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An engineering firm engaged in a project to develop its web‑based system using algorithms and GPS data to provide accurate real‑time data for predicting the arrival time of public transit buses.
In the course of finding that the firm satisfied the five-factor test in Northwest Hydraulic as to what was SR&ED, Smith J noted that the hypothesis that was tested was whether “autonomous distributed computing systems based on general purposes computing units [can] be effectively deployed in order to provide accurate real‑time status information … in a real world transit system,” and stated:
There is necessarily a fine line between a “technological advancement” or “incremental improvements” to existing materials, devices, products or processes. This suggests that the Appellant need not prove that its activities were novel, but rather that there were incremental improvements to existing technology.
Neal Armstrong. Summary of CRL Engineering Ltd. v. The Queen, 2019 TCC 65 under s. 248(1) - SR&ED.
Vinet – Quebec Court of Appeal affirms that the activities of an individual were as president of the general partner rather than on behalf of the LP for s. 96(2.4)(a) purposes
An individual, who was the sole limited partner of a Quebec limited partnership (“SEC”) that owned and operated multiple farms, and the president of its general partner, argued that he was not a limited partner under the Quebec equivalent of ITA s. 96(2.4)(a), so that he could deduct his share of a substantial loss of the LP. He relied in this regard on s. 2244 of the Civil Code, which provided that a limited partner “may not negotiate any business on behalf of the partnership or act as mandatary or agent for the partnership,” and pointed to his involvement in the business of the LP including negotiating with suppliers and making various purchases.
The Court of Appeal found no error in the findings of Breault JCQ below in connection with confirming the ARQ’s application of the s. 96(2.4)(a) equivalent, including that the identified activities of the individual in relation to SEC were “more linked to his role as mandatary or representative of the general partner” rather than of SEC, so that he had limited liability.
Neal Armstrong Summary of Vinet v. Agence du revenu du Québec, 2019 QCCA 574 under s. 96(2.4)(a).
Sunshine Coach – Tax Court of Canada finds that Alberta bus tours were separate from international flights for ETA zero-rating purposes
ETA Sched. VI., Pt. VII, s. 3 provides for zero-rating of transportation services where the services are part of a “continuous journey” that includes air transportation, and either the origin or termination of the journey or a stopover respecting that journey are outside Canada and, in a subset of situations, also outside North America. In finding that the Canadian transportation services of a Calgary-based tour operator were not part of a “continuous journey” that included internationalflights, so that s. 3 zero-rating was not available, Campbell J noted that the bus tickets issued by the Appellant did not include the airline tickets that international passengers used to travel into and out of Canada, nor did booking companies through which some passengers arranged travel act as agents of the bus operator.
Savics – Tax Court of Canada infers that a settlement agreement referring to partnership loss allocations included partnership gains allocations
The taxpayer was allocated losses for the initial years of his membership of three LPs and income-account gains for a subsequent year. CRA initially reassessed to deny both the taxpayer’s allocated losses and to reverse the subsequent year’s gains allocation on the basis that the LPs did not exist (i.e., on the basis that the partners were not carrying on business in common with a view to profit). A subsequent settlement agreement provided for the reinstatement of much of the losses but was silent on the treatment of the gains (although it did reference an ability of CRA to reassess to make “consequential” adjustments).
In agreeing to the settlement, the taxpayer provided a waiver of any right of appeal of an implementing assessment. Sommerfeldt J indicated that “if a settlement-implementing reassessment is not in keeping with the agreement that the taxpayer and the fiscal authority have reached, a waiver of the right to appeal will not preclude the taxpayer from appealing in respect of the aspect of the reassessment that does not coincide with the settlement agreement.”
However, he went on to find that it accorded with the settlement agreement for CRA, in its reassessments to implement the agreement, to reinclude the subsequent year’s gains in the taxpayer’s income. The settlement agreement was based on the premise that the LPs existed after all, and the gains inclusions reassessed by CRA were “consequential” on this premise. Furthermore, implementing a settlement agreement that was based on the proposition that a partner was to be allocated his share of the LP losses, but not gains, would have violated the Galway principle, which “precludes a taxpayer and the Crown from arriving at a settlement that has no basis in the ITA.”
Neal Armstrong. Summary of Savics v. The Queen, 2019 TCC 71 under s. 169(3).
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in April and March 2012. Their descriptors and links appear below.
