Category Archives: Canada

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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Affaire Bitton Trust : portée extraterritoriale des pouvoirs de Revenu Québec?

La récente décision de la Cour suprême du Canada dans 1068754 Alberta Ltd. c. Québec (Agence du revenu)[1] confirme le droit de Revenu Québec d’envoyer une demande péremptoire à une institution située en dehors du Québec sans que cette demande n’ait une portée extraterritoriale.

Faits

En 2014, Revenu Québec a envoyé une demande péremptoire de renseignements et de documents en vertu de l’article 39 de la Loi sur l’administration fiscale (Québec) à une succursale de la Banque Nationale du Canada située à Calgary. Par cette demande, Revenu Québec cherchait à établir le lieu de résidence de la fiducie DGGMC Bitton Trust (la « Fiducie »), qui tient un compte bancaire à cette succursale, et à déterminer si elle devait payer de l’impôt au Québec. Revenu Québec a envoyé sa demande à la succursale de Calgary plutôt qu’au Québec afin de se conformer à la Loi sur les banques (Canada), qui exige que certains documents concernant des clients des banques soient envoyés à la succursale de tenue du compte.

La Fiducie s’est opposée à la demande de Revenu Québec jusqu’en Cour suprême du Canada pour le motif qu’elle outrepassait sa compétence. Selon la Fiducie, la Loi sur les banques (Canada) exige que la succursale d’une banque doit être traitée comme une entité distincte de la banque considérée dans son ensemble. En conséquence, elle prétend que Revenu Québec a outrepassé sa compétence en envoyant sa demande à l’extérieur du Québec.

Décision

La Cour Suprême du Canada, sous la plume du juge Rowe, a rejeté l’appel de la Fiducie.

Selon la Cour, la Loi sur les banques (Canada) contraignait Revenu Québec à envoyer sa demande à la succursale de la Banque Nationale du Canada à Calgary. En se soumettant à cette obligation, Revenu Québec n’a pas agi de façon extraterritoriale. Le fait qu’une mesure prise par Revenu Québec dans l’exercice de ses pouvoirs ait des répercussions à l’extérieur du Québec ne rend pas automatiquement une telle mesure extraterritoriale.

De l’avis de la Cour, le facteur déterminant en cause était le lieu où l’exécution de la demande de Revenu Québec peut être réclamée. La Banque Nationale du Canada exerce des activités au Québec, et les exigences procédurales de la Loi sur les banques ne devraient pas empêcher Revenu Québec de transmettre une demande péremptoire à une personne faisant affaires sur son territoire.

Il est clair pour la Cour que la Banque Nationale du Canada forme une seule et même entité qui ne devrait généralement pas être distinguée de ses succursales. Les faits en cause ne justifiait pas que la succursale de Calgary soit traitée comme une entité distincte afin que les objectifs de la Loi sur les banques (Canada) soit satisfaits. C’est à la Banque Nationale du Canada que Revenu Québec a adressé sa demande, peu importe où la demande fut envoyée.

Conclusion

Il appert clairement du texte du jugement que la décision de la Cour, favorable à Revenu Québec, accorde une grande importance au fait que la Banque Nationale du Canada fait affaires au Québec. La Cour n’ayant pas statué sur la situation inverse, il y a lieu de se demander si la demande de Revenu Québec à la succursale de Calgary aurait eu une portée extraterritoriale si aucune activité n’était exercée au Québec.


[1]       2019 CSC 37.

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Update on the Status of the Multilateral Instrument in Canada

On June 21, 2019, one year after it was tabled in the House of Commons, Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting, received Royal Assent and became law. By way of background, Canada had signed the Multilateral Instrument (the “MLI”) on June 7, 2017 and had then announced its intention to adopt the minimum standards proposed by the Organisation for Economic Co-operation and Development (the “OECD”) under the Base Erosion and Profit Shifting project, as well as mandatory arbitration for tax treaty disputes.

The next step for Canada is to notify the OECD through the deposit of its instrument of ratification which is likely to be done before the end of the year. The MLI will then enter into force for Canada on the first day of the month following the expiration of a three-month period from the date of notice to the OECD. For example, if the notice is sent in October 2019, the MLI will enter into force for Canada on February 1, 2020.

The MLI provisions on withholding tax will then take effect between Canada and a treaty partner where the MLI is already in force on the first day of the next calendar year, i.e. January 1, 2021. For other taxes, such as the capital gains tax on shares meeting the real property asset valuation threshold (discussed below), the MLI will have effect for the taxable periods beginning after a six month period (or a shorter period if the contracting states notify the OECD that they intend to apply such a period), i.e. for the taxable periods beginning August 1, 2020.

As of July 4, 2019, out of the 89 countries who signed the MLI, 29 have deposited their instrument of ratification with the OECD, including Australia, Finland, France, India, Ireland, Luxemburg, Japan, the Netherlands, New Zealand, Sweden and the United Kingdom.

As indicated, Bill C-82 confirms the adoption of the minimum standards, along with other measures for which Canada had initially registered a reservation, including the two following measures which are noteworthy.

1. MLI – Article 8, paragraph 1: Dividend Transfer Transactions

Most tax treaties signed by Canada call for a reduction in the domestic withholding tax rate on dividends from 25% to 5% when the beneficial owner of the dividends is a corporation subject to corporate tax in the contracting jurisdiction that directly or indirectly holds at least 10% of the voting rights (and, in some cases, of the capital) of the Canadian corporation paying the dividend. Fulfillment of the 10% ownership test is determined when the dividend is paid.

