News of Note

Income Tax Severed Letters 25 November 2020

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

Ouazana – Tax Court of Canada finds that a retroactive GST registration of a real estate buyer relieved the vendor of liability for failure to charge GST

In February 2014, the taxpayer made a taxable supply of real property to a purchaser which represented that it was registered for GST and QST purposes but, in fact, was not, so that the registration numbers it provided were invalid. In 2016, the purchaser was re-registered with retroactive effect to the sale date in February 2014 with the same registration numbers that it had provided to the taxpayer.

In finding that the retroactive registration was effective for ETA s. 221(2)(b) purposes, so that the appellant could not be reassessed for its failure to charge GST to the purchaser, Favreau J stated:

When the effective date of registration is backdated, the retroactive effect of the registration must be recognized for all purposes of the ETA unless there is a clear provision of the ETA to the contrary. No such provision seems to exist in respect of paragraph 221(2)(b).

He contrasted the situation here of a voluntary registration under s. 241(1), where “there is no limitation to the discretionary power of the Minister to backdate the effective date of registration,” and a non-voluntary registration under s. 241(1.5), where there is essentially no ability of the Minister to backdate the registration date.

Neal Armstrong. Summary of Ouazana v. The Queen. 2020 TCC 124 under ETA s. 241(1).

Rémillard – Federal Court finds that the certified Federal Court record is open to the public absent a specific confidentiality order

The taxpayer, a retired businessman living in Barbados, sought to challenge, through judicial review, information requests made by CRA (who was reviewing his residency status) to other countries’ tax authorities. After he had requested the certified record contemplated by Federal Court Rules 317 and 318), he was contacted by a journalist inquiring about the application. The taxpayer immediately obtained a judicial provisional confidentiality order, and launched an application for a declaration that the material communicated in accordance with Rule 318 did not form part of the public court file, but was rather akin to documents produced on discovery so as to be subject to an implied undertaking of confidentiality. Pamel J concluded that there were significant differences between discovery procedures and the communication of the certified record, and that the latter was not subject to the implied undertaking rule. Pamel J referred in numerous places in his reasons to the “open court” principle, including the statement by the Supreme Court in Sierra Club that “[t]he link between openness in judicial proceedings and freedom of expression has been firmly established by this Court,” and further stated:

Section 26 of the FCR is clear. The open court principle allows any person to inspect a court record and any annex "that is available to the public" … .

While the general rule is that documents in a court file or annex are public, not all documents in the court file or annex are necessarily "available to the public". Documents or material that are treated as confidential under a rule of law or that are subject to a confidentiality order of the Court continue to be treated as confidential and are designated as such at the time of filing with the Court, identifying the relevant rule of law or court order, if any (s. 152(1) FCR). Otherwise, the FCR do not provide a mechanism for recognizing the confidentiality of documents "in the possession of the Registry".

The taxpayer also unsuccessfully argued that making the certified record public as a matter of course violated section 8 of the Charter.

Pamel J dismissed the motion to declare the entire certified record confidential. However it remained open to the taxpayer to make a motion for a confidentiality order in accordance with the Sierra Club principles.

Neal Armstrong. Summaries of Rémillard v. Canada (Revenu national), 2020 CF 1061 under Federal Court Rules, s. 318(1) and s. 26(1) and Charter, s. 8.

Our translations of CRA Interpretations go back over 11 years

We have published 5 further translations of CRA interpretation released in November and October, 2009. Their descriptors and links appear below.

