Reproduced here from the April 2014 Canadian Tax Highlights:

Reproduced here from the March 2014 Canadian Tax Highlights:

Amended Ontario Estate Tax

Reproduced here from the March 2013 Canadian Tax Highlights

UPDATE: The Domestic & International Tax Treatment of Crowdfunding

It seems equity crowdfunding in Ontario may become a reality much sooner than expected. Recently, Sunita Doobay wrote on the topic in the March 2014 issue of Thomson Reuters Carswell Newsletter Privately Held Companies and Taxes. Since then, regulators in six different provinces have jointly released a proposed framework that would allow companies to raise funds online for equity. Sunita has revisited the issue and summarized the proposed changes in an update to the newsletter.

The Domestic & International Tax Treatment of Crowdfunding

Crowdfunding is on everyone’s mind these days. Recently, I wrote on the topic in the March 2014 issue of Thomson Reuters Carswell Newsletter Privately Held Companies and Taxes.

Revenue from” Click” Advertising Taxable in Canada

Recently published in the ABA Section of International Law Privacy, E-Commerce & Data Security Committee Quarterly Newsletter and reproduced here:

The Canada Revenue Agency (“CRA”) was asked in CRA Views 2011-0416181E5 to opine on whether revenue generated from the sale of advertising space on a U.S. website through an independent agent situated in Canada would be subject to Canadian Income Tax. The facts are as follows.  A U.S. resident corporation operates a website that is hosted by one or more servers that are all physically located solely in the U.S. The website is managed and maintained in the U.S. The U.S. resident through an independent agent in Canada sells advertising space on its website.  U.S. situated employees of U.S. resident update the website in the U.S. to reflect the Canadian advertisers’ ads.  Residents in Canada viewing the website can click on the Advertiser’s ad to view more information.  Advertisers in turn would pay the independent agent in Canada a fee based on the number of “clicks” on their ads by customers.  Part of the fee is retained by the independent agent as fee for services and the remainder of the fee is remitted to the U.S. resident. 

In this opinion CRA was not asked to consider whether the U.S. resident was carrying on business in Canada but was asked to determine whether the portion of the revenue remitted to the U.S. resident would be subject to a 25% Canadian income tax withholding.  The CRA concluded that the revenue generated from the clicks was a direct result of the services provided by the U.S. resident and its U.S. based employees because the revenue was generated through the services performed by a non-resident person and the amount payable was dependent on the sale of such services (clause 212(1)(d)(iii)(A) of the Income Tax Act.  The amount payable however could not be characterized as royalties but according to the CRA was business income.

Where a tax treaty exists between Canada and the country wherein the non-resident taxpayer resides, Canada will cede its jurisdiction to tax to the non-resident’s country unless the business of the non-resident was carried on through a permanent establishment in Canada. Under the business services article of the Treaty, a U.S. resident earning business profits in Canada not through a Canadian permanent establishment will not be subject to Canadian income taxation. 

The CRA stated in CRA Views 2008-0279141E5 that Canada is following the OECD on the taxation of electronic commerce.  As such CRA confirmed that a website solely by itself will not constitute a permanent establishment. However a non-resident who presents a website to its Canadian customers will be considered to be carrying on business in Canada where (i)the host server is located in Canada; (ii)the business is carried on, wholly or in part, through the operation of the website on that server; (iii)the host server is at the non-resident’s disposal; (iv)the host server is more or less permanently linked to a geographic location in Canada and (v)the website is hosted by the particular computer server on a more than merely temporary or tentative basis.    The revenue earned from the click ads would therefore not be subject to Canadian income tax because it was not income generated through a Canadian permanent establishment. 

Sunita D. Doobay

Partner

TaxChambers LLP

Subsection 56(2) and a Discretionary Trust

Reprinted with permission from the Canadian Tax Foundation and published in the October 2013 edition of the Canadian Tax Highlights.

At the Foundation’s 2012 Ontario Tax Conference, the CRA was asked to comment on whether subsection 56(2) applies to the sole trustee of a discretionary trust who is also a discretionary beneficiary of trust income.  The CRA concluded that the application of subsection 56(2) was a question of fact and could thus not confirm its application to the sole trustee/beneficiary of a discretionary trust that had other discretionary beneficiaries.

