News of Note

Fowler – UK Supreme Court finds that deeming an employee to be an independent contractor did not oust the Treaty Employment-Income Article

A U.K. domestic income tax provision deemed the diving activities of a South African resident in the North Sea to be the carrying on of a U.K trade, notwithstanding that in fact he was an employee. A majority of the Court of Appeal of England and Wales found that this meant that his earnings were business profits for purposes of Art. 7 of the U.K-South Africa Treaty (rather than employment income under Art. 14) so that they escaped U.K. taxation (as he had no U.K. permanent establishment.)

In reversing this decision, Lord Briggs stated:

Nothing in the Treaty requires articles 7 and 14 to be applied to the fictional, deemed world which may be created by UK income tax legislation. Rather they are to be applied to the real world, unless the effect of article 3(2) is that a deeming provision alters the meaning which relevant terms of the Treaty would otherwise have.

He noted that the UK domestic deeming provision instead only had a limited purpose, which was to give the diver access to more generous deductions from income, and stated that to apply this limited “deeming provision … so as to alter the meaning of terms in the Treaty with the result of rendering a qualifying diver immune from UK taxation would be contrary to its purpose.”

Neal Armstrong. Summary of Fowler v Commissioners for Her Majesty’s Revenue and Customs [2020] UKSC 22 under Treaties – Income Tax Conventions - Art. 3 and Statutory Interpetation – Interpretation Provisions.

Al Saunders Contracting – Federal Court of Appeal finds that s. 6(1)(b)(vii) precludes bifurcation of an unreasonable allowance into a reasonable and unreasonable portion

The Tax Court found that some of the travel allowances paid to employees of the taxpayer were reasonable and, thus, properly excluded from income under s. 6(1)(b)(vii), but that other of the allowances were unreasonable in amount – and excluded the reasonable portion from income. In finding that the Tax Court had thus erred in its latter findings by severing travel allowances into two parts: a portion that was unreasonable; and a portion that was reasonable - so that the reasonable portion was excluded, Dawson JA stated:

I take from the grammatical and ordinary sense of the language of subparagraph 6(1)(b)(vii) that … [a]llowances that exceed what is reasonable are to be included in their entirety in income.

She also noted that when s. 6(1)(b)(vii) was amended in 1991 to take its current form, the Technical Notes confirmed this purpose of the provision.

Neal Armstrong. Summary of Canada (National Revenue) v. Al Saunders Contracting & Consulting Inc. 2020 FCA 89 under s. 6(1)(b)(vii) and Statutory Interpretation - Hansard, explanatory notes etc.

CRA notes the inapplicability of an interspousal rollover where the deceased annuitant’s RRSP had already matured

The deemed income inclusion to the deceased RRSP annuitant under s. 146(8.8) (equalling the FMV of the property in the plan) is potentially reduced under s. 146(8.9), so that if the surviving spouse is the beneficiary, s. 146(8.9) reduces the s. 146(8.8) inclusion, and the spouse is taxed under s. 146(8) on the “benefit” received, which typically is a “refund of premiums” that can be rolled into the spouse’s RRSP under s. 60(l).

When asked whether an amount can be deducted under s. 146(8.9) when the surviving spouse is designated in the contract as successor annuitant of a matured RRSP, CRA indicated, no: for s. 146(8.9) to apply, an amount must otherwise be deemed to be received pursuant to s. 146(8.8) and an amount must qualify as a refund of premium - which is not possible in the case where the annuitant dies after the maturity of the RRSP.

CRA also indicated that when the annuitant of an unmatured RRSP dies and the surviving spouse is named as the sole beneficiary in the contract, the issuer should issue the T4RSP slip in the name of the surviving spouse, instead of in the name of the deceased where the entire refund of premiums is transferred directly under s. 60(l) to an RRSP under which the spouse is the annuitant and, before December 31 of the year following that of death, all the RRSP property is distributed.

Where the RRSP issuer is notified of the death of the annuitant after the due date for filing the T4RSP information return (at the end of February following the year of death “the issuer will be required to file an additional T4RSP … for the deceased annuitant within a reasonable time after being notified of the death.”

Similar interpretations were provided for the comparable RRIF provisions.

Neal Armstrong. Summaries of 8 April 2020 External T.I. 2016-0668991E5 F under s. 146(8.9), s. 146.3(6.2), Reg. 214(4), Reg. 215(4) and Reg. 205(1).

LPIC – Federal Court of Appeal finds that LPIC was not exempt under s. 149(1)(d.5) because its owner, the Law Society, did not provide municipal-type services

Lawyers’ Professional Indemnity Co. did not qualify under s. 149(1)(d.5) as being owned by a “municipal or public body performing a function of government in Canada” because its parent, the Law Society of Upper Canada, although a “public body,” did not satisfy the test of “performing a function of government .”

