News of Note

Ouellette – Court of Quebec finds that the quick (re)building and sale of three successive residences was eligible for the principal residence exemption

A couple (one of them, a carpenter), who successively substantially renovated or built, and sold, three homes, with the sales occurring over a four-year period, realized capital gains eligible for the principal residence exemption on such sales, rather than fully taxable business profits. Lachapelle JCQ accepted that each sale had occurred for personal reasons rather than as build-and-sell adventures in the nature of trade:

  • The first residence was sold as a result of the increasing noise and congestion attributable to a nearby quarry and campsite
  • They sold the second residence (designed by them) because they determined that it was too small to host family members
  • They sold the third residence because they wanted to move closer to the family of one of them in Montreal.

Neal Armstrong. Summary of Ouellette v. Agence du revenu du Québec, 2020 QCCQ 8765 under s. 9 – capital gain v. profit – real estate.

CRA states that a DSLP cannot be used as a pre-retirement vehicle

One of the requirements for qualification as a deferred salary leave plan (“DSLP”), contained in Reg. 6801(a)(v), is that the employee be required to return to regular employment after the DSLP leave of absence for a period of not less than the leave period. CRA confirmed that this condition would be violated if a plan was initiated for the employee to go on paid leave between the end of the DSLP leave period and the scheduled commencement of the employee’s retirement. Furthermore, the employer would be required to wind up the DSLP on a taxable basis to the employees, generally within 60 days of becoming aware that the DSLP rules would not be met.

Neal Armstrong. Summary of 8 December 2020 External T.I. 2020-0869961E5 under Reg. 6801(a)(v).

CRA makes a further COVID-related extension of the period for carrying forward unused HCSA credits

In 2020-0846751E5, CRA noted that health care spending accounts (“HCSA”) that comply with IT-529 generally provide that the HCSA can permit the carry-forward of either unused credits or eligible medical expenses (but not both) for a period not exceeding 12 months, so as to not disqualify the HCSA from the exemption in s. 6(1)(a)(i) for private health services plans (“PHSPs”). CRA further announced in 2020-0846751E5:

In these extraordinary [COVID] circumstances, a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15 and December 31, 2020, could temporarily permit the carry forward of those unused credits for a … period of up to six months [which] would generally … not, in and of itself, disqualify the HCSA from being a PHSP. [emphasis added]

In generally extending these periods, CRA now stated:

In light of the severity of the second wave of the COVID-19 pandemic, the CRA will allow a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15, 2020 and March 16, 2021, to temporarily carry forward those unused credits for a period of up to 12 months. … However, since a HCSA must involve a reasonable element of risk to qualify as a PHSP, it is our view that any further extension of the temporary carry-forward period beyond 12 months, would likely disqualify the HCSA from being a PHSP. [emphasis added]

Neal Armstrong. Summary of 26 January 2021 External T.I. 2020-0857841E5 under s. 248(1) - private health services plan.

Income Tax Severed Letters 24 February 2021

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

CRA releases an example showing how the CEWS affects the SR&ED proxy method

CRA has published a webpage which confirms that the CEWS (wage subsidy) received by a corporation regarding the salaries of its employees engaged in SR&ED is government assistance that reduces both the pool of deductible SR&ED expenditures, and its qualified SR&ED expenditures for investment tax credit purposes. It also provides an example of how the government assistance provisions in ss. 127(18) and (19) interact in this context with computing the qualified expenditures under either the “traditional” or the proxy method (i.e., claiming a permitted arbitrary proxy for the amount of certain SR&ED overheads, rather than claiming their actual amount.)

In the example, the corporation’s lead engineer (Sarah) spends all of her time for a 12-week period directly engaged in an SR&ED project and does non-SR&ED work for the rest of the year. The only relevant overhead expense is the salary of her administrative assistant (Jamaal), who spends 30% of his time during the same period tracking the SR&ED project costs and its progress.

