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6 further translations of CRA interpretations are available

We have published a further 6 translations of interpretations released in October and September 2012. Their descriptors and links appear below.

These are additions to our set of 771 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ½ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for February.

Bundle Date Translated severed letter Summaries under Summary descriptor
2012-10-10 6 July 2012 Internal T.I. 2012-0453461I7 F - rental losses Canada-France Treaty Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit no requirement to establish reasonable expectation of profit re deducting loss from French rental property if no personal element
Treaties - Income Tax Conventions - Article 24 s. 126(1) FTC re French income tax on rental income
2012-10-03 17 July 2012 Internal T.I. 2012-0454701I7 F - Arrière-arrière-grand-père Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Share of the Capital Stock of a Family Farm or Fishing Corporation - Paragraph (a) - Subparagraph (a)(iii) farm use by great-great-grandparent did not qualify the property, cf. great-grandparent
Income Tax Act - Section 252 - Subsection 252(2) - Paragraph 252(2)(a) parent in s. 110.6 context includes great-grandparent but not great-great-grandparent
2012-09-14 4 July 2012 External T.I. 2011-0429601E5 F - Roulement et société de personnes Income Tax Act - Section 98 - Subsection 98(3) two partnerships potentially could be merged by using s. 97(2) followed by s. 98(3), or the reverse
Income Tax Act - Section 97 - Subsection 97(2) partnership is taxpayer for purposes of s. 97(2), which might be used with s. 98(3)
30 July 2012 External T.I. 2011-0421801E5 F - Choix aux paragraphes 70(2) et 70(3) Income Tax Act - Section 70 - Subsection 70(2) if desire for s. 70(3) to apply, a timely revocation of s. 70(2) election can be made
Income Tax Act - Section 70 - Subsection 70(3) application of s. 70(3) re deceased’s share of partnership WIP is at estate’s choice
2012-08-31 14 August 2012 External T.I. 2012-0450041E5 F - subsection 55(4) Income Tax Act - Section 55 - Subsection 55(4) s. 55(4) not engaged where transactions eliminate shareholdings but not unrelated status of unrelated person
Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) s. 55(3)(a)(ii) exclusion avoided by distributing shares out of unrelated-person trust
15 August 2012 External T.I. 2012-0444461E5 F - Pompiers volontaires Income Tax Act - Section 118.06 - Subsection 118.06(1) not a “volunteer” if paid more than a minimal amount or minimum hours are required
Income Tax Act - Section 81 - Subsection 81(4) “volunteer firefighter” has the same meaning as in s. 118.96(1)

Madison Pacific – Federal Court of Appeal indicates that a CRA memo to Finance requesting action on an "abuse" likely would be inadmissible in a GAAR case on that abuse

Predecessors of the taxpayers had been acquired for their losses in transactions where less than 50% of their voting shares, but more than 90% of their non-voting participating shares, had been acquired. The Minister had reassessed to deny the acquired losses primarily on the basis that there had been an acquisition of control, but secondarily through applying the general anti-avoidance rule.

V. Miller J had required the Minister to disclose two documents that had been placed in the audit file: a draft proposal letter; and a memo from the Income Tax Rulings Directorate to Finance requesting an amendment to cut off this type of transaction. Gleason JA found no reversible error in requiring production of this memo - nor in the decision of V. Miller J that a request for all correspondence between the Directorate and Finance respecting the legislative scheme dealing with transfer of corporate losses was an impermissible “fishing expedition of vague and far-reaching scope.” However, she stated:

[T]he documents in issue are of limited relevance and likely inadmissible at trial as, under the GAAR analysis, the question of the policy in the ITA that the taxpayer is alleged to have avoided is ultimately a question of law. … Thus, while it may well be incumbent on the Minister to set out the disputed policy in the Minister’s pleadings as a matter of fairness … it does not follow that evidence on the policy will be admissible at trial as matters of law are for a court to determine.

Neal Armstrong. Summary of Madison Pacific Properties Inc. v. Canada, 2019 FCA 19 under s. 245(4), aff’g sub nomine MP Western Properties Inc. v. The Queen, 2017 TCC 82 under Tax Court Rules, Rule 95.

