News of Note

9056-2059 Québec – Tax Court of Canada finds that ETA s. 153(2) requires a reasonable allocation of consideration between component supplies

In order to promote the sale of its farm products (mostly honey), the appellant developed a “labyrinth” of trails on its forest lands and, when it sold tickets for access by visitors to the trails, stipulated that the ticket, generally sold for $12, also constituted a coupon of $1.50 to be applied to the purchase of honey or other products. However, if the visitor purchased further coupons, the value proposition improved, for example, six coupons (with the additional five purchased at $1.50 each), would purchase 20 times as much honey as one coupon.

In 9056-2059 Québec, the Federal Court of Appeal had rejected the CRA position that s. 138 applied to deem all the supplies by the appellant to be taxable supplies of access to a place of amusement (rather than zero-rated supplies of food), in light inter alia of beekeeping accounting for 50% of the appellant’s maintenance costs, and remitted the matter for redetermination by the Minister on that basis.

Before confirming the resulting reassessments that treated $1.50 of the ticket prices as being zero-rated consideration for the honey or other food products, and the balance as consideration that was subject to tax, Boyle J indicated that s. 153(2) required that the “cost of admission to … the … forest must be reasonably divided between access to the labyrinth and other activities, and the mandatory purchase of a coupon to be exchanged for a honey or maple food product,” and then stated:

Appellant was unable to present any valid reason why the value of the initial coupon should be other than $1.50, which is what it charged for the same coupons when purchased individually.

Neal Armstrong. Summary of 9056-2059 Québec Inc. v. The Queen, 2022 CCI 6 under ETA s. 153(2).

Income Tax Severed Letters 19 January 2022

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

Charron – Court of Quebec finds that all the expenses incurred in relation to a rental home under construction from the building permit to being livable were to be capitalized

The taxpayers purchased a lot, constructed a house, leased it out for a year and then sold it at a gain. Regarding the computation of the ACB of the house for capital gains computation purposes, Laurin JCQ referred to the Quebec equivalents of ss. 18(1) and 18(3.1) to (3.3), and found (contrary to the ARQ view of these items as being of a personal nature) that the taxpayers were entitled to add the costs of the following items incurred during the construction period: municipal taxes, school taxes, insurance, electricity, interest on a line of credit and mortgage interest.

He considered the construction period to commence with the receipt of the building permit and to end with the point of substantial completion, being the point at which “there was some minor work to be done that did not prevent the house from being used for the purpose for which it was built.” He further found that “[e]xpenditures after that date were current expenses that should have been deducted from income.

Neal Armstrong. Summary of Charron v. Agence du revenu du Québec, 2021 QCCQ 12137 under s. 18(3.1).

Young - Supreme Court of Nova Scotia finds that Jarvis principle did not exclude evidence gathered before referral to criminal investigation

An auditor (Power) performed an audit of a company, that then extended to seven related companies, that had very poor record-keeping and that had been making large input tax credit and rebate claims. A month after having visited the business premises and interviewed the registrants, she concluded that the matter should be referred to the Criminal Investigation Division. In concluding that the evidence gathered by Power should not be excluded on Jarvis grounds (so that it was admissible in the subsequent criminal proceeding), Gogan J stated:

[I]t is a nuanced distinction … between a registrant being unable to support claims made (the audit conclusion and one potentially explained by poor record keeping) and a registrant making false or fraudulent statements to CRA (a criminal conclusion potentially explained by having no legitimate records). In this case, I am satisfied that any evidence obtained came as a result of Power’s audit inquiries.

… I find that the predominant purpose of the investigation did not turn to criminal or penal liability until after the completion of Power’s interviews with each of the accused. …

Neal Armstrong. Summary of R v Young, 2021 NSSC 361 under ETA s. 288(1).

Dias – Tax Court of Canada denies ABILs to 2 individuals who lent to their SBCs through their Loanco rather than directly

The two individual taxpayers made loans to their two start-up retail-business companies (which were small business corporations) through another corporation (“201”) owned by them (which was not an SBC), rather than directly. Consequently, losses realized by them on their loans did not qualify as business investment losses. Graham J concluded (at para. 30):

Had they structured their affairs differently, they may have been successful in claiming ABILs, but in tax law form matters.

