News of Note

Robinson – Tax Court of Canada finds that costs of investigating and developing opportunities for drop down to a corporation were capital expenditures

The taxpayer (with modest success) sought to follow a pattern of first developing assets (e.g., a patent portfolio) and then contributing them to a corporation (one for each such venture) for an equity interest therein. Monaghan J first indicated that these personal-level activities had “more of the hallmarks of seeking an investment opportunity to earn income from property than business” – but did not pursue this point, as the Crown had not suggested that the source was not a business.

In going on to find that the expenses that he directly incurred in this “business” prior to any such drop-down transaction were capital expenditures, Monaghan J stated:

Mr. Robinson’s circumstances are strikingly similar to the circumstances in the Neonex and Firestone cases. In other words, the expenses were not incurred in the course of the operation or running of a business, but as part of the process of creating, or acquiring the assets for a business, the objective of which was to acquire investments in entities engaged in innovation from which he might derive income.

Neal Armstrong. Summary of Robinson v. The Queen, 2019 TCC 181 under s. 18(1)(b) – start-up expenditures and s. 3(a).

Levatte Estate – Tax Court of Canada finds that 40(4) avoided the need for an estate to make a principal residence designation

An individual (Mr. Levatte) devised a home on his death to a spousal trust, which then was deemed to have disposed of the home on the spouse’s death. Russell J found that the correct interpretation was that the spousal trust was effectively deemed to have designated the home as a principal residence for all the years for which it would have been eligible for such a designation by Mr. Levatte (which, on the evidence, was some, but not all, the years of his ownership of the residence as he appeared to have designated another property as his residence for some of those years). Thus, it was not necessary that a principal residence exemption had been made – only that it would have been available.

The final return for the spousal trust (which had a saole trustee, Ms Warner) was a assessed a late-filing penalty under s. 162(1) of 5% as a result of the return being filed one day late. In vacating the penalty, Russell J stated:

Ms. Warner[‘s] … husband was dying of cancer and in fact passed away only days later …leaving her as sole parent of three children.

… I do not require specific details to appreciate what a difficult time this would have been for Ms. Warner. The fact that the return was late by only one day does indicate reasonable efforts most probably were made to file the return on a timely basis, although unsuccessful.

Neal Armstrong. Summaries of Levatte Estate v. The Queen, 2019 TCC 177 under s. 40(4) and s. 162(1).

CRA finds that a corporate partner carries on the business of the partnership for TOSI (and other) purposes

CRA considers that (at least in the common law provinces) each partner of a partnership should be considered to carry on the business of the partnership. Accordingly, where an inactive spouse holds 10% (by votes and value) of a Partnerco of a partnership carrying on an active non-services partnership, the Partnerco will be considered to carry on directly the “related business” (i.e., the business of the partnership), so that the test to this effect in the “related share” definition in s. 120.4(1) will be considered to be satisfied.

Neal Armstrong. Summary of 9 August 2019 External T.I. 2019-0813021E5 under s. 120.4(1) – excluded share – para. (c).

Income Tax Severed Letters 11 September 2019

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

Mark Anthony – Federal Court of Appeal finds that an exemption provision should not be interpreted to give CRA discretion as to its scope

An excise duty exemption applied to Canadian cider if it could be said that it was “produced in Canada and composed wholly of agricultural or plant product grown in Canada.” This quoted requirement, if interpreted literally, would be commercially impossible to comply with if it was to be tested at the time of packaging the beverage, because by that time there invariably would have been something added to the beverage, such as a preservative, that was not an agricultural product. In rejecting the CRA position in this regard, Webb JA stated:

The Crown’s interpretation … [is] that all ingredients that are included in the packaged product must be agricultural or plant products grown in Canada, except those that are permitted to be added by the CRA, on the basis that they are “incidental”. This would result in a delegation of authority to the CRA to decide what wine will qualify for the exemption. … [I]t would not have been the intent of Parliament to implicitly delegate this authority to the CRA.

Webb JA went on to find that the quoted wording was to be applied only to each alcoholic component of the blended product, e.g., the alcoholic product of the cider fermentation process, or any spirits that were added to fortify the cider.

Neal Armstrong. Summary of Canada v. The Mark Anthony Group Inc., 2019 FCA 183 under Excise Act, 2001, s. 135(2)(a).

Lost Forest Park – Tax Court of Canada finds that an incorporated RV camp carried on a specified investment business

Smith J found that a corporation with one employee, that owned and ran a campground consisting of approximately 150 fully-serviced sites for use by mobile home/RV’s for about half the year (with storage available for the vehicles for the balance of the year), in the case of 90 of the sites, or for most of the year (for the balance), was carrying on a specified investment business. First, the relatively long-term character of the arrangements (e.g., typically for many months, rather than day-to-day like a hotel), and the personalization by the occupants of their sites (suggesting exclusive possession), indicated that the fees generated had the legal character of rent.

Second, he stated that:

I am not satisfied that the services provided by the Appellant, including limited event planning, garbage pick-up, office hours and “on-call” availability, changed the legal character of the income to something other than that of rental income contemplated by the definition of a SIB … .

Neal Armstrong. Summary of 1717398 Ontario Inc. (Lost Forest Park) v. The Queen, 2019 TCC 183 under s. 125(1) - specified investment business.

6 more translated CRA interpretations are available

We have published a translation of a CRA technical interpretation released last week, and a further 5 translations of CRA interpretations released in October, 2011. Their descriptors and links appear below.

