News of Note

Soucy - Court of Quebec finds that a double gift was not an avoidance transaction

A direct gift of a vehicle to the taxpayer by her ex-husband would have been subject to Quebec sales tax as they were now unrelated persons. From this perspective, QST was avoided as a result of the vehicle being gifted by her ex-husband to her daughter, and then by her daughter to her – both of them, related-person transfers. In finding that these were not avoidance transactions for Quebec GAAR purposes, Poirier JCQ accepted the taxpayer’s testimony that the transactions had to happen this way in order for her to get the vehicle – her ex was only prepared to give the vehicle to her daughter.

He also stated that "utilizing the exemptions provided by the Act cannot constitute an abuse within the meaning of the Act."

Neal Armstrong. Summary of Soucy v. Agence du revenu du Québec, 2018 QCCQ 4845 under ETA s. 274(3).

A proposed amendment will allow charities to fully engage in non-partisan public policy dialogue and development in furtherance of their charitable purposes

Canada Without Poverty made a declaration “that the phrase 'charitable activities' used in s. 149.1(6.2) be read to include political activities, without quantum limitation, in furtherance of the organization’s charitable purposes.” A joint Finance/CRA Press Release has now indicated that although this decision (which contains “significant errors”) will be appealed “to seek clarification on important issues of constitutional and charity law,” this Fall the Government will also introduce retroactive amendments “consistent with recommendation no. 3 of the Report of the Consultation Panel on the Political Activities of Charities.” That recommendation (in its detailed form) stated:

The Panel recommends that amendments:

  1. retain the current legal requirement that charities must be constituted and operated exclusively for charitable purposes, and that political purposes are not charitable purposes;
  2. fully support the engagement of charities in non-partisan public policy dialogue and development in furtherance of charitable purposes, retiring the term "political activities" … and clearly articulating the meaning of "public policy dialogue and development" to include: providing information, research, opinions, advocacy, mobilizing others, representation, providing forums and convening discussions; and
  3. retain the prohibition on charities’ engaging in "partisan political activities", with the inclusion of "elected officials" (i.e. charities may not directly support "a political party, elected official or candidate for public office"), and the removal of the prohibition on "indirect" support, given its subjectivity. …

Neal Armstrong. Summaries of Statement by the Minister of National Revenue and Minister of Finance on the Government’s Commitment to Clarifying the Rules Governing the Political Activities of Charities (15 August 2018 Press Release) and of Report of the Consultation Panel on the Political Activities of Charities 13 March 2017 under s. 149.1(6.2).

CRA will apply a tracing approach for split income purposes where a shareholder-spouse works 20 hours (as measured by time logs) in only one of the corporation’s businesses

CRA provided a number of comments on the split income rules:

  • In addition to repeating previous comments respecting shares of holdcos not being excluded shares, it confirmed that there was a similar problem for dividends from a related manufacturing company paid through a family trust.
  • Where a shareholder-spouse works in only one of two businesses of the corporation, an excluded amount determination respecting the worked-in business requires “separate accounting for each business and a tracing of funds.”
  • CRA will cut some slack with respect to pre-2018 years, but on a going forward basis, if reliance will be placed on the spouse or child having worked 20 hours per week in a business, “the ongoing maintenance of [timesheets, schedules, or logbooks] in respect of any family members involved in the business will ensure that businesses are able to comply with the new rules.”
  • Respecting the requirement for excluded shares to be of a corporation that derives less than 90% of its business “income” (i.e., revenue) from the “provision of services,” CRA repeated some previous examples about replacement part sales by plumbers and mechanics being good, whereas charges by an office cleaner for cleaning supplies are to be ignored - but then went on to note that:

We are in the process of preparing examples to illustrate how the determination of whether less than 90% of the income of a corporation is from the provision of services is made.

Neal Armstrong. Summaries of 25 May 2018 External T.I. 2018-0761601E5 under s. 120.4(1) – excluded shares – para. (b), excluded shares – subpara. (a)(i), excluded amount – subpara. (e)(ii) and s. 120.4(1.1)(a).

Income Tax Severed Letters 15 August 2018

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

Saramac – Quebec Court of Appeal confirms the voiding of a search warrant based on failure to disclose that lawyers worked at the targeted premises

When the ARQ laid the information seeking a search warrant for a search of the taxpayers’ office, it did not disclose, despite being aware that this was likely, that a lawyer and notary worked at those premises, and the search warrant accordingly was issued by the magistrate without knowledge of this. After noting that in fact there had been issues as to the proper protection of legal privilege, Mainville JCA affirmed the annulment by Dallaire JCS below of the search warrant and his order to return the seized documents.