These are additions to our set of 1,326 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 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
2009-11-06 16 October 2009 Internal T.I. 2009-0337721I7 F - Perte lors de fusion étrangère Income Tax Act - Section 87 - Subsection 87(8) claiming of capital loss in promptly-filed amended return would be accepted as an election
Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(b) s. 40(3.4) not applicable to foreign triangular merger to which s. 87(8) was elected not to apply
2009-10-30 20 October 2009 External T.I. 2009-0328441E5 F - Fiducie testamentaire Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(a) unlikely to have been a distribution as a consequence of death where mooted testamentary trust formed by beneficiaries by their own agreement
Income Tax Act - Section 75 - Subsection 75(2) s. 75(2) would apply if heirs form a trust to provide for their sister out of the residue, with the remainder to them on her death
23 October 2009 External T.I. 2009-0309861E5 F - Tax-free Savings Accounts Income Tax Act - Section 143.2 - Subsection 143.2(2) - Paragraph 146.2(2)(c) contribution by spouse causes cessation as TFSA
Income Tax Act - Section 74.5 - Subsection 74.5(12) - Paragraph 74.5(12)(c) s. 74.5(12)(c) inapplicable to contribution of property to TFSA of contributor’s spouse followed by spouse’s withdrawal of property and investment of proceeds
20 October 2009 External T.I. 2009-0327911E5 F - Fiducie non-résidente Contribuant résidant Income Tax Act - Section 94 - Subsection 94(1) - Resident Contributor any period of residence in Canada even if prior to a period when the person was non-resident in Canada is included in computing the 60-month period
2009-10-23 13 October 2009 External T.I. 2009-0342091E5 F - Revenu d'emploi exonéré par Conv.- frais de garde Treaties - Income Tax Conventions - Article 19 employment income that was Treaty-exempt was to be reported (on a separate line), with the s. 110(1)(f)(i) deduction then claimed
Income Tax Act - Section 63 - Subsection 63(2) child care expenses could only be claimed by the spouse with the lower net income, notwithstanding that her income was Treaty-exempt

Lockwood Financial – Tax Court of Canada finds that shares received on a deferred basis from a successor of a client were fee income in the year of entitlement to receive

A broker (Lockwood) whose business included brokering deals for junior resource companies earned an up-front fee for brokering a farm-in deal for a client (LEO) in 2010. Its fee included a component that was payable in the form of 833,333 shares of LEO (which the payment agreement stated had a “deemed value” of $250,000 in total) when LEO had earned an interest in the subject resource property by having made the targeted exploration or development expenditures. However, in June 2011, LEO was taken over by a second company (AOI - which happened to be the other party to the farm-in deal) under a plan of arrangement. Lockwood brought an action to receive shares of AOI (based on the exchange ratio under the plan of arrangement) in lieu of the promised shares of LEO, and in June 2012, it was agreed that it would receive a smaller number of shares of AOI in full satisfaction of its claim. Lockwood disposed of these shares during the balance of the same (2012) taxation year.

Lockwood submitted that this fee component should have been recognized by it in its 2010 rather than 2012 taxation year in the amount of $250,000 and that the excess of the proceeds received by it in 2012 over this amount was a capital gain. St-Hilaire J instead found that:

  • This fee did not become receivable, and was not to be recognized as income, in 2010, as “its right to receive this compensation cannot be said to have been ‘absolute and under no restriction’” in 2010.
  • Had it been received, the payment of the LEO shares would have been a payment to Lockwood for services rendered and, hence, would have been business income.
  • Since the AOI shares received in 2012 under the settlement replaced the LEO shares, the AOI shares, valued on the settlement date, were received for services rendered, so that such value was business income to Lockwood in its 2012 taxation year.
  • This amount recognized as the consideration for Lockwood’s services “thus becomes the adjusted cost base of the AOI shares received in 2012. That is the amount that the taxpayer gave up to acquire the shares”.
  • Thus, the proceeds for the AOI shares received in excess of that ACB was a capital gain.

Neal Armstrong. Summaries of Lockwood Financial Ltd. v. The Queen, 2020 TCC 128 under s. 12(1)(b) and s. 54 – ACB.

Keybrand Foods – Federal Court of Appeal finds that a transaction with a financially subordinate company was a non-arm’s length transaction

The taxpayer (“Keybrand”) and its wholly-owning parent (“BWS”) were guarantors of loans made to a start-up company (“Vidabode”) by GE Capital. In order to fund the discharge of the GE Capital loans following a Vidabode default, Keybrand subscribed $19.5 million for Vidabode common shares (of which $14.3 million was funded with a bank borrowing), thereby resulting in Keybrand holding about 39% of the common shares of Vidabode in addition to the 41% already held at that point by BWS. A receiver was retained two weeks later by BWS in its capacity of a secured creditor of Vidabode, and on May 6, 2011, Vidabode filed for bankruptcy.

Webb JA confirmed that Keybrand did not generate an allowable business investment loss on its subsequent disposition (under s. 50(1)(b)(iii)) of its shares of Vidabode, on the basis that the share subscription transaction was one between persons not dealing at arm’s length – so that s. 69(1)(a) deemed the cost of those shares to Keybrand to be their nil fair market value.

