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Mariani - Ontario Court of Justice finds that business records extracted from seized data storage units contrary to s. 8 of the Charter could be admitted into evidence

A CRA auditor had a strong suspicion that the audited company (MMFL) had been paying for substantial construction work on its individual shareholder’s home, but she did not transfer the file over to criminal investigations until eight months later when she encountered evidence suggesting that invoices on hand at MMFL from the building contractor had been fraudulently altered to disguise that this was going on. Greene J found that this did not engage the Jarvis doctrine based on evidence of the CRA auditor that, up until that point, she was exploring s. 163(2) civil penalties rather than considering it to be a criminal matter. Accordingly, the evidence subsequently seized pursuant to a search warrant after the transfer of the file to criminal investigations was not excluded by Greene J on Jarvis grounds.

However, there was a deficiency in the search warrant. It authorized CRA to seize records and data storage units, but did not authorize CRA to conduct a thorough search of the data storage units. However, Greene J found that s. 24(2) of the Charter permitted this evidence seized contrary to s. 8 of the Charter to be used at trial since the admission of such evidence would not put the “administration of justice into disrepute.” In particular, “the CRA investigators honestly believed that the warrant permitted the search of the computers and the ability to forensically examine the computers” and since the “CRA officers limited their search to banking records, tax forms, invoices and similar documents,” “the privacy interest was arguably reduced.”

Neal Armstrong. Summary of R. v. Mariani, 2019 ONCJ 128 under Charter s. 8.

Jimenez – Court of Appeal of England and Wale finds that a demand for information issued to a former UK resident was valid

The UK tax legislation contained a blanket provision stating:

An officer of Revenue and Customs may by notice in writing require a person ("the taxpayer")—

(a) to provide information, or

(b) to produce a document,

if the information or document is reasonably required by the officer for the purpose of checking the taxpayer's tax position.

The taxpayer was a Dubai resident who also was a UK national and former UK resident. HMRC was investigating his past and present tax positions including as to when he ceased to be a UK resident, and issued a notice to him at his Dubai address asking him to produce banking information and a schedule of his visits to the UK over a nine-year period.

The Court found the notice to be valid for U.K purposes. Leggatt LJ stated:

Counsel for Mr Jimenez … relied on a distinction … adopted … [by Rossiter CJ] in Oroville Reman & Reloadbetween documents of notice that merely involve the supply of information with no threat of penalties in the event of non-compliance and documents involving a compulsory process or containing a command. They submitted that a document of the latter kind, such as the notice issued in this case which explicitly threatened penalties if Mr Jimenez did not comply with it, must be regarded as an unlawful exercise of enforcement jurisdiction.

… I do not accept that sending a notice by post to a person in a foreign state requiring him to produce information that is reasonably required for the purpose of checking his tax position in the UK violates the principle of state sovereignty. Such a measure does not involve the performance of any official act within the territory of another state – as would, for example, sending an officer of Revenue and Customs to enter the person's business premises in a foreign state and inspect business documents that are on the premises … .

[T]he imposition of a civil penalty … for failure to comply with such a taxpayer notice would [not] involve an exercise of enforcement jurisdiction … provided that no steps are taken to seek to enforce the penalty in a foreign state.

Neal Armstrong. Summary of Jimenez, R. (On the Application of) v The First Tier Tribunal (Tax Chamber) [2019] EWCA Civ 51 under s. 231.1(1)(d).

Morrison 2002 Maintenance Trust – Court of Appeal of England and Wales finds that identifying the form of ultimate sale was not essential to finding a pre-ordained series

Three “Scottish Trusts” exercised their put to sell shares of a listed public company to trusts (the “Irish Trusts”) with similar terms for the shares’ cost base of £4.5M; and the Irish Trusts sold the same shares eight days later to Merrill Lynch for £14.3M, who then sold the shares into the market. Newey LJ confirmed the findings below that the put exercise and subsequent sale were a "pre-ordained series of transactions" (a.k.a., a "single composite transaction") under the Ramsay doctrine so that the transactions were to be treated for U.K. capital gains purposes as if the Scottish Trusts had disposed of their shares for £14.3M.

The Scottish Trusts submitted inter alia that it was significant that at the time of exercise of the put, it was contemplated that the Irish Trusts would on-sell their shares into the market (through the agency of Merrill Lynch), whereas in fact the shares were sold to Merrill Lynch as principal for what effectively was a partially underwritten price. Newey LJ stated that he agreed with the First-tier Tribunal:

that the sale to Merrill Lynch "sufficiently corresponded to the scheme as planned" and … it "would be extraordinary if the application of the Ramsay approach could be defeated by the sale being to brokers rather than to the market by brokers on behalf of the Irish Trustees" … .

The identification of a so-called “common law” series of transactions is still relevant under the ITA since, in order for an extended series to be deemed to exist under s. 248(10), there first must be the identification of a common law series to which “in contemplation of” transactions can be assimilated.

Neal Armstrong. Summary of The Trustees of the Morrison 2002 Maintenance Trust & Ors v Revenue and Customs [2019] EWCA Civ 93 under s. 248(10).

CRA indicates that the requirement for employer profit contributions to an EPSP cannot be waived

In approximate terms, one of the requirements to qualify as an EPSP is that the employer make payments computed by reference to profits to the plan trustee. CRA stated:

This means that there must be a binding obligation on the employer to make contributions pursuant to the plan’s contribution formula, and that such contributions must actually be made in the event of profits.

