News of Note

CRA respects the effect of a court order providing that a lump sum payment was in satisfaction of a retroactive periodic support obligation

A 2018 court order required retroactive child and spousal support payments to be made by an individual to a former spouse on a monthly basis for the period from 2013 until the date of the order but treated various payments previously made by the individual to the former spouse as being in satisfaction of this periodic obligation and also contemplated that such obligation would be satisfied in part by way of set-off against an obligation of the former spouse to pay an equalization amount to the individual respecting a division of matrimonial property.

After noting that s. 60.1(3) deemed payments made in the previous year and during 2018 up to the time of the order to be made pursuant to the order, so that such payments could potentially qualify for deduction under s. 60(b), CRA turned to the deductibility of amounts paid after the time of the order, and stated:

[W]here the lump-sum amount is paid pursuant to a court order that establishes a clear obligation to pay retroactive periodic maintenance for a specified period prior to the date of the court order … the lump-sum payment will not, in and of itself, change the nature of the underlying legal obligation of periodic maintenance payments and, if all other requirements are met, the lump-sum amount paid will be deductible to the payer according to the formula in paragraph 60(b) … .

CRA went on to indicate that above principle would apply even though such lump sum payment of retroactive periodic support was made in part by way of set-off against an obligation of the support recipient to make an equalization payment.

Neal Armstrong. Summaries of 7 September 2022 Internal T.I. 2022-0931081I7 under s. 60.1(3), s. 60(b) and General Concepts – Effective Date.

It may be unclear as to whether maximum CCA should be treated as having been claimed for pre-acquisition taxation years of an LLC under Reg. 5907(2.03)

US LLC acquired depreciable property in 2015 for use in its active business, and then on January 1, 2022, its shares were acquired by a Canadian taxpayer (Acquireco).

Reg. 5907(1)(a)(iii) generally provide that earnings from an active business of an LLC foreign affiliate of a taxpayer resident in Canada shall be computed as if if the business was carried on in Canada and the LLC was resident in Canada; and Reg. 5907(2.03) generally provides that its income or loss from that business for a particular taxation year shall be computed on the basis that for that year and “any” preceding taxation year ending after August 19, 2011. it claimed the maximum CCA and other deductions in computing its income from the business.

Under the above wording, it might seem that the maximum CCA should be treated under Reg. 5907(2.03) as having been claimed in the prior years, thereby increasing the earnings for 2021 and subsequent years. However, it is suggested that it could be argued that no CCA should be considered to be claimed for the pre-acquisition period, given inter alia that prior to the acquisition, US LLC was not a foreign affiliate of Acquireco and, therefore, never claimed depreciation in computing income with respect to Acquireco.

Neal Armstrong. Summary of Nakul Kohli and Simon Townsend, “Computing UCC for Newly Acquired LLCs,” Canadian Tax Focus, Vol. 13, No. 1, February 2023, p. 9 under Reg. 5907(2.03).

Income Tax Severed Letters 1 February 2023

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

CRA continues to apply advantage tax where employee registered plans subscribe for post-freeze common shares of the employer

2009-0320311I7 considered that where, following a freeze transaction, a key employee subscribed for new common shares through a TFSA, the requirements of s. (b)(i) of the “advantage” definition in s. 207.01(1) were satisfied (namely, that such transaction “would not have occurred in an open market where parties deal with each other at arm’s length”), so that the advantage tax would apply to any increase in the total FMV of those shares.

An observed more-recent application of this approach occurred where the shareholders of a widely held private company exchanged their common shares for fixed-value preferred shares and numerous employees (all dealing with each other and the company at arm’s length) then subscribed for new common shares at a low subscription price. The “CRA’s position was that the new common shares were available for purchase solely due to the subscribers’ employment status, and thus the advantage tax was payable by each employee-shareholder who acquired new common shares through their TFSA.”

Neal Armstrong. Summary of Tyler Berg, “Registered Plan Taxes: Recent Experiences,” Canadian Tax Focus, Vol. 13, No. 1, February 2023, p. 3 under s. 207.01(1) – advantage – (b)(i).

