Further to the announcement on March 27, 2020 that GST/HST and Customs
Duties payment deadlines would be extended due to the COVID pandemic, the
Canada Revenue Agency has provided some additional guidance in the form of a
Question and Answer document posted on the Canada Revenue Agency website.
The document deals with the delays granted to payments of tax, but also to questions of the processing of returns, the payment of refunds and the granting of rebates. One of the key things for all taxpayers to remember is that the due dates for the filing of returns has not changed, only the requirement to make payments of tax without incurring interest charges or penalties has changed. Excise taxes and duties are all still due at the ordinary times.
Do not hesitate to contact us if you need further information about the changes to your tax obligations during the COVID Pandemic.
On March 18, 2020, the Canadian government announced economic measures to help stabilize the Canadian economy in response to the COVID-19 pandemic. These measures are intended to provide up to $27 billion in direct support to Canadian workers and businesses. This newsflash will provide a brief summary of the key tax measures that were included with this announcement. Similar measures were announced on March 17, 2020 by the Quebec government. Fasken commentary on the Quebec measures can also be found on our website.
Tax Return Filing Deadlines
With 2019 tax return filing deadlines approaching, the Canada Revenue Agency (“CRA”) will defer the filing due date for the 2019 tax returns of individuals, including certain trusts. For certain individuals (other than trusts), the return filing due date will be deferred from April 30 until June 1, 2020. Self-employed individuals (and their spouses) are unaffected by these measures as the filing due date for 2019 tax returns remains June 15, 2020.
For trusts having a taxation year ending on December 31, 2019, the return filing due date will be extended from March 30, 2020 to May 1, 2020.
Upcoming Income Tax Liabilities
CRA will permit all taxpayers (including businesses) to defer, until after August 31, 2020, the payment of any amounts on account their income tax liabilities that become owing on or after March 18, 2020 and before September, 2020. This relief applies to income tax balances due, as well as instalments on account of such taxes. CRA will not charge interest or penalties on these amounts during this period.
It should be noted that the timing of payment of other Canadian taxes including GST/HST, payroll taxes and non-resident withholding taxes are not deferred.
Suspension of Audit Activity
CRA will not contact any small or medium businesses to initiate any post assessment GST/HST or income tax audits for the next four weeks (ending April 15, 2020) and the CRA will temporarily suspend audit interaction with taxpayers and representatives for the “vast majority of businesses”.
Other Tax Proposals
Unlike the administrative relief described above, some of the measures announced require Parliamentary approval. The Canadian government has proposed to provide a special payment by early May 2020 through the Goods and Services Tax credit (“GSTC”). The proposal is to double the maximum annual GSTC payment amounts for the 2019-20 benefit year. The Minister of Finance (Canada) estimates that the average increase to income for those benefiting from this measure will be approximately $400 for single individuals and nearly $600 for couples.
The Canadian government is also proposing to increase the maximum annual Canada Child Benefit (“CCB”) payment amounts for the 2019-20 benefit year by $300 per child.
Finally, these measures contain a proposal to provide “eligible small employers” a wage subsidy for a period of three months. The announcement states that eligible small employers will include corporations eligible for the small business deduction, as well as non-profit organizations and charities but provides no further specifics. The proposed subsidy is to be equal to 10% of remuneration paid during that period, up to a maximum subsidy of $1,375 per employee and $25,000 per employer. The announcement does not stipulate when the three month period will begin but provides that eligible businesses will be able to deduct the amount of such subsidy from the income tax withholdings that they would otherwise remit in respect of their employees’ remuneration.
Canada’s prime minister indicated that all of the major political parties in Parliament support these measures and will likely reconvene Parliament to approve them in the coming days.
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
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, 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.
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”). A year
later, Alta Lux sold the shares of Alta Canada to a third party at a
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
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
The Canada Revenue Agency reassessed Alta Lux on the
basis that the Treaty exemption did not apply and raised the GAAR in the
Tax Court of
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, 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
Federal Court of Appeal
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
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
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.
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:
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. In the meantime, taxpayers may need to rely on rulings and other administrative positions for guidance.
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
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.
On July 27, 2018, the Department of Finance announced draft legislation to amend the GST/HST holding corporation rules in section 186 of the Excise Tax Act (Canada) (“the ETA”), effective on and after July 27, 2018. This article summarizes the background, the proposed rules, and related considerations for corporate groups that rely on the rules in section 186 to claim input tax credits (“ITCs”).
For the most part, the proposed changes focus on subsection 186(1) of the ETA, which generally allows a holding corporation to claim ITCs in respect of GST/HST expenses where the holding corporation and another corporation are “related” as defined in subsection 126(1) of the ETA (“the Related Test”), and the GST/HST expenses can reasonably be regarded as having been acquired for consumption or use in relation to shares or debt of the related corporation (“Purpose Test”). All or substantially all of the property of the related corporation must also be for consumption, supply or use exclusively in the course of its commercial activities (“Property Test”). While both the holding corporation and the related corporation must be corporations, only the holding corporation is required to be resident in Canada and registered for GST/HST.
Over the years, the Canada Revenue Agency (“the CRA”) interpreted the Purpose Test in a manner that significantly limited the scope of subsection 186(1). For example, the CRA’s view as expressed in GST/HST New Memorandum 8.6, “Input Tax Credits for Holding Corporations and Corporate Takeovers”, November 2011, example #3, was that if a parent corporation raises capital by issuing its own shares in order finance the purchase of additional shares in a related corporation, related expenses would be “for consumption or use in relation to HoldCo issuing shares of its capital stock (the first order of supply) and not for consumption or shares in relation to the shares of [the related corporation]” as required to claim ITCs under subsection 186(1).
