News of Note

Use of high-PUC shares rather than a note in a pipeline transaction may be preferred

It is suggested that taking back shares with high paid-up capital (rather than a note) from the transferee Buyco in a pipeline transaction reduces whatever risk there is of s. 84(2) applying.

Neal Armstrong. Summary of Balaji (Bal) Katlai and Hugh Neilson, “Challenges and Caution: Using a Pipeline for Shareholder Remuneration” Tax for the Owner-Manager, Vol. 22, No. 4, October 2022, p. 1 under s. 84(2).

Halwachs – Court of Quebec finds that estimates of a taxpayer’s unreported income based on annual changes to his Swiss bank accounts should be translated using year end spot rates

The ARQ estimated unreported income of the taxpayer for his 2008 to 2010 taxation years from offshore investments based in part on its application of the “indirect variation method” to the bank statements which it had obtained for his Swiss bank accounts. This method was based on the change in the total value of funds held by him from the end of one year to the end of the next.

Breault JCQ found that the results of the application of this method should be converted into Canadian dollars by translating the year end fund balances using the spot exchange rates on December 31 and then taking the differences, rather than by determining the differences in foreign currency and then translating those differences using the average exchange rate for the year (as had been done by the ARQ). He stated:

In this case, since the calculation is based on the last day of each of Mr. Halwachs' taxation years in dispute, the Court is of the view that the same logic should be followed in translating the tax results obtained in this manner into Canadian dollars.

After quoting from ITA s. 261(2) and the Quebec equivalent, he further stated:

[T]he day on which the amount of the variation was determined or "arose" was December 31 of each of the 2008, 2009 and 2010 taxation years.

Neal Armstrong. Summary of Halwachs v. Agence du revenu du Québec, 2022 QCCQ 5817 under s. 261(2).

We have translated 8 more CRA interpretations

We have published 8 translations of CRA interpretations released in March and February of 2004. Their descriptors and links appear below.

These are additions to our set of 2,232 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 18 2/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2004-03-05 25 February 2004 External T.I. 2003-0042461E5 F - Invalidité d'un actionnaire/admin./employé Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose premiums paid by corporation on disability policy on its principal employee are non-deductible
Income Tax Act - Section 3 - Paragraph 3(a) disability benefits received by corporation to fund continuing salary-equivalent payments to its chief employee are not income
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) taxable continued payment of salary-equivalent payments to disabled employee, but no taxable benefit from employer’s previous payment of premiums on funding disability policy
23 February 2004 External T.I. 2003-0050641E5 F - Fiducie Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts no particular mortality table required re donation of a residual interest in a trust to a public charitable foundation
23 February 2004 External T.I. 2003-0051371E5 F - Déduction des intérêts Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) non-deductible personal residence interest could be converted to deductible interest through sale of rental property to spouse for money borrowed by her
16 February 2004 External T.I. 2003-0054091E5 F - Rollover for Contractors Income Tax Act - Section 85 - Subsection 85(1.1) - Paragraph 85(1.1)(a) construction lien holdbacks are eligible property that can be transferred at a nominal agreed amount
Income Tax Act - Section 56 - Subsection 56(4) s. 56(4) not applied where construction lien holdbacks are transferred on s. 85(1) rollover basis to transferee, which includes them when they become receivable
2 March 2004 Internal T.I. 2003-0045921I7 F - 118(5) - impact d'une clause rétroactive Income Tax Act - Section 118 - Subsection 118(5) homologated order with effect of judgment that retroactively eliminated Monsieur’s support obligation re one of his children did not retroactively eliminate the s. 118(5) prohibition
General Concepts - Effective Date CRA would not apply a retroactive judgment to the affected prior period because it was inconsistent with the actual understanding at the time
23 February 2004 External T.I. 2004-0057051E5 F - RAP - Personne séparée Income Tax Act - Section 146.01 - Subsection 146.01(1) - Regular Eligible Amount - Paragraph (f) separated spouse’s ownership is relevant
3 March 2004 Internal T.I. 2004-0061781I7 F - Engagement de non-concurrence Income Tax Act - Section 9 - Exempt Receipts/Business Manrell inapplicable where recipient of non-compete carried on the related business
2004-02-27 24 February 2004 External T.I. 2003-0041121E5 F - Avantages imposables-installations récréatives Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) making employer’s resort recreational facilities available to all employees not a taxable benefit

Frucor Suntory – New Zealand Supreme Court applies the NZ GAAR to treat interest coupons under a convertible loan and forward purchase arrangement as mostly principal

The New Zealand GAAR provided that a tax avoidance arrangement (defined to include an arrangement that has “tax avoidance as its purpose or effect … [or] as 1 of its purposes or effects … if the purpose or effect is not merely incidental”) was void as against the Commissioner. However, Ben Nevis had essentially found that where an arrangement “viewed in a commercially and economically realistic way” did not have the effect of using particular provisions of the NZ Act “in a manner … beyond parliamentary contemplation,” it generally would not be a tax avoidance arrangement. (Thus, the NZ courts got to a somewhat similar result as if there had been a specific statutory safe harbour like ITA s. 245(4), but with more emphasis on economic substance.)

