News of Note

Jayco – Tax Court of Canada finds that the taxpayer has no remedy in a costs award for LC fees paid to secure its GST/HST obligation until reversed

After its successful appeal of a GST/HST assessment, Jayco sought to include, in the costs recoverable from the Crown, the $1.4 million paid by it to JP Morgan in order to obtain a letter of credit to secure the GST/HST it owed until the assessment was reversed. In rejecting this claim, D’Auray J stated:

In essence, Jayco is submitting that the Minister ought to have exercised her discretion differently and not taken any collection action on the GST/HST assessed. …

This Court does not have jurisdiction to review the Minister’s exercise of that power—that jurisdiction rests with the Federal Court. …

The Rules are clear that disbursements will only be awarded if they are essential to the conduct of the proceedings. … The interest was not paid by Jayco to establish that the Minister’s assessment was incorrect … .

Neal Armstrong. Summary of Jayco, Inc. v. The Queen, 2018 TCC 239 under Tax Court Rules, Rule 147(3)(j).

Apex City – Tax Court of Canada finds that a due diligence defence was not available where the taxpayer incorrectly disagreed with a CRA position

A partnership (Apex) hired a general contractor to construct condos which it then sold. It was required under Reg. 238(2) to file T5018s if its business income was “derived primarily from” construction activities. MacPhee J rejected Apex’s argument that it was not in the business of constructing condos but, rather, “in the business of selling condos after they are constructed,” stating:

To ignore the construction component of the Appellant’s business would be an incorrect interpretation of the phrase “derived primarily from”.

A due diligence defence to s. 162(7) penalties also was not established given that Apex had become aware of CRA’s position that T5018s should be filed but had nonetheless chosen not to file the T5018s because it disagreed with that position. This did not come within the l’École Polytechnique doctrine (2004 FCA 127) that “due diligence excuses either a reasonable error of fact, or the taking of reasonable precautions to comply with the Act.”

Neal Armstrong. Summaries of Apex City Homes Limited Partnership v. The Queen, 2018 TCC 247 under Reg. 238(2) and s. 162(7).

Income Tax Severed Letters 12 December 2018

This morning's release of 27 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Adecco – English Court of Appeal finds that a placement service providing non-employee temps to clients was not paying the temps’ compensation on the clients’ behalf

An employment bureau (Adecco) introduced temporary staff ("temps"), who were not Adecco employees, to clients looking for a temporary worker to undertake an assignment, and if the temps accepted an assignment, Adecco paid them for the work they did for the clients – and collected those amounts plus a mark-up from the clients.

Newey LJ essentially found that Adecco was not paying the temps as agent for the clients, so that the full consideration received by it from the clients was subject to VAT rather than just the “commission” earned by it.

It was helpful to Adecco’s case that it could not direct the temps as to how to carry out their assignments, had no effective control over when the assignments ended and did not conduct any appraisals of the temps. However Newey LJ noted that there was no contract between the temps and the clients, the contracts referred to their services being provided "through Adecco," and Adecco charged a single sum for each hour worked rather than breaking out the commission portion.

Neal Armstrong. Summary of Adecco UK Ltd & Ors v Revenue & Customs [2018] EWCA Civ 1794 under s. 123(1) – consideration.

CRA rules that a sideways transfer of property between two MFTs with identical unitholders came within s. 107.4(1)

The units of a REIT were stapled to those of another mutual fund trust (Finance Trust), so that they traded on a stock exchange together and had identical ownership by the same unitholders. Finance Trust held interest-bearing notes of the indirect U.S. commercial real estate subsidiary of the REIT (U.S. Holdco). Finance Trust qualified as a fixed investment trust for Code purposes, so that its unitholders were treated as if they held such notes directly, so as to avoid the U.S. earnings stripping limitations on the level of permitted interest deductions by U.S. Holdco. However, U.S. tax reform eliminated this issue, and the decision was taken to unwind this structure.

Finance Trust will transfer all it notes to the REIT for no consideration, the REIT will purchase all the Finance Trust units for what now is their nominal value and Finance Trust will be terminated through its redemption of its units.