Practitioners and taxpayers generally took a broader view of subsection 186(1) based on the jurisprudence, including the Tax Court of Canada’s informal decision in Stantec Inc. V.R.,  G.S.T.C. 137 (TCC). In the absence of a binding decision from the courts on the scope of this provision (the Tax Court of Canada’s Act provides that an informal procedure judgement is not to be treated as precedent in any other case), the scope of subsection 186(1) remained the subject of dispute.
While the proposed changes address some of these issues, they go beyond clarifying the scope of the Purpose Test, and essentially replace it with a detailed set of rules. If the proposed legislation is enacted in its current form, ITC eligibility will no longer turn on whether the inputs “can reasonably be regarded” as being in relation to the shares or debt of a related corporation, but on whether the detailed and specific requirements of paragraph 186(1)(a), 186(1)(b) and 186(1)(c) are met.
Operating Corporation Test
In each case, in order for GST/HST expenses incurred by a holding corporation to be recovered under subsection 186(1), the “operating corporation” test must be met. These requirements are also found in the current version of subsection 186(1), but are being moved into a new provision under the proposed rules.
Pursuant to new subsection 186(0.1) of the ETA, a particular corporation (“Subsidiary”) qualifies as an “operating corporation of another corporation” if the following conditions are met:
1. The Subsidiary is “related” as defined in subsection 126(2) of the ETA to another corporation (“ the Parent”), and 2. All or substantially all of the property of the Subsidiary is property that was last manufactured, produced, acquired or imported by the Subsidiary for consumption, use or supply by the Subsidiary exclusively in the course of its commercial activities.
The test for when two corporations are “related” for these purposes is defined in subsection 126(2) and looks to whether the corporations are related pursuant to subsections 251(2) to (6) of the Income Tax Act (Canada). As discussed further before, the Department of Finance has requested comments on whether this test should be changed to a “closely related” test instead.
For purposes of determining whether an input is for consumption, use or supply exclusively in the course of commercial activities, the CRA’s view, as summarized in New Memorandum 8.6, supra, is that “‘exclusively’ generally means 90% or more for non-financial institutions and 100% for financial institutions.”
Under the proposed rules, the underlying expenses must also fall under one of new paragraphs 186(1)(a), 186(1)(b) or 186(1)(c) in order to qualify for ITCs. In brief, these provisions would allow ITCs to be claimed for expenses incurred in respect of a Subsidiary that meets the above Operating Corporation Test (“Qualifying Subsidiary”) in the following circumstances:
a) Proposed paragraph 186(1)(a) generally provides for ITCs on expenses incurred by the Parent to dispose of, obtain or hold, shares or indebtedness of a Qualifying Subsidiary, or on expenses incurred by a Qualifying Subsidiary to issue, redeem, convert or otherwise modify same.
b) Proposed paragraph 186(1)(b) generally provides for ITCs in relation to expenses incurred by the Parent to raise capital to the extent the proceeds are transferred for shares or debt to a Qualifying Subsidiary for use exclusively in the course of its commercial activities. The amount claimed under this provision would need to be pro-rated as appropriate if only a portion of the proceeds raised are transferred to a Qualifying Subsidiary or the Qualifying Subsidiary does not use the proceeds exclusively in the course of its commercial activities.
c) Proposed paragraph 186(1)(c) generally provides for ITCs in relation to expenses incurred by the Parent for the purpose of carrying on its activities if all or substantially all (generally understood to mean at least 90%) of Parent’s property is shares, or indebtedness of, Qualifying Subsidiaries unless (i) the expenses were incurred for activities that primarily relate to investments in entities other than Qualifying Subsidiaries, or (ii) the expenses relate to the making of an exempt supply by Parent, other than the financial services that are listed in clauses 185(1)(c)(ii) (A) to (E). The enumerated financial services generally include dealings in shares or debt of a Qualifying Subsidiary or Parent, guarantees in respect of same, the payment or receipt of related dividends or similar amounts, as well as underwriting of shares or indebtedness of a Qualifying Subsidiary.
Section 186 is an important provision, as businesses commonly operate through multiple legal entities, and Canada’s GST/HST regime does not have tax grouping or VAT grouping unlike other jurisdictions. In the absence of section 186 (and other relieving provisions), businesses that operates through multiple legal entities (and incur expenses in respect of non-GST/HST registered subsidiaries that engage in commercial activities outside Canada, for example) would routinely incur unrecoverable GST/HST.
The draft amendments are helpful in resolving long-standing disputes on certain types of costs, including expenses incurred by the Parent to raise its own capital to in turn invest in shares or debt of its subsidiary. At the same time, the proposed rules include new Purpose Test requirements, which raise new questions. For example, while proposed paragraph 186(1)(b) allows ITCs in relation to expenses incurred by the Parent to raise capital, this is only to the extent that the proceeds are transferred for shares or debt to a Qualifying Subsidiary for use exclusively in the course of its commercial activities. It is not clear in what timeframe this transfer of proceeds must occur, and what will be sufficient to meet the requirement that the proceeds be for use by the Subsidiary exclusively in the course of commercial activities.
Other Potential Changes to Section 186
Concurrent with the release of the proposed rules, the Department of Finance announced that it is considering whether the long-standing “related” test currently included in proposed subsection 186(0.1) of the ETA should be replaced with a “closely related” test, consistent with other GST/HST rules that require two corporations to be “closely related” to be treated as one person. This change would require 90% common ownership instead of 50% common ownership under the current rules and would significantly reduce the scope of subsection 186(1).
Also, the rules in section 186 currently only apply where both the parent and related person are corporations. The Department of Finance is considering whether these rules should be expanded to partnerships and trusts.