By adopting the restriction described in paragraph 1 of Article 8 of the MLI, Canada agrees to apply the reduced withholding tax rate of 5% only if shares granting voting rights (and capital, where applicable) of at least 10% are owned throughout a 365-day period, including the day on which the dividend is paid. For the purpose of computing that period, no account shall be taken of changes of ownership that are a direct result of a corporate reorganisation, such as a merger or divisive reorganisation, of the corporation that holds the shares or the Canadian corporation that pays the dividend. This amendment will block surplus exit planning strategies where the shareholding of a Canadian corporation was modified within days prior to the payment of a dividend, which was generally easy to achieve from a Canadian tax perspective as the gain on the sale of the shares of a Canadian corporation is not taxable unless more than 50% of the value of the shares is derived directly or indirectly from real or immovable property, resource property or timber resource property situated in Canada.

2. MLI – Article 9, paragraph 1: Capital Gains from Alienation of Shares or Interests of Entities Deriving Their Value Principally from Immovable Property

Canadian domestic law stipulates a five-year test to determine taxation of a capital gain from disposition of shares or other interests in entities whose value is or was mainly (i.e. more than 50%) derived from immovable property in Canada. Thus, if, at any time during this 60-month period ending on the date of disposition of the shares, more than 50% of their value was derived directly or indirectly from an immovable property located in Canada, the capital gain from the disposition is taxable in Canada. In comparison, most tax treaties signed by Canada do not include a retroactive test. In fact, the value test is generally applied at the time of disposition. It was therefore possible, subject to the general anti-avoidance rule, to proceed with an asset “stuffing” to decrease the relative value of the immovable property in Canada below the 50% threshold before the sale.

With paragraph 1 of Article 9 of the MLI, Canada is adopting a one-year retroactive look back, i.e. Canada is reserving the right to tax the capital gain if the 50% value threshold is exceeded at any time during the 365 days preceding the disposition.

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Proposed Legislative Changes to the Taxation of Employee Stock Options in Canada

In the 2019 Federal Budget, the Canadian government outlined its proposal to introduce a $200,000 annual limit on employee stock option grants for employees of “large, long-established, mature firms”. The government takes the view that the current regime of preferential tax treatment for employee stock options does not help to achieve the policy objective of supporting younger and growing Canadian businesses, but instead, disproportionally benefits executives of large, mature companies who take advantage of the rules as a preferred form of compensation. 

In an effort to provide further clarifications to the proposed new stock options rules, the Department of Finance released a Notice of Ways and Means Motionon June 17, 2019.

Current Regime

Under the current stock option rules, pursuant to subsection 7(1) of the Income Tax Act (Canada) (the “Act”), at the time when employee stock options are exercised by an employee, a taxable benefit is added to the employee’s taxable income to the extent the fair market value (“FMV”) of the underlying shares exceeds the exercise price specified in the option agreement. However, provided that at the time of the grant, the options are not in-the-money (i.e. exercise price is not less than FMV) and, generally, common shares are issued upon the exercise of the options, the employee is entitled to claim a deduction under paragraph 110(1)(d) in the amount of 50% of the taxable benefit determined under subsection 7(1).

New Proposed Amendments

The new draft legislative proposals, if enacted as proposed, would impose a $200,000 annual vesting limit on employee stock option grants (based on the fair market value of the underlying shares at the time the options are granted) that could be entitled to receive the 50% deduction allowed under paragraph 110(1)(d). 

Under the new regime, a vesting year in respect of an option agreement is determined by either: (i) the calendar year in which the employee is first able to exercise his or her option as specified in the option agreement; or (ii) if the option agreement does not specify a vesting time, the first calendar year in which the option can reasonably be expected to be exercised.

The new annual vesting limit would not apply to employee stock options granted by “specified persons” as defined in the Act to mean: (i) Canadian-controlled private corporations (“CCPCs”); and (ii) non-CCPCs that meet certain prescribed conditions (yet to be released).

In addition, the new draft legislative proposals introduce a tax deduction for an employer who enters into an option agreement with its employee to grant non-qualified securities. The amount of deductions the employer is entitled to claim against its taxable income for a taxation year would be equal to the amount of taxable benefit its employees realize under subsection 7(1) in respect of non-qualified securities.

An employer would be entitled to claim such deductions under circumstances where the following conditions are met: (i) at the time of entering into the agreement, the employer notifies the employee in writing that the security is a non-qualified security; (ii) the employer notifies the Minister of National Revenue that the security is a non-qualified security in prescribed form filed with the employer’s income tax return in the year the agreement is entered into; and (iii) the employer is a specified person and the employees would have otherwise been entitled to claim the deduction under paragraph 110(1)(d).

In order to be entitled to claim the tax deduction, it is critical that the employer designates the options that would have otherwise qualified for a deduction under paragraph 110(1)(d) as non-qualified securities by specifying this in the option agreement.

The new draft legislative proposals will apply to employee stock options granted on or after January 1, 2020.

The federal government is currently seeking input on the characteristics of companies that should be considered “start-up, emerging, and scale-up companies” for purposes of the prescribed conditions as well as views on the administrative and compliance implications associated with putting such characteristics into legislation. Submissions of any comments with respect to the prescribed conditions for the consideration by the Department of Finance are due on September 16, 2019.

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