News of Note

CRA states that no intention to claim exemption on future recognition of a capital gains reserve claimed on a s. 84.1 transfer to a purchaser corporation is irrelevant to the operation of the ACB grind

CRA considers that s. 84.1(2.1) essentially treats a resident individual who. having made a non-arm’s length transfer of shares to a purchaser corporation, then claims a capital gains reserve on the disposition, to have claimed a capital gains deduction on the disposition to the extent of the individual’s unused capital gains exemption room in that year, irrespective of whether such exemption was actually claimed and regardless whether there is no intention to claim the deduction when the reserve is recognized in future years.

Neal Armstrong. Summary of 2015-0594461E5 under s. 84.1(2.1).

Income Tax Severed Letters 25 May 2016

This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA indicates that an employee received a retiring allowance under a “non-compete” if it compensated for a loss on an investment sale occurring because of his termination

CRA indicated that an amount received by a former employee from his employer under a non-compete agreement entered into after the termination of his termination of employment would generally be deemed to be employment income to him pursuant to s. 6(3)(b). However, in this case, the amount paid to the employee was equal to the loss he sustained on disposing of an investment following his termination. CRA stated that if the investment was sold only because of the termination, i.e., the investment would not otherwise have been sold, the amount received from the employer could reasonably be regarded as compensation for loss of employment, so that it would be a retiring allowance.

Neal Armstrong. Summary of 2015-0599581E5 under s. 248(1) – retiring allowance.

Adobe – Delhi High Court finds that India had no ability under Art. 7 of the U.S. Treaty to tax Adobe US on R&D servicing by its Indian sub whose fees already were subject to Indian tax in accordance with the arm's length pricing standard

Adobe U.S. received software-related R&D services on a cost plus 15% basis from its wholly-owned Indian subsidiary ("Adobe India"). The assessment officer (AO) had assessed Adobe India on the basis that its fees did not accord with the arm’s length standard. Adobe India had successfully appealed that assessment to the ITAT, and an appeal by the AO of that loss to the High Court of Delhi was in process. Bakhru J found that even if the taxpayer had a permanent establishment in India, the AO had no ability under Art. 7 of the U.S.-India Treaty to tax Adobe U.S. respecting the R&D services business of Adobe India as the latter’s fees already was subject to Indian tax in accordance with the arm's length pricing standard.

He went on to find that Adobe U.S. had no PE in India given that it had no right to use Adobe India’s premises – and there was no service PE as the only Adobe U.S. “service” potentially provided in India that the AO could point to was the right to audit Adobe India’s performance.

Neal Armstrong. Summaries of Adobe Systems Inc. v. ADIT, W.P.(C) 2384/2013 (Delhi High Ct) under Treaties Art. 7, Art. 5.

Air Canada – Quebec Court of Appeal finds that ARQ is obligated to send a copy of its notices of further reassessment to the lawyer who was its contact on a tax dispute

The lawyer acting for Air Canada in a tax dispute with ARQ was copied on a letter to Air Canada indicating that ARQ would be reassessing in a smaller amount than the original reassessment under dispute. This occurred several weeks later, but without the lawyer being copied. The Montreal head office of Air Canada forwarded the reassessment to its Winnipeg office (which dealt with tax matters), where something went awry, so that no action was taken. The lawyer did not find out about this until the 90-day objection period had expired.

The Quebec Court of Appeal found that, in light of considerations of procedural fairness, the Quebec equivalent of ITA s. 165(3) should be read as if it contained the additional bolded words noted below:

[T]he Minister shall … reconsider the assessment and … make a reassessment, and send the Minister's decision to the person by mail and to its designated representative, if any.

The same reasoning could apply federally.

Notwithstanding that ARQ thus had made a procedural error, the Court nonetheless declined to grant an extension of the 90-day appeal period under the more stringent Quebec equivalent of s. 166.2, which required that the taxpayer demonstrate that “it was impossible in fact” for it to appeal promptly. Air Canada, in the absence of any evidence as to why nothing had happened after the reassessment was forwarded to Winnipeg, had not established due diligence.

Neal Armstrong. Summaries of Air Canada v. ARQ, 2016 QCCA 710 under s. 165(3) and s. 166.2(5).