News of Note
AgraCity – Federal Court of Appeal notes that the boundary between ss. 247(2)(a) and (b) is unresolved
Email this ContentA Barbados corporation reported substantial profits from the sale of a herbicide to Canadian farmers, and deducted amounts paid to a non-arm’s length Canadian corporation (AgraCity – which was the taxpayer in the case) as service fees. The Crown’s pleadings in support of its assessment of AgraCity stated that the Barbados corporation did not sell any herbicide, and that the fair market value of the fees received by AgraCity should be increased by all of the profit reported by the Barbados corporation. However, in pleadings in support of an assessment of the Canadian parent of the Barbados corporation, the Crown pled that the Barbados corporation sold the herbicides to AgraCity, thereby giving rise to FAPI under s. 95(2)(a.1) to the Canadian parent.
In finding that these inconsistent pleadings were acceptable, Webb JA noted that it is inherent in separate persons (including related persons) being separate taxpayers that inconsistent assessments and, thus, inconsistent pleadings may result - and that the Crown acknowledged that it did not seek to have both assessments upheld.
Webb JA also found that at the pleadings stage it was acceptable for the Crown to rely both on ss. 247(2)(a) and (c) (re terms of the transactions departing from arm’s length terms) and on ss. 247(2)(b) and (d) (re the transactions themselves being something that arm’s length persons would not have entered into), quoting with approval a statement in Cameco (2015 FCA 143):
No court has determined where paragraphs 247(2)(a) and (c) end and where 247(2)(b) and (d) begin and I agree with the Crown that it would be inappropriate to attempt to resolve this issue on a motion to strike… .
Neal Armstrong. Summaries of AgraCity Ltd. v. The Queen, 2015 FCA 288 under s. 247(2) and Tax Court Rules, s. 82.
CRA considers that telecommuters are deemed to report to work for source deduction purposes to the office from which they are paid rather than from which they are managed
The operation of the source deduction rules can be affected by whether an employee is considered to “report for work” at an actual establishment of the employer as per Reg. 102(1), or whether the employee is deemed by 100(4) to report for work at the establishment of the employer from which the remuneration is paid. In this regard, CRA considers that:
Generally… a presence on a weekly basis at the establishment of the employer, for a duration of the equivalent of a typical day’s work of the employee in fulfilling the employee’s normal workload, is sufficient to lead to a conclusion that the employee reports to work there.
Conversely “a telecommuter with a home office would not be considered to be reporting to work at an establishment of the employer when exercising his or her functions.”
Neal Armstrong. Summary of 4 February 2016 Memorandum 2015-0620821I7 F under Reg. 102(1).
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Neal Armstrong.
Justice Rothstein notes that Backman limits to a certain extent the use of foreign law in Canadian tax cases
Observations of Marshall Rothstein, who retired from the bench on August 31, 2015, on practices in the Supreme Court of Canada include:
- “The Supreme Court has indicated a willingness to depart from its own precedent where a new legal issue has been raised or where there has been a change in the facts that ‘fundamentally shifts the parameters of the debate.’”
- Signing of judgments by “The Court” as “a rule of thumb..is reserved for controversial cases of significant public importance” (e.g., assisted dying, medicinal pot).
- On rare occasions, the Court will order oral argument on leave applications, as was done in Daishowa-Marubeni, where counsel were told they were to focus on two specific issues.
- Reasons for considering foreign judgments in Treaty interpretation cases include looking to “the effects of a particular rule in action in considering the merit of arguments about likely consequences.”
- In Backman:
The Court wrote that if a partnership wants to deduct losses under Canadian law, it must satisfy the elements of a partnership under Canadian law. This precedent limits to a certain extent the use of foreign law in Canadian tax cases.
- “The judges...will not engage in blogging” [or other disreputable conduct].
Neal Armstrong. Summaries of Justice Marshall Rothstein, "An Overview of the Supreme Court of Canada," Bulletin for International Taxation (IBFD), January/February 2016, p. 20 under General Concepts – Stare decisis, Supreme Court Act, s. 40(1), Treaties – General, s. 96, s. 247(2) and s. 248(10).
