News of Note

Ahmar – Federal Court of Appeal finds that a director’s plan to turn the company around is not a due diligence defence to failure to remit

After a construction company (Strong Forming) began to run out of money, its sole shareholder, director and officer (Mr. Ahmar) decided that Strong Forming would stop making HST remittances, but that it would continue on with another construction contract using revenues that came in and money contributed by Mr. Ahmar – before Strong Forming had to cease operations. In affirming that Mr. Ahmar had not made out the due diligence defence to director liability for failure to remit, Mactavish JA stated:

… Mr. Ahmar made the conscious decision to have Strong Forming defer payment of its HST debt, and to use these revenues to satisfy other obligations in the hopes of turning the company’s financial position around. …

Buckingham … state[ed] that the defence under section 323 “should not be used to encourage such failures by allowing a due diligence defence for directors who finance the activities of their corporation with Crown monies on the expectation that the failures to remit could eventually be cured”… .

In its COVID-19 release, Finance is now effectively letting companies defer GST/HST remittance obligations in order to help keep themselves afloat. Will doing so still give rise to director’s liability?

Neal Armstrong. Summary of Ahmar v. Canada, 2020 FCA 65 under ETA s. 323(3).

5 more translated CRA interpretations are available

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

These are additions to our set of 1136 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 1/3 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 April.

Bundle Date Translated severed letter Summaries under Summary descriptor
2010-12-03 9 November 2010 External T.I. 2010-0380661E5 F - Internal Reorganization Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) two siblingcos, although not related to each other, were related to dividend recipient on spin-off transaction
Income Tax Act - Section 55 - Subsection 55(4) potential application of s. 55(4) where increase of interest of siblings companies is sheltered by control of Father – unless he held his shares to protect his “economic interests”
9 November 2010 External T.I. 2010-0357091E5 F - Prestation fiscale pour le revenu de travail Income Tax Act - Section 122.7 - Subsection 122.7(1) - Eligibile Dependant qualification as an eligible dependant
22 November 2010 External T.I. 2010-0374861E5 F - Actions - société agricole familiale Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Share of the Capital Stock of a Family Farm or Fishing Corporation - Paragraph (b) test in para. (b) is applied re the use of the property throughout the period of the taxpayer’s ownership
30 September 2010 Internal T.I. 2010-0373901I7 F - Bigamie fiscale - transfert de biens au décès Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(a) s. 70(6)(a) could apply simultaneously to the devise of House A to surviving spouse and of House B to surviving common-law partner
Income Tax Act - Section 40 - Subsection 40(4) - Paragraph 40(4)(b) - Subparagraph 40(4)(b)(i) application of s. 40(4)(b)(i) by both surviving spouse re House A and surviving common-law partner re House B – but not for overlapping years
2010-11-26 28 September 2010 External T.I. 2010-0372461E5 F - Exploitation d'une entreprise à perte Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit reasonable expectation of profit test not applied where no personal element
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Goodwill, Trademarks and Customer Lists per Canada Starch, a payment made to preserve goodwill or a business is not a capital expenditure

CRA confirms that accelerated CDE deductions can be available for drilling on land acquired from an affiliate

S. 66.2(2) provides an increased deduction for Canadian development expense incurred after November 20, 2018 – but with an exclusion for “a cost in respect of a Canadian resource property acquired by the taxpayer … from a person or partnership with which the taxpayer does not deal at arm’s length.” When asked, CRA confirmed that this exclusion would not apply to amounts paid to an arm’s length party for “drilling or completion expenses, solely because they were incurred on lands acquired from a person with whom a taxpayer does not deal at arm’s length.”

Neal Armstrong. Summary of 6 June 2019 CPTS Roundtable, 2019-0816111C6, Q.6 under s. 66.2(5) – accelerated CDE – (a)(ii).

The deadline for most income tax filings has now been extended

CRA has now provided a more general COVID-19 related extension of income tax filing deadlines, that otherwise fell after March 18, 2020, to June 1, 2020, stating:

These administrative income tax actions include the filing of returns, forms, elections, designations, and responses to information requests. Payment and remitting requirements [e.g., of source deductions] are not covered by this announcement.

However, the filing deadlines for trust, partnership and NR4 information returns are extended only to May 1, 2020, and the filing deadline for the T661 (re SR&ED claims) is not extended at all.

No mention is made of extensions for the filing deadlines for GST/HST returns, e.g., the “regular” GST34, or the GST111 (for financial institutions that are not registered for Quebec purposes and are not “SLFIs.”) However, the CRA announcement is effectively part of a Finance Release (dated 27 March 2020) which states that “the Government is deferring Goods and Services Tax/Harmonized Sales Tax (GST/HST) remittances and customs duty payments to June 30, 2020.” There is no late-filing penalty under ETA s. 280.1 where no amount was required to be remitted. Nonetheless, it is odd that there is no mention of there being an extension of the filing deadline for GST/HST returns.

The Finance release also states:

No audits should be finalized and no reassessments should be issued. ...