CRA requires that there be no basis step-up in FA shares above their relevant cost base and net surplus

A Canadian-resident corporation (ACo) wished to transfer its shares of a foreign subsidiary (FA1) to a Canadian subsidiary of ACo (BCo). This was to be accomplished by ACo transferring its FA1 shares on a s. 85.1(3) rollover basis to a newly-formed non-resident subsidiary (New FA), with New FA then transferring its FA1 shares to BCo for a note – which then was to be repaid in cash out of share subscription proceeds from ACo, and with FA1 then distributing such cash to ACo (with a Reg. 5901(2)(b) designation being made).

CRA wished to restrict the cost to BCo of the FA1 shares (which were excluded property) to the sum of their relevant cost base and the net surplus (being exempt surplus) of FA1 – rather than letting such cost be stepped up to the shares’ higher fair market value. Accordingly, it required that the note equal such sum. S. 69(1)(c) deemed the proceeds to New FA to be the higher FMV, but apparently this did not matter, as the disposition of the FA1 shares did not give rise to FAPI, their exempt surplus was levitated under s. 93(1.11)(a) to New FA, and the note repayment proceeds were received by ACo out of pre-acquisition surplus and (to the extent of any amount that otherwise would be a negative ACB gain) out of New FA’s exempt surplus pursuant to s. 93(1.11)(b) and Reg. 5902(6).

These transactions in their essential features were the same as transactions implemented by the same corporate group in 2016-0630761R3f. One difference from the earlier ruling letter is that a ruling was requested and given that s. 69(11)(b) would not apply to deem ACo’s proceeds of disposition on the s. 85.1(3) drop-down of FA1 Shares to New FA to be equal to the FMV of the FA1 Shares. Although it clearly would have been contemplated that the transferee (New FA) would “obtain the benefit of an exemption available to” it for excluded shares, CRA concluded (as per its summary) that the “one of the main purposes” test in s. 69(11) was not satisfied.

Neal Armstrong. Summaries of 2017-0693751R3 under s. 69(11)(b), s. 9 – capital gain v. profit – shares and s. 93(1.11).

Kaul – Tax Court of Canada finds that art work was donated at a FMV equal to its cost rather than appraised value

The taxpayers bought sets of artists’ prints (each set consisting of 11 prints) at a purchase price that might be 7 or 10 times the vendor’s cost, and then immediately donated 10 out of the 11 prints in each set to registered charities at appraised values (reflected in the charitable receipts issued) around 3 times their purchase price. In confirming assessments that found the FMV of the donated art was the taxpayers’ purchase price, Rossiter CJ essentially applied the statement of Bowman ACJ in Klotz that:

Why chase the will o' the wisp of an elusive and largely hypothetical fmv through the trendy up scale art galleries of New York and ignore the best evidence that is right there before your very nose? The problem with the claim here, whereby property is acquired for $5 to $50, sold to the appellant for $300 and claimed to have a fmv two days later of $1,000, is that it is devoid of common sense and out of touch with ordinary commercial reality.

Rossiter CJ commented scathingly on the appraisals.

Neal Armstrong. Summary of Kaul v. The Queen, 2019 TCC 17 under General Concepts – FMV – Other.

Therrien – Court of Quebec finds that the adult daughter of the taxpayer’s ex-common law partner was the taxpayer’s “child”

When the handicapped daughter (“V”) of the taxpayer’s ex-common law partner was 22, she started living with the taxpayer. Whether the taxpayer (Therrien) was able to claim medical tax credits for expenses associated with V turned on whether V was a “child” of the taxpayer. The relevant part of the Quebec Taxation Act definition of “child” (which was essentially the same as ITA s. 252(1)(b)) referred to:

a person who is wholly dependent on the taxpayer for support and of whom the taxpayer has, or immediately before such person attained the age of 19 years did have, in law or in fact, the custody and control

This reference to “custody and control … in law or in fact” might have, but did not, give Massol JCQ difficulty given that V was an adult who was with him purely as a matter of choice. He simply stated:

The evidence establishes that in 2011 and 2012, V was wholly dependent on Richard Therrien and that he had custody and control of her in fact.

