News of Note

Ludmer – Quebec Court of Appeal confirms that CRA had abusively applied Reg. 7000(2)(d) to equity-linked notes and, thus, inconsistently with published positions

The Canadian-resident taxpayers were shareholders of a BVI company (“SLT”) which, in turn, held notes issued by two foreign subsidiaries of two Canadian banks. The notes were payable in 15 years’ time and the amount payable was calculated by reference to the performance of a reference portfolio of equities or bonds.

CRA considered that there was a requirement to recognize deemed interest income on the notes under Reg. 7000(2)(d) given that, in contrast to the usual equity-linked notes that were available to investors at the time, these notes had “internal puts,” i.e., SLT had the right to terminate the notes at any time, on 367 days’ notice, at the market value of the reference assets. On this basis, it considered that the “the maximum amount of interest thereon that could be payable thereunder in respect of that year” was the difference between the maximum value of the reference assets at the end of the year and the maximum value in the prior years, and assessed accordingly, to treat such annual increase as foreign accrual property income of SLT under element A of the s. 95(1) FAPI definition.

In rejecting the Crown’s position that the trial judge erred in awarding damages stemming from various finding including that CRA’s assessing position based on Reg. 7000 was inconsistent with its past practice, Schrager JA stated):

What the trial judge ruled as unreasonable was the lack of consistency and publicity. The CRA sought to apply a position solely to the Appellants, choosing to ignore that other equity-linked notes had pre-maturity redemption rights (albeit at the initiative of the holder rather than the issuer as was the case with SLT). Moreover, the CRA did not publicize its position adopted with respect to the Appellants apparently because of the plethora of equity-linked notes issued by Canadian financial institutions. All of this led him to the conclusion that the results ought by those spearheading the assessments was dictated by an unreasonable approach. I am consequently not convinced of any reviewable error in the trial judge’s conclusions that the conduct of the CRA in arriving at and applying the assessing position under Regulation 7000 was, in the circumstances of the case, unreasonable and, as such, constituted a fault.

In rejecting the taxpayers’ submissions that punitive damages should also have been awarded, Schrager JA stated:

The conduct of the CRA in performing the audits, driving the file, responding to ATIA requests and issuing the assessments and, finally, the manner of resolving the assessments was, as the trial judge ruled, abusive and constitutive of fault. However … to succeed, the claim for punitive damages must rest upon a finding of intentional conduct and an unlawful deprivation of property. … However abusive the CRA’s conduct might have been, it is difficult to subscribe to the Appellants’ arguments that there was here an intention to unlawfully deprive the Appellants of their property.

Neal Armstrong. Summaries of Ludmer v. Attorney General of Canada, 28 May 2020 QCCA 500-09-027787-183 under Reg. 7000(1)(d) and General Concepts – Negligence.

CRA finds that discretion of trustees to retain capital or income rather than distribute to the sole current beneficiary does not preclude the latter being the beneficial owner

Two of the conditions for the s. 107.4 rollover to apply to a disposition of capital property by an individual to a trust is that the disposition “not result in a change in the beneficial ownership of the property” (s. 107.4(1)(a)), and that s. 73(1) (ignoring any election out of s. 73(1) and any application of s. 73(1.02)) does not apply to the disposition (s. 107.4(1)(i)). CRA appeared to find that both conditions could be satisfied where an individual transferred capital property to a trust of which he and another were the trustees. Under the trust deed, he was the sole beneficiary during his lifetime, but any remaining corpus would, in accordance with Art. 1297 of the Quebec Civil Code, go to his estate on his death. Furthermore, the trustees had the discretion to retain capital and income rather than distribute it to him.

CRA found that this discretion did not detract from him being the continued beneficial owner, stating:

Having regard to paragraph 248(3)(e) and subsection 248(25), it is reasonable to consider that the transfer of property to a trust governed by the C.C.Q. of which the transferor is the sole beneficiary does not result in a change in beneficial ownership for the purposes of paragraph 107.4(1)(a).

Thus, a discretion accorded to the trustees, under the terms of the trust indenture, as to when they may distribute capital and income to the beneficiary, would not, in and of itself, affect the determination of whether or not there is a change in beneficial ownership as long as the individual is, as a result of the transfer of the property to the trust, the sole person beneficially interested in the trust within the meaning of subsection 248(25).

Regarding, s. 107.4(1)(i), this situation did not meet the requirement in s. 73(1.01)(c)(ii) that, after transferring the capital property to the trust, the “individual is entitled to receive all of the income of the trust that arises before the individual’s death” given the trustees’ discretion to retain income. Accordingly, s. 107.4(1)(i) also was satisfied.

