News of Note

Income Tax Severed Letters 21 August 2019

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

CRA gives an expansive interpretation to the GST/HST definition of “debt security”

CRA gave the following rationale for an NSF cheque charge being for an exempt financial service:

[A] dishonoured cheque triggers a situation in which the [Organization] obtains a “right to be paid money” by the drawer of the cheque. This “right to be paid” meets the definition of “debt security” in subsection 123(1). The debt security is a “financial instrument” and the processing of a financial instrument is an exempt supply of a “financial service” … .

Neal Armstrong. Summaries of 23 April 2019 GST/HST Ruling 186334 – S under ETA Sched V, Pt VI, s. 20, s. 20(c), s. 20(b)(i), Sched. V, Pt III, s. 6 and ETA s. 123(1) – debt security.

Brandimarte – Federal Court reviews CRA decision to partly waive interest that accrued over 35 years, and rejects comparison to those with complete interest relief

Taxpayers who were the innocent (albeit, perhaps aggressive) victims of a tax fraud, i.e., purported partnerships giving rise to large reported losses in the mid-1980s where, in fact, the partnerships were non-existent, ultimately had their Tax Court actions decided against them in 2014, and sought relief in 2014, or 10 years previously, for accrued interest. A large part of the delay (including CRA not assessing the taxpayers’ returns for quite some time) was attributable to CRA and Justice wanting to bring a criminal prosecution against the promoters before dealing with the taxpayers.

After three levels of review of the requested interest relief, CRA cancelled approximately 15 years and 63 months of accrued interest for the 2004 and 2014 applications, respectively. Boswell J found this decision to be reasonable. The lower relief for the 2014 application properly reflected the application to those applicants of the prohibition after a 2005 amendment to going back more than 10 years with interest relief; and the CRA delays were appropriately weighed against the fact that the applicants had had the ability to have their returns assessed so that they could pay the tax and cut off the interest.

Respecting the taxpayers’ comparison of themselves as the “innocent victims of fraud”, with the “KPMG Untouchables.” who “knowingly participated in a suspect offshore tax scheme,” and “the GLGI cases where taxpayers were granted full interest relief despite their culpability in participating in the tax schemes,” Boswell J stated (at para. 59):

…[C]omparisons to the KPMG Untouchables or the GLGI donors are neither factually relevant nor legally permissible. In Ludco the Federal Court of Appeal held that evidence about other taxpayers who had benefited from an interest deduction for loans obtained in circumstances identical to those of the appellants was inadmissible… .

Neal Armstrong. Summary of Brandimarte v. Canada, 2019 FC 1034 under s. 220(3.1).

6 more translated CRA interpretations are available

We have published a translation of a CRA interpretation released last week, and a further 5 translations of CRA interpretations released in November, 2011 (all of them, from the October 2011 APFF Roundtables). Their descriptors and links appear below.

These are additions to our set of 939 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 3/4 years of releases 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
2019-08-14 10 June 2019 Internal T.I. 2019-0796221I7 F - Qualification d’un véhicule à titre de « voiture de tourisme » Income Tax Act - Section 248 - Subsection 248(1) - Automobile a passenger vehicle ceases to qualify as such when it commences to be used as a taxi given the s. 13(7)(b) deemed acquisition
Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(b) s. 13(7)(b) applies when passenger vehicle converted to taxi use
2011-11-04 7 October 2011 Roundtable, 2011-0411811C6 F - Règlement 1101(5b.1) Income Tax Regulations - Regulation 1101 - Subsection 1101(5b.1) Reg. 1101(5b.1) election can be made in partnership T5013, or by a partner
7 October 2011 Roundtable, 2011-0411851C6 F - Fiducie de protection d'actifs Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Testamentary Trust - Paragraph (b) distribution of property from asset protection trust directly, rather than via estate, to testamentary trust would taint it
General Concepts - Effective Date trust deed clause deeming trust property to be distributed immediately prior to death would not be recognized as taking effect at that time
7 October 2011 Roundtable, 2011-0406551C6 F - Régime coll. d'ass. maladie et les accidents Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i) PHSP can include spouses and dependent related persons
Income Tax Act - Section 144.1 - Subsection 144.1(1) - Designated Employee Benefit benefit from a group sickness or accident insurance plan may be paid from a Life and Health Trust to the employee, spouse or dependent child
7 October 2011 Roundtable, 2011-0412061C6 F - Financing Expenses Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) - Subparagraph 20(1)(e)(i) no s. 20(1)(e) deduction if only capital property that is not a source of income
Income Tax Act - Section 20 - Subsection 20(1) property that is source only of capital gains cannot support a s. 20 deduction

