewan are exceptions) have public health legislation that regulates the use of e-cigarettes in a manner that parallels the regulation of cigarettes and other tobacco products.

For example, Ontario’s Smoke-Free Ontario Act, 2017 regulates the sale, advertisement, packaging, and consumption of e-cigarettes, in some ways reproducing restrictions on tobacco use.

In Canada, both federal and provincial governments exercise jurisdiction over health. This dual jurisdiction explains why there are two layers of tobacco legislation: the provincial laws noted above and the federal Tobacco and Vaping Products Act (SC 1997, c. 13), which governs public health aspects of tobacco and vape consumption in Canada.

Although provincial public health legislation regulates e-cigarettes as it does tobacco cigarettes, provincial tax legislation does not. In all 10 provinces, tobacco sales are taxed under special tobacco tax legislation, and in most provinces tobacco sales are also subject to GST/HST. For example, in Ontario a pack of 20 cigarettes is subject to a tobacco tax of $3.30 and an additional 13 percent HST. However, vaping liquid, or e-liquid, does not come within the scope of tobacco tax legislation, which is limited to tobacco products.  As a result without new legislation, vape products escape the additional taxed levied on tobacco products.

As explained above, e-cigarettes and e-liquid are tobacco-free, and while the nicotine in e-liquid may give smokers a sensation similar to that of a traditional cigarette, the nicotine is not a tobacco product. As a result, while sales of e-cigarettes and e-liquid are subject to GST/HST, they are not subject to a special tobacco tax.

This means that now as more Canadians have shifted from traditional smoking to vaping, they are escaping the financial burden of tobacco taxation.  In turn, this means that provinces are losing their tobacco tax base. However, it is estimated that BC’s new legislation will generate roughly $10 million a year in new tax revenue.  We won’t be surprised to see other provinces follow BC’s lead.

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Tax Treatment of Cryptocurrency Mining

On August 8, 2019, the Canada Revenue Agency (the “CRA”) released an Income Tax Ruling, 2018-0776661I7, clarifying its view on the taxation of cryptocurrency miners.

The ruling responded to a taxpayer inquiry, asking whether a bitcoin miner should include the value of mined bitcoin in income at the time it is received.

Bitcoin miners have an essential role in both the creation and the maintenance of the block-chain technology, which is the foundation of bitcoin itself. When miners, using their computers, solve computation-intensive math problems on the bitcoin network, they produce or create new bitcoin. In addition, in solving the math problems, bitcoin miners verify the network’s transaction information, securing the bitcoin payment network.

One might say that miners create bitcoin, in which case mining bitcoin would not be a taxable event. Some in the cryptocurrency sector have analogized bitcoin mining with mining for gold. However, in the ruling the CRA takes the position that miners earn bitcoin, or receive bitcoin as consideration for their work in validating transactions on the block-chain, with the result that miners must include any bitcoin they mine in their income at the time it is received. In other words, the CRA ignores the “creation” element of mining.

The CRA further advises that the value of the bitcoin for tax purposes is determined by the barter rules, which in this case would require that a miner bring into income the value of the mining services rendered or the value of the bitcoin received. Since in most cases the value of the bitcoin will be more readily valued, this is the amount to be brought into income.

While many will find the CRA’s position to be obvious given the miners play a key role in servicing the blockchain, those who have relied on the gold mining analogy should note the tax consequences of the CRA position. Another interesting issue is the extent to which “miners” of other cryptocurrencies that may use other methods of creation, can rely on this ruling. In either case, the additional clarity providing by the ruling is useful to everyone working in the cryptocurrency space.

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