Neal Armstrong. Summaries of 9 April 2020 External T.I. 2014-0527261E5 F under s. 107.4(1)(a) and s. 107.4(1)(i).

Income Tax Severed Letters 27 May 2020

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

Express Gold – Federal Court suggests that a taxpayer can bring a mandamus motion if CRA drags out an audit of GST/HST refund claims for ulterior or strategic reasons

ETA s. 229(1) requires that a net tax refund claimed in a return is to be paid “with all due dispatch after the return is filed.” Pentney J found that this provision required that the Minister proceed “with all due dispatch” in determining whether the refund should be paid (i.e., if CRA so chooses, it can apply an “audit first with all due dispatch, then pay” system, rather than a “pay right away, audit later” system, as argued by the registrant.)

Here, the registrant claimed a net refund claim of $9.13 million in its August 2018 return, and then, on December 6, 2018 - which was only two months after having been notified by CRA that that return would be audited and that, in the meantime, no refund would be paid - made an application for a mandamus order to compel the Minister to pay the net refund. This was found not to have been a reasonable time in which to require an audit to be performed.

Pentney J stated:

I have concluded that the Applicant brought its application before a reasonable time for the performance of the [“with all due dispatch”] duty had elapsed, and so I am dismissing the application. In doing so, it is worth underlining that if the Applicant has or obtains evidence that the CRA is acting for an ulterior purpose, or that the audit is being continuously expanded in bad faith, or otherwise not proceeding in a reasonable time-frame, it can bring another motion.

Neal Armstrong. Summary of Express Gold Refining Ltd. v. Canada (National Revenue), 2020 FC 614 under ETA s. 229(1).

GST/HST Severed Letters August 2019

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

CRA announces that pending a Finance COVID-19 review, it will not require the termination of a deferred salary leave plan if the leave of absence is deferred beyond 6 years

The deferred salary leave plan (DSLP) rules permit the deferral of salary for up to six years before the leave period commences. Finance is addressing issues that have arisen under the DSLP rules, including the effect on health care and other essential workers who are currently needed even if the six-year deadline for taking leave is arriving.

CRA has announced:

Pending completion of the Department of Finance Canada review, the CRA will not require an employer to terminate an individual’s DSLP in the event that the individual defers their leave of absence beyond the six-year maximum deferral period. This administrative position will apply regardless of the reason for deferring the leave. In addition to providing flexibility to health care workers and others providing essential services, it will accommodate, for example, individuals who had planned to travel during their leave but who are now unable to because of travel restrictions.

Neal Armstrong. Summary of 14 May 2020 External T.I. 2020-0848641E5 under Reg. 6801(a)(i) (15 May 2020 External T.I. 2020-0848511E5 F is similar).

Eisbrenner – Federal Court of Appeal finds that the onus of proof rested at all times with the taxpayer

One of the difficulties of the taxpayers in a charitable gift program for the donation by them of entitlements to pharmaceuticals (acquired in a distant land) to a registered charity is that they had no granular evidence that they had indeed acquired beneficial ownership of the supposedly-donated pharmaceuticals. Although they had pled that they had acquired the pharmaceuticals, this was also a pleaded assumption of the Minister in her reply.

One of the taxpayers (through counsel) argued that “he only had to raise a prima facie case, which he submitted was a lower standard than the balance of probabilities,” whereupon the onus of proof shifted to the Minister.

This argument was especially unlikely to persuade Webb JA. After noting that in Sarmadi, he had concluded that “[i]f the taxpayer has, on the balance of probabilities, disproven the particular facts assumed by the Minister, …there is no burden to shift to the Minister to disprove what the Tax Court judge has determined that the taxpayer has proven,” he concluded:

[B]ecause Mr. Eisbrenner pled that he had acquired ownership of certain pharmaceuticals and transferred these pharmaceuticals to the in-kind charity, he had the onus of proving that he owned these particular pharmaceuticals on a balance of probabilities.

Neal Armstrong. Summary of Eisbrenner v. Canada, 2020 FCA 93 under General Concepts - Onus.

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 September and August 2010. Their descriptors and links appear below.

These are additions to our set of 1,180 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ¾ 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 June.