For any objection request [i.e., notice of objection] due March 18 or later, the deadline is effectively extended until June 30, 2020. [As per private correspondence dated, March 29, 2020, it is understood that CRA has confirmed that this refers to an automatic extension under s. 166.1, so that no legislative amendment is required.]

Neal Armstrong. Summary of COVID-19 Update: Additional measures from the Canada Revenue Agency, 26 March CRA News Release under s. 220(3). See also Additional Support for Canadian Businesses from the Economic Impact of COVID-19, 27 March 2020 Finance News Release.

CRA disagrees that project expenses incurred after determining economic feasibility and before project approval are generally deductible

Rio Tinto found that investment dealer fees incurred in connection with an acquisition but before the board determined to make the acquisition were fully deductible. When asked about the deductibility of expenses incurred prior to the approval of a project (pre-Final Investment Decision, or “FID” expenses), CRA stated (without referring to Rio Tinto):

[T]he CRA does not accept that there is bright line test, such as FID, to determine the characterization of expenses for income tax purposes.

… [E]xpenditures in respect of research in determining economic viability may be considered to be on income account … . The economic viability determination of a project may include preliminary designs for tangible assets and estimating capital and operating expenses.

There are a variety of activities undertaken subsequent to the preliminary economic viability study. These may include government approval, equipment specification, contract negotiations, stakeholder consultations, refinement of the economic viability study, etc. [If] … the expenditure brings into existence an asset or advantage that has an enduring benefit ... it is denied current deduction … .

Neal Armstrong. Summary of 6 June 2019 CPTS Roundtable, 2019-0816111C6, Q.5 under s. 18(1)(b) - capital expenditure v. expense - oversight and investment management.

CRA confirms that Folio S4-F15-C1 applies for purposes of the new accelerated CCA rules

Properties acquired for use in manufacturing or processing activities that are included in Class 29, 43 or 53 generally generate a 100% CCA deduction in the first year. CRA confirmed that its statements in Folio S4-F15-C1 as to the meaning of M&P also apply in this context so that, for example, in the oil and gas context, M&P includes the processing in Canada of natural gas at a straddle plant or at a plant devoted primarily to the recovery of ethane.

Neal Armstrong. Summary of 6 June 2019 CPTS Roundtable, 2019-0816111C6, Q.2 under Class 29.

CRA acknowledges that taxpayers can choose between reasonable alternative formats (e.g. hard or soft) for providing their tax working papers/records

CRA indicated that in Béarence:

The Court found that the taxpayer had provided all the information in its possession and that the CRA could not compel a taxpayer to provide such information in another format.

It then stated:

Taxpayers have access to the information pertaining to their tax obligations and are expected to cooperate with CRA officials and to respond to reasonable requests for information. …

[T]he CRA policy is not at odds with the decision in … Béarence. CRA officials are expected to be reasonable in their requests for the information and documentation.

Neal Armstrong. Summary of 6 June 2019 CPTS Roundtable, 2019-0816111C6, Q.1 under s. 231.2(1).

Finance/CRA’s implied sunset for the COVID-19 lockdowns of June 20 is not pollyannish

I will pretend that this post has something to do with tax.

The new temporary COVID-19 wage subsidy announced by Finance and CRA implicitly assumes that relief is only required until June 20, 2020. The article linked below, which was recommended to professional staff by the Chief of Surgery at a downtown hospital, suggests that indeed it may be possible by then to lift the fairly severe lockdown (referred to as the “hammer”) in places like Ontario - and then shift to something referred to as the “dance.”

Provided that the hammer has been successful in reducing the reproduction rate well below 1 to, say, a rate of 0.3, then the outbreak will be well under control after about 5 weeks. Once the number of active cases is substantially reduced at about that point, there can be a switch over to the dance, which only requires that the reproduction rate be kept to slightly under 1.00. This can be done with milder social distancing (that permits most people to get back to regular work) and doing things like testing and contact tracing to a South Korean standard.

The article is highly critical of the U.S. “mitigation” approach which, it is suggested, will result in millions of unnecessary deaths if it continues to be pursued. (This implies that Trudeau did the right thing in agreeing to partially close the border.)

Neal Armstrong

Income Tax Severed Letters 25 March 2020

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

Honey Fashion – Federal Court of Appeal requires the CBSA to revisit an adverse decision due to its failure to explain a departure from past practices

In a specialized customs tariff remission context, De Montigny JA agreed with Zinn J of the Federal Court that a decision of the CBSA - to deny a request of a clothing manufacturer (Honey Fashion) to have the name of the importer of record changed from the actual importer to that of Honey Fashion (in order that Honey Fashion could generate remission claims for the importations in question) – should be reversed given that the CBSA decision did not give any explanation as to why it was not following its practice in previous such claims of allowing such a name change. In applying Vavilov, De Montigny JA stated:

A decision maker cannot deviate from earlier decisions or from a longstanding past practice, especially when it is too late for those affected by these decisions to adjust their behaviour accordingly, without providing a reasonable explanation for that departure.

Neal Armstrong. Summary of Canada (Attorney General) v. Honey Fashions Ltd., 2020 FCA 64 under Customs Act, s. 7.1.