These are additions to our set of 957 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 7 3/4 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2019-09-04 15 July 2019 External T.I. 2018-0747761E5 F - Application de 73(4.1) Income Tax Act - Section 73 - Subsection 73(4.1) - Paragraph 73(4.1)(c) negative ACB is not triggered under s. 73(4.1)(c)
2011-10-28 14 October 2011 External T.I. 2011-0421141E5 F - Computation of capital dividend account Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) - Subparagraph (a)(i) - Clause (a)(i)A) s. 89(1)(a)(i)(A) exclusion re s. 53(1)(b)(ii) is inapplicable if s. 55(2)(a) applied
14 October 2011 Internal T.I. 2011-0410781I7 F - Repas fournis gratuitement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) benefit from free meals delivered on-site
27 September 2011 External T.I. 2011-0400141E5 F - Allocations pour frais de déplacement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) reasonable daily meal allowance for travelling in local municipality to enhance efficiency is non-taxable
29 September 2011 External T.I. 2011-0405391E5 F - Utilisation d'un aéronef Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) price charged to customers for flights on company aircraft determined taxable benefit to employees/benefit to majority shareholder was qua employee
13 October 2011 External T.I. 2010-0382441E5 F - RSG- Employé / travailleur autonome Income Tax Act - Section 5 - Subsection 5(1) home childcare providers were self-employed given relative autonomy

Glencore – Federal Court of Australia finds that transfer pricing should take into account the division of functions between the two cross-border parties

An Australian Glencore subsidiary (“CMPL”) with a high-cost copper mine entered into a three year extension of an agreement for the sale of copper concentrate to Glencore (“GIAG”) with a number of complicated-to-describe features which, nonetheless, were not unusual for the industry, such as deductions for treatment and copper refining charges that were notional rather than based on the actual refining costs and “quotational period optionality with back pricing” (e.g., with elements of backdating that favoured GIAG.) The Commissioner did not think it coincidental that the result was that CMPL generated significantly less profit than if it had sold on less complicated terms, and assessed under the OECD-grounded Australian transfer-pricing rules.

Before concluding that “the taxpayer has established that the prices that CMPL was paid by GIAG for the copper concentrate it supplied to GIAG under the … Agreement were within an arm’s length range” (and before quoting with approval the statement in Cameco that “The traditional transfer pricing rules must not be used to recast the arrangements actually made among the participants,”) Davies J stated:

As made clear in Chevron, the task of ascertaining the consideration that might reasonably be expected would have been paid to CMPL for the copper concentrate that it sold to GIAG is not to be undertaken upon the hypothesis that CMPL was not a member of the Glencore Group. … [T]he relevant mine producer for the purposes of the [arm’s length] hypothetical agreement is a mine producer with all the characteristics of CMPL, which include … that it had no need for a logistics or marketing division because it sold the whole of its production for the life of the mine to a buyer with GIAG’s characteristics, namely a trader with a substantial marketing team which purchased the whole of the mine’s production for the life of the mine.

Neal Armstrong. Summary of Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432 under s. 247(2)(a).

Teitelbaum – Quebec Court of Appeal finds that an RCA balance (viewed as a “right or thing”) was “transferred” on death notwithstanding its subsequent distribution

ITA 70(3) requires “rights or things” of a deceased taxpayer to be recognized in the taxpayer’s terminal return unless the executors elect to include those amounts in a separate return. However, s. 70(3) overrides this rule, and provides that, where the rights or things have been transferred to a beneficiary within one year of the death, the amounts received by the beneficiary on the realization or disposition of the rights or things are to be included in the beneficiary’s income.

The will of the deceased common-law partner of the taxpayer designated her as the beneficiary of all his “pension plans.” Gagnon JCA accepted that this had the effect of bequeathing to her the value of his RCA, with that legacy being paid in two lump sums paid more than one year after the deceased’s death.

The taxpayer argued because she received these two sums more than one year after his death, they were not includible in her income under the Quebec equivalent of s. 70(3)) as a legacy pursuant to this designation. Gagnon JCA stated:

This argument confounds the debt claim bequeathed by the deceased with the liquidation of that same claim by the Trust. The Taxpayer could not be the heir of the deceased other than by what she received on the date of his death. …

In sum, I am of the view that the debt claim bequeathed to the Taxpayer was transferred to her on … the date of death of Mr. Lewin. This is a transaction described by TA section 430. The reference in this provision to the time of the realization of this right bears only on the determination of the year in which the amounts received must be included in the income of the taxpayer.

Thus, although the “transfer” to her occurred on Mr. Lewin’s death, she was not required to include any amount in her income until she received the amounts in her subsequent taxation year (when the amounts were “realized”).

Neal Armstrong. Summary of Agence du revenu du Québec v. Teitelbaum, 2019 QCCA 1408 under s. 70(3).

CRA confirms that negative ACB is not triggered under a parent-child transfer of an interest in a family farm or fishing partnership under s. 73(4.1)(c)

Where a taxpayer has so elected in the taxpayer's return respecting the transfer of an interest in a family farm or fishing partnership to the taxpayer’s resident child, the taxpayer is deemed by s. 73(4.1)(c) not to have disposed of the interest, and the child is deemed to have acquired the interest at the taxpayer’s cost. CRA confirmed that this meant that any negative ACB for the interest was not triggered on its transfer as a capital gain. Furthermore, that negative ACB in effect flowed through to the child under s. 73(4.1)(c)(iii).

Neal Armstrong. Summary of 15 July 2019 External T.I. 2018-0747761E5 F under s. 73(4.1)(c).