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Tax Court Interprets “Ownership” For Purposes Of GST/HST New Housing Rebate

In Rochefort v. The Queen (2014 TCC 34), the Tax Court of Canada provided clarity on the definition of “ownership” for the purposes of the GST/HST New Housing Rebate. Justice Campbell Miller held that “ownership” in subparagraph 254(2)(e) of the Excise Tax Act (the “ETA”) does not necessarily mean holding legal title but denotes a more expansive view of ownership.

In the case, the recently-married Mr. and Mrs. Rochefort decided to buy a new home. Unfortunately, shortly before the closing, Mr. Rochefort was advised by his bank that, due to his failure to sell his current property and his wife’s poor credit rating, the couple no longer qualified for a mortgage. Having already paid $20,000 in deposits, the couple chose to close the deal, and so they enlisted Mr. Fontaine, the nephew of Mr. Rochefort, to act as a co-signor on a mortgage from another bank.

Mr. Fontaine testified that he was prepared to help his uncle by signing whatever documents were required. Mr. Fontaine in fact signed a Fixed Rate Mortgage form, as well as a Direction re: Title, authorizing the lawyers to transfer the deed to Mr. Rochefort and Mr. Fontaine as joint tenants.  It was evident from Mr. Fontaine’s testimony that he was not entirely clear as to what he had signed, and he had no intention of ever living in, or receiving a benefit from, the property. Rather, it was clear that the new home was for the sole benefit of Mr. and Mrs. Rochefort, and Mr. Fontaine was merely assisting a family member by doing a favour.

Mr. Rochefort signed the new housing rebate in 2010 and, as a result, the developer was credited with $27,278. The Minister of National Revenue reassessed Mr. Rochefort on the basis that he was not entitled to the rebate as the definition of “ownership” in subparagraph 254(2)(e) of the ETA had not been satisfied.

The Minister argued that, under subparagraph 254(2)(e), “ownership” must be transferred to a “particular individual” (the Court noted that, where there is more than one purchaser, subsection 262(3) of the ETA makes it clear that “particular individual” refers to both purchasers). Ownership had not been transferred to Mr. and Mrs. Rochefort but had been transferred to Mr. Rochefort and Mr. Fontaine. Therefore, in the Minister’s view, this requirement had not been met.

The Tax Court disagreed. Mr. and Mrs. Rochefort were the “particular individuals” who signed the Agreement of Purchase and Sale and, thus, Mr. Fontaine was not a “particular individual” for the purposes of the ETA. The requirements in subsection 254(2) of the ETA had been met by Mr. Rochefort. The only question was whether the other “particular individual” (i.e., Mrs. Rochefort)  had ownership transferred to her as required by subparagraph 254(2)(e).

The Minister argued that “ownership” meant title to the property, and suggested that definition of owner in the Ontario Land Titles Act (i.e., an owner in fee simple) should apply for the purposes of the ETA. However, the Tax Court noted that, if the drafters of the ETA had intended ownership to mean title, they could have said as much in the ETA. The Tax Court held that “ownership” for purposes of the GST/HST New Housing Rebate must be explored in a “textual, contextual and purposive manner for a fuller meaning than simply title.”

The Court interpreted subparagraph 254(2)(e) as a timing condition – ownership happens after substantial completion. This view is consistent with the views expressed by the CRA in GST/HST Memorandum 19.3.1 “Rebate for Builder-Built Unit (Land Purchased)” (July 1998, as amended in 2002 and 2005).

The Tax Court viewed Mr. and Mrs. Rochefort as the individuals the rebate was intended to benefit. They were the buyers of the property, the individuals liable for the GST, and they took possession of the property after its substantial completion in order to reside in it as their primary residence. Moreover, Mrs. Rochefort had acquired sufficient rights to constitute ownership thereby satisfying the requirements in 254(2)(e): she had signed the Agreement of Purchase and Sale to become an owner, she had made the necessary deposits, she acted as an owner in making decisions to amend the Agreement of Purchase and Sale, she was liable for the GST, she took possession of the property with her husband, and had acted in every way as an owner by enjoying the property.

The Tax Court concluded that Mrs. Rochefort was a beneficial owner of the property and that Mr. Fontaine had agreed to hold title solely for the benefit of the Rocheforts. As a trustee, Mr. Fontaine was required to convey title to the Rocheforts on demand or to any third party at their request. “Ownership” of the property had been transferred to Mrs. Rochefort.

Accordingly, the taxpayer’s appeal was allowed and Mr. Rochefort was entitled to the GST/HST New Housing Rebate under subsection 254(2) of the ETA.

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Tax Court Interprets “Ownership” For Purposes Of GST/HST New Housing Rebate

New Guidance from the OECD on the Meaning of “Beneficial Owner” for Tax Treaty Purposes

Taxpayers and their advisors should be aware of a significant new development concerning the appropriate withholding tax rate on the payment of cross-border interest, royalties and dividends.

