Uber-taxation arrives; GST/HST catching up with ride-sharing services

At issue

Millennials may believe that the sharing economy is the economy, but our tax system needs time to adapt. In the breach, both purveyors and consumers may be unclear as to the true ultimate economic cost and value of these novel offerings.

Arguably, the poster-child for the new economy is Uber, the ride-sharing technology company that has disrupted the taxi industry across the globe. This and other new technologies can also be disruptive to tax authorities: What jurisdiction can levy tax? Who do you collect it from? And as a starting point, is it even something that is taxable?

In this last respect, the 2017 Federal Budget has brought some clarity to the intersection of ride-sharing and taxis for GST/HST purposes.

CRA and the sharing economy

For a few years now, the Canada Revenue Agency has used news releases and its own website to make taxpayers aware that tax obligations arise out of the sharing economy. It enumerates five sectors that have emerged: accommodation sharing, ride sharing, music and video streaming, online staffing and peer/crowd funding.

Income from sharing-economy activities must be reported for income tax purposes, whether earned by an individual or a registered business. As well, these activities are often caught by GST/HST, imposing collection, remittance and reporting obligations.

Excise Tax Act (R.S.C., 1985, c. E-15) – GST/HST small supplier rules

Suppliers of goods and services covered by the GST/HST must register and comply with the rules under the Excise Tax Act (ETA). However, s.148(1) relieves certain small suppliers who supply less than $30,000 annually in goods or services from having to collect the tax. As it doesn’t collect and remit the tax, a small supplier is also not entitled to claim input tax credits (which are available to registrants).

This general rule is then modified in s.240. Section 240(1) sets out the requirement for suppliers to be registered under the ETA, excepting small suppliers and a few others from registration. There is then an exception to the exception:

Taxi business – s. 240(1.1) Notwithstanding subsection (1), every small supplier who carries on a taxi business is required to be registered for the purposes of this Part in respect of that business.

Uber Canada inc. c. Agence du revenu du Québec, 2016 QCCA 130

Uber appealed a motions judge’s ruling that denied its attempt to obtain a return of property seized from its premises under warrant by Revenu Quebec. Among the issues raised in the appeal was whether certain Uber drivers were carrying on a taxi business. Section 407.1 of the Quebec legislation has similar wording and effect as ETA s.240(1.1).

Uber lost its appeal and subsequently negotiated an agreement with Quebec regulators (September 2016) requiring its drivers in that province to register for GST and QST. This appears on the Uber website, but there is no mention of other provinces (at time of writing).

Federal Budget 2017 – Amend ITA s.123 definition of “taxi business”

In the Budget, the government noted the similarity between commercial ride-sharing services facilitated by web applications and traditional taxi services. However, for a variety of regulatory reasons, under current tax rules ride-sharing may not be subject to the same GST/HST rules applicable to taxis.

The existing definition in the ETA is one brief sentence referring specifically to transport by “taxi”. To place matters on a level footing, the definition will be expanded to include “taxi or other similar vehicle”, including transportation “arranged or coordinated through an electronic platform or system”.

Practice points

  1. While new technologies like ride-sharing may quickly change commercial dynamics, rest assured – unfortunately for individual wallets – that the tax system will eventually follow.
  2. For drivers, it seems likely that the central ride-sharing service will take care of GST/HST collection and compliance (as is the case in Quebec now). It remains to be seen how demand may be affected by this narrowing of cost differential vis-à-vis traditional taxis.
  3. For consumers, the ETA amendments to the definition of a taxi business come into effect as of Canada Day, 2017. Enjoy the ride while you can..”

Estate doesn’t own deceased’s Maple Leaf tickets, and is instead a constructive trustee

At issue       

Sometimes estate assets have commercial value, other times emotional attachment, and frequently both. That last situation is ripe ground for estate disputes.

