News of Note

Libfeld – Tax Court of Canada does not permit a new home purchaser to resile from the vendor’s certification that it was an exempt sale

Libfeld claimed the $24,000 Ontario new housing rebate on his purchase in 2018 of an unoccupied and sparsely-furnished home. He provided indirect evidence that the individual vendor was a builder of the home, including a Toronto Life promotional article (admitted to be hearsay) titled “House of the Week: $7 million for a newly built mini-mansion in Forest Hill” and explaining that the vendor had torn down a pre-existing house and built this one in its place.

In finding that Libfeld had not established that the vendor was a builder, as required by s. 254(2)(a), so that the rebate was unavailable, Smith J noted that “the Court does not have the benefit of any direct evidence from the Vendor or other independent witness as to the frequency of similar transactions, what her intention was when she acquired the Property or what her motive was for selling” and that, on the closing of the purchase, Libfeld had accepted the sworn declaration of the vendor that the sale was not a taxable supply. There also was not much evidence to establish, as required by ss. 254(2)(f) and (g), that the vendor had not, at some point, occupied the “new” home prior to its sale.

Neal Armstrong. Summary of Libfeld v. The Queen, 2022 TCC 91 under ETA s. 254(2)(a).

CRA ruling confirms that a s. 149(1)(o.2)(ii)(A) permitted activity can include an implied activity

A corporation which was otherwise exempted under ss. 149(1)(o.2)(ii) and (iv) will borrow money from an arm’s length lender on the security of a mortgage on some of its existing real estate, and use the loan proceeds to acquire, on an unencumbered basis, Canadian income-producing real property, or invest in real estate partnerships described in s. 149(1)(o.2)(ii)(A)(II).

CRA ruled that such borrowing and acquisition will not, by themselves, cause the corporation to fail to comply with s. 149(1)(o.2)(ii). The CRA summary stated:

The use of existing real property to secure additional borrowing, where such borrowed money is used for activities described in subclause 149(1)(o.2)(ii)(A)(I) or (II), is part of acquiring and investing in real property for the purposes of subparagraph 149(1)(o.2)(ii).

Apparently, someone was concerned that the list of permitted activities in s. 149(1)(o.2)(ii)(A) did not include the granting of a security interest on real property that was not itself being acquired, and the answer was that this was part and parcel of the acquisition of the further real estate.

Neal Armstrong. Summary of 2021 Ruling 2020-0872241R3 under s. 149(1)(o.2)(ii)(A).

CRA notes uncertainties as to whether two condos functionally used as one residence are a single residence for ETA purposes

A couple (A and B) along with others purchased a property in trust for development as a condominium complex. On completion of construction, A and B took title to two of the units jointly, with a view to using them (as the first occupants) functionally as a single place of residence (with sleeping quarters in one unit and living quarters in the other).

After noting uncertainties as to whether the two units constituted two, or a single, residential complex and place of residence, CRA noted that even if each was a residential complex (and each of A and B, a builder) then the personal use exception in s. 191(5) to the self-supply rule in s. 191(1) would apply to each unit if either A or B, or both A and B, used the unit primarily as a place of residence.

CRA did not discuss the income tax jurisprudence (e.g., Salama and Boulet) as to whether duplex units or basement apartments are separate residences.

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.12 under ETA s. 191(5).

CRA indicates that a health spending account for a single shareholder/employee likely does not qualify as a PHSP

S. 6(1)(a)(i) excludes a taxable benefit from the employer’s funding of a private health services plan (PHSP) for its employees, including in the case of a health spending account (HSA) (under which an employer agrees to reimburse its employees’ hospital and medical expenses incurred during the year up to a pre-determined limit).

However, CRA considers that an HSA established for a single shareholder/employee (and family members) likely does not qualify as a PHSP. This is based on its view that “for a plan to be a PHSP … the plan must be a plan of insurance” and, here, “[e]ffectively, the sole employee-shareholder is paying for the personal hospital and medical expenses for themselves and their family members through their solely owned corporation without any risks being assumed by the corporation.”

Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q. 10, 2022-0928901C6 under s. 248(1) – PHSP.

Income Tax Severed Letters 17 August 2022

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

CRA does not accept that s. 160 cannot apply to a death payment made out of a segregated fund

In Higgins, the payment of death benefits under a London Life segregated fund to named beneficiaries (the daughters of the tax debtor) was found not to constitute a transfer by the estate to which s. 160 could apply given that London Life, in paying such benefits, was fulfilling a direct obligation to them under what Rowe DJ characterized as being predominantly an insurance policy.

CRA declined to indicate that it was following Higgins and suggested that Higgins was inconsistent with Orpin v. Littlechild, 2011 ONSC 7695 - and instead stated that “with so many unique financial products, and various legislation governing them, the application of section 160 of the Act is decided on a case-by-case basis.”

Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q. 11, 2022-0928911C6 under s. 160(1).

We have translated 8 more CRA interpretations

We have published a further 8 translations of CRA interpretations released in June of 2004. Their descriptors and links appear below.

These are additions to our set of 2,175 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 18 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2004-06-18 8 June 2004 Internal T.I. 2004-0067401I7 F - Dépenses d'une entreprise illégale Income Tax Act - Section 9 - Computation of Profit onus on taxpayer, who did not keep records, to displace the net worth assessment method results
General Concepts - Onus onus on taxpayer, who did not keep records, to displace the net worth assessment results, with documentation or other “acceptable evidence”
Income Tax Act - Section 20 - Subsection 20(16) terminal loss when illegal equipment was forfeited to the Crown by court order
Income Tax Act - Section 13 - Subsection 13(21) - Disposition of Property disposition when illegal equipment was forfeited to the Crown by court order, rather than when it was seized by the RCMP
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees legal fees incurred to defend criminal charges for carrying on an illegal drug business were non-deductible
12 May 2004 Internal T.I. 2004-0061071I7 F - Assistance sociale - Famille d'accueil Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(h) receipt of special allowance by the public institution under the CCTB program does not render the assistance to the individual taxable
2004-06-11 28 May 2004 Internal T.I. 2004-0065101I7 F - Tenures à bail - Catégorie 13 et loyers Income Tax Act - Section 13 - Subsection 13(21) - Disposition of Property no disposition when premises were vacated (but not abandoned)
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs rent on premises continued to be deductible after they were vacated
Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) vacated leased premises continued to qualify as Class 13 property
Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) no change of use when premises were vacated
28 May 2004 External T.I. 2004-0065291E5 F - Corp. associated through a third corp.: 256(2) Income Tax Act - Section 256 - Subsection 256(2) “either of the other two corporations" in pre-2016 version interpreted as "both of the other corporations"
31 May 2004 External T.I. 2004-0069681E5 F - Adjusted Cost Base of Real Property Income Tax Act - Section 54 - Adjusted Cost Base legal fees and settlement payment made in connection with disputed legacy of residence might be an addition to its ACB
3 June 2004 Internal T.I. 2004-0072971I7 F - Taxable Benefit - Life Insurance Premiums Income Tax Act - Section 15 - Subsection 15(1) no benefit conferral where corporation pays premiums on policy on life of its shareholder of which it is the policyholder and beneficiary
1 June 2004 Internal T.I. 2004-0078161I7 F - ITCs - Winding-up Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(e.3) ITCs incurred by sub only available to parent for post-wind-up years
Income Tax Act - Section 88 - Subsection 88(1) to be “wound up” there must generally be evidence that the sub will soon be dissolved
18 May 2004 Internal T.I. 2004-0063351I7 F - Double déduction des intérêts et paragraphe 18(6) Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) double-dip structure does not preclude access to s. 20(1)(c) deduction
Income Tax Act - Section 18 - Subsection 18(6) thin cap rules not engaged by parent guarantee

CRA indicates that a renovation or alteration made to a depreciable property may qualify as accelerated investment incentive property

Would a renovation or alteration made to a depreciable property, originally acquired in a taxation year ending prior to November 21, 2018, qualify as accelerated investment incentive property (“AIIP”), notwithstanding that the taxpayer had, prior to that date, been claiming CCA on the original property?

