News of Note

Diktakis – Tax Court of Canada finds that a taxpayer and her two years old half-sister were related

ITA s. 251(6)(a) indicates that siblings are related. Smith J found that a taxpayer was related to a two year old child who was the result of relations between the taxpayer’s father and a woman who was not his spouse or common-law partner. Accordingly, the taxpayer might have been entitled to the new housing GST rebate if she could have established (which she did not) that her half-sister and that child’s mother had been the first occupants of a new condo that had been acquired by the taxpayer.

In this regard, Smith J noted the oddity of a two-year old child satisfying the occupying-the-new-home requirement in the rebate provisions. However, he referred to s. 158 of the Civil Code of Quebec, which provided that “an act that may be performed by a minor alone may also be validly performed by his representative,” and then found that the acts of the child (i.e., home occupation) could be performed by her representative (the mother).

Neal Armstrong. Summaries of Diktakis v. The Queen, 2016 TCC 262 under ETA, s. 254(2)(g).

Six further full-text translations of CRA technical interpretations/Roundtable items are available

Full-text translations of the French technical interpretation released last week, of two (APFF) Roundtable item released on January 14, 2015 and of three technical interpretations released on January 7, 2015, are listed and briefly described in the table below.

These (and the other translations covering the last 30 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2017-07-05 7 June 2017 External T.I. 2016-0671731E5 F - Transfer of life insurance policy by dividend in kind Income Tax Act - Section 148 - Subsection 148(7) - Paragraph 148(7)(a) dividend-in-kind of a life insurance policy avoids the policy’s disposition at FMV
Income Tax Act - Section 52 - Subsection 52(2) proceeds and cost of distributed life insurance policy determined under s. 148(7) rather than s. 52(2)
2015-01-14 10 October 2014 APFF Roundtable, 2014-0538131C6 F - revenus d'achats intégrés Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(a) full inclusion for in-app sales
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) no reserve for extended use by purchasers of in-apps
10 October 2014 APFF Roundtable, 2014-0538621C6 F - Disposition en contrepartie de 1$ Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) treatment of transfer for nominal consideration as "gift" turns on Quebec law
2015-01-07 13 November 2014 External T.I. 2014-0523911E5 F - Frais médicaux Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(a) Quebec osteopath and orthotherapist services excluded from METC
27 November 2014 External T.I. 2013-0503861E5 F - Application du paragraphe 248(16) Income Tax Act - Section 248 - Subsection 248(16) ETA s. 193 ITC claim does not reduce UCC under s. 85(1)(e)(i)
Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e) ETA s. 193 ITC generated on drop-down does not reduce UCC at that time
23 September 2014 External T.I. 2013-0509021E5 F - Rajustement obligatoire Income Tax Act - Section 28 - Subsection 28(1) - Paragraph 28(1)(c) qualification of non-breeding animals as inventory

CRA states that whether aluminium shingles were a fixture turned on their purpose

New aluminum shingles with an electric cable (the “Equipment”) were attached over existing asphalt shingles on the portion of a roof immediately beneath existing solar panels, so as to melt snow accumulations, which otherwise would hinder the functioning of the solar panels. In order for the Equipment to qualify as Class 43.2 property, it could not be “part of the building,” i.e., it could not be a fixture.

CRA stated that this turned on the question of “whether an article is attached to another property to effect a permanent and substantial improvement of that other property or to enable [its] more complete enjoyment.” In then applying this test, it stated:

Here, the intention to install the Equipment is to resolve a problem caused by the deficient operation of the solar panels. Thus, the fact that the Equipment is necessary for the proper operation of the photovoltaic equipment during the winter period and that its main function is to support the solar panels (with any benefits to the building being negligible), may support the inclusion of its capital cost to Class 43.2… .

Neal Armstrong. Summary of 16 May 2017 External T.I. 2016-0670661E5 under Class 43.1.

Binder Capital – Federal Court finds that it lacks the jurisdiction to overturn CRA’s decision not to extend s. 129(1) refund-claim deadline

In 1057513, Webb JA found that a corporation was ineligible for dividend refunds for various years because it did not file the returns claiming the dividend refunds within three years of the taxation year-ends in question as required under s. 129(1).

Binder Capital sought extension of the three-year deadline on the basis of extenuating circumstances explaining its delay in filing returns, and submitted that the discretion accorded to the Minister under s. 220(3) to extend a return-filing deadline impliedly accorded the Minister the discretion to extend the s. 129(1) 3-year deadline. In denying this request, CRA applied its position in 2011-0426331E5 that:

Although subsection 220(3) of the Act provides the Minister with the discretion to extend the time for making a return of income, this discretion does not extend to the filing deadline in subsection 129(1) of the Act… Subsection 220(3) does not alter or affect whether a corporation has factually filed its return of income within the period required under the Act.

In dismissing Binder Capital’s application to overturn this decision, Campbell J stated:

[W]hether the Minister’s discretion applies to s. 129 is a jurisdictional question with respect to an interpretation of the ITA which is not within this Court’s authority to decide.

Given the findings in 1057513, this effectively seems to indicate that the s. 129(1) claim-deadline cannot be extended even where there are extenuating circumstances explaining the delay.

Neal Armstrong. Summary of Binder Capital Corp v. Canada (National Revenue), 2017 FC 642 under s. 129(1).

Grant – Tax Court of Canada finds that the six-month CRA filing “requirement” in s. 227.1(2)(c) is merely directory

Smith J confirmed the finding in Kalef that the appointment of a trustee in bankruptcy did not cause an individual to cease to be a director notwithstanding that the directors were no longer in control.