On October 19, 2012, the Organisation for Economic Cooperation and Development (the “OECD”) released a revised discussion draft concerning the meaning of “beneficial owner” for the purposes of Articles 10, 11 and 12 of the OECD’s model tax convention (the “OECD Model”). The discussion draft builds on the OECD’s prior discussion draft (released on April 29, 2011), which received widespread international criticism for its ambiguity and lack of meaningful guidance on this fundamental issue of international taxation.

Background

Canada’s Income Tax Act (the “Act”) requires that a Canadian company withhold 25 percent of dividends, interest and royalties paid to non-residents and remit this amount to the Canada Revenue Agency (the “CRA”) on behalf of the non-resident. However, Canada has entered into numerous bilateral tax treaties with various countries that reduce or eliminate the withholding tax. To benefit from these reductions or eliminations of Canadian withholding tax, the treaties generally require (among other things) that the recipient qualify as the “beneficial owner” of the amount paid.

Canada’s tax treaties are generally based on the OECD Model, which, together with its commentaries, generally provide that a resident of a contracting state will be the beneficial owner of an amount received from a resident of the other contracting state so long as the recipient was not acting in its capacity as an agent, nominee, fiduciary or administrator on behalf of a person not resident in that state.

However, there is surprisingly little additional insight into the intended meaning or possible interpretations of this term. There is a growing body of Canadian and international jurisprudence on the issue, with the Canadian case of Prevost Car, Inc. v. The Queen (2009 D.T.C. 5053 (F.C.A.), aff’g 2008 D.T.C. 3080 (T.C.C.)) currently serving as the high-water mark.  Nevertheless, inconsistencies remain in the manner in which different states interpret and apply “beneficial owner” (see also the earlier article by FMC’s Matt Peters on Velcro v. The Queen (2012 TCC 57)) .

OECD Guidance

Instead of clarifying the issue, the OECD’s prior discussion draft was roundly criticised for adding further uncertainty to the meaning of “beneficial owner”. In the prior draft, the OECD emphasized the desire to introduce a meaning that could be universally accepted and applied by all countries.  In this respect, the prior draft focused on assessing the recipient’s ability to have the “full right to use and enjoy” dividend, interest or royalty income and stated that a recipient will not be the beneficial owner if its powers are constrained by a contractual or legal obligation to pass the payment received to another person.  Many commentators suggested that this approach was too broad and ambiguous and left taxpayers with little certainty when structuring their affairs.  Moreover, the exact role of a country’s domestic law meaning of “beneficial owner” was left somewhat open.

The new draft attempts to clarify the issue by (i) more strongly abandoning the relevancy of any particular state’s domestic law meaning of “beneficial owner”; and (ii) providing further guidance as to what is meant by the right to use and enjoy an amount unconstrained by contractual or legal obligations.  The revised draft reviews in some detail the comments received by the OECD on it’s prior draft and explains in more detail (and through examples) the rationale behind its approach.

Next Steps

This is a controversial issue and the approach adopted by the OECD in its revised discussion draft will undoubtedly stir debate in the international tax arena.  The OECD has indicated that it will be accepting comments on the revised draft before 15 December, 2012, suggesting that another revised draft will likely be released in 2013.  Tax practitioners and their clients will need to carefully consider the approach that contained in the OECD’s revised draft and assess whether it presents any risks in their particular circumstances.

* Special thanks to Christian Orton, Articling Student, for his valuable contributions to this article. 

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New Guidance from the OECD on the Meaning of “Beneficial Owner” for Tax Treaty Purposes

Velcro Canada – Clarification on Cost Awards

In what circumstances can a party obtain a large lump-sum cost award after a favourable Tax Court decision?

That was the question considered by the Tax Court in Velcro Canada Inc. v. The Queen (2012 TCC 273), in which the Tax Court awarded the successful taxpayer a lump sum cost award of $60,000 plus disbursements. The Court’s reasoning has provided some helpful clarification on the manner in which the Court will determine the nature and amount of a cost award.

In the main appeal (Velcro Canada Inc. v. The Queen, 2012 TCC 57), the Appellant taxpayer was successful in establishing that a Dutch holding company was the “beneficial owner” of royalties paid by a related Canadian company. (See our previous commentary on the decision by FMC’s Matt Peters here.)

At the costs hearing, the Appellant argued that the Tax Court should award enhanced costs because the Appellant had been entirely successful in the appeal, the amount in issue was in excess of $9 million, the issues raised were of national and international importance, and the novelty of the issues required additional time and resources in preparing for and conducting the appeal.

The Respondent’s view was that costs should be assessed in accordance with Tariff B of Schedule II of the Tax Court of Canada Rules (General Procedure). The Respondent argued that the main issue had previously been considered in the ground-breaking case of Prévost Car Inc. v. The Queen (2008 TCC 231; aff’d 2009 FCA 57), and that the Appellant had not adduced evidence of the work and effort put into the appeal. Further, no exceptional circumstances existed that would justify the Court exercising its discretion to award costs beyond the Tariff.