Neal Armstrong. Summary of Agence du revenu du Québec v. 9229-0188 Québec Inc. (Saramac Schokbéton Québec Inc.), 2018 QCCA 1039 under s. 231.3(3).

Safe income should be calculated on a share-by-share rather than class-by-class basis

If a shareholding of the same class has been purchased over time, this is thought to mean that the older shares will have earned more safe income. This suggests that if a dividend of $X per share is paid on that class, it is insufficient to know that on a global basis there is enough safe income on hand of the class to cover that dividend.

Neal Armstrong. Summary of Henry Shew, "Safe Income May Vary Within Shares of the Same Class", Canadian Tax Focus, Vol. 8, No. 3, August 2018, p. 3 under s. 55(2.1)(c).

CRA rules that a double transfer of shares under ss. 85(1) and 85.1(3) would not affect the shares’ capital property status

CRA provided s. 55(3)(a) rulings in the usual guarded form respecting a spin-off by one Canadian subsidiary (CanSub1) of a public company of CanSub1’s foreign subsidiary (ForSub1) to another wholly-owned Canadian subsidiary (CanSub2) of the public company. The summary stated respecting the non-application of GAAR that “there is no creation or streaming of cost base and the preferred shares ... are cross-redeemed for notes that are set-off and cancelled." The Additional Information stated that the proposed transaction is not expected to affect the trading in the shares of the public company.

It was proposed that the acquisition by CanSub2 of the ForSub1 shares be followed by their s. 85.1(3) drop-down to a foreign subsidiary of CanSub2. CRA ruled that this double transfer of the ForSub1 shares would not result in those shares not qualifying as capital property.

Neal Armstrong. Summaries of 2016 Ruling 2016-0648991R3 under s. 55(3)(a) and s. 85.1(3).

Six further full-text translations of CRA interpretations are available

The table below provides descriptors and links for six Interpretation released in May 2013, as fully translated by us.

These (and the other full-text translations covering all of the 621 French-language Interpretations released in the last 5 1/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2013-05-15 23 November 2012 External T.I. 2012-0449101E5 F - Production exclue - CIPCMC Income Tax Regulations - Regulation 1106 - Subsection 1106(1) - Excluded Production - Paragraph (a) - Subparagraph (a)(iii) - Clause (a)(iii)(A) 5-year test was violated when successor to production company became controlled by an unrelated person
13 September 2012 Internal T.I. 2012-0442671I7 F - Dédommagement pour la perte de bénéfices Income Tax Act - Section 248 - Subsection 248(1) - Death Benefit damages received for loss of life insurance coverage were not rendered a death benefit under the surrogatum principle
Income Tax Act - Section 6 - Subsection 6(3) damages received by former employees of insolvent company for cancellation of their life insurance coverage were received in lieu of remuneration for their employment services
Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(b) legal fees paid to recover damages for employer cancellation of insurance coverage, and medical plan, qualifed and did not qualify, respectively
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i) damages received after 2011 by employees of an insolvent company for cancellation of their medical plan have become taxable
6 December 2012 External T.I. 2012-0461711E5 F - Paiements indirects / Indirect payments Income Tax Act - Section 56 - Subsection 56(2) 56(2) inapplicable to incorporated artist respecting producer paying mandatory contributions to the fund for the artist’s union
Income Tax Regulations - Regulation 200 - Subsection 200(1) no T4A slip to be issued by producer paying mandatory contributions to the fund for the union of the artist whose corporation receives fees from the producer
18 April 2013 Internal T.I. 2013-0485481I7 F - Balance of sale price without interest Income Tax Act - Section 16 - Subsection 16(1) s. 16(1) inapplicable if sale price including non-interest bearing balance does not exceed sold assets’ FMV
21 January 2013 Internal T.I. 2012-0442021I7 F - Assessing 163(2) penalty Income Tax Act - Section 163 - Subsection 163(2) - Paragraph 163(2)(c.2) penalty is computed on total RMES adjustment, not just the false portion
Income Tax Act - Section 163 - Subsection 163(2) - Paragraph 163(2)(c) false RMES claim by husband does not generate any penalty for resulting overstatement of CCTB, WITB and GSTC by wife, assuming she made no false statement
Income Tax Act - Section 163 - Subsection 163(2) - Paragraph 163(2)(a) - Subparagraph 163(2)(a)(i) deduction against increase to income attributable to a false statement can be reduced by QPP contribution increase or by discretionary CCA claim that is wholly related to that income source
20 March 2013 Internal T.I. 2012-0463181I7 F - Revenu des entrepreneurs Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) completion method unavailable for communication and electricity structure installations