Bundle Date Translated severed letter Summaries under Summary descriptor
2020-05-20 8 April 2020 External T.I. 2016-0668991E5 F - Death of RRSP or RRIF annuitant Income Tax Act - Section 146 - Subsection 146(8.9) discretionary s. 146(8.9) deduction is available even where no timely issuance of T4RSP, but no deduction where annuitant with surviving spouse dies after the maturity of the RRSP
Income Tax Act - Section 146.3 - Subsection 146.3(6.2) s. 146.3(6.2) deduction can be less than the formula amount and does not depend on timely receipt of T4RIF – but applies only when the last annuitant of a RRIF dies
Income Tax Regulations - Regulation 214 - Subsection 214(4) T4RSP issued to surviving spouse rather than to deceased where transfer of entire refund of premiums to surviving spouse’s RRSP and RRSP is fully distributed
Income Tax Regulations - Regulation 215 - Subsection 215(4) T4RIF issued to surviving spouse rather than to deceased where transfer of entire eligible amount to surviving spouse’s RRSP or RRIF, and RRIF is fully distributed
Income Tax Regulations - Regulation 205 - Subsection 205(1) issuer required to issue T4RSP or T4RIF within a reasonable time after notification of death received after February filing date
2010-09-10 7 June 2010 Internal T.I. 2009-0351031I7 F - Faillite changée en proposition Income Tax Act - Section 128 - Subsection 128(2) - Paragraph 128(2)(g) - Subparagraph 128(2)(g)(iii) court approval of consumer proposal and individual’s discharge was not a s. 128(2)(g) unconditional discharge, so that individual thereafter could apply unused tuition tax credits
2010-08-27 13 August 2010 External T.I. 2010-0359571E5 F - Crédit d'impôt étranger Income Tax Act - Section 126 - Subsection 126(1) foreign withholding tax is borne by the copyright holder rather than the Cdn. selling agent
2010-08-13 6 August 2010 External T.I. 2010-0364091E5 F - Utilisation d'un véhicule fourni par l'employeur Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(e) benefit even if the vehicle is made available for responding quickly to an emergency
23 June 2010 Internal T.I. 2010-0368161I7 F - 84.1 Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(b) s. 84.1(2)(b) inapplicable to individual’s transfer of ½ of Opco to Holdco (owned by 3 unrelated individuals) for note and non-voting pref
Income Tax Act - Section 84.1 - Subsection 84.1(2.2) - Paragraph 84.1(2.2)(b) s. 84.1(2.2)(b) group can include a non-voting shareholder
4 August 2010 External T.I. 2009-0330501E5 F - Superficial loss Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(b) - Subparagraph 251.1(1)(b)(ii) X (holding the Opco non-voting shares), and a discretionary trust (holding the Opco voting shares) of which X was a beneficiary, were an affiliated group

Fowler – UK Supreme Court finds that deeming an employee to be an independent contractor did not oust the Treaty Employment-Income Article

A U.K. domestic income tax provision deemed the diving activities of a South African resident in the North Sea to be the carrying on of a U.K trade, notwithstanding that in fact he was an employee. A majority of the Court of Appeal of England and Wales found that this meant that his earnings were business profits for purposes of Art. 7 of the U.K-South Africa Treaty (rather than employment income under Art. 14) so that they escaped U.K. taxation (as he had no U.K. permanent establishment.)

In reversing this decision, Lord Briggs stated:

Nothing in the Treaty requires articles 7 and 14 to be applied to the fictional, deemed world which may be created by UK income tax legislation. Rather they are to be applied to the real world, unless the effect of article 3(2) is that a deeming provision alters the meaning which relevant terms of the Treaty would otherwise have.

He noted that the UK domestic deeming provision instead only had a limited purpose, which was to give the diver access to more generous deductions from income, and stated that to apply this limited “deeming provision … so as to alter the meaning of terms in the Treaty with the result of rendering a qualifying diver immune from UK taxation would be contrary to its purpose.”

Neal Armstrong. Summary of Fowler v Commissioners for Her Majesty’s Revenue and Customs [2020] UKSC 22 under Treaties – Income Tax Conventions - Art. 3 and Statutory Interpetation – Interpretation Provisions.

Al Saunders Contracting – Federal Court of Appeal finds that s. 6(1)(b)(vii) precludes bifurcation of an unreasonable allowance into a reasonable and unreasonable portion

The Tax Court found that some of the travel allowances paid to employees of the taxpayer were reasonable and, thus, properly excluded from income under s. 6(1)(b)(vii), but that other of the allowances were unreasonable in amount – and excluded the reasonable portion from income. In finding that the Tax Court had thus erred in its latter findings by severing travel allowances into two parts: a portion that was unreasonable; and a portion that was reasonable - so that the reasonable portion was excluded, Dawson JA stated:

I take from the grammatical and ordinary sense of the language of subparagraph 6(1)(b)(vii) that … [a]llowances that exceed what is reasonable are to be included in their entirety in income.

She also noted that when s. 6(1)(b)(vii) was amended in 1991 to take its current form, the Technical Notes confirmed this purpose of the provision.

Neal Armstrong. Summary of Canada (National Revenue) v. Al Saunders Contracting & Consulting Inc. 2020 FCA 89 under s. 6(1)(b)(vii) and Statutory Interpretation - Hansard, explanatory notes etc.