The share appreciation rights (SAR) plan of an employer corporation provides for dividend equivalents on SAR units that are satisfied by way of cash payments made annually to employee participants.

CRA indicated that if the current vesting period for a SAR unit granted under the plan was extended from three years to five years (so that the three year bonus plan safe harbour in para. (k) of the salary deferral arrangement definition no longer applied), then the plan would not be considered to come within CRA’s accommodation of SAR plans, so that the SDA rules could apply. CRA stated:

If a SAR plan provides for dividend equivalents to be paid in cash on an accelerated basis (such as annually or after each dividend payment date) without the whole of the corresponding unit being redeemed, the CRA general position will cease to apply with effect from the time that the employee becomes entitled to receive the first such dividend equivalent payment. This is because, in such a case, the units would not be considered to be solely for future services.

Neal Armstrong. Summaries of 14 May 2019 External T.I. 2017-0737571E5 under s. 248(1) - salary deferral arrangement and s. 6(14).

Prior to the transfer of his accountancy practice in 2007 to his corporation, the taxpayer borrowed under a home equity line of credit to fund alleged expenses of that practice. Following the drop-down, the outstanding balance was maintained. Favreau J allowed in full the deduction by the taxpayer of his HELOC interest for two subsequent years, stating:

[P]aragraph 20.1(2)(c) specifically provides that the portion of the borrowed money outstanding when the business ceases operating shall be deemed to be used by the taxpayer at any subsequent time for the purpose of earning income from the business.

An oddity is that CRA initially had disallowed the deduction of all of the HELOC-financed expenses, and then at trial conceded that 2/3 of them were deductible – yet Favreau J allowed all of the related interest to be deducted under s. 20.1(2)(c). Although not discussed, perhaps this could be explained on the basis that the taxpayer had succeeded in “demolishing” the basis for the full interest denial by CRA, so that the onus now shifted to the Crown to demonstrate that some portion of the interest was still non-deductible on more factual grounds, which it failed to do.

The self-represented taxpayer apparently did not argue that the shares of his corporation had replaced his accountancy practice as an income-producing source.

Neal Armstrong. Summary of Moras v. The Queen, 2019 TCC 111 under s. 20.1(2)(c).

Two co-owners paid a portion of the expropriation proceeds received for one of their properties to their affiliated tenant of that property. However, when CRA treated that receipt in the tenant’s hands as a s. 9 receipt, rather than as a s. 12(1)(x) receipt that was eligible for the s. 13(7.4) election, the two co-owners and the tenant requested CRA (within the normal reassessment period) to amend their returns for the year of expropriation to treat the amount that had been paid to the tenant not as income to the tenant but instead as capital gains realized by the co-owners. CRA essentially refused this request. The taxpayers considered it to be unfair that CRA had not issued any reassessment that they could appeal, and applied for an order of mandamus compelling CRA to reassess in some manner.

Walker J found that the refusal of CRA to reassess was a decision that could be subject to judicial review (e.g., if the decision was unreasonable) – although, of course, the substantive question of whether the requested adjustment was correct could not be reviewed by her. However, this decision was not before her because their application had not been brought on a timely basis and the criteria for extending the 30-day period for bringing such an application had not been made out.

In any event, CRA had no legal obligation to issue a reassessment notice following the taxpayer request – that was a decision that was within its discretion (s. 152(4) used the word “may”).

Neal Armstrong. Summary of 3087-1883 Québec Inc. v. Canada (National Revenue), 2019 CF 785 under s. 152(4).

CRA provided some further commentary on 2017-0729431R3, which helps fill in some of the redacted details.

This related to a situation where CRA had assessed a Canadian subsidiary (Canco) in a Canadian multinational group under s. 247(2) on the basis that the fees earned by a CFA (resident in Country A) of Canco’s Canadian parent from management services were too high from a transfer-pricing perspective and the fees earned by Canco itself from providing management services to group companies were too low. After negotiations between the competent authorities, it was agreed (under the “MAP Settlement”) that the income of CFA (which was from an active business) would be reduced by assessment by the Country A taxing authority, thereby generating income tax refunds for the affected years, and that there would be no adjustment to the actual fees charged by CFA (to which it was entitled under the Country A domestic law) and that there also would be no secondary adjustments.

CRA in its discussion indicated that, as a result:

• The “earnings” of CFA, under Reg. 5907(1)(a)(i), were reduced by the income adjustment under the MAP Settlement as reassessed by Country A.
• Upon receipt of such Country A reassessments reducing CFA’s income to reflect the MAP Settlement adjustments, the “net earnings” of CFA, under Reg. 5907(1), were increased by the amount of income taxes that had been paid to Country A but, in fact, were not payable after giving effect to the MAP Settlement and consequential Country A reassessment.
• The amount of the MAP Settlement adjustment (reassessed by Country A) that was excluded from the computation of income or profit from an active business pursuant to the income tax law of Country A for each of the reassessed taxation years was added to the earnings of CFA pursuant to Reg. 5907(2)(f) given that the amount of such adjustment constituted “revenue, income or profit” of CFA for purposes of Reg. 5907(2)(f).

Neal Armstrong. Summary of 15 May 2019 IFA Roundtable Q. 10, 2019-0798781C6 under Reg. 5907(2)(j).