webtip

PROCEEDS RECEIVED FROM A SUPPLIER LOYALTY CONTRACT

In a February 16, 2016 Technical Interpretation (2015-0618601E5, Posadovsky, T.), CRA commented on the treatment of proceeds received under a loyalty contract with a major supplier. The taxpayer received a substantial lump sum payment for entering the contract. If the contract was breached within 5 years, the entire payment would be repaid. If the contract was breached in the 10 subsequent years, damages payable would be prorated based on the remaining number of years.

CRA opined that the payment was for a restrictive covenant (Subsection 56.4(1)), as the agreement “appears to affect, in any way whatever, the acquisition or provision of property or services”, so the payment would be income when received or receivable (Subsection 56.4(2)). In the event the contract was not a restrictive covenant, CRA indicated it would be an inducement payment (Paragraph 12(1)(x)) taxed on the same basis.

CRA noted that there is no provision for a reserve related to either form of income, therefore, the income could not be deferred for income tax purposes (Paragraph 18(1)(e)) despite the fact that, for accounting purposes, it would be reported as revenue over the term of the contract. 

For further information see VTN Monthly Tax Update Seminar, Issue No. 416

Independent Contractor (IC) vs Employee – Trucker

In a December 31, 2015 Tax Court of Canada case (Big Bird Trucking Inc. vs. H.M.Q., 2015-1041(EI), 2015-1051(CPP)), at issue was whether truck drivers hired by the taxpayer were employees or ICs, and, therefore, subject to CPP and EI withholdings.

The taxpayer clearly intended to hire the drivers as ICs.

The Court put little weight into the Agreement reflecting the driver’s intentions.

The Court then looked to the well-established test as follows:

  • Equipment – The Court noted that ownership of the trucks was not determinative, as drivers may be in the driving business without a truck. The drivers could provide the services which required the necessary qualifications and licence. In this case the hirer owned the trucks, allowing the workers to use them. The owner also allowed the drivers to use the “trucks for other jobs provided that he got a cut”. This was not indicative of an employment relationship.
  • Risk of Loss – If the taxpayer did not offer loads to be transported, the worker had to find loads elsewhere. Further, if the customer of the taxpayer did not pay for the transport, the taxpayer would not pay the drivers. As there was some risk, this favoured IC status.
  • Chance of Profit – The workers were paid a specific amount per load which took about a week. The loose arrangement did, however, permit the driver to arrange his own time to take advantage of other opportunities if presented.
  • Degree of Responsibility for Investment and Management – There was little investment required by the worker. Although invoices were prepared, there was contradictory evidence as to who did it. This slightly favoured employment.

Although the traditional factors were not as helpful as they sometimes are, the Court found on the balance, the factors favoured IC status: the drivers were in the business of providing services.

For further information see VTN Monthly Tax Update Seminar, Issue No. 416

ALLOWABLE BUSINESS INVESTMENT LOSS (ABIL) – BANKRUPTCY

In a November 16, 2015 French Tax Court of Canada case (Delisle vs. H.M.Q., 2013-1829(IT)I), at issue was whether the taxpayer was entitled to claim an ABIL of $21,457 representing 50% of the outstanding debt owed to him by his spouse’s company in 2007. In 2006, the company’s creditors accepted a proposal under the Bankruptcy and Insolvency Act.

In this case, the company’s creditors accepted a bankruptcy proposal in 2006, effectively releasing the company from the debts and obligations owed to its unsecured creditors. As such, the outstanding debt to the taxpayer was written off and ceased to exist at this time, in 2006. At the end of 2007, no debt was owed to the taxpayer.

As Subsection 50(1) requires that the debt must be outstanding at the end of the tax year, the Court found that the taxpayer was not entitled to claim the ABIL in 2007 (as the debt was not outstanding as at December 31, 2007). 

For further information see VTN Monthly Tax Update Seminar, Issue No. 413

CAPITAL DIVIDEND ACCOUNT – ECOLOGICAL GIFTS

In a December 3, 2015 French Technical Interpretation (2015-0613761E5, Seguin, Marc), CRA discussed the effect of an eligible ecological property gift (Paragraph 110.1(1)(d)) by a corporation on its capital dividend account (CDA).

When such a gift is made, the taxable capital gain pursuant to Paragraph 38(a.2)(i) is deemed to be $0, therefore, the addition to the CDA would be the full amount of the gain.

For further information see VTN Monthly Tax Update Seminar, Issue No. 414