Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether, in this case, subsection 246(1) can be applied on its own as a stand-alone basis of assessment.
Position: Yes.
Reasons: Federal Court of Appeal decision in Massicotte.
Renuka Minhas
Business Objections
875 Heron Road 2009-034425
Appeals Division, Rm 224 Ryan Lay
Ottawa ON K1A 1A2 (250) 594-3618
January 10, 2011
Dear Ms. Minhas:
Re: Response to your memorandum dated October 13, 2009 requesting the Income Tax Rulings Directorate's ("Rulings") views on the potential application of subsection 246(1) in a particular fact situation.
In your memorandum to us you describe a situation in which Opco has paid personal and other vehicle expenses of the taxpayer. The taxpayer owns shares of Holdco, which in turn owns shares of Opco.
The taxpayer's representative argues that subsection 246(1) only applies where another provision, i.e., subsections 6(1), 9(1), 15(1) or 105(1), would be applicable if the taxpayer were deemed to reside in Canada. In this case, the taxpayer resides in Canada. The taxpayer's representative contends that subsection 15(1) cannot apply because the expenses are paid by Opco, and the taxpayer is not a shareholder of Opco. Since the taxpayer resides in Canada and subsection 15(1) does not apply for other reasons, the taxpayer's representative concludes that subsection 246(1) is not applicable because one of the conditions for its application is not met, namely that the amount "would be included in the taxpayer's income [under subsection 15(1)] if the amount of the benefit were a payment made directly by the person to the taxpayer". The taxpayer's representative considers that the reasons of the Federal Court of Appeal in Massicotte v. the Queen (2008 DTC 6610) do not extend the scope of subsection 246(1) as described in this paragraph.
The facts in Massicotte v. the Queen were that the taxpayer owned all the issued shares of Holdco, which in turn owned all the issued shares of Opco. The taxpayer also had a receivable from a third party with a face amount of $240,000, but the Tax Court judge concluded it was almost worthless. The taxpayer transferred the receivable to Opco in exchange for the forgiveness of $240,000 worth of debt owed by the taxpayer to Opco. The Minister assessed under subsection 246(1) on the basis that the taxpayer had received a benefit when Holdco arranged for Opco to assign a value of $240,000 to a nearly worthless debt.
The Massicotte case was the subject of two decisions at the Tax Court of Canada before it was heard by the FCA.
In the first decision rendered by the Tax Court of Canada (2006 DTC 2629), Tardiff J. concluded that the Minister may assess solely on the basis of subsection 246(1), and that the way to prove a section 246 assessment is to show that the amount is not included in the taxpayer's income, but that it would have been if the payment had been made directly. At paragraphs 34 through 37, Tardiff J. states:
[34] Subsection 246(1) of the ITA is a provision of alternative application since it must be shown that the amount is not otherwise included (for example, under subsection 15(1) of the ITA) and that it would be included if the payment made to the taxpayer was made to him directly.
[35] In the instant case, the amount was paid to Louis Massicotte. As a result, it is not a benefit conferred on a shareholder in accordance with subsection 15(1) of the ITA since Louis Massicotte is not a shareholder of Pub Création. However, Mr. Massicotte is a shareholder of Gestion Amadéus-Amadéus Inc., which holds 100 percent of the shares of Pub Création.
[36] Consequently, subsection 246(1) of the ITA will be applied "alternatively". That does not mean that the Respondent may not assess solely on the basis of subsection 246(1) of the ITA, since that provision is sufficient basis for an assessment.
[37] It is enough simply to establish that the amount is not otherwise included, whereas it would be included were it not for the fact that the payment was made indirectly. The way to prove this is to enumerate the facts constituting the basis of the assessment in the Reply to the Notice of Appeal. This proof should normally show that the amount is not included in computing the taxpayer's income, but would have been if the payment had been made directly.
In the second decision rendered by the Tax Court of Canada (2008 DTC 3132), Archambault J. decided that the Minister should have relied on paragraph 6(1)(a), and went on to decide the case in favor of the Minister on the basis of this paragraph. However, Archambault J. also stated that if he was wrong in respect of the application of paragraph 6(1)(a), subsection 246(1) would also apply. At paragraph 101 of his decision he sets out his reasoning in respect of the application of subsection 246(1):
[101] In my view, it is not necessary to use subsection 246(1) of the Act to include the $239, 000 benefit in Mr. Massicotte's income because paragraph 6(1)(a) of the Act requires that the amount of the benefit be included.
If I was wrong to conclude thusly, I would conclude that this benefit should be included under subsection 246(1) of the Act. I would then conclude without any hesitation whatsoever that the $239,000 benefit was conferred indirectly on Mr. Massicotte by Amadeus, and that if Amadeus had done it directly, the value of the benefit would have been included in Mr. Massicotte's income, under subsection 15(1) of the Act. Mr. Massicotte, as a shareholder, controlled Amadéus, and Amadéus controlled Pub.
In its decision on the case of Massicotte v. the Queen (2008 DTC 6610), at paragraph 19 of its decision, the Federal Court of Appeal made specific reference to the comment made by Archambault J. at paragraph 101 of his decision and stated that he should have decided the case based on the underlined language reproduced above. At paragraph 23 of its decision, the Federal Court of Appeal also reproduced and cited with approval the comments made by Tardiff J. at paragraphs 34, 36 and 37 (reproduced above). The Federal Court of Appeal disagreed with Archambault J. for deciding the case on the basis of paragraph 6(1)(a) since the assessment did not rely on this paragraph.
The Federal Court of Appeal also stated at paragraphs 24 and 25 that:
[24] The question the TCC judge should have asked was not whether the benefit "could be included" under paragraph 6(1)( a), but rather whether the value of the benefit was "included" in computing Mr. Massicotte's income under paragraph 6(1)( a) or any other provision in Part I. While subsection 246(1) is generally used as an alternative basis, nothing prevents the Minister from relying on this provision as the sole basis of assessment when the circumstances require.
[25] As the TCC judge concluded there had been a benefit under subsection 246(1) on the facts in evidence, and the value of that benefit had not been included in Mr. Massicotte's income under Part I, he should have confirmed the assessment. He did not have to go any further.
On this basis, the FCA went on to decide the appeal in favour of the Minister. The case of Massicotte v. the Queen was denied leave to appeal to the Supreme Court of Canada.
Just like in the case of Massicotte v. the Queen, the facts in the particular case that we have been asked to comment on involve a benefit provided by a second tiered subsidiary to a shareholder of the first tiered corporation. We could paraphrase Archambault J. at paragraph 101 reproduced above and cited with approval by the Federal Court of Appeal by saying that:
The [...] benefit was conferred indirectly on [the taxpayer by Holdco], and that if [Holdco] had done it directly, the value of the benefit would have been included in [the taxpayer's] income, under subsection 15(1) of the Act.
We are therefore of the view that subsection 246(1) is, on its own, a sufficient basis for an assessment in this case.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
If you wish to discuss this matter further, please contact Ryan Lay at (250) 594-3618 or Yves Moreno at (613) 957-2091.
Yours truly,
Yves Moreno
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011
Email this Content