CRA ruled that the disposition of the notes to the REIT will constitute a “qualifying disposition” within the meaning of s. 107.4(1), such that the rules in s. 107.4(3) will apply to the REIT, Finance Trust and their respective unitholders. No reference was made to the safe harbour rule in s. 107.4(2)(a) (whose application was ambiguous), and this ruling letter might be authority for the proposition that (as required by s. 107.4(1)(a)) there was no change in the beneficial ownership of the property (the transferred notes) on general principles notwithstanding that they were held by the unitholders through a sister rather than subsidiary trust.

The same REIT and Finance Trust were issued a s. 107.4(1) ruling in 2017-0720591R3.

Neal Armstrong. Summary of 2018 Ruling 2018-0752811R3 under s. 107.4(1)(a).

Placer Dome – High Court of Australia finds that $6B in goodwill for accounting purposes largely did not exist for tax purposes

Whether the acquisition by Barrick Gold of Placer Dome triggered Western Australia stamp duty of A$55 million on the lands in Western Australia of an Australian subsidiary of Placer Dome turned on whether, on a global consolidated basis, the value of all of Placer Dome's land (defined to include mining tenements and improvements) equalled or exceeded 60% of the value of all its property.

The post-acquisition balance sheet of Placer valued its land assets at $5.694 billion, and recognized goodwill of $6.506 billion, being the excess of the acquisition cost (grossed-up for liabilities) over the fair value of the specifically identified tangible and intangible assets.

In rejecting the proposition that sufficient value could thus be assigned to the goodwill to avoid a conclusion that Placer Dome did not exceed the 60% threshold, the plurality stated:

Murry [(1998) 193 CLR 605] did not broaden the legal concept of goodwill to include sources which did not generate or add value (or earnings) to the business by attracting custom. …

[A]t the acquisition date, there were no sources of goodwill that could explain the $6 billion gap which was attributed by Barrick to goodwill. That unexplained gap suggests that the DCF calculations used by Barrick's valuers to value Placer's land, its principal asset, were wrong. … [T]he danger identified by the majority in Murry of attributing a value to goodwill which actually inheres in an asset was readily apparent. …

At the acquisition date, Placer was a land rich company which had no material property comprising legal goodwill. [annoying italics in original]

In most instances, it will be obvious that shares of a private Canadian resource company (or 25% public company bloc) will be taxable Canadian property. This case may be more germane to the question whether a company which for accounting purposes has recognized goodwill in relation to a real estate portfolio (e.g., shopping centres, office towers, retirement homes or hotels) will have significant goodwill for tax purposes. Goodwill is also specifically referenced in ETA s. 167.1.

Neal Armstrong. Summary of Commissioner of State Revenue v Placer Dome Inc, [2018] HCA 59 under Sched. II, Class 14.1 - para. (a).

6 further translations of CRA French-language interpretations are available

The table below provides descriptors and links for six Interpretations released in January 2013 (including two 2012 APFF Roundtable items), all as fully translated by us.

These are additions to our set of 708 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 5 3/4 years of releases 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
2013-01-16 5 October 2012 Roundtable, 2012-0454141C6 F - Déductibilité des frais afférents à un véhicule Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(h.1) s. 6(1)(b) inclusion and s. 8(1)(h.1) deduction where allowance received for daily travel only in excess of 40 kilometres
5 October 2012 Roundtable, 2012-0451251C6 F - Excess of foreign tax withheld at source Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax foreign withholdings on American depositary receipts in excess of Treaty-limited rate does not qualify as an income tax
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose tax withheld in excess of Treaty-rate is not deductible as an expense
15 October 2012 Internal T.I. 2012-0452161I7 F - Frais de garde, revenu gagné, RQAP Income Tax Act - Section 63 - Subsection 63(3) - Earned Income Quebec Parental Insurance Plan (QPIP) benefits not included in earned income
2013-01-09 16 October 2012 External T.I. 2011-0425271E5 F - Small CCPC Income Tax Regulations - Regulation 5301 - Subsection 5301(4) - Paragraph 5301(4)(a) Amalco’s instalments based on tax payable of predecessors
Income Tax Regulations - Regulation 5301 - Subsection 5301(6) - Paragraph 5301(6)(a) flow-through of attributes of wound-up sub
Income Tax Regulations - Regulation 5301 - Subsection 5301(8) - Paragraph 5301(8)(a) 1st instalment base of transferor taken into account by transferee
Income Tax Act - Section 157 - Subsection 157(1.2) - Paragraph 157(1.2)(a) carryback of losses can produce small CCPC ("SCCPC") status (quarterly instalments) but not reduce instalment base
5 November 2012 External T.I. 2012-0458801E5 F - Frais de déménagement Income Tax Act - Section 248 - Subsection 248(1) - Eligible Relocation move can relate to an existing workplace if there is a causal link
5 November 2012 External T.I. 2012-0445241E5 F - 54 et 40(2)b) Income Tax Act - Section 54 - Principal Residence whether a duplex is a single housing unit turns on the degree of independence v. integration of the two units