Mactavish JA, on the basis of a detailed textual and contextual analysis as well as a review of the legislative history, concluded that the 2013 expansion of s. 149(1)(d.5) to encompass something more than just municipalities was intended to include only “entities that while not legally municipalities, nevertheless possess attributes of, and provide services similar to those provided by municipalities.” The Law Society did not so qualify because its “primary focus … is on the regulation of the legal profession in Ontario, and it does not provide the type of services that are typically provided by municipalities or municipal bodies in a localized geographical area.”

Neal Armstrong. Summaries of Lawyers’ Professional Indemnity Company v. Canada, 2020 FCA 90 under s. 149(1)(d.5) and Statutory Interpretation – Interpretation Act – s. 14, Redundancy and Consistency.

CRA publishes administrative relief for COVID-19 impact on international transactions and status

CRA referred to the travel restrictions imposed by governments or businesses in response to the COVID-19 crisis as a safety measure for their citizens or employees (the “Travel Restrictions”) and to the following administrative response of CRA (being a concession rather than an interpretive approach) which will apply from March 16 until June 29, 2020, unless extended:

  • Days of physical presence in Canada solely because of the Travel Restrictions will not count towards an individual’s residency in Canada under the 183-day sojourning rule or the “common law” residency test, assuming a return to the country of residence when able.
  • “[W]here a director of a corporation must participate in a board meeting from Canada because of the Travel Restrictions, the Agency will not consider the corporation to become resident in Canada solely for that reason” and similarly “where appropriate” for commercial trusts.
  • CRA will not consider a non-resident entity to have a permanent establishment in Canada only because employees perform their duties in Canada solely as a result of the Travel Restrictions, or to have an "agency" PE solely due to a dependent agent concluding contracts in Canada where such activities would not have been performed in Canada but for the Travel Restrictions.
  • Any days of physical presence in Canada due solely to Travel Restrictions will not count towards the 183-day presence test in "services PE" provisions (e.g., Art. V(9)(a) of the Canada-U.S. treaty).
  • If a non-resident which is not resident in a treaty country can demonstrate that it has crossed the threshold of carrying on business in Canada only because of the Travel Restrictions, CRA “will consider whether administrative relief is appropriate on a case-by-case basis.”
  • U.S. residents who exercise their employment in Canada solely as a result of the Travel Restrictions will not have those days count towards the 183 days referred to in Art. XV(2) of the Canada-U.S. treaty – with the same approach being applied in other Treaties.
  • Where a request for a Reg. 105 or 102 waiver was not processed within 30 days due to COVID-19 interruptions in processing, CRA will not assess for failure to have withheld where the sole reason for not obtaining the waiver was this interruption and the person paying the amount can demonstrate having “taken reasonable steps to ascertain that the non-resident person was entitled to a reduction or elimination of Canadian withholding tax by virtue of an income tax treaty with Canada.”
  • As the processing of s. 116 certificate requests was interrupted and processing has only resumed with a “limited capacity,” “urgent requests for comfort letters may be submitted on a temporary basis.”

Neal Armstrong. Summaries of Guidance on international income tax issues raised by the COVID-19 crisis, CRA Webpage 19 May 2020 under s. 2(1), Treaties – Income Tax Conventions – Art. 5, Art. 15, s. 2(3)(b), s. 153(1.1), Reg. 105(1), s. 116(1).

Income Tax Severed Letters 20 May 2020

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

Atlantic Packaging - Federal Court of Appeal finds that a drop-down of 68% by value of the assets of a division in a hybrid transaction did not satisfy s. 54.2

The taxpayer, a paper products manufacturer, engaged in a hybrid transaction in which it sold some of the assets of its “Tissue Division” directly to a third-party purchaser (“Cascades”) and rolled the balance of them down to a Newco (“722”) under s. 85(1) for shares of 722 and sold those shares to Cascades. CRA assessed on the basis that the sale of the shares was on income account.

Graham J found that the transferred assets represented about 68% of the fair market value of the assets of the Tissue Division – and perhaps significantly less, given that some of the Tissue Division assets had not been valued. Accordingly, the requirement of s. 54.2 - that all or substantially all of the assets of the business have been transferred to a corporation – had not been met, so that s. 54.2 did not deem the gain on the share sale to be a capital gain.

Webb JA affirmed this finding, stating:

I agree with the Tax Court Judge that conveying 68% of the assets used in the Tissue Division to 722 would not satisfy the requirement that all or substantially all of the assets of the Tissue Division be conveyed to 722.

The taxpayer sought to argue for the first time before the Court of Appeal that the share sale gain was a capital gain on ordinary principles. Webb JA found that it was too late for this issue to be raised. Although the evidence before the Tax Court could have permitted it to address most of the factors that were relevant to the capital account issue, Webb JA noted that one of the relevant factors in this regard was “the frequency or number of other similar transactions completed by the taxpayer,” and stated:

While it would be presumed that Atlantic Packaging would not be frequently selling off an entire division, there is no indication of whether Atlantic Packaging followed a similar pattern or similar transactions in disposing of other depreciable property.

Accordingly, there would have been potential prejudice to the Crown in now addressing that issue.