In its published response, the CRA in TI 2012-0462891C6 concluded that the sole trustee was not in a position analogous to that of a corporate director who is also a shareholder and related to the other shareholders.  Income splitting is often structured so that a trust holds the common shares of a family business corporation after an estate freeze or carries on a business of providing services such as managerial services to a closely held family company.  Dividends paid on the common shares are distributed to the beneficiaries on a discretionary basis typically determined by income brackets.  Management fees earned by a trust may also be distributed on a discretionary basis. The jurisprudence supports the CRA’s conclusion that the trustee’s position is not analogous to that of a corporate director.

Subsection 56(2) is rooted “in the doctrine of “constructive receipt” and was meant to cover principally cases where a taxpayer seeks to avoid receipt of what in his hands would be income by arranging to have the amount paid to some other person either for his own benefit (for example the extinction of a liability) or for the benefit of that other person…” (Winter (90 DTC 6681)). The SCC in McClurg ([1990] 3 SCR 1020) concluded that a discretionary dividend payment does not fall within the scope of subsection 56(2). 

The purpose of s. 56(2) is to ensure that payments which otherwise would have been received by the taxpayer are not diverted to a third party as an anti-avoidance technique.  This purpose is not frustrated because, in the corporate law context, until a dividend is declared, the profits belong to a corporation as a juridical person…Had a dividend not been declared and paid to a third party, it would not otherwise have been received by the taxpayer.  Rather, the amount simply would have been retained as earnings by the company.  Consequently, as a general rule, a dividend payment cannot reasonably be considered a benefit diverted from a taxpayer to a third party within the contemplation of s. 56(2).

Although obiter in McClurg suggested that subsection 56(2) may apply if the shareholder receiving the dividend made no contribution  to a closely held corporation, the SCC in Neuman ([1998] 1 SCR 770) rejected that view. The SCC reasoned that a dividend is not paid as reward for a shareholder’s contributions but is based on the shares or capital held by her. The court recited the four McClurg conditions before a payment or transfer property  falls within subsection 56(2): the payment must be to a person other than the reassessed taxpayer;  the allocation must be at the direction or with the concurrence of the reassessed taxpayer; the payment must be for the benefit of the reassessed taxpayer or for the benefit of another person whom the reassessed taxpayer wished to benefit; and the payment would have been included in the reassessed taxpayer’s income if it had been received by him or her. Neuman concluded that a discretionary dividend was not subject to subsection 56(2) because by its very nature a dividend cannot satisfy the fourth condition in the absence of a sham or other subterfuge. Both McClurg and Neuman confirmed that subsection 56(2) cannot attribute a discretionary dividend to a closely held corporation’s director and read in an implicit entitlement requirement to the fourth McClurg condition: a director is not entitled to an undeclared dividend, which is simply retained by the corporation as retained earnings. The SCC distinguished Winter, which seemed to challenge the entitlement requirement, because it did not deal with dividend income.

The TI ignored the FCA decision in Ferrel (99 DTC 5111), which cited Neuman in support of the rights of “taxpayers [to] arrange their affairs in a particular way for the sole purpose of deliberately availing themselves of the tax reduction levies on the Income Tax Act.” The taxpayer was the settlor and sole trustee of a trust that carried on the business of providing management services to a family holding company under a written agreement; in a separate written agreement, the taxpayer agreed to provide the trust’s managerial services to the trust to the management company. The management fees earned by the trust were distributed to the child beneficiaries, who paid tax thereon.  The TCC concluded that subsection 56(2) did not apply because there was no evidence that the management fees would otherwise have been paid to the taxpayer in fulfilment of the fourth McClurg condition. And consistent with Winter, the TCC said that the beneficiaries were taxed on the distribution, even though the taxpayer was not entitled to the payment and would have been taxable on its receipt.

Although not referred to in the TI, the SCC in Stubart  ([1984] 1 SCR 536) said unanimously that a transaction should not be disregarded for tax purposes merely because it lacks an independent or bona fide business purpose.  The CRA has also said that GAAR does not apply to Neuman-type income-splitting arrangements (ITTN 16.)

Sunita Doobay

TaxChambers, Toronto