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Income Tax Severed Letters 20 March 2019

This morning's release of 6 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA rules on hybrid post-mortem 164(6)/pipeline transactions

CRA has provided the usual rulings for a pipeline transaction in which the estate with a resident beneficiary sells a company (Opco) with apparently some sort of real estate business to a Newco for consideration consisting mostly of a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time. These pipeline transactions are to be immediately preceded by transactions in which the estate utilizes Opco's capital dividend account to step up the ACB of a portion of its Opco shares and also to redeem those Opco shares so as to generate a capital loss that can be carried back under s. 164(6).

The ruling letter stipulates that the amalgamation will occur no sooner than 12 months after the sale to Newco, and that thereafter the note will be paid off no faster than 10% per quarter for the first year. This contrasts with:

Neal Armstrong. Summary of 2018 Ruling 2018-0780201R3 under s. 84(2).

Sampson - B.C. Supreme Court finds that a Calgary executive with a large B.C. home had his “principal place of residence” in B.C.

The taxpayer, described as “a wealthy CEO of an international energy company,” maintained a 600 square foot apartment within three blocks of the Calgary headquarters of his employer, but spent over half of his Canadian time in B.C., where there was a 10,000 square foot home (near his parents’ home) owned by his wife and where their social life was centered. Gaul J found that although the taxpayer was resident both in B.C. and Alberta, B.C. was the taxpayer’s “principal place of residence” under the tie-breaker rule in Reg. 2607, so that he was subject to B.C. income tax. Not only did he spend somewhat more time there, but he also “had a much closer and profound personal tie” with B.C.

Neal Armstrong. Summary of Sampson v British Columbia, 2018 BCSC 1503 under Reg. 2607.

A Oy – European Court of Justice finds that a demolition or dismantling contract entailed a barter exchange of demolition/dismantling services and materials for VAT purposes

Pursuant to demolition contracts, a company undertook to demolish old factory buildings with responsibilities that included the disposal and processing of materials and waste. It took the estimated sales proceeds of the scrap metal and other materials generated into account in quoting its price for the work but did not communicate this estimate to the customer for commercial reasons. The company also undertook dismantling contracts under which the equipment and materials to be removed had an estimated value such that the company would pay the customer to enter into the contract (rather than being paid to perform the dismantling).

The 9th Chamber held in both cases there was a reciprocal supply of a demolition or dismantling service and of goods (the removed materials or equipment) for VAT purposes. In the first case, the

the supply of recyclable scrap metal is made for consideration if the person acquiring it, namely a demolition company, attributes a value to that supply which it takes into account in the calculation of the price quoted for carrying out the demolition works

with the consideration it received for its demolition work effectively being grossed up by this estimated amount.

Similarly, in the second (dismantling) case:

[T]he value of the performance of dismantling and waste disposal … must be regarded as equal to the amount that the purchaser, that is a demolition company, takes into account as a factor reducing the purchase price of the goods to be dismantled.

…[T]he taxable base of the supply of goods to be dismantled is, therefore, constituted by the price actually paid for the purchase of those goods and the amount corresponding to the factor applied by the purchaser in order to reduce the purchase price proposed.

A similar gross up of consideration for reciprocal supplies might occur under ETA s. 153(1). This would be problematic for the parties, who thereby would be required for GST/HST purposes to invoice each other based on subjective imputed amounts.

Neal Armstrong. Summary of A Oy v. Veronsaajien oikeudenvalvontayksikkö, [2019] EUECJ C-410/17 (10 January 2019) European Court of Justice (9th Chamber) under ETA s. 123(1) - consideration.

6 more translated CRA interpretations are available

We have published a further 6 translations of interpretations. One of these interpretations was released by CRA last week and five were released in May 2012. Their descriptors and links appear below.