3295036 Canada – Court of Quebec finds that the use, years later, of stepped up ACB through sales of the property was “in contemplation” of the basis step-up series

In October 1996, a Quebec-taxpayer company (“329”) acquired public company shares from its parent. The parent realized no gain because federal and Ontario s. 85(1) elections were made. However, 329 acquired the shares at full cost for Quebec purposes because no Quebec rollover election was filed. Most of the shares were sold by 329 in 2000 at a capital loss for Quebec purposes, and it claimed some of those capital losses in its 2007 and 2008 Quebec returns.

A specific Taxation Act provision (s. 529.1) effectively denied 329’s use of its stepped-up cost if its two 1996 acquisitions occurred as part of a series of transaction that ended after 18 December 1996. Fournier JCQ found that the two 1996 share drop-downs were a “series of transactions” and that the subsequent sales of the shares by 329 were transactions occurring “in contemplation” of that series and, thus, were assimilated to the series by the Quebec equivalent of s. 248(10).

He also rejected 329’s submissions that the backward-looking interpretation of “in contemplation” adopted in inter alia Copthorne should be rejected because the French version had used the narrower phrase “en vue de” rather than “au vue de” and because a narrower scope should be given to a specific anti-avoidance provision than to GAAR. Accordingly, the ARQ was successful in its application of s. 529.1 to deny the use of the stepped-up basis.

S. 248(10) only assimilates a transaction to an existing series. A different result might have obtained if the 1996 drop-down had occurred in a single transaction rather than on two separate days.

Neal Armstrong. Summary of 3295036 Canada Inc. v. Agence du revenu du Québec, 2018 QCCQ 8100 under s. 248(10).

CRA indicates that it could accept Univar GAAR doctrine of looking at reasonable alternative transactions

Univar found that the result of cross-border surplus-stripping transactions could have been equally accomplished if the non-resident indirect purchaser of Canco had instead been able to access the surplus of Canco by using a subsidiary Buyco with high paid-up capital.

Alexandra MacLean indicated that Univar signifies that, in the context of a consideration of the general anti-avoidance rule, there can be an examination of what the taxpayer could have done versus what the taxpayer did do – but CRA is examining what limitations should be placed on this approach. For example, the mooted alternative must have been commercially reasonable – something that the taxpayer could actually have done.

Neal Armstrong. Summary of Alexandra MacLean, "CRA Audits of Large Corporations - The view from ILBD" under Responses to recent adverse decisions – Univar, 27 November 27 2018 CTF Annual Conference presentation under s. 245(4).

CRA indicates that GAAR should not be applied until realization of a tax savings

Wild found that transactions that boosted the paid-up capital of shares held by the taxpayer should not be addressed by applying the general anti-avoidance rule to reduce the PUC of those shares, but that there instead could only be a GAAR abuse when such PUC was distributed to him.

After indicating that the effect of the decision is that a tax benefit has to be realized before s. 245(2) can be applied, CRA indicated that, as a result, when the GAAR Committee determines that excessive tax attributes have been created, CRA will issue a letter indicating that if a future cash tax benefit is realized through their use, GAAR will be applied at that time.

Summary of Alexandra MacLean, "CRA Audits of Large Corporations - The view from ILBD" under Responses to recent adverse decisions – Wild, 27 November 27 2018 CTF Annual Conference presentation under s. 247(2).