Neal Armstrong. Summary of Dias v. The Queen, 2021 TCC 85 under s. 39(1)(c).

We have translated 10 more CRA interpretations

We have published a further 10 translations of CRA interpretation released in October, 2005. Their descriptors and links appear below.

These are additions to our set of 1,890 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 16 ¼ years of releases of such items 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
2005-10-28 17 October 2005 External T.I. 2005-0139031E5 F - Activités exercées en dehors de la réserve Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(d.6) timber royalties derived from timber cutting off the reserve had non-reserve situs
Income Tax Act - Section 149 - Subsection 149(1.2) timber royalties derived from agreement with provincial government but paid by 3rd party operator did not qualify
2005-10-21 11 October 2005 External T.I. 2005-0148281E5 F - Déductibilité de dépenses Income Tax Act - Section 248 - Subsection 248(24) s. 248(24) does not affect deductibility of fees for preparing consolidated financials
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense periodic (every 3 years) required actuarial valuations were currently deductible
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees accounting fees in preparing consolidated financial statements generally deductible
13 September 2005 External T.I. 2005-0148831E5 F - REÉR - retenues à la source Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(j) no discretion (otherwise than under s. 153(1.1)) to relieve from withholding for an in-kind distribution
4 October 2005 External T.I. 2005-0149671E5 F - Congé à traitement différé Income Tax Regulations - Regulation 6801 - Paragraph 6801(a) - Subparagraph 6801(1)(a)(v) returning to pre-retirement leave is not returning to “regular” employment
29 August 2005 External T.I. 2005-0125811E5 F - Actions prescrites: 6204(1)b) du Règlement Income Tax Regulations - Regulation 6204 - Subsection 6204(1) - Paragraph 6204(1)(b) likelihood that employees’ stock option shares would be immediately repurchased meant they were not prescribed shares
Income Tax Act - Section 248 - Subsection 248(28) s. 248(28) does not preclude the application of s. 84(3) on the exercise of employee stock options and the immediate redemption of the acquired shares
18 October 2005 Internal T.I. 2005-0133411I7 F - Penalty for repeated failures to report income Income Tax Act - Section 163 - Subsection 163(1) simultaneous filing of returns for three successive years, each with unreported income, did not engage s. 163(1) (if no unreported income in prior years)
8 September 2005 Internal T.I. 2005-0133721I7 F - Crédit d'impôt - fonds de travailleurs Income Tax Act - Section 211.8 - Subsection 211.8(1) no s. 211.8(1) tax where shares of provincially regulated LSVCC are redeemed and where there is no acquisition of replacement shares
30 August 2005 External T.I. 2005-0134081E5 F - Transfert d'un REER entre conjoints de fait Income Tax Act - Section 146 - Subsection 146(16) - Paragraph 146(16)(b) application to RRSP transfer between two separated common-law partners pursuant to written separation agreement
17 August 2005 External T.I. 2005-0135911E5 F - REEE- Établissement d'enseignement à l'étranger Income Tax Act - Section 146.1 - Subsection 146.1(1) - Post-Secondary Educational Institution a foreign educational institution that is listed in the American Council on Education's Accredited Institutions of Postsecondary Education will be recognized as a "post-secondary educational institution"
6 October 2005 External T.I. 2005-0146061E5 F - Coop de travailleurs actionnaire - montants versés Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a) interest on a preferred share was a dividend
Income Tax Act - Section 136 - Subsection 136(2) workers shareholder cooperative qualified
Income Tax Act - Section 135 - Subsection 135(4) - Allocation in Proportion to Patronage patronage dividend based on volume of work performed

Froehling – Federal Court finds that the taxpayer failed to demonstrate why his RRSP over-contribution was attributable to reasonable error

The taxpayer over-contributed to his RRSPs for the 2018 taxation year in December 2018 and, upon realizing his error in March of 2019, filed a return reporting the Part X.1 tax on his over-contribution (which was assessed largely as filed) - and then applied for waiver of the tax pursuant to s. 204.1(4).