Under the proxy method, the corporation’s qualified expenditures include only Sarah’s (not Jamaal’s) salary for the period, but are grossed-up by the 55% prescribed proxy amount, and that total is reduced by all and 30%, respectively, of the CEWS received by the corporation in relation to their respective salaries for that period. Thus, the CEWS for Jamaal that relates to his 30% SR&ED overhead time is in effect deducted from the notional proxy amount.

Neal Armstrong. Summary of “Guidance: How the Canada emergency wage subsidy affects SR&ED claims” 19 February 2021 CRA Webpage under s. 37(8)(a) and s. 127(19).

Bank of Montreal – Tax Court of Canada awards pre-settlement offer legal costs at more than the party and party rate in order to encourage timely settlement offers

The Crown agreed that BMO was entitled to substantial indemnity costs of $450,069 for the legal costs incurred by BMO after it had made a settlement offer (over seven months before the Tax Court hearing), but argued that BMO was entitled to receive costs only at the meagre Tariff rate for its legals incurred before then. This was based on Rule 147(3.1), which provided that a party receiving substantial indemnity costs following a settlement offer is entitled to party and party costs to the date of service of the settlement offer.

Graham J instead awarded pre-offer costs of 35% of BMO’s actual such costs of $684,471. He considered that being more generous in this regard accorded with the policy of encouraging settlement offers to be made at least 90 days before the hearing even in circumstances where substantial legal costs had already been incurred. Otherwise:

A party who made an offer within the [90 day] time limits would be rewarded for making the offer but, at the same time, punished for not having made it sooner.

Neal Armstrong. Summary of Bank of Montreal v. The Queen, 2021 TCC 3 under Tax Court of Canada Rules (General Procedure), s. 147(3.1).

We have 1400 translations of CRA interpretations going back 12 years

We have published translations of two CRA interpretation released last week, and a further 6 translations of CRA interpretation released in March and February, 2009. Their descriptors and links appear below.

These are additions to our set of 1400 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for March.

Bundle Date Translated severed letter Summaries under Summary descriptor
2021-02-17 19 November 2020 External T.I. 2020-0848111E5 F - Remboursement d'équipement de bureau pour le télétravail Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) aggregate reimbursement during COVID exceeding $500 for teleworking office furniture and computer is taxable benefit
23 June 2020 External T.I. 2020-0848441E5 F - SSUC - Entité déterminée et institution publique Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(c) regional county municipalities are municipalities
Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Entity an entity may be an eligible entity for CEWS purposes if it is not a public institution
2009-03-20 4 March 2009 External T.I. 2009-0306401E5 F - Plafond des affaires Income Tax Act - Section 125 - Subsection 125(5) - Paragraph 125(5)(a) no inappropriate grind of business limit, where a straddling fiscal period, when business limit increased to $400,000 in 2007
2009-02-27 30 January 2009 External T.I. 2008-0287541E5 F - Décès - actions détenues en indivision Income Tax Act - Section 70 - Subsection 70(6) s. 70(6) inapplicable if partition of bequeathed shares between death and distribution to spousal trust
Income Tax Act - Section 248 - Subsection 248(21) block of shares is not a single property, so that partition must occur on a share-by-share basis giving rise to separately-held fractional shares
16 February 2009 External T.I. 2008-0293911E5 F - Application of subsection 55(2). Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) s. 55(3)(a) most clearly unavailable where Opco repurchases a portion of its commons shares held by Bco, followed by Bco’s purchase of the Opco shares of Aco
2009-02-20 5 February 2009 External T.I. 2008-0302821E5 F - Revenu de biens ou revenu d'entreprise Income Tax Act - Section 129 - Subsection 129(6) carrying on a specified investment business does not preclude the operation of s. 129(6)
2009-02-13 15 January 2009 External T.I. 2008-0272681E5 F - Options d'achat sur devises Income Tax Act - Section 204 - Qualified Investment - Paragraph (d) FX puts and calls are qualified if listed
4 February 2009 External T.I. 2008-0292771E5 F - Régime de congé à traitement différé Income Tax Regulations - Regulation 6801 - Paragraph 6801(a) plan failed to provide: withdrawal must be in employer’s discretion; maximum deferral period of 6 years; a deferral period must precede leave; return to work required