These are additions to our set of 807 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ 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
2019-03-13 12 February 2019 Ministerial Correspondence 2018-0741061M4 F - Revenu d’un Indien Other Legislation/Constitution - Federal - Indian Act - Section 87 pension income generated from off-reserve employment and received on reserve not exempted
2012-05-18 30 March 2012 Internal T.I. 2011-0408311I7 F - Résidence principale General Concepts - Ownership ownership of home generally follows legal title
Income Tax Act - Section 54 - Principal Residence - Paragraph (a) must be described combination of ownership and ordinary habitation
2012-05-11 28 March 2012 External T.I. 2011-0422531E5 F - Revenu fractionné Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (c) - Subparagraph (c)(ii) - Clause (c)(ii)(C) only a portion of s. 104(13) income might be split income
24 April 2012 Internal T.I. 2012-0440711I7 F - Indemnité de repas; remboursement pour déplacement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) policy re subsidized meals does not extend to meal allowances or vouchers
30 March 2012 External T.I. 2011-0428741E5 F - Allocations pour frais de déplacement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) travel allowance for additional travel to and from work might be taxable even where employer fault
23 January 2012 External T.I. 2011-0424671E5 F - Avantage imposable - Stationnement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) generally no benefit from free parking if employee must use car 3 days a week in duties

Mariani - Ontario Court of Justice finds that business records extracted from seized data storage units contrary to s. 8 of the Charter could be admitted into evidence

A CRA auditor had a strong suspicion that the audited company (MMFL) had been paying for substantial construction work on its individual shareholder’s home, but she did not transfer the file over to criminal investigations until eight months later when she encountered evidence suggesting that invoices on hand at MMFL from the building contractor had been fraudulently altered to disguise that this was going on. Greene J found that this did not engage the Jarvis doctrine based on evidence of the CRA auditor that, up until that point, she was exploring s. 163(2) civil penalties rather than considering it to be a criminal matter. Accordingly, the evidence subsequently seized pursuant to a search warrant after the transfer of the file to criminal investigations was not excluded by Greene J on Jarvis grounds.

However, there was a deficiency in the search warrant. It authorized CRA to seize records and data storage units, but did not authorize CRA to conduct a thorough search of the data storage units. However, Greene J found that s. 24(2) of the Charter permitted this evidence seized contrary to s. 8 of the Charter to be used at trial since the admission of such evidence would not put the “administration of justice into disrepute.” In particular, “the CRA investigators honestly believed that the warrant permitted the search of the computers and the ability to forensically examine the computers” and since the “CRA officers limited their search to banking records, tax forms, invoices and similar documents,” “the privacy interest was arguably reduced.”

Neal Armstrong. Summary of R. v. Mariani, 2019 ONCJ 128 under Charter s. 8.

Jimenez – Court of Appeal of England and Wale finds that a demand for information issued to a former UK resident was valid

The UK tax legislation contained a blanket provision stating:

An officer of Revenue and Customs may by notice in writing require a person ("the taxpayer")—

(a) to provide information, or

(b) to produce a document,

if the information or document is reasonably required by the officer for the purpose of checking the taxpayer's tax position.

The taxpayer was a Dubai resident who also was a UK national and former UK resident. HMRC was investigating his past and present tax positions including as to when he ceased to be a UK resident, and issued a notice to him at his Dubai address asking him to produce banking information and a schedule of his visits to the UK over a nine-year period.

The Court found the notice to be valid for U.K purposes. Leggatt LJ stated:

Counsel for Mr Jimenez … relied on a distinction … adopted … [by Rossiter CJ] in Oroville Reman & Reloadbetween documents of notice that merely involve the supply of information with no threat of penalties in the event of non-compliance and documents involving a compulsory process or containing a command. They submitted that a document of the latter kind, such as the notice issued in this case which explicitly threatened penalties if Mr Jimenez did not comply with it, must be regarded as an unlawful exercise of enforcement jurisdiction.

… I do not accept that sending a notice by post to a person in a foreign state requiring him to produce information that is reasonably required for the purpose of checking his tax position in the UK violates the principle of state sovereignty. Such a measure does not involve the performance of any official act within the territory of another state – as would, for example, sending an officer of Revenue and Customs to enter the person's business premises in a foreign state and inspect business documents that are on the premises … .

[T]he imposition of a civil penalty … for failure to comply with such a taxpayer notice would [not] involve an exercise of enforcement jurisdiction … provided that no steps are taken to seek to enforce the penalty in a foreign state.