I have a friend who was a shareholder in a business corporation which owned Toronto Maple Leaf season tickets used to entertain clients. When the team moved from the Gardens to its new home at Air Canada Centre, the new tickets (and this may have been true of the old ones) were required to be held in his personal name, not in the name of the corporation as they had been at the time. When the corporation was wound down a few years later, one of the shareholders bought out the tickets, and they all shook hands and called it a day.

Their amicable resolution contrasts sharply with a recent case where an estate’s claim to Leaf tickets was opposed by the deceased’s business colleagues. But first, here are a few cases as warmups to the main event.

Fobasco Ltd. v. Cogan, 72 O.R. (2d) 254 [1990]

When major league baseball arrived in Toronto in 1976, Cogan subscribed for eight Blue Jays season tickets. Six of the eight tickets were subsequently offered to and paid for by the plaintiffs. Cogan advised in 1986 that he would soon cease making the tickets available to the plaintiffs, and though the dispute was settled for a time, he stopped sharing the tickets in 1989 when the Jays moved into the Skydome.

The plaintiffs failed in all their arguments under contract, resulting or constructive trust, and fiduciary duty. Importantly on the trust arguments, the judge found that Cogan initiated the purchase for his own benefit vis-à-vis the Blue Jays, then extended an offer to the plaintiffs.

Byers v. Foley, 16 O.R. (3d) 641 [1993]

The parties were members of a men’s softball team that decided to purchase Toronto Blue Jays season tickets beginning in 1983. Two of the teammates were designated to make the arrangements, and their names were recorded in the official records. In 1989 those two advised the others that they were no longer going to share the tickets.

The plaintiffs commenced an action based on constructive trust. As both the certainty of subject-matter (the tickets) and objects (the parties) were ascertained, the only issue was whether the third certainty of intention to create a trust had been met. In distinction to Fobasco v. Cogan, the purchasers acted on behalf of the group from the beginning, leading the judge to hold that the purchasers held the tickets as trustees throughout.

Trustee of estate of A.M.K. Investments Limited v. Kraus, (1996) 42 CBR (3d) 227

Kraus was listed as the licence holder for Toronto Raptors season tickets. His corporation, AMK, paid for and used the actual tickets. After AMK was petitioned into bankruptcy by its creditors, Kraus contended that he continued to own the ongoing licence.

The judge acknowledged the distinction between the licence and ticket purchase, but found on the facts that AMK funded the cost of both. Kraus was held to be trustee under a purchase money resulting trust in both respects, and was ordered to transfer the licence to AMK.

Anspor et al v. Neuberger, 2016 ONSC 75

Chaim Neuberger and Harry Sporer emigrated from Poland to Canada, launching a successful construction business in partnership as Nuspor. In the late 1960s or early 1970s, a business contact brokered a deal for the two to purchase Toronto Maple Leaf season tickets from its then-owner Harold Ballard. They were advised (incorrectly, though nothing turns on the point) that the tickets could not be held by Nuspor, so they decided to register in Neuberger’s name alone.

After Neuberger’s death in 2012, his daughter as executor took the position that the tickets were his personally, and in turn belonged to the estate. The plaintiffs argued that Nuspor was always the beneficial owner, with Neuberger (and later the estate) serving as trustee.

As in Byers, the facts and surrounding conduct showed that the tickets were being acquired for Nuspor, not Neuberger personally. Furthermore, and akin to AMK v. Kraus, Nuspor paid all amounts, thus satisfying the requirements of a purchase money resulting trust. The executor was ordered to transfer the tickets to Nuspor.

Practice points

  1. Though these cases all involve Toronto franchises, a quick search of news and legal databases reveals that the issue crosses many borders – both geographic, and between here and the hereafter.
  2. Inherent in the estate cases is that a person cannot pass on a better title than was held during life. Indeed, the estate will be bound by any restrictions imposed upon the living person, and will likely be required to extricate itself from any continuing involvement.
  3. Whatever the commercial requirements of any sports club, it would be a good idea for any pooled ownership arrangements to be backed-up by clear documentation acknowledged by all purported owners and trustees.