These are additions to our set of 825 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Gillen – Federal Court of Appeal affirms finding that property was not used in a business for s. 110.6(14)(f)(ii) purposes when it was beneficially acquired and dropped-down on the same day
Webb JA affirmed a finding of D’Arcy J that the beneficial ownership of some applications to the Saskatchewan government for potash exploitation rights that had been acquired by a limited partnership had been immediately on-transferred by it to a wholly-owned corporation for share consideration (presumably on an s. 85(2) rollover basis), so that their fleeting beneficial ownership by the LP did not qualify them as being used in a Canadian active business, as required under the s. 110.6(14)(f)(ii) test. Accordingly a gain that was realized approximately four months later when the shares were sold at a gain did not qualify for the capital gains deduction when the gain was distributed by family-trust limited partners of the LP to their family beneficiaries including, in the case of one of the family trusts, the taxpayer.
Webb JA noted that the shares in fact were not issued until shortly before their sale, but stated that “there is no prohibition on a corporation receiving payment for shares well in advance of the shares being issued.”
Neal Armstrong. Summary of Gillen v. Canada, 2019 FCA 62 under s. 110.6(14)(f)(ii).
CRA indicates that Ponzi scheme investors can generally write off their reinvested interest income in the year the perpetrators are charged
Individuals had “invested” in what turned out to be a Ponzi scheme under which for many years they reported annual income inclusions for interest which they were treated as having reinvested in the scheme. They sought to have their returns for those years adjusted in order to obtain a refund of the taxes they paid on such interest income.
The Directorate indicated that because various of the taxation years were before the 10-year period referred to in s. 152(4.2), they could not be so reassessed – and, in any event, the interest had been required to be recognized in the years in which the individuals received or were entitled to receive it.
The Directorate went on to indicate that potential relief could be provided though a subsequent bad debt deduction, likely, in the year in which the promoters were charged. It stated:
[T]he CRA generally accepts that the "time" when a taxpayer can conclude that the taxpayer’s debt has become uncollectible occurs in the year in which the Crown makes charges against the perpetrator of the fraud (the "Year of Charges").
Thus, where a taxpayer has included investment income in the computation of the taxpayer’s income for the Year of Charges or for years prior to the Year of Charges and that income becomes a debt that has not has never been recovered by the taxpayer or a third party for the taxpayer’s benefit, the CRA is generally prepared to accept that the taxpayer may claim a bad debt deduction in respect of that debt under paragraph 20(1)(p) in the Year of the Charges.
Cameco – Federal Court of Appeal finds that CRA cannot under s. 231.1(1) compel oral answers to its questions other than for aid in auditing taxpayer books and records
Cameco had appealed transfer-pricing assessments to the Tax Court. CRA then audited subsequent years, where essentially the same issues arose, and applied to the Federal Court for an order pursuant to s. 231.7(1) compelling Cameco to submit 25 listed employees of it and subsidiaries to CRA interviews. The Federal Court dismissed this application.
In dismissing the Crown’s appeal of such dismissal, Rennie JA found that s. 231.1(1)(d) was limited to providing CRA aid in its “inspection, search, examination or review of records,” whereas here, CRA sought “oral answers to oral questions” in order to facilitate its “understanding of Cameco's potential tax liability.”
The Crown submitted that the word “audit” in the power under in s. 231.1(1)(a) to “inspect, audit or examine” encompassed the authority to ask questions of employees of a taxpayer, including the employees of its overseas subsidiaries, and to require that they be answered orally.
Rennie JA instead found that the word “audit,” like the words “inspect” and “examine,” were directed to “the book and records” of the taxpayer and that “[o]ral examination is not the ordinary meaning of the word audit.” He also found it telling that 1986 amendments eliminated the word “orally” from the stated duty to answer all proper questions “relating to the audit.”
Grondin – Court of Quebec confirms that the Quebec equivalent of s. 13(21.1)(b) applies irrespective of an intention to dispose of the underlying land
The uninsured barn of a pig farmer burned down. Lafrenière JCQ confirmed the application by the ARQ of the Quebec equivalent (in Art. 93.3) of s. 13(21.1)(b) to reduce what otherwise would have been that taxpayer’s terminal loss by one-half, stating:
[T]he exception provided in Articles 93.1 to 93.3 … applies without regard to whether the disposition is voluntary or involuntary, and also applies independently of whether or not there was a wish to dispose of the underlying land.
He also quoted with approval similar findings made by the Tax Court in 9136-6872 Québec.
Neal Armstrong. Summary of Grondin v. Agence du revenu du Québec, 2019 QCCQ 1059 under s. 13(21.1)(b).