North American – Manitoba Court of Queen’s Bench comments briefly on s. 256(5.11)

Dewar J reversed a finding of the Manitoba Tax Appeals Commission that a corporation (“533”) was subject to de facto control (as described in ITA s. 256(5.1)) by Mr. Carson rather than Mrs. Carson, Accordingly, 533 in fact was not associated within the meaning of ITA s. 256 with Mr. Carson’s companies and, thus, also, for Manitoba payroll tax purposes. This reversal was made on the basis that the TAC had misinterpreted the terms of a declaration of trust respecting 2/3 of the 533 shares held by one of Mr. Carson’s companies. With that reversal, there were no other significant findings that would support the TAC’s findings of association. In contrast to McGillivray, the evidence indicated that “she was making the material decisions in the operation of the restaurant” of 533, and there was no unwritten agreement that she would follow her husband’s direction.

Dewar J also commented obiter on the subsequent enactment of s. 256(5.11), stating:

I make no comment about whether that amendment if applicable in 2007 - 2011 would have changed the result which I have come to on this appeal, except to say that it would have merited further consideration. The amendment permits a court to conclude that a person without a legally enforceable right or ability to control or influence the election of directors has control of a company for the purpose of determining whether that company is associated with another.

I have italicized one word to highlight the lukewarm nature of this comment.

Neal Armstrong. Summary of North American et al. v. The Deputy Minister of Finance, 2019 MBQB 29 under s. 256(5.1).

Glencore – High Court of Australia finds the Australian Taxation Office was entitled to use privileged documents included in the Paradise Papers leak

Glencore companies sought an injunction restraining the Australian Taxation Office from making any use of privileged documents that had been prepared for Appleby in Bermuda to provide legal advice on the Glencore inbound structure and which had ended up in the ATO’s hands as a result of their inclusion in the Paradise Papers.

Before denying any relief on the basis that the privilege could not found a cause of action, and instead was merely “an immunity from the exercise of powers which would otherwise compel the disclosure of privileged communications,” the unanimous Court stated:

[T]he rule promotes the public interest because it "assists and enhances the administration of justice by facilitating the representation of clients by legal advisers". By keeping secret their communications, the client is encouraged to retain a lawyer and to make full and frank disclosure of all relevant circumstances to the lawyer.

After referencing the “more general, public interest … in the fair conduct of litigation, which requires that all relevant documentary evidence be available,” the Court further stated:

In striking the balance between the two competing public interests, the law was not concerned to further a client's personal interest in preventing the use which might be made by others of the client's communications if they obtained them. …

It is the policy of the law that the public interest in the administration of justice is sufficiently secured by the grant of an immunity from disclosure.

Given somewhat more strident statements in Canada of the protection accorded by the privilege under the Charter (e.g., in Chambre des notaires, at para. 28), the same result might not have obtained in Canada.

Neal Armstrong. Summary of Glencore International AG v Commissioner of Taxation, [2019] HCA 26 under s. 232(1) – solicitor-client privilege.

Keybrand Foods – Tax Court of Canada finds that if A controls de facto B and C, B controls de facto C

The taxpayer and its parent (BWS) were guarantors of loans to an unrelated corporation (Vidabode) which had defaulted on loans from GE Capital.

Jorré DJ found that the taxpayer was entitled to deduct interest on a bank loan that it took out to on-lend on an interest-bearing basis to Vidabode in order for Vidabode to obtain GE Capital’s agreement to extend the period for remedying the default. He stated that at that point “the survival of Vidabode was still a possibility.” However, two months later, the taxpayer borrowed a larger sum in connection with subscribing for and acquiring common shares of Vidabode in order inter alia to fund the repayment by Vidabode of the GE Capital loans. The interest on this borrowing was non-deductible. Jorré DJ stated that at the time of this second borrowing:

the reasonable expectation … was that the company would quickly collapse. That is not consistent with a reasonable expectation of income.