He also applied Kyte and Moriyama to find that the stipulation in s. 227.1(2)(c), that CRA first make proof of its claim within six months of a bankruptcy before assessing a director under s. 227.1, was merely “directory.” Accordingly, an alleged failure to satisfy s. 227.1(2)(c) did not invalidate the s. 227.1 assessment.

Neal Armstrong. Summaries of Grant v. The Queen, 2017 TCC 121 under s. 227.1(4) and s. 227.1(2)(c).

RFC 2012 – UK Supreme Court finds that payments derived from employment services are assessable even where they are agreed to be redirected to a trust with a 3rd-party trustee

A group of companies, which ran a Glasgow football club, implemented a scheme for their key employees to avoid income tax on their annual bonuses or other compensation. Most of the compensation package for an employee might be paid by the employer to a master trust whose trustees in their discretion would use the amount to settle a sub-trust with the class of beneficiaries (usually the employee's family members) determined by them after reading a letter of suggestion from the employee. The trustee of the sub-trust would lend all the funds to the employee under a long-term loan at LIBOR+1.5%, and the employee as sub-trust protector could change beneficiaries or the trustees of the sub-trust.

In finding that this scheme did not work, i.e., the payments to the master trust were taxable employment income subject to source deductions, Lord Hodge stated:

Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money’s worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect.

Neal Armstrong. Summary of RFC 2012 Plc v. Advocate General for Scotland, [2017] UKSC 45 under s. 6(1)(a).

News Australia – Federal Court of Australia finds that interest was “derived” on an accrual basis on a loan where it was a business asset and there was no collection uncertainty

Australia, whose statute still has a general inclusion of income “derived directly or indirectly from [a] source…during the income year,” has provided some of the jurisprudence on the meaning of “derived.” In the Carsden’s case in the Australia High Court, Dixon J expressed the view that the receipts basis of accounting would alone truly reflect the income of a medical practice if “there [was] but little certainty about the payment of fees.”

The Federal Court of Australia found that the accrual basis of taxation was instead appropriate for recognizing interest income on a large loan made by a subsidiary to its parent given inter alia that although it “did not carry on a business of investment or of lending money… its income earning activities included the lending of money to, amongst others, its parent on commercial terms for reward,” and “there was no suggestion on the evidence that payment of the accrued interest income from its parent was uncertain.”

Neal Armstrong. Summary of News Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCA 645 under s. 12(1)(c).

CRA finds that a non-severable parcel of land could not have two beneficial owners of the principal residence and business portions thereof

An individual owning a parcel of farming land that cannot be legally severed would like to transfer the farming portion of the property to a wholly-owned corporation, while retaining beneficial ownership of the farmhouse. In finding that the individual would not be able to claim the principal residence exemption on a subsequent sale by the corporation of this parcel, CRA stated:

[T]he essential rights of ownership of a property used as an individual’s principal residence cannot be transferred or retained separate from the ownership of the rest of the property because the individual does not retain the right of alienation (that is, the ability to transfer the property).

Similar issues can arise in other contexts, for example, where a corporation holding non-severable real estate would like to sell the building to a 3rd-party purchaser directly and the land “through” an affiliate with net capital losses.

Neal Armstrong. Summary of 21 June 2017 External T.I. 2017-0687961E5 under s. 54 – principal residence.

CRA finds that a dividend-in-kind of a life insurance policy avoids the policy’s disposition at FMV

A corporation (“Holdco”) holds a policy on the life of its sole shareholder with an adjusted cost basis (“ACB”), cash surrender value (“CSV”) and fair market value (“FMV”) of $200k, $240K and $450K, respectively. If Holdco transfers the policy to its shareholder as a dividend in kind, its proceeds of disposition (and his cost) will be only the CSV of $240K, since the FMV of the consideration received by it is nil (so that its gain is $40K) - whereas its proceeds of disposition would have been $450K if Holdco instead had paid a $450K dividend to its shareholder, and he had purchased the policy for $450K. (In both scenarios, he would include a $450K dividend (plus gross-up) in his income.)

CRA considers that the lower gain in the dividend-in-kind scenario might be anomalous, and has raised this with Finance.

CRA did not mention s. 52(2), which provides that property paid as a dividend in kind is deemed to have been disposed of and acquired at its FMV – perhaps because it thought it was obvious that s. 52(2) was trumped by s. 148(7).

Neal Armstrong. Summary of 7 June 2017 External T.I. 2016-0671731E5 Tr under s. 148(7)(a).

Thompson – Tax Court of Canada finds that a failure to keep asking questions constituted carelessness

In Aridi, Hogan J found that there was no "neglect" in the taxpayer’s reliance on incorrect advice from his accountant (which he had probed before accepting), so that the reassessment at issue was statute-barred.

In Thompson, Hogan J declined to extend Aridi to the situation where in Year 1 the taxpayer had inquired of his accountant, Why was his income from his newly-incorporated business lower than his cash draws, and was informed that there was an income deferral because shareholder advances had not yet been required to be converted into taxable bonuses - but had failed to inquire in Years 2 and 3, Why did his reported income continue to be low. If he had continued to ask questions, errors in his Years 2 and 3 returns would have emerged, and this “absence of oversight constitute[d] carelessness” which opened up those returns to reassessment beyond the normal reassessment period.

Neal Armstrong. Summary of Thompson v. The Queen, 2017 TCC 115 under s. 152(4)(a)(i).

Pages