Aylen J noted that in Connolly “the applicant had provided little detail as to why he made the mistake that resulted in his over-contribution and did not appear to have made any inquiries, whether with his accountant, his bank or his employer, to confirm his RRSP contribution room … [so that] the Federal Court of Appeal concluded that his error likely could not be said to have been a reasonable one,” and found that she was faced with a similar situation here, stating:

The onus was on the Applicant to ensure that he did not over-contribute to his RRSP and if there was any lack of clarity or understanding as [to] the contribution room available to him, the Applicant was expected to seek advice … .

She found that CRA’s decision not to waive the tax was not unreasonable.

Neal Armstrong. Summary of Froehling v. Canada (Attorney General), 2021 FC 1439 under s. 204.1(4).

CRA indicates that a subsidized charity providing rent-geared-to-income housing units in a larger housing project could qualify for the municipal GST/HST PSB rebate

Municipalities generally are entitled to enhanced rebates for their non-creditable GST/HST costs. Their definition includes a person designated as such by CRA in respect of activities involving the making of non-taxable municipal supplies.

CRA issued an interpretation indicating that the rebate generally would be available respecting a registered charity that received subsidies from a government organization to lease housing units scattered within a housing project that were mostly sub-let by it to tenants (with verified low incomes) on a “rent-geared-to-income” basis, although it was permitted to rent a portion of the units to tenants with a modest (rather than quite low) income on a market-rent basis.

Neal Armstrong. Summary of 25 May 2021 GST/HST Interpretation 209926 under ETA s. 259(1) – municipality.

Frank C. Smith Medicine Professional Corp – Federal Court finds that it was not unreasonable for CRA to request information under s. 231.1 (not 231.6) on a Buffalo USB key

CRA, which had been auditing the taxpayers -Dr. Smith, a physician and his Ontario professional corporation - learned of a USB key that included accounting data for Caymans corporations controlled by Dr. Smith. Dr. Smith initially had brought the USB key to Canada and provided it to his Canadian accountants, but they had sent it to their Buffalo office, which had the requisite software to extract the information on the key. The Minister issued request letters in October 2020 effectively requesting, pursuant to s. 231.1, information on the USB key along with certain other information. Although the Minister brought compliance applications in April 2021, this hearing dealt only with the taxpayers’ application for judicial review of the request letters.

After having indicated that the reasonableness of the letters turned on a test of whether there may be considered to be “a rational connection … between the information sought and the administration and enforcement of the ITA,” Fothergill J rejected a submission that the request letters sought foreign-based information and that they should have been issued under s. 231.6, stating:

I am satisfied that Dr. Smith is being audited with respect to potential unreported income and assets from his offshore holdings. His long association with, and ownership interests in [the two offshore companies] are sufficient to establish that the requests for information respecting the two entities are rationally connected to the audit of Dr. Smith personally. ...

… I am not persuaded that the evidence in this case is so compelling that it was unreasonable for the Minister to proceed otherwise than under s. 231.6 of the ITA. … [A] taxpayer cannot transform domestic-based information into foreign-based information merely by moving it outside the country.

He went on to note that, in dismissing the judicial review application, all he was deciding was that the request letters were not unreasonable - and that Dr. Smith would still have an opportunity (e.g., by adducing evidence relevant to the location of the material) “to equip the Court to decide whether a compliance order should be issued” in the subsequent hearing.

Summary of Frank C. Smith Medicine Professional Corporation v. Canada (National Revenue), 2022 FC 29 under s. 231.1(1).

Carroll – Federal Court of Appeal confirms that a s. 163(2) penalty can be imposed even where CRA was never misled

The taxpayer’s claim for a loss from a fictitious business was rejected by CRA even before initially assessing his return. In rejecting the taxpayer’s argument “that subsection 163(2) penalties cannot be imposed unless the return as filed has been accepted or there is an amount of income or tax in dispute,” Monaghan J.A. stated:

What is relevant is what the taxes would have been if the return had been accepted as filed, and what the taxes would have been if the false loss were added to the taxable income that was reported in the return filed.

2005-0129131I7 F is similar.

Neal Armstrong. Summary of Carroll v. Canada, 2022 FCA 5 under s. 163(2).