CRA stated that it “considers there to have been an acquisition of property when there is an alteration or renovation to a particular depreciable property, even if this alteration or renovation represents an addition to an already existing property,” so that the requirement in Reg. 1104(4)(a), that the property have been acquired after November 21, 2018, would be satisfied.

CRA also indicated that Reg. 1104(4)(b) would generally be deemed by Reg. 1104(4.1) to be satisfied, provided that “no CCA or terminal loss had been deducted in respect of the alteration or renovation by any person or partnership for a taxpayer year ending before the property was acquired by the taxpayer.” Thus, the renovation or alteration would generally be expected to qualify as AIIP.

Neal Armstrong. Summary of 16 June 2022 External T.I. 2019-0819951E5 under Reg. 1104(4).

Coopers Park – Tax Court of Canada grants production of documents reviewed by the GAAR Committee in a similar case that then was applied to the taxpayer

The taxpayer, which had been assessed under s. 245(2) to deny the carryforward of losses and credits, sought the discovery of proposals made by CRA to two unrelated taxpayers that set out its understanding of the facts and its legal analysis thereof. The CRA auditor had considered such documents (which he had placed in the file) but had not relied on them in auditing the taxpayer.

In finding that they were discoverable, Owen J stated:

[I]n GAAR cases, the legal analysis of the Minister in support of the policy relied upon is subject to discovery. …

[R]eliance is not the test for relevance. … [C]onsideration of the documents in the context of the audit of the Appellant is sufficient to make them relevant for the purposes of discovery.

CRA had relied on the GAAR Committee’s analysis of a similar case in deciding to assess the taxpayer under GAAR, so that a GAAR Committee review of the taxpayer’s transactions was considered unnecessary. After noting that “[i]f the GAAR Committee had considered the Appellant’s case, there is no doubt that the Appellant would be entitled to discovery of all non‑privileged documents considered by the GAAR Committee in deciding to assess the Appellant under the GAAR,” Owen J stated:

[T]he Appellant is equally entitled to all non-privileged documents considered by the GAAR Committee in deciding to assess under the GAAR the unrelated taxpayer described in the Similar Case … because that decision directly resulted in the subsequent decision to assess the Appellant under the GAAR.

Accordingly, such documents were discoverable, subject to redaction of all information identifying third parties, and subject to any claims of solicitor-client privilege.

Summary of Coopers Park Real Estate Development Corporation v. The Queen, 2022 TCC 82 under Rule 83(1).

Stroud – Tax Court of Canada applies the Moldowan REOP tests for GST/HST purposes

Moldowan indicated that an activity should have a reasonable expectation of profit (REOP) to qualify as a business, and suggested that, in determining whether there is a REOP, the “following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.”

Although the relevance of REOP for ITA purposes was subsequently restricted by Stewart, in the meantime, the ETA definition of “commercial activity” was enacted, which excludes, in the case of an individual, “a business carried on without a [REOP].”

After reviewing the unsatisfactory evidence presented by the taxpayer, who had reported very large losses (with meagre documentary support) from a racehorse farm and modest profits from his law practice (in years before he was disbarred), Spiro J stated:

Having applied the criteria … in Moldowan, I find that each factor (other than time spent), weighs heavily in favour of the conclusion that the Appellant did not carry on his farm business with a reasonable expectation of profit.

As the taxpayer did not have a commercial activity, his input tax credit claims were properly denied.

Neal Armstrong. Summary of Stroud v. The Queen, 2022 TCC 86 under ETA s. 123(1) – commercial activity.