Perron-Ali – Tax Court of Canada finds that training expenses were eligible capital expenditures

A couple wanted to start investing in rental real estate but, in the year prior to that in which they started looking seriously at potential acquisitions, they were charged approximately $34,000 by a corporation, which provided some intensive three-day weekend training sessions that were focused on different strategies for investing and dealing in real estate, as well as “mentoring” services and over-the-phone coaching. Jorré DJ characterized these expenses as an “educational expense” which (as they involved more than “simply maintaining or somewhat extending existing knowledge and skills”) were capital expenditures, so that they were not currently deductible and could be recognized only under the eligible capital expenditure (now Class 14.1 property) rules.

Neal Armstrong. Summary of Perron-Ali v. The Queen, 2021 TCC 6 under s. 18(1)(b) – Capital expenditure v. expense - Know-how and training.

CRA indicates that an entity may be an eligible entity for CEWS purposes if it is not a public institution

In response to a question as to whether an “organization” that was an inter-municipal authority held by four regional Quebec county municipalities was eligible for the Canada emergency wage subsidy, CRA indicated that an “entity may be an ‘eligible entity’ for CEWS purposes, provided that it is not a ‘public institution,’.” Although the definition of “eligible entity” only explicitly excludes corporations, trusts, registered charities and organizations listed in ss. 149(1)(e), (j), (k) or (l) that are public institutions, this answer seems to indicate that CRA was indifferent as to whether this organization might instead be some other type of association or body.

CRA went on to indicate that regional Quebec county municipalities are municipalities (and, thus, public institutions), but did not address the nature of the authority that they jointly held.

Neal Armstrong. Summary of 23 June 2020 External T.I. 2020-0848441E5 F under s. 149(1)(c) and s. 125.7(1) – eligible entity.

Paletta – Tax Court of Canada decision supports the offsetting of almost $200M in taxable income through straddle trades

The taxpayer in Friedberg entered into spread positions in gold futures contracts, and in the same taxation year closed out the losing legs on his straddle positions (while entering into further contracts to maintain his hedged position) but deferred closing out the remaining contracts until the subsequent taxation year. The taxpayer in Paletta carried out a similar straddle program, except that it involved FX OTC forward contracts rather than gold futures. In order that he could shelter virtually all of the income of around $40 million earned by him over a number of years ending in 2007, he had to keep increasing the scale of his straddle position, given that the entire gain from closing out, in each year, the gain leg from the previous year’s trading needed to be offset in addition to his other taxable income for that year. Associated companies claimed $150 million in losses from the same straddle program.

In finding that the taxpayer’s claimed losses (except for an $8 million overstatement of the 2002 loss due to an “egregious error” – for which a gross negligence penalty was sustained) were fully deductible, Spiro J noted:

  • Friedberg stands for the proposition that straddle traders may report the results of their trades for tax purposes on a [realization] basis that does not reflect the true economic results of such trades.”
  • The Parliamentary response to Friedberg (in ss. 18(17) to (23)) was not introduced until 2017.
  • Regarding Crown arguments based on the trading consistently generating small economic losses, so that there was no source of income, Stewart established that “provided that one’s activity is clearly commercial, and that no personal element is involved, there is a source of income” and made “it clear that there is no ‘sufficiency’ test.”
  • The straddle trades were not shams: the “parties to the trades did not represent their legal rights and obligations to the Minister any differently than the way they themselves understood them”; and although there could “be no doubt but that the straddle trading had no business purpose”, “[l]ack of business purpose is not a sham”.
  • Furthermore, the Crown failed to “cite any binding authority that establishes ‘window dressing’ as a stand-alone judicial anti-avoidance doctrine”.

Neal Armstrong. Summaries of Paletta v. The Queen, 2021 TCC 11 under s. 9 – timing, General Concepts – Sham and s. 163(2).