Ardmore Construction – Court of Appeal of England and Wales accepts that the determination of source of income is to be made on a multifactorial and practical basis

In Folio S5-F2-C1, CRA states that the source of interest generally is in the country of residence of the debtor.

Lady Justice Arden noted the agreement of the parties before her that the question of source was a “multifactorial” one, so that the residence of the debtor would not always be determinative, and also referred to jurisprudence indicating that the question of source should be determined from a practical rather than juristic perspective. However, in circumstances where the debtor actually used the borrowed funds in its active business in the country of its residence, she considered the finding of the Tribunals below that the source was in that country should not be interfered with.

Neal Armstrong. Summary of Ardmore Construction Ltd v Revenue and Customs [2018] EWCA Civ 1438 under s. 126(1).

Lin – New Zealand Court of Appeal finds that Chinese tax spared on Chinese CFC income and attributed under a CFC regime to a New Zealand shareholder was not “in respect of” income derived by that shareholder from China

As a result of having a 30% interest in four companies which were resident in China, the taxpayer had the active business income of those companies of $4.6 million attributed to her in New Zealand under the New Zealand controlled foreign companies (CFC) regime. The New Zealand income tax payable by her on that income was reduced by the Chinese tax actually paid by those companies, but not by approximately $0.6 million of tax that the Chinese companies were spared from paying due to tax concessions granted to them under Chinese domestic law.

Art. 23 of the China- New Zealand Double Taxation Agreement provided in relevant part that “Chinese tax paid … in respect of income derived by a resident of New Zealand from sources in the [PRC] … shall be allowed as a credit against New Zealand tax payable in respect of that income,” and that for such purposes, such Chinese tax “shall be deemed to include any amount which would have been payable as Chinese tax for any year but for an exemption from, or reduction of tax granted for that year … under [specified] provisions of Chinese law.”

In finding that Art. 23 did not require the Commissioner to grant a foreign tax credit for the spared Chinese tax, Harrison J stated:

[W]e are satisfied that art 23(2)(a) requires the tax to have been paid by a New Zealand resident on income derived by him or her in China, not by a third party CFC; that is the essential precondition to a credit in New Zealand. …

The fact that the ultimate source is income attributed to Ms Lin from the Chinese CFCs does not justify treating the two income streams, earned separately by the CFCs and Ms Lin, as one for revenue purposes, and ignoring the plain foundation of art 23(2)(a) on the source of “the income derived by a resident of New Zealand”, Ms Lin.

In commenting on this case, Brian Arnold suggests that it accorded with the literal meaning of Art. 23, but went on to suggest that it is strange that the taxpayer did not raise the issue of whether the Treaty prevented the application of New Zealand's CFC rules, which were introduced after the Treaty and, by extending to business income of CFCs, were very broad in scope:

[T]here is a strong argument - based on a broad purposive interpretation of tax treaty, the unusually broad scope of New Zealand's CFC rules, the OECD Commentary as it read at the time the treaty was signed, and the absence of any specific provision in the treaty allowing New Zealand to apply its CFC rules - that the treaty should have been interpreted to prevent New Zealand from applying its CFC rules and imposing tax on the taxpayer with respect to the income of the Chinese CFCs. The Lin case is significantly different from the Canadian case [Canada-Israel Development] in this regard because the Canada-Israel [Treaty] contained an explicit provision to the effect that nothing in the treaty prevents Canada from applying its CFC rules.

Neal Armstrong. Summary of Commissioner of Inland Revenue v. Lin, [2018] NZCA 38 under Treaties – Income Tax Conventions – Art. 24 and of Brian J. Arnold, “The Relationship between Controlled Foreign Corporation Rules and Tax Sparing Provisions in Tax Treaties: A New Zealand Case,” Bulletin for International Taxation July 2018, p. 430 under Treaties – Income Tax Conventions – Art. 24.