Michaluk – Tax Court of Canada finds that a train-operator employee could not deduct his costs of staying in Oshawa, as he reported to work at the Oshawa train station

The taxpayer, who was a Bombardier commuter train operator, usually started and finished work at the Oshawa Go Train Station, which was 160 kilometres from his home in Picton. The taxpayer claimed, pursuant to s. 8(1)(g), the costs of his stays on workdays at the Travelodge Oshawa or in rental apartments, and of related meals (for which his employer provided a form T2200). Given that the taxpayer reported to work in Oshawa, Favreau J unsurprisingly found that these costs incurred in Oshawa did not satisfy the test under s. 8(1)(g) of being incurred outside the metropolitan area where he reported to work.

Neal Armstrong. Summary of Michaluk v. The King, 2023 TCC 15 under s. 8(1)(g).

Bérubé – Tax Court of Canada finds that, as shown by his winnings over a protracted period, a full-time poker player had a reasonable expectation of making a living at it

After depositing his entire savings with an online poker site in 2007, the taxpayer began playing poker (online around 95% of the time, and in-person for the balance) and between 2008 and 2010 took part in around 20 poker tournaments in various international locations. His poker activities were his only source of income from 2008 to 2011.

CRA reassessed his 2008 year to include $1.6 million of net poker winnings in his income, but his appeal for this year was later allowed by consent. At issue were further reassessed inclusions in the taxpayer’s income for the 2009, 2010, and 2011 of $884,323, $454,867, and $231,208, respectively.

Before confirming these income inclusions subject to some agreed downward adjustments, Favreau J dismissed the taxpayer’s arguments that poker was not a source of income to him, for essentially the same reasons as in D'Auteuil (which was released on the same day). He stated:

[T]he appellant spent almost all of his time playing poker. …

Despite his unusual lifestyle and his propensity to ridicule his opponents, the appellant was a serious businessman. … The appellant adopted objective standards of risk management and minimization. He played multiple tables at once in an effort to maximize his winning potential in the shortest amount of time.

At this level of winnings by the appellant over such a long period of time, I am satisfied that the appellant had a reasonable expectation of being able to make a living at playing poker … .

Neal Armstrong. Summary of Bérubé v. The King, 2023 CCI 12 under s. 3(a) – business source.

D'Auteuil – Tax Court of Canada finds that poker, which the taxpayer successfully engaged in on a full-time basis using skill and risk-minimization techniques, was a source of income

The taxpayer was assessed for unreported net earnings from his activities as an online poker player participating in games of the type “Texas Hold’em without limit” for his 2008 to 2011 taxation years (including net earnings of $1.4 million and $1.9 million for 2010 and 2011), and also was allowed the deduction of a net loss for 2012.

In finding that the taxpayer’s gambling activities were a source of income and in dismissing the taxpayer’s appeal, Favreau J noted that these activities were his main source of income during the years in dispute, that he devoted himself on essentially a full-time basis to them, and that “[d]espite his unusual lifestyle and his propensity for always wanting to play at the high-stakes tables, the appellant was a serious businessman” as evidenced, for instance, by various risk-management techniques that he utilized.

Neal Armstrong. Summary of D'Auteuil v. The King, 2023 CCI 3 under s. 3(a) – business source.

We have translated 7 more CRA severed letters

We have published a translation of a CRA ruling released last week, and a further 6 translations of CRA interpretations released in October of 2003. Their descriptors and links appear below.

These are additions to our set of 2,363 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 19 ¼ 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
2023-01-25 2022 Ruling 2020-0858451R3 F - Trust to trust transfer Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Trust - Paragraph (g) deemed disposition under s. 104(4) avoided through irrevocable vesting of interests in successor trust
Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (f) no disposition on transfer of assets of Trust 1 to Trust 2 with essentially the same terms other than a clause facilitating irrevocable-vesting designations
2003-10-31 23 October 2003 External T.I. 2003-0017935 F - BIEN AGRICOLE ADMISSIBLE
Also released under document number 2003-00179350.

Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Farm or Fishing Property rebate of municipal taxes reduces the farming expense rather than constituting gross revenue from farming
Income Tax Act - Section 248 - Subsection 248(1) - Gross Revenue rebate of municipal taxes reduced that business expense rather than constituting gross revenue
Income Tax Act - Section 9 - Expense Reimbursement reimbursement of business expense reduces the expense rather than being included in gross revenue
15 October 2003 External T.I. 2003-0030905 F - Associated Corporations and 129(6)
Also released under document number 2003-00309050.

Income Tax Act - Section 256 - Subsection 256(2) s. 256(2) election does not affect the operation of s. 129(6)
29 October 2003 External T.I. 2003-0006505 F - REGIME D'ASSURANCE SALAIRE
Also released under document number 2003-00065050.

Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) criteria for determining whether there are separate plans
20 October 2001 External T.I. 2003-0007015 F - RESSOURCE INTERMEDIAIRE
Also released under document number 2003-00070150.

Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(h) amounts received for accommodating disabled individuals in the taxpayer’s home were exempted
Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c) amounts received for accommodating disabled individuals in the taxpayer’s home would not engage s. 45(1)(c) if they were exempted under s. 81(1)(h)
2003-10-24 20 October 2003 External T.I. 2003-0014615 F - allocation non-imposable
Also released under document number 2003-00146150.

Income Tax Act - Section 6 - Subsection 6(16) - Paragraph 6(16)(a) per-kilometre rates published by Finance could be used for reasonableness purposes
16 October 2003 External T.I. 2003-0038315 F - CONVENTION DE RETRAITE
Also released under document number 2003-00383150.

Income Tax Act - Section 248 - Subsection 248(1) - Retirement Compensation Arrangement loan back to employer may negate RCA status
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) reasonableness of interest rate determined re market interest rates

CRA rules that a gift certificate need not have a stated monetary value

By virtue of ETA s. 181.2, the use of a gift certificate to pay for a supply is treated in the same manner as a money payment, and issuances and sales of gift certificates are deemed not to be supplies. In CIBC, the majority pointedly declined to comment on the finding in the Tax Court below “that in order to qualify as a gift certificate, the property must have attributes similar to money.”

Before concluding that, for example, a gift card available in digital form and without a stated cash value, that could be applied for an online time-limited subscription to use software, qualified as a gift certificate, CRA ruled:

  • A gift certificate can be in physical or digital format (e.g., a digital code) to qualify
  • The CIBC decision has not affected CRA’s current policy in P-202.
  • “The CRA will continue to accept that a stated monetary value is not required on a gift certificate where it can be easily determined by the parties involved in the transaction or where the gift certificate is for a supply of a specified product or service identified on the certificate as per P-202.” – which is a question of fact.
  • A gift card that entitles a person to redeem the card for a particular product or service, or that is redeemable for a time-limited (e.g., 6 months) subscription service will still qualify as a gift certificate where all the attributes listed in P-202 are met.

Neal Armstrong. Summary of 11 August 2022 GST/HST Ruling 210068r under ETA s. 181.2.

Gordon – Federal Court of Appeal indicates that a CRA investigation had not breached CRA’s duty of care to the taxpayers

After a criminal prosecution of the appellants, in connection with allegedly fraudulent SR&ED claims, was stayed, the appellants brought an action in the Federal Court against the Crown for damages based on multiple grounds including a negligent investigation by CRA of their claims.

Boivin JA noted that:

“The Judge recognized that the CRA investigators owed the appellants a duty of care … but found that the investigation was not carried out in a manner that could be characterized as negligent and was not motivated by malice or any other improper purpose”.

Regarding the appellants’ contention “that the procedures set out in the Taxation Operations Manual (TOM) 11 for CRA investigations were not properly followed … the Judge rightly noted that the TOM 11 ‘is a set of guidelines that have no binding legal effect and their breach is not evidence per se of a wrongful prosecution or negligence’”.

Boivin JA found “no reason to disturb the Judge’s findings” – their appeal was dismissed.

Neal Armstrong. Summary of Gordon v. The King, 2023 FCA 12 under General Concepts – Negligence & Fault.

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