CRA recognizes that a trust preserved s. 92(1) basis in shares of a CFA when it transitioned from old to new s. 94 trust rules
Where in its pre-2007 years a non-resident discretionary trust recognized FAPI under “old” s. 94(1)(c)(i)(C) from a CFA and then received a dividend from the CFA in 2007 while it was subject to “new” s. 94(3), CRA would recognize that the upward ACB adjustment to the CFA shares that occurred as a result of the FAPI recognized under the old rule could now be considered to be distributed under s. 91(5) notwithstanding the trust’s new status.
Neal Armstrong. Summary of 16 November 2015 Memorandum 2015-0598491I7 under s. 91(5).
Lee – Federal Court of Appeal states that non-judicially authorized requirements made under s. 231.2(1) can be used to obtain documents about third parties
Mandamin J in the Federal Court appears to have interpreted a requirement issued to the individual taxpayer under s. 231.2(1) as potentially asking him to include documentation about assets of corporations of which he was the principal shareholder “that he would only have access to in his capacity as a director or officer of the corporations.” He considered this to be objectionable, perhaps because it looked rather like a disguised third-party demand but without advance judicial authorization (and without the corporations being specifically named, as required by s. 231.2(2)).
Dawson J.A. did not share these concerns, stating:
[T]he scope or breadth of the Requirement is a matter for the Minister, so long as the information requested is required for any purpose related to the administration or enforcement of the Act. Moreover, it is not improper for a requirement to issue that requires information to be provided about a third party.
Neal Armstrong. Summary of MNR v. Lee, 2016 FCA 53 under s. 231.2(1).
Weinberg Family Trust – Tax Court of Canada states that it lacks jurisdiction to reverse a provincial gross negligence penalty
V. Miller, J stated emphatically that the Tax Court did not have the jurisdiction to consider an appeal by a purported Alberta trust which had been assessed by CRA for Ontario income tax (on the basis of being resident in Ontario) as well as for Ontario gross negligence penalties.
This case is unusual in that there was no federal tax or penalty at issue (and the Ontario issues were appealed simultaneously in the appropriate Ontario court). However, it suggests that when taxpayers in agreeing provinces appeal federal penalties, they may have to file protective appeals of any corresponding provincial penalty.
Neal Armstrong. Summary of Weinberg Family Trust v. The Queen, 2016 TCC 37 under Taxation Act, 2007 s. 125(2).
Teranet - Tax Court of Canada orders E&Y to explain why it considered a 9.75% interest rate in the Teranet income fund structure to be reasonable
The conversion of Teranet to an income fund resulted in the operating corporation owing $1.23B of unsecured notes indirectly to the income fund. CRA reassessed to reduce the interest deduction on the notes from 9.75% to 5.45%.
On discovery, the Crown asked various questions - respecting how the interest rate was determined, and the rationale behind the structuring of the particular reorganization steps - of the Teranet CFO, who indicated he could not answer because no one remained at Teranet who had been involved in the reorganization.
V. Miller, J. found that, in these circumstances, it was appropriate to grant the Crown leave to examine a knowledgeable representative of the accounting firm (E&Y) that had prepared a study before the reorganization in support of the reasonableness of the interest rate chosen, and of a second accounting firm (Deloitte) which had been involved in structuring the transactions. She also ordered that “both EY and Deloitte will produce documents in its control which are relevant to the issues in this appeal.”
Neal Armstrong. Summary of Teranet Inc. v. The Queen, 2016 TCC 42 under Tax Court Rules, s. 99(2).
Income Tax Severed Letters 24 February 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Canadian Forest Navigation – Tax Court finds that foreign rectification orders are not binding on the Tax Court (but can be given weight)
After receiving dividends from Barbados and Cyprus subsidiaries, a Quebec company responded to reassessments of the dividends by obtaining rectification orders from the applicable Barbados and Cyprus courts declaring that the amounts instead were loans to it. In response to a question to this effect posed under Rule 58, Lamarre ACJ found that the federal Crown “is not bound by the foreign judgments since they have not been recognized in Canada by a court of competent jurisdiction, and therefore [the Crown] is not precluded from taking the position at trial that the [taxpayer] received dividends, rather than…loans.”
She also stated that “it will be up to the presiding judge to determine the weight to be given to the Foreign Judgments when ruling on the correctness or incorrectness of the assessments being appealed.”
Neal Armstrong. Summary of Canadian Forest Navigation Co. Ltd. v. The Queen, 2016 TCC 43 under General Concepts – Rectification.