Ignoring interim financing steps, a NZ “Buyco” (DHNZ) in the Danone group financed about ¾ of its acquisition of a NZ target company with a $204 million interest-bearing advance from Deutsche Bank pursuant to a note that was convertible into non-voting shares of DHNZ. Contemporaneously with the advance, the Singapore immediate parent of DHNZ (DAP) paid Deutsche Bank $149 million pursuant to a forward purchase agreement to acquire the shares to be issued on maturity of the note.

William Young J indicated that the economic substance of the arrangements was that Deutsche Bank advanced only $55 million to DHNZ (being the difference between the $204 million advance and the $149 million paid by DAP under the forward purchase agreement) and that the $66 million in “interest” coupons paid by DHNZ to Deutsche Bank over the term of the $204 million advance amounted to repayment of that $55 million and interest on an amortizing basis.

In finding that there was thus a tax avoidance transaction (so that the Commissioner appropriately treated $55 million of the “interest” payments as being non-deductible), he stated:

[T]he effect of the arrangement was that DHNZ sought to obtain deductions in relation to $55 million in principal repayments. These are provided for in the Act to meet financing expenses and not repayments of principal. DHNZ was thus claiming deductions for expenses which, in economic substance, it had not incurred. This use of the relevant deduction provisions of the Act lay outside of parliamentary contemplation as to the use of those provisions.

This decision perhaps has the greatest interest in the context of the announced intention of Finance “to add an explicit economic substance rule to the GAAR.” Its finding that the Parliamentary intent was to provide deductions only for real financing expenses is also somewhat reminiscent of Global Equity (finding that it is an abuse of s. 9 to recognize losses not corresponding with commercial reality).

Neal Armstrong. Summary of Frucor Suntory New Zealand Limited v Commissioner of Inland Revenue, [2022] NZSC 113 under s. 245(4).

CRA indicates that whether a virtual medical service is rendered at the location of the health professional or of the patient requires a review of the provincial licensing requirements

S. 118.4(2)(a) indicates, respecting references in various provisions to listed types of health-care professionals, that “where the reference is used in respect of a service rendered to a taxpayer,” the reference to an authorized health care professional refers to authorization “pursuant to the laws of the jurisdiction in which the service is rendered.” In the context of services rendered virtually, is this referring to the health care professional’s location at the time of rendering the services, or to the location of the patient at such times? CRA stated:

It is a question of fact whether a virtual medical service is considered rendered at the location of the health care professional, the location of the patient, or both. Many governing bodies regulate virtual medical services performed within their province. This can include licensing requirements for professionals performing virtual medical services within their province, licensing requirements for professionals in their province performing virtual medical services for a patient in another province, licensing requirements for professionals performing virtual medical services from outside their province for an individual within their province, and so on. Each of these requirements must be considered before a determination can be made.

This indicates that CRA does not want to address in the abstract the question of whether health-care professionals are “authorized” if they are licensed in the location where they are sitting at their screens but not where their patient is located, or vice versa, without reviewing the actual licensing rules.

Accordingly, this interpretation does not illuminate the question as to whether a professional working outside Canada can be considered to be rendering services in Canada to Canadian clients for purposes of Reg. 105.

Neal Armstrong. Summary of 29 June 2022 External T.I. 2022-0923441E5 under s. 118.4(2)(a).

Zeifmans – Federal Court of Appeal confirms that its earlier TD Bank decision has been overruled (re prior judicial authorization for s. 231.2(1) demands)

An accounting firm (Zeifmans) unsuccessfully argued before Walker J in the Federal Court that the Minister should have sought prior judicial authorization under s. 231.2(3) of a requirement to provide information (RFI) issued in the course of a CRA audit of three related resident individuals (the “named persons”) who were Zeifmans clients. The RFI set out a detailed list of required information and documents in relation to the named persons and all “entities owned, operated, controlled or otherwise connected to [such] individuals” (the “unnamed entities.”)

In confirming the decision below that no such prior judicial authorization was required, Stratas JA adverted to Toronto Dominion Bank (where the FCA found that a demand to the Bank to disclose the name, address and telephone number of an account holder to whose account a tax debtor had deposited a cheque was invalid as there was no prior judicial authorization under s. 231.2(2)) and stated:

Artistic Ideas, eBay and their progeny correctly interpret section 231.2. To the extent that Toronto Dominion Bank stands for something different from Artistic Ideas, eBay and their progeny, it should not be followed.

He also confirmed the finding below that CRA had not targeted the unnamed entities for investigation (so as to require judicial authorization).

Neal Armstrong. Summary of Zeifmans LLP v. Canada (National Revenue), 2022 FCA 160 under s. 231.2(1).