Webb JA made note of the “directing mind” test applied in the Robson Leather case (whose facts revealed “a striking similarity,” as in both cases there was “substantial debt” owing by a company with poor prospects to the relevant family.) He then stated:

Given the degree of financial dependence of Vidabode on BWS and Keybrand and the lack of any negotiation with respect to the terms and conditions (including the price) related to the share subscription, it is more likely than not that Keybrand controlled both sides of the transaction related to the issue of shares by Vidabode to Keybrand.

Webb JA also confirmed that the interest on the bank loan to fund the shares subscription was non-deductible, given that the factual findings of the Tax Court supported its conclusion “that Keybrand did not have a reasonable expectation of income in acquiring the shares of Vidabode and hence did not borrow the money for the purpose of earning income from property.”

Neal Armstrong. Summaries of Keybrand Foods Inc. v. Canada, 2020 FCA 201 under s. 251(1)(c), s. 20(1)(c)(i) and General Concepts - Purpose/Intention.

ACN 154 - Federal Court of Australia, Full Court finds that gold refining included refining gold that was already at the precious metal level of purity

ETA Sched. VI, Pt. V, s. 6.3 zero-rates “a supply made to a non-resident person that is not registered [for GST/HST purposes] of … a service of refining a metal to produce a precious metal.”

An Australian GST provision effectively zero-rated a supply of “precious metal” (relevantly defined as gold, in an investment form, of at least 99.5% fineness) if it was the “first supply of that precious metal after its refining by … the supplier”. The Australian Commissioner argued that an Australian company did not qualify as refining gold “scrap” purchased by it (which was generally of at least 99.99% fineness, but nevertheless was scrap gold because it was not in investment form) because its mooted refining was of gold that thus already exceeded the statutory threshold of 99.95% fineness.

In rejecting this submission, the Full Court stated:

The ordinary meaning of the word “refining” … and the statutory context suggest that the word “refining” in s 38-385 is referring to a process by which metal is brought to a finer state or form. It may be accepted that, as the Commissioner submits, this is concerned with increasing the metallic fineness of the metal. But this does not require that the process be directed towards increasing the metallic fineness of the metal above the requisite standard of fineness (99.5% in the case of gold). …

[E]ven if …the primary objective of these processes was to provide quality assurance (rather than to increase the metallic purity), the processes nevertheless constituted “refining” in the sense outlined above.

Neal Armstrong. Summaries of ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190 under ETA Sched. VI, Pt. V, s. 6.3 and s. 123(1) – precious metal.

CRA denies a deduction for the employer’s source deduction payment for s. 7 RSU benefits where that payment is funded by reducing the RSU shares issued

An employee who otherwise would be entitled to receive, say, 30 shares of the employer’s parent (ParentCo) as a result of restricted share units (“RSUs”) vesting, instead is only issued 18 shares to reflect that the employer (EmployerCo) will make a cash payment to the Receiver General on behalf of the employee on account of the required income tax withholding on the taxable benefit under s. 7(1) arising in the year of issuance.

In finding that s. 7(3)(b) prohibited EmployerCo from claiming a deduction for this payment in computing its income, CRA stated:

[A] portion of the rights of the employee under the RSU Plan is considered to have been disposed of by the employee in exchange for EmployerCo paying the required income tax withholdings arising from the issuance of shares of ParentCo under the RSU Plan. Consequently, the employee is deemed to have received a benefit under paragraph 7(1)(b) equal to the amount of income tax remitted by EmployerCo on behalf of the employee.

Since the benefit … arises from the issuance of shares, paragraph 7(3)(b) precludes a deduction by EmployerCo in respect of that benefit.

This analysis seems to implicitly treat the 30 shares that were agreed to be issued as having been issued for s. 7(3)(b) purposes even though, in fact, only 18 are issued.

Neal Armstrong. Summary of 28 September 2020 External T.I. 2020-0840681E5 under s. 7(3)(b).

CRA confirms that a long-term project election under s. 13(29) need only be filed once

Where a major construction project (other than of a rental building) is expected to extend beyond three years, the adverse impact of the available-for -use rules on potential capital cost allowance claims in the third and subsequent years often can be ameliorated by making a s. 13(29) election. The wording of the election form (which likely will be amended in this regard) seems to suggest that the election must be made annually, starting generally with the third year.

CRA has clarified that this is incorrect – the election need only be made once (generally with the return for the project’s third taxation year).

Neal Armstrong. Summary of 1 October 2020 Internal T.I. 2019-0821651I7 under s. 13(29).

Income Tax Severed Letters 18 November 2020

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