News of Note
CRA indicates that “habitual abode” is determined in context based inter alia on relative stays and nature of activities
We have published a summary of today’s IFA Roundtable.
Q.1 was on how CRA applies the test of an in individual’s “habitual mode” under the “tie breaker” rules in most treaties. CRA responded that length of stays, and the nature of the activities, of the individual in each jurisdiction would have to be considered, to determine whether the individual usually lives in one state as compared to the other, and that the relevance of particular lengths of time would need to be considered in the circumstances: no set periods of time were applied as tests.
Jefferson – Federal Court of Appeal indicates that a taxpayer had not “demolished” the Minister’s assumption where it is demonstrated to be somewhat incorrect
The taxpayer relied on a statement in Hickman that the “initial onus of ‘demolishing’ the Minister’s exact assumptions is met where the appellant makes out at least a prima facie case.” He argued that since he had established that around ¼ of the payments received by him as cheques from a corporation, with which he did not deal at arm’s length, properly reimbursed him for business expenses, he had demolished the Minister’s “exact” assumption made in assessing him under s. 160 that the taxpayer had “provided no consideration for the cheques.”
In rejecting this position, Monaghan JA stated that the taxpayer “places far too much emphasis on the word ‘exact’ and gives insufficient weight to the word ‘demolish’ in … Hickman.” and further stated that “establishing some consideration for the cheques is not sufficient to demolish the Minister’s assumption,” noting in this regard that the “purpose of pleading the assumption is to provide the appellant with notice of the case the appellant has to meet” and here, the taxpayer knew that, in the context of a s. 160 assessment, he needed to establish that he had provided fair market consideration for the cheques, “not merely some consideration.”
Neal Armstrong. Summary of Jefferson v. Canada, 2022 FCA 81 under General Concepts – Onus.
We have published a translation of a CRA ruling released last week and a further 8 translations of CRA interpretation released in December of 2004. Their descriptors and links appear below.
These are additions to our set of 2,039 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 17 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA rules on a pipeline involving a deferred distribution of portfolio assets from the corporation held on death
CRA labelled it a “post-mortem hybrid pipeline,” so that must have been what it was despite an unusual form.
An individual died holding shares of a portfolio investment company (“Investments”) directly and through a holding company (“Newco”), so that the estate acquired those shares with their basis stepped up under s. 70(5). Investments redeemed various shares held by the estate for a note (giving rise to deemed dividends and capital losses which were carried back under s. 164(6)), and the estate then disposed of all its shares of Investments to Newco in consideration for a further note. Investments then sold its stock market investments to the estate beneficiaries (four testamentary trusts) for four trust notes.
It was now proposed that Investments be wound-up into Newco under s. 88(1), and that the estate distribute, to its beneficiaries, most of the Newco notes owing to it by Newco, with the beneficiaries (the four trusts) then presumably using these notes as the currency to settle the trust notes owing by them to Newco. Newco would then by wound-up into the estate pursuant to s. 88(2).
Neal Armstrong. Summary of 2021 Ruling 2020-0865901R3 F under s. 84(2).
Rennie JA confirmed that, as set out in Northwest Hydraulic, the scientific method was required to be followed in order for work to qualify as SR&ED. The Tax Court judge “did not take a narrow or restrictive approach to what evidence might be encompassed by the scientific method,” and she had “noted that ‘what is important’ is there be the formulation of hypothesis, testing of those hypotheses and recording of results in a systematic manner.”
In contrast, here, the taxpayer “did not conduct its work in a methodical manner and did not keep adequate records.” The denial of its investment tax credit claims was confirmed.
Neal Armstrong. Summary of National R&D Inc. v. Canada, 2022 FCA 72 under s. 248(1) - SR&ED.
CRA confirms that the CSV-valuation rule in s. 70(5.3) applies to a foreign life insurance policy of a non-resident corporation whose shares were held by an immigrating individual
At the time a non-resident individual immigrated to Canada, the individual owned shares of a non-resident corporation which was the policyholder of a foreign life insurance policy on the life of the individual. On the immigration, there was a deemed disposition and acquisition of the shares for their FMV under s. 128.1(1)(b) and (c).
CRA indicated that, by virtue of s. 70(5.3), the shares were to be valued for such purposes by treating the policy as having a value equal to its cash surrender value.
In contrast, a foreign life insurance policy (which would not be an “excluded right or interest” under s. 128.1(10) – (f)) held by a non-resident corporation when it became resident in Canada would not be subject to s. 70(5.3), and for purposes of determining its deemed cost under s. 128.1(1)(c), “would be valued in accordance with normal valuation practices taking into consideration all facts relevant to the particular case.”
Neal Armstrong. Summary of 17 February 2022 External T.I. 2021-0882401E5 under s. 70(5.3).
CS Communication – Court of Quebec finds that that expenditures under an agreement to develop software for a 3rd party pursuant to its specifications qualified for SR&ED ITCs
A software development company (CS Canada) entered into an agreement with Pratt & Whitney for the sale to of aeronautical control system software. The ARQ accepted that various salary expenses of CS Canada (of about $0.9M per annum) were incurred on the prosecution of SR&ED, but denied investment tax credits on the basis that the contractual consideration paid by P&W constituted “contract payments” under the Quebec equivalent of the definition of that term in ITA s. 127(9), i.e., on that basis that the SR&ED was performed on behalf of P&W.
In finding that such payments were not contract payments, so that CS Canada was entitled to its claimed ITCs, Riverin JCQ noted that subject matter of the contract was a sale of system control software (required to meet the detailed specifications of P&W) and not the performance of SR&ED, and that CS Canada bore all the risk (it paid all the development costs in consideration for a largely fixed contract price), and retained ownership of the intellectual property developed by it in performing the development work (although it licensed that IP to P&W).
Neal Armstrong. Summary of CS Communication v. Agence du revenu du Québec, 2022 QCCQ 1175 under s. 127(9) – contract payment - (a).
We have uploaded a copy of the 61-page submission of the Joint Committee on the draft ss. 18.2 and 18.21 “excessive interest and financing expenses limitation" rules, and hope to provide our summaries within the next few days.
We have published a further 8 translations of CRA interpretation released in January of 2005. Their descriptors and links appear below.
These are additions to our set of 2,030 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 17 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).