Income Tax Severed Letters 28 September 2022

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

Abdat – Federal Court finds that CRA reasonably refused remission of tax that had been agreed to be paid pursuant to a settlement agreement

After having reached a settlement with CRA on favourable terms of his Tax Court appeal of net worth assessments, Abdat brought an action against CRA for damages (which later was dismissed). In that context, a retired CRA collections agent - who had been assigned to the file after the initial objection of Abdat to his reassessments, to determine if there was a collection risk - stated on an examination under oath that he had no doubt that the reassessments were ill-founded.

Abdat then brought this application for judicial review of CRA’s refusal to recommend remission, under s. 23 of the Financial Administration Act, of the taxes owing by Abdat from reassessments pursuant to the settlement offer.

In finding that CRA’s decision was intelligible and reasonable (and did not reflect any fettering of the CRA decision-maker’s discretion), so that the application should be dismissed, Grammond J noted that the decision-maker could reasonably rely on the settlement agreement having taken into account concerns expressed by the CRA collections agent, which concerns were already known to Abdat. Grammond J further stated:

It stands to reason that a remission order should not normally be used as an alternative avenue of appeal for a taxpayer who has failed to pursue the remedies available under the Income Tax Act, let alone as a means of overriding a settlement to which the taxpayer has agreed. …

Internal disagreement alone does not prove the outcome of the objection and appeal process to be wrong … .

Neal Armstrong. Summary of Abdat v. Canada (Attorney General), 2022 CF 1316 under Financial Administration Act, s. 23.

Contact Lens King – Federal Court of Appeal finds that a requirement to make supplies pursuant to a prescription did not require obtaining a copy of the prescription

The zero-rating for contact lenses in Sched. VI, Pt. II, s. 9 requires that the contact lenses be supplied under the authority of a prescription by an authorized practitioner, but does not explicitly require that the supplier obtain and retain copies of such prescriptions. LeBlanc JA found, contrary to the Tax Court, found that no such requirement should be inferred. However, he found that the supplier (a U.S. corporation that apparently did not require any confirmation of the prescription other than that implicit in the notion that most customers would not be able to provide the contact lens particulars without having first received a prescription) was required to establish the prescriptions’ “existence by means of sufficient and credible evidence,” which it had not done.

He noted that the supplier, after the reporting periods in issue, had commenced requiring customers to certify that they had the prescription in their possession – and, regarding this customer attestation requirement, stated:

[I]t is not for this Court, in this context, to measure its impact on the burden imposed on the appellant. The question will surely arise in the future.

Neal Armstrong. Summaries of Contact Lens King Inc. v. Canada, 2022 CAF 154 under ETA Sched. VI, Pt. II, s. 9, s. 286(1) and Statutory Interpretation – Inserting Words.

We have translated 8 more CRA interpretations

We have published 8 translations of CRA interpretations released in March of 2004. Their descriptors and links appear below.

These are additions to our set of 2,224 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 18 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2004-03-12 4 March 2004 External T.I. 2003-0049831E5 F - Allocation pour l'achat d'ordinateur Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) reimbursement of internet and modem charges not taxable where internet access is essential to performing employment duties
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) monthly home computer allowance was taxable
5 March 2004 External T.I. 2004-0060831E5 F - Congé à traitement différé Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(i) no SDA impact if, after taking leave, an employee responds to early retirement incentives
2004-03-05 10 February 2004 Income Tax Severed Letter 2003-0052621A11 F - Régime de pension étranger Treaties - Income Tax Conventions - Article 18 French social security payments based on years of service in self-employment were not exempted a having been “paid in respect of past employment”
1 March 2004 External T.I. 2003-0017861E5 F - Bien agricole admissible Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Farm or Fishing Property - Paragraph (a) - Subparagraph (a)(iii) farm satisfied the qualified farm property definition on the death of an individual who, with his father, had used it in farming
Income Tax Act - Section 159 - Subsection 159(5) general overview/ election unavailable where s. 70(9) applies
1 March 2004 External T.I. 2003-0060381E5 F - Police d'assurance exonérée Income Tax Act - Section 148 - Subsection 148(9) - Proceeds of the Disposition proceeds must be recognized on termination of policy irrespective of whether an exempt policy
2 March 2004 External T.I. 2003-0042631E5 F - Déductibilité de dépenses Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose life interest in condo to surviving spouse precluded deductibility of condo expenses
1 March 2004 External T.I. 2004-0059151E5 F - Déduction des intérêts Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) interest generally deductible on money borrowed to acquire preferred shares with a dividend entitlement
26 February 2004 External T.I. 2003-0045471E5 F - Prêt à un actionnaire Income Tax Act - Section 15 - Subsection 15(2.4) - Paragraph 15(2.4)(e) housing loan not excluded if comparable employees would not have received it
Income Tax Act - Section 15 - Subsection 15(1.21) inclusion of home-acquisition loan under s. 15(2) precluded a further inclusion under s. 15(1.21)
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense forgiven amount not deductible in computing income