News of Note

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 controlled by Mr. Carson rather than Mrs. Carson, so that 533 was 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 wold 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).

Income Tax Severed Letters 14 August 2019

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

SLFI Group – Federal Court of Appeal finds that the Invesco group successfully reduced their HST-taxable management fees by having a third party take over the funding of broker commissions

A non-resident bank (Citibank) agreed to fund the payment of the upfront brokerage commissions that were payable on the issuance of units in the Invesco/Trimark funds (the “Funds”) in consideration for receiving an assignment of a portion of the amounts that otherwise would have been earned by the Invesco manager as management fees. More precisely, the manager agreed to reduce its management fees (i.e., reduce its percentage charge of NAV), and the Funds agreed to pay the same percentage amounts to a special purpose non-resident Citibank-formed vehicle (“Funding Corp”) essentially in consideration for Funding Corp paying the brokerage commissions. Funding Corp then immediately sold its fee-amount entitlements to Citibank.

The Tax Court had essentially found that taking care of the brokerage commissions was part and parcel of the management duties of the manager, and that delegating that duty to Funding Corp did not detract from its performance being a management function. Therefore, the consideration paid by the Funds to Funding Corp was tainted as Funding Corp was providing a management service.

Woods JA found that history is bunk, i.e., it was irrelevant that what Funding Corp was receiving was in a sense in lieu of what previously had been paid by the Funds as management fees. She stated:

[T]he character of the supply is determined by its dominant element, which … is in the nature of a financing service provided by third party financial institutions.

The amounts paid by the Funds to Funding Corp were for an exempt “financial service” under para. (a) or (l) of the definition.

Although the facts grounding this finding in this case were unique, Woods JA made a finding with broader ramifications, namely that the denial under s. 261(2)(b) of the right to claim a rebate for tax that has been assessed applied even where it is another person to whom the assessment was issued.

Neal Armstrong. Summaries of SLFI Group v. Canada, 2019 FCA 217 under ETA s. 123(1) financial service – para. (l), para. (q), s. 261(2)(b) and Statutory Interpretation - Interpretation Act, s. 8.1.

Moose Factory – Tax Court of Canada finds that arrangements were not structured to give rise to a debt

After quoting the statement in Sattva that “While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement,” Owen J found that, contrary to the taxpayer’s understanding of the arrangements as reflected in its financial statements, the arrangements at issue had not in fact been structured so as to give rise to a debt owing to the taxpayer by a corporation that subsequently became bankrupt. Hence, no business investment loss (or capital loss).

Neal Armstrong. Summary of Moose Factory Restaurant Properties Ltd. v. The Queen, 2019 TCC 156 under s. 39(1)(c)(iv) and s. 12(11) – investment contract.

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 933 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
2019-08-07 11 June 2019 External T.I. 2019-0795291E5 F - Tax on Split Income - 120.4(1) excluded amount Income Tax Act - Section 120.4 - Subsection 120.4(1) - Related Business no TOSI tax applied to a dividend received from the surviving step-mother’s company
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Amount - Paragraph (e) - Subparagraph (e)(i) dividend received from widowed step-mother's company was not re a related business
2011-11-04 7 October 2011 Roundtable, 2011-0412041C6 F - Accumulated Profits for 20(1)(c) Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) appraisal increment excluded from accujulated profits
7 October 2011 Roundtable, 2011-0407291C6 F - Group Life Insurance Policy Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) - Subparagraph (d)(ii) CDA addition for receipt of proceeds of policy on life of shareholder
Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) could possibly apply where a professional corporation pays the premiums, and is designate the beneficiary, of a policy in name of professional
7 October 2011 Roundtable, 2011-0411941C6 F - Covoiturage Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) employees and employer must reasonably allocate benefit from gas carpooling expenses being reimbursed
7 October 2011 Roundtable, 2011-0411961C6 F - Dépenses de déplacement Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(b) - Subparagraph 6(6)(b)(i) s. 6(6)(b)(i) extended to a temporary foreign principal place of residence
7 October 2011 Roundtable, 2011-0413281C6 F - Avantage à un actionnaire et assurance-vie Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) benefit where corporation switches the life insurance policy beneficiary to a shareholder may not be based on premiums paid if death impendng