RRIF rollover allowed via joint election between deceased’s estate and grandson

At issue

On death, a person’s property is deemed disposed, including funds held in registered retirement savings plans and registered retirement income funds. The RRSP or RRIF value is brought into income in the deceased’s terminal year. In addition to triggering taxation sooner than the family may wish, this can contribute to a higher tax bill than anticipated due to the lump sum being taxed in a single year.

Relief is available by certain tax-free rollovers to qualified beneficiaries: a spouse, a dependent minor child, or a disabled dependent minor or adult child. Commonly this can be achieved through direct beneficiary designation on the plan, or alternatively if the funds have fallen into the estate then by joint election between the deceased’s personal representative (executor) and a qualified beneficiary who has a sufficient entitlement as an estate beneficiary. The procedure for spouse beneficiaries is typically straightforward, but could be more complicated with a minor or mentally infirm individual.

Putting the focus on minors, even if there is a remaining surviving parent, that parent is generally the automatic guardian of the child’s person but not of property. Approval of the provincial public trustee or other court order will be necessary to make the election and execute a legal contract for the required annuity to age 18 – and having those funds in such a young person’s hands without oversight is likely not a desirable result. These hurdles were addressed in a unique fact situation in a recent advance income tax ruling from the Canada Revenue Agency (CRA).

Income Tax Act (ITA) Canada

Paragraph 56(1)(t) and parts of section146.3 – These provisions work together to allow the value of a RRIF to be a designated benefit (income inclusion) of a beneficiary rather than the deceased/estate.

Section 60.011 – A lifetime benefit trust may be established for a minor child or grandchild who was dependent on a deceased by reason of mental infirmity. A qualifying trust annuity may be purchased with the trust funds.

Paragraph 56(1)(d.2) and section 75.2 – These provisions cause income paid to a qualifying trust annuity to be included in the income of the trust beneficiary.

CRA 2016-0627341R3 (E) – Rollover of RRIF proceeds after death

The exact date of this advance income tax ruling is redacted, but it was issued some time in 2016.

The minor child was adopted by his grandmother because his parents were incapable of caring for him. A court issued a parenting order providing that the grandmother had “all powers, responsibilities, entitlements of guardianship and decision-making regarding the grandson.” Furthermore, it was clear that he was financially dependent on her and no-one else.

Unfortunately a difficult situation got worse when it was determined that the grandmother had a terminal medical condition. As part of arranging her affairs, she named her son as executor under her will, and executed an authorization for that son and his wife to apply to adopt the grandson (presumably their nephew). Two RRIFs came into the grandmother’s estate upon her death, the combined value of which was less than the grandson’s share of the estate.

The proposal to CRA goes into a number of steps, including reference to the above ITA sections, essentially having the RRIF go by tax-free rollover to an annuity that will pay out over the years until the grandson reaches 18. The payments will be received by the trust, but will be taxable to the grandson whose basic personal tax credit will negate much or all of any tax.

In approving the proposal, the CRA acknowledges the dual-purpose to reduce taxes otherwise arising on the grandmother’s death and to allow the executor to maintain control over the funds. Though not stated in the ruling, take note that the minor child must have had a mental infirmity in order for ITA s.60.011 to have applied. This also skirts the issue of having the minor enter into the contract for the annuity, as it is the executor/trustee of the lifetime benefit trust who carries out that purchase.

Practice points

  1. Directly naming minors or mentally infirm individuals as RRSP/RRIF beneficiaries may enable tax deferral, but it does not resolve all complications and hurdles.
  2. Though there is only brief mention of the grandmother’s parenting court order and the presumed/forthcoming adoption order in the ruling, those seem to have facilitated the process. Together with the child’s apparent mental infirmity, an acceptable result is obtained.
  3. More generally, all parents and guardians of minors should be conscious of the need to coordinate beneficiary designations with will provisions to satisfy their estate planning needs.