On June 21, 2018, the Ontario Court of Appeal handed down a decision in the case of Canada Life Insurance Company of Canada v. the Attorney General of Canada and Her Majesty the Queen in the Right of Ontario. This is a very troubling decision for taxpayers and their professional advisors. The facts are briefly as follows. The Canada Life Insurance Company of Canada (“CLICC”) and certain of its affiliates carried out a series of transactions and events in December 2007. The purpose of the transactions was to realize a tax loss to offset unrealized foreign exchange gains accrued in the same taxation year. The Canada Revenue Agency (the “CRA”) disallowed the claimed loss in the reassessment of CLICC’s taxes for 2007. Asserting that it had proceeded on the basis of erroneous advice from its tax advisor, CLICC applied to the courts for an order setting aside the transactions and replacing them with other steps retroactive to the date of the original transaction.
The problem arose because the tax loss was to be triggered by the winding up of a limited partnership. The mistake was that the general partner of the limited partnership, CLICC GP, was also wound up at the same time that the partnership was wound up. This resulted in the limited partner, CLICC, carrying on the business of the limited partnership alone within three months of the dissolution of the partnership.
CLICC originally applied for an order rectifying the transaction so as to move the winding-up of the general partnership from December 31, 2007 to April 30, 2008. The taxpayer was successful in its application before the application judge. However, the Attorney General appealed the decision. While the appeal was pending, the Supreme Court of Canada, in the case of the Fairmont Hotels, overruled previous decisions which permitted rectification. The change in law restricted the scope of the equitable remedy of rectification to the correction of written agreements. Continue Reading
In March of 2018, the province of Quebec introduced a proposal to vastly expand the requirements for non–residents of Quebec to collect and remit the Quebec Sales Tax (“QST”) on sales of services and intangible property. Although no draft legislation has yet been released, these proposals would require both Canadian and non–Canadian suppliers of intangible property or services, whether delivered through a digital platform or not, to register as a collector of the Quebec Sales Tax, and to collect, report and remit such tax on all such sales to unregistered Quebec residents.
These proposals follow the OECD recommendations designed to address the tax challenges associated with the digital economy globally, and appear to be directed primarily at B2C transactions, such that only non–residents of Quebec that make sales to unregistered Quebec resident consumers will be subjected to these new rules. Further, Quebec has indicated that there will be a $30,000 threshold (calculated on a rolling basis over the previous 12–month period), below which registration will not be required.
Although there are many layers of complexity that will need to be dealt with as the legislation is drafted, Quebec has already made it clear that the tax collected under this new system, as well as those collecting such tax, will not be treated the same as the traditional amounts of QST or the traditional QST collectors. For example, collectors under this new regime will not be entitled to recover any of their own QST costs by way of input tax refund.
Further, it appears that Quebec will also require certain digital intermediaries (e.g. a third party that provides the digital platform to enable supplies of intangibles) to register and collect the QST on such taxable supplies. This imposition of a compliance burden on such third party intermediaries, appears similar to similar compliance burdens placed on intermediaries in other value added tax jurisdictions (e.g. in Brazil, credit card companies are obligated to collect, report and remit certain sales taxes on payments made by resident Brazilians to non–resident suppliers of intangibles and services). Although we note that the Quebec proposals appear to exempt payment processors from such compliance obligations, we questions whether Quebec (and possibly Canada) will continue to move in this direction in order to more fully tax the digital economy.
As can be imagined, there will be many difficulties faced by Quebec in the implementation of this new form of QST, not the least will be ensuring compliance by non–residents. Although it is likely that Quebec will effectively be able to force compliance by Canadian suppliers that do not otherwise carry on business in Quebec, there will likely be significant challenges in enforcing such registration requirements of non–Canadian suppliers. Similarly, there will likely be significant challenges faced by such non–resident suppliers in determining whether they are making sales to consumers that are actually subject to this tax.