Neal Armstrong. Summary of Jimenez, R. (On the Application of) v The First Tier Tribunal (Tax Chamber) [2019] EWCA Civ 51 under s. 231.1(1)(d).

Morrison 2002 Maintenance Trust – Court of Appeal of England and Wales finds that identifying the form of ultimate sale was not essential to finding a pre-ordained series

Three “Scottish Trusts” exercised their put to sell shares of a listed public company to trusts (the “Irish Trusts”) with similar terms for the shares’ cost base of £4.5M; and the Irish Trusts sold the same shares eight days later to Merrill Lynch for £14.3M, who then sold the shares into the market. Newey LJ confirmed the findings below that the put exercise and subsequent sale were a "pre-ordained series of transactions" (a.k.a., a "single composite transaction") under the Ramsay doctrine so that the transactions were to be treated for U.K. capital gains purposes as if the Scottish Trusts had disposed of their shares for £14.3M.

The Scottish Trusts submitted inter alia that it was significant that at the time of exercise of the put, it was contemplated that the Irish Trusts would on-sell their shares into the market (through the agency of Merrill Lynch), whereas in fact the shares were sold to Merrill Lynch as principal for what effectively was a partially underwritten price. Newey LJ stated that he agreed with the First-tier Tribunal:

that the sale to Merrill Lynch "sufficiently corresponded to the scheme as planned" and … it "would be extraordinary if the application of the Ramsay approach could be defeated by the sale being to brokers rather than to the market by brokers on behalf of the Irish Trustees" … .

The identification of a so-called “common law” series of transactions is still relevant under the ITA since, in order for an extended series to be deemed to exist under s. 248(10), there first must be the identification of a common law series to which “in contemplation of” transactions can be assimilated.

Neal Armstrong. Summary of The Trustees of the Morrison 2002 Maintenance Trust & Ors v Revenue and Customs [2019] EWCA Civ 93 under s. 248(10).

CRA indicates that the requirement for employer profit contributions to an EPSP cannot be waived

In approximate terms, one of the requirements to qualify as an EPSP is that the employer make payments computed by reference to profits to the plan trustee. CRA stated:

This means that there must be a binding obligation on the employer to make contributions pursuant to the plan’s contribution formula, and that such contributions must actually be made in the event of profits.

If this requirement ceases to be met because the employer no longer wishes to make contributions, the plan will cease to qualify as an EPSP – and it will be a question of fact as to whether it thereafter becomes a salary deferral arrangement, retirement compensation arrangement or an employee benefit plan.

Neal Armstrong. Summary of 11 February 2019 External T.I. 2018-0738561E5 under s. 144(1) - employees profit sharing plan - para. (a).

Mikhail - Tax Court of Canada allows taxpayers to resile from their admission that they received funds from their corporation

After CRA inquired as to the treatment of rebates (in the form of traveller’s cheques, gift cards and prepaid credit cards) received by an incorporated pharmacy from generic pharmaceutical drug manufacturers, the two shareholders (a married couple) decided to treat the rebate amounts as additions to their income and filed T1 amendments accordingly. They may have been assuming that the corporation would receive offsetting deductions (to the amounts of the rebates received by it) through additions to its deductions for services fees paid to the husband and to the employee remuneration paid to the wife.

However, CRA applied its presumption that amounts paid to shareholders generally are received by them qua shareholder rather than employee (or services provider) and assessed the corporation on the basis that it had paid the rebate amounts to the individuals as non-deductible shareholder benefits, so that the rebates were included in income at both the corporate and individual level.

Monaghan J accepted the husband’s testimony that the corporation had spent the rebate amounts purchasing supplies for use in its business and that the reason that they had reported the rebate amounts as personal income was that this would make it easier to deal with CRA as they had no documentary evidence that the rebate amounts were spent at the corporate level. Accordingly, the rebate amounts were not taxable benefits and Monaghan reversed the personal reassessments and confirmed the corporate reassessments.

Neal Armstrong. Summaries of Mikhail v. The Queen, 2019 TCC 49 under s. 15(1) and . 152(4)(a)(i).