Accordingly, the taxpayer got the credits.

Neal Armstrong. Summary of Therrien v. Agence du revenu du Québec, 2019 QCCQ 28 under s. 252(1)(b).

Best Buy – Federal Court of Appeal finds that CITT accorded insufficient deference to WCO opinions

Brown cow reasoning occurs when a decision is distinguished on the basis that it involved a brown cow rather than a black cow.

S. 11 of the Customs Tariff Act provides that, in interpreting headings and subheadings in the Customs Tariff, “regard shall be had” to opinions of the World Customs Organization. Near JA found that the CITT essentially used brown cow reasoning in not following two WCO opinions and instead following an earlier decision of the Board. He stated:

Having “regard” … entails that the Tribunal should respect WCO opinions unless there is “sound reason” to do otherwise.

He sent the classification matter back for a fresh hearing.

Neal Armstrong. Summary of Canada (Attorney General) v. Best Buy Canada Ltd., 2019 FCA 20 under Customs Tariff Act, s. 11.

Stewart – Tax Court of Canada finds that a mortgage issued in a scam had full FMV

The RRSPs of the two taxpayers and for 117 other investors were defrauded. They were induced to purchase undivided interests in mortgages for an aggregate amount of $7 million, bearing interest at 12%, secured by mortgages on land with a value of around $5,000. Those proceeds immediately disappeared.

D'Arcy J first found that each purchased interest qualified as a “a mortgage secured by real property situated in Canada, or an interest therein” and, thus, as a qualified investment under former Reg, 4900(4) –which did not have the current requirement in Reg. 4900(1)(j) that the mortgage amount be “fully secured.” (Other mortgage provisions still lack this requirement.)

He also found that there was no income inclusion in the RRSP annuitants’ income under s. 146(9)(b), on the basis that such mortgage interests had a fair market value that equaled rather than being less than the cash consideration paid by the RRSPs therefor, stating that:

The fact that they paid a price similar to the price paid by 117 other individuals evidences that they negotiated the price in “a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length”. …

…[P]aragraph 146(9)(b) does not apply in a situation where a taxpayer directs his/her RRSP to make an investment with an arm’s length party for what the taxpayer believes is a fair market value consideration and the investment turns out to be a poor investment.

This case illustrates the proposition that the fair market value of an “investment” such as Bre-X can be rest on ignorance of reality.

Neal Armstrong. Summaries of Stewart v. The Queen, 2019 TCC 22 under Reg. 4900(1)(j), s. 146(9)(b) and General Concepts - FMV.

Income Tax Severed Letters 30 January 2019

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

CRA expands its comments on the disclosure of tax accrual working papers

In the final version of his response to a question dealing with tax accrual working papers, Gordon Parr expanded his comments respecting solicitor-client privilege to include the bolded text below (as compared to the answer orally presented at the annual CTF conference):

A taxpayer may claim that the tax accrual working papers include information that is subject to solicitor-client privilege. The CRA cannot compel production of privileged communications, but a taxpayer has the right to waive privilege. The taxpayer’s list of uncertain tax positions that relates to the tax reserves in the taxpayer’s financial statements is considered to be part of the taxpayer’s books and records and is not a privileged document unless otherwise demonstrated.

This perhaps makes it clearer that CRA would acknowledge that it would be appropriate to redact any portion of the “list” that summarized tax advice received from a law firm.

Neal Armstrong. Summaries of 27 November 2018 CTF Roundtable Q. 11, 2018-0779971C6 under s. 231.1(1) and s. 232(1) – solicitor-client privilege.

CRA positions on plain vanilla domestic structures may not be portable to offshore structures

A response co-authored by Len Lubbers stated:

[W]here reliance is placed on a published view regarding a plain vanilla domestic tax arrangement, taxpayers should not be surprised that the CRA might take the view that the underlying facts and issues in an offshore structure would be sufficiently distinguishable to result in a challenge to taxpayer’s self-reported assessment of tax. …

The response also referenced CRA’s “commitment … to resolve disputes at the earliest possible stage.”

Neal Armstrong. Summary of 27 November 2018 CTF Roundtable Q. 7, 2018-0779951C6 under s. 152(1).