A second issue was whether the taxpayer could claim an allowable business investment loss on its share investment in Vidabode. After that investment, each of it and BWS held about 40% of the Vidabode shares and BWS was party to a shareholders’ agreement with the second largest (34%) Vidabode shareholder providing that BWS would appoint two of the four directors and the chairman, who would have a casting vote. In finding that this meant that the taxpayer did not deal at arm’s length with Vidabode, so that no ABIL could be claimed, Jorré DJ stated:

The practical effect of the casting vote is the same as if BWS has the power to name three out of five directors.

Silicon Graphics … is met. BWS had de facto control of Vidabode. It follows that BWS and Vidabode do not deal at arm’s length and, in turn, because BWS and the Appellant do not deal at arm’s length, the Appellant and Vidabode do not deal at arm’s length.

Neal Armstrong. Summaries of Keybrand Foods Inc. v. The Queen, 2019 TCC 161 under s. 20(1)(c)(i) and s. 251(1)(c).

GST/HST Severed Letters April 2019

This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their April 2019 release) is now available for your viewing.

Canadian Home Publishers – Ontario Court of Appeal notes that under the LPA (Ont.) a limited partner on dissolution can only receive a return of its capital contributions

S. 24 of the Limited Partnerships Act (Ontario) provides that “unless the partnership agreement or a subsequent agreement provides otherwise,” on a partnership dissolution the residual assets are to go to the general partner excepting for the payment to the limited partner of its contributions and unpaid profits distributions. Accordingly, Nordheimer JA found that, on a dissolution of a limited partnership that occurred as a result of the death of the limited partner (who had had a 50% profits participation), the estate of the limited partner was entitled to receive only a return of the relatively modest contributions of capital that the limited partner had made decades earlier, rather than 50% of the residual assets. The balance went to the general partner.

Nordheimer JA stated:

A limited partner enjoys protection from the liabilities of the limited partnership, unlike a partner in an ordinary partnership. In return for that protection, the limited partner is restricted to the receipt of two things under the LPA: one is their share of the profits and the other is the return of their contribution (see LPA, s. 11). A limited partner has no broader right to participate in the upside of the limited partnership, just as the limited partner has no broader obligation to suffer or contribute in the downside.

This is something to keep in mind in the relatively rare circumstance of a limited partnership agreement that does not override s. 24.

Neal Armstrong. Summary of Canadian Home Publishers Inc. v. Parker, 2019 ONCA 314 under s. 98(1)(b).

CRA indicates that a s. 88(1)(d) late designation could be made for a statute-barred year that CRA was assessing within the expanded cross-border reassessment period

S4-F7-C1, para. 1.40 indicates that it does not allow a late-filed s. 88(1)(d) designation where the particular eligible property to be bumped was disposed of in a taxation year that was statute-barred. CRA has now relaxed this position in the situation where:

  • The Canadian Acquireco formed by a non-resident acquired all the shares of a Canadian public-company target (whose assets included the shares of a U.S. sub) and amalgamated with it.
  • The Amalco then sold the shares of the U.S. sub to a non-resident affiliate, and did not make the s. 88(1)(d) designation at the first taxation year end following the amalgamation (“year-end #1”) because a professional appraisal indicated that there was no gain on those shares.
  • The TSO proposed to reassess that sale (beyond the normal reassessment period but within the extended s. 152(4)(b)(iii period) by substantially increasing the proceeds of disposition of those shares.

After quoting from Nassau Walnut to the effect that a late designation was acceptable where the situation “does not raise the spectre of retroactive tax planning,” the Directorate stated:

[I]f the CRA has the ability to reassess the Taxpayer’s Part I income tax return for year-end #1 pursuant to subparagraph 152(4)(b)(iii) with respect to its disposition of the … US shares … the Taxpayer’s late-filed designation request could be considered.

Neal Armstrong. Summary of 30 May 2019 Internal T.I. 2019-0806761I7 under s. 88(1)(d).