Neal Armstrong. Summaries of Atlantic Packaging Products Ltd. v. Canada, 2020 FCA 75 under s. 54.2 and s. 9 – capital gain v. profit – machinery and equipment.

Baril – Court of Quebec finds that executive with furnished apartments in Calgary and a family home in Montreal failed to establish Alberta residency

An executive of an airport security firm (Garda) was assigned significant responsibilities for the Prairie provinces (but not to the exclusion of duties performed in Montreal and Toronto). She rented a succession of furnished apartments in Calgary and took the position that she had become a resident of Alberta – notwithstanding that she remained the co-owner with her husband of the family home in Montreal, where two of their four children were still under their charge, and that she “visited” Montreal much more than her husband visited Calgary (in addition to seeing her family during Florida vacations).

In finding that the taxpayer had failed to establish Alberta residency, Lewis JCQ stated:

The evidence tends to show that Ms. Baril never intended to live in Alberta other than to carry out her duties as Garda required. …

Ms. Baril did not develop any social life in Alberta, claiming that her schedule was too busy at work. The Court does not doubt that she worked a lot, but does not believe that this prevented her from having any social life or any relaxation activities.

Neal Armstrong. Summary of Baril v. Agence du revenu du Québec, 2020 QCCQ 1466 under s. 2(1).

Drolet – Quebec Court of Appeal finds that a written conveyance by a tax debtor to his spouse was not fleshed out as a written separation agreement by virtue of a subsequent retroactive divorce judgment

After a rift and the taxpayer’s husband moving out, he conveyed a ½ co-ownership interest in the family home to the taxpayer for nominal stated consideration but on the understanding that she would not be seeking support from him. The family home then was sold, and she received ½ of the net proceeds. The ARQ subsequently assessed her under the equivalent of ITA s. 160. At issue was the exclusion, under the equivalent of s. 160(4), which applied “where the property is transferred to a spouse pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement.” Unfortunately for her, there was nothing in writing at the time of the transfer of the co-ownership interest to her, other than the conveyance itself, which made no mention of the alleged consideration provided by her to him of foregoing support and, in fact, it did not even state that they were separated.

The Court of Quebec had concluded that the mere mention in the divorce judgment that was issued about five years later that the effects of the partition of the family patrimony dated back to the time of the conveyance was not sufficient to meet the criteria of the Quebec equivalent of s. 160(4).

Before dismissing the taxpayer’s appeal, Schrager, JA noted that “where it has been argued that the deed of transfer or assignment in itself constitutes the separation agreement, the case law has been unanimous that it must contain a reference to the separation pursuant to which the transfer was made,” and that the extremely expansive interpretation of the s. 160(4) language urged by the taxpayer would have the effect of “opening up the potential for a taxpayer with huge tax debts to benefit from the transfer of the family home through the division of the family patrimony a number of years later.”

Neal Armstrong. Summary of Drolet v. Agence du revenu du Québec, 2020 QCCA 636 under ITA s. 160(4).

5 more translated CRA interpretations are available

We have published a further 5 translations of CRA interpretations released in September 2010. Their descriptors and links appear below.

These are additions to our set of 1,174 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ¾ 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
2010-09-10 28 June 2010 External T.I. 2009-0350241E5 F - Crédit d'impôt pour investissement du Québec Income Tax Act - Section 13 - Subsection 13(7.1) - Paragraph 13(7.1)(f) Quebec investment tax credit reduces capital cost at end of year for which it is claimed, excepting any carryforward portion
Income Tax Act - Section 127 - Subsection 127(9) - Government Assistance Quebec investment tax credit is government assistance
Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(vi) Quebec investment tax credit is deducted under s. 13(7.1) rather than included under s. 12(1)(x)
28 June 2010 External T.I. 2010-0361561E5 F - Programme d'aide au développement international Income Tax Regulations - Regulation 3400 exclusion for international aid program
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(iii) ordinary resident apparently eligible for the exclusion on overseas posting re international aid program
27 July 2010 External T.I. 2010-0364841E5 F - Questions relatives à une séparation Income Tax Act - Section 63 - Subsection 63(3) - Supporting Person no supporting person where two spouses lived separate and apart under same roof
Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(b) two separated spouses living under the same roof required to agree on which one claims the s. 118(1)(b) credit
Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(a) joint payment of expenses incurred under the same roof did not preclud two separated spouses living “separate and apart”
26 July 2010 External T.I. 2010-0364721E5 F - Revenus de bien et d'entreprise Income Tax Act - Section 18 - Subsection 18(12) bed and breakfast operation was business rather than property source (and thus subject to s. 18(12) limitation) since more than normal essential services provided
Income Tax Regulations - Regulation 1100 - Subsection 1100(14) rental property restriction rule applies to business properties as well/"principally" references over 50% of the time
Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit reduction of personal expenses is not the pursuit of profit
27 July 2010 External T.I. 2009-0347471E5 F - Déduction pour amortissement - Catégorie 52 Income Tax Regulations - Regulation 1104 - Subsection 1104(2) - General-Purpose Electronic Data Processing Equipment PDA qualified as Class 52 property