The Tax Court considered the factors discussed in section 147 of the General Procedure Rules and Tariff B of Schedule II thereto, and concluded that no exceptional circumstances were required to justify a deviation from the Tariff. In fact, the discretion of the Tax Court is quite wide – the Tariff may be relied on, but only if the Court chooses to do so. The Court stated:

[16] Under the Rules, the Tax Court of Canada does not even have to make any reference to Schedule II, Tariff B in awarding costs. The Court may fix all or part of the costs, with or without reference to Schedule II of Tariff B and it can award a lump sum in lieu of or in addition to taxed costs. The Rules do not state or even suggest that the Court follow or make reference to the Tariff. …

[17] It is my view that in every case the Judge should consider costs in light of the factors in Rule 147(3) and only after he or she considers those factors on a principled basis should the Court look to Tariff B of Schedule II if the Court chooses to do so. … [emphasis in original]

The Court went on to consider the result in the proceeding (taxpayer was entirely successful), the amount in issue (more than $9 million), the importance of the issues (very important domestically and internationally), any settlement offer in writing (there wasn’t one), the volume of work (considerable effort required), the complexity of the issues (relatively straight-forward but in a complex factual matrix), and the conduct of the parties (very well pleaded and impressive presentations at the hearing). The Court awarded $60,000 plus disbursements to the Appellant.

The Court’s decision is significant because it signals an evolution in the approach to cost awards from the currently accepted practice.

As most tax litigators know, a general practice developed whereby large lump-sum cost awards were sought only in exceptional circumstances (i.e., where one party had engaged in misconduct or unnecessary procedural wrangling). The decision of Associate Chief Justice Rossiter appears to open the door to the possibility of seeking large lump-sum cost awards in any proceeding because, according to the Court, the Judge should look first to section 147 of the Rules and may, but not necessarily, look to the Tariff.

It seems that this approach accords with the Tax Court’s recent focus, and emphasis, on the importance of settlements. The parties to a tax appeal should not lightly dismiss the Court’s reasoning in Velcro Canada when considering whether to settle a matter before going to trial.

 

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Velcro Canada – Clarification on Cost Awards

“Beneficial Owner” – CRA’s Assessment of Velcro Doesn’t Stick

The Tax Court has once again considered the meaning of the phrase “beneficial owner” for purposes of the tax treaty between Canada and the Netherlands (the “Treaty”).  It has also once again ruled in favour of the taxpayer in determining that a Dutch holding company was the “beneficial owner” of amounts received from a related Canadian company.

On February 24, 2012, the Tax Court of Canada released its eagerly-anticipated decision in Velcro Canada Inc. v. Her Majesty the Queen, which addresses the applicable Canadian withholding tax rate in respect of cross-border royalty payments within a multinational corporate group.  The decision comes almost four years after the Tax Court of Canada released its landmark decision in Prévost Car Inc. v. The Queen, which dealt with the identical treaty interpretational issue in the context of cross-border dividend payments.  The decision of the Tax Court was affirmed by the Federal Court of Appeal.

Both the Prévost Car Inc. and Velcro decisions are relevant to any multinational enterprise using a foreign holding company as an investment/financing vehicle and provide considerable comfort concerning the tax effectiveness of such structures.

The issue in Velcro was whether a Dutch holding company was the “beneficial owner” of royalties paid by a related Canadian company, and therefore entitled to a reduced rate of Canadian withholding tax under the Treaty in respect of the royalties.  Pursuant to the “beneficial owner test” described in Prévost Car Inc., this required that the Tax Court consider the following issues:

  • Did the Dutch holding company enjoy possession, use, risk and control of the amounts it received from the Canadian corporation?
  • Did the Dutch holding company act as a “conduit”, an agent or a nominee in respect of the amounts it received from the Canadian corporation?

The CRA’s position was that Dutchco was not the beneficial owner of the royalties generally because Dutchco was contractually required to remit a specific percentage of all amounts received from the Canadian corporation to its parent company located in the Netherlands-Antilles (which does not have a comprehensive tax treaty with Canada).  If the Canadian company had paid royalties directly to the Netherlands-Antilles company the royalty payments would have been subject to a 25% Canadian withholding tax.  In the CRA’s view, Dutchco was merely a collection agent for the Netherlands-Antilles company.

The Court rejected the CRA’s arguments and concluded that Dutcho was indeed the beneficial owner of the royalties.  The basis for the Court’s conclusion was that, even though Dutchco may have been contractually required to pay money onward to the Netherlands-Antilles company, it retained some discretion as to the use of the royalties while in its possession. Dutchco therefore possessed sufficient indicia of beneficial ownership while it held the royalties and could not be considered a conduit based on the “beneficial ownership test” outlined in Prévost Car Inc., which requires a lack of all discretion.

It is unclear at this time whether the CRA will appeal the Tax Court’s decision in Velcro to the Federal Court of Appeal. The tax community will continue to watch the progress of this case (if any) with great interest.

Please open the attached PDF for further information about the Velcro case.

Please visit the FMC website for prior coverage of Prévost Car Inc.

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“Beneficial Owner” – CRA’s Assessment of Velcro Doesn’t Stick