If this requirement ceases to be met because the employer no longer wishes to make contributions, the plan will cease to qualify as an EPSP – and it will be a question of fact as to whether it thereafter becomes a salary deferral arrangement, retirement compensation arrangement or an employee benefit plan.

Neal Armstrong. Summary of 11 February 2019 External T.I. 2018-0738561E5 under s. 144(1) - employees profit sharing plan - para. (a).

Mikhail - Tax Court of Canada allows taxpayers to resile from their admission that they received funds from their corporation

After CRA inquired as to the treatment of rebates (in the form of traveller’s cheques, gift cards and prepaid credit cards) received by an incorporated pharmacy from generic pharmaceutical drug manufacturers, the two shareholders (a married couple) decided to treat the rebate amounts as additions to their income and filed T1 amendments accordingly. They may have been assuming that the corporation would receive offsetting deductions (to the amounts of the rebates received by it) through additions to its deductions for services fees paid to the husband and to the employee remuneration paid to the wife.

However, CRA applied its presumption that amounts paid to shareholders generally are received by them qua shareholder rather than employee (or services provider) and assessed the corporation on the basis that it had paid the rebate amounts to the individuals as non-deductible shareholder benefits, so that the rebates were included in income at both the corporate and individual level.

Monaghan J accepted the husband’s testimony that the corporation had spent the rebate amounts purchasing supplies for use in its business and that the reason that they had reported the rebate amounts as personal income was that this would make it easier to deal with CRA as they had no documentary evidence that the rebate amounts were spent at the corporate level. Accordingly, the rebate amounts were not taxable benefits and Monaghan reversed the personal reassessments and confirmed the corporate reassessments.

Neal Armstrong. Summaries of Mikhail v. The Queen, 2019 TCC 49 under s. 15(1) and . 152(4)(a)(i).

Bernardin – Court of Quebec finds that interest that accrued prior to a class action judgment having become res judicata was non-taxable

An individual, by virtue of being part of a group of class action claimants, was awarded damages in 2004 of $1,200 for each of the eight winter seasons in which she had endured snowmobile noise. In 2010 she received a supplementary “indemnity” pursuant to Article 1619 of the Quebec Civil Code of $8,400 (capital) and $6,148 (interest). Whether the interest was taxable under the Taxation Act turned on when her damages were considered to have become “liquidated.”

Coutlée, J.C.Q. found that this liquidation date did not occur until July 3, 2009, being the date on which the Attorney General of Quebec abandoned the appeal which had been launched in December 2004 (reasoning that it was only on that date that “the November 30, 2004 judgment attained the status of res judicata”) – so that only the awarded interest that was referable to the period after July 3, 2009 was taxable to the individual.

Neal Armstrong. Summary of Bernardin v. Agence du revenu du Québec, 2019 QCCQ 846 under s. 12(1)(c).

CRA further clarifies that a qualifying s. 94(2)(t) sale of Canadian shares effects an immediate change in trust residency

If a non-resident trust is "tainted" as a resident trust under s. 94(2)(g) by being issued shares by a resident corporation, it potentially can re-acquire non-residency status under s. 94(2)(t) if it makes a qualifying sale of the shares. When this occurs, it changes its status immediately, so that it is non-resident for the stub period beginning with the sale, is resident for the stub period before the sale, and has a potential deemed disposition of its property under the emigration rule (s. 128.1(4)) as a result of the status change.

2013-0509111E5 confirmed the above results. However, a 2019 Interpretation has essentially amended 2013-0509111E5 by getting rid of a confusing passage that suggested that for certain purposes the trust remained a deemed resident until year end. The 2019 interpretation confirms that the sale triggers the change back to non-resident status for all relevant purposes.

Neal Armstrong. Summary of 17 January 2019 Internal T.I. 2018-0781041I7 under s. 94(2)(t).

Income Tax Severed Letters 13 March 2019

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

Roy – Tax Court of Canada finds that CRA could not deny the carry-forward of excess RRSP contributions as an imposed quid pro quo for forgiving Part X.1 penalty tax

The taxpayer made a substantial overcontribution to his RRSP to fund investments that quickly became worthless. Accordingly, he was not in a position to withdraw the amount of the overcontributions to mitigate the corresponding Part X.1 penalty tax. CRA granted his application to waive that tax under s. 204.1(4). However, it thought that it was fair to also deny him any further deductions of the over-contributed amount in future years as he gradually earned income in those years to utilize the excess. Accordingly, it denied RRSP deductions taken by him in those subsequent years.

Smith J, in allowing the claimed RRSP deductions, stated:

…[T]he Respondent has failed to point to any legislative provision that would allow the Minister to eliminate unused RRSP contributions on the basis that they represent excess contributions.

Moreover … the Court does not make decisions on the basis of fairness ... .

Neal Armstrong. Summary of Roy v. The Queen, 2019 TCC 50 under s. 204.2(1.2).

CRA provides numerical speed limits on a pipeline for a company with a marketable securities “business”

CRA has provided the usual rulings for a pipeline transaction in which the estate sells a company with a “business” of investing and trading in marketable securities to a Newco for consideration comprising mostly a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time.

The ruling letter stipulates that the amalgamation will occur no sooner than 12 months after the sale to Newco, and that thereafter the note will be paid off no faster than 15% per quarter for the first year. This contrasts with, for example, 2014-0540861R3 F and 2014-0548621R3, where these two parameters were 12 months and 25% per quarter, and 2016-0670871R3, where they were 30 months and 15% per quarter.

Neal Armstrong. Summary of 2018 Ruling 2018-0767431R3 under s. 84(2).