News of Note
Income Tax Severed Letters 10 May 2023
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Tax Court of Canada finds that funding under a government “service agreement” caused the HST self-supply rule to apply to the cost of a new seniors’ home rather than its lower FMV
The Appellant obtained the agreement of the Nova Scotia Department of Health to construct a replacement seniors facility for its aging existing facility, and concluded both a Development Agreement with the Department, which set out the terms upon which it was to develop the Facility, and a “Service Agreement” with the Department, which set out the services that the Appellant was to provide through the Facility and the payments that it would receive from the Department and the residents.
Although assisted–living facilities normally are subject to HST on their fair market value when substantially completed, CRA assessed on the basis of s. 191.1(2) effectively deeming the HST to be payable on most costs incurred, as these were higher than the new facility’s FMV. This provision very generally applied where the builder (the Appellant) received government funding "for the purpose of making residential units in the complex available to [seniors]."
In dismissing the Appellant’s appeal, Graham J indicated that the facts of this case were in all material respects identical to those in High-Crest, and that he agreed with the conclusions of Jorré J in that case. For instance, he agreed with Jorré J that “[s]o long as some portion of the total payments that the Department of Health made to the Appellant were made for the purpose of making residential units in the Facility available to seniors” the government funding test was met (para. 37). That was the case here given that the Service Agreement included accommodation in the required services, and the payments thereunder covered interest and principal under the mortgage financing.
Furthermore, it was not relevant to the tests in s. 191.1(2) that, after construction, the Appellant might be considered to be making a single supply of health care services to the residents.
Neal Armstrong. Summary of Windsor Elms Village for Continuing Care Society v. The King, 2023 TCC 58 under s. 191.1(2).
2405124 Ontario – Tax Court of Canada finds that a s. 244 Requirement applies to funds that the recipient is directed by its controlling shareholder (the tax debtor) to pay to him
CRA issued a Requirement to Pay to a corporation (240 Ontario) respecting the unpaid tax debt of its sole shareholder (IB), who was also its officer. IB, through his control of the corporate bank account, then withdrew funds from that account in order to repay credit card balances that he had run up on his wife’s credit card. S. 224(1), by its terms, indicated that the Requirement applied to any amount that 240 Ontario became liable to pay to another person within a year of the Requirement, and garnished that amount when it was paid.
In finding that the bank account withdrawals were subject to s. 224 so that 240 Ontario was liable for its failure to pay those amounts over to the Receiver General, Russell J stated that “[j]urisprudence has established that the subsection 224(1) language ‘liable to make a payment’ applies where there is responsibility at law to make a payment,” and found that such responsibility to pay the amounts arose when IB through his “ownership of and authority over 240 Ontario” required it to pay the funds to him.
Neal Armstrong. Summary of 2405124 Ontario Ltd. v. The King, 2023 TCC 57 under s. 224(1).
O'Hagan – Tax Court of Canada indicates that whether a false statement engages a s. 163(2) penalty should be determined only as at the time of return filing
The taxpayer, who had a modest income, filed a return prepared by an “accounting firm” (DSC) claiming a false business loss of $214,176.
Before confirming the imposition of a gross negligence penalty, Russell J referred approvingly to the finding in Torres that wilful blindness can impute knowledge as well as constitute gross negligence, and adopted and applied the Torres indicators as to wilful blindness to find that in the circumstances the taxpayer should have first reviewed the return to ensure its correctness, rather than signing it without any review, or enquiry of DSC.
Russell J further stated that “whether … false statements or omissions in a return justify a subsection 163(2) penalty is determinable at the time the return is filed,” so that he did “not consider evidence heard that post-dates the filing of the 2009 return containing the false statement is of relevance.”
Neal Armstrong. Summary of O'Hagan v. The King, 2023 TCC 52 under s. 163(2).
We have translated 7 more CRA severed letters
We have a translated another CRA ruling released earlier in the year and a further 6 translations of CRA interpretations released in June of 2003. Their descriptors and links appear below.
These are additions to our set of 2,458 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 ¾ 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 |
|---|---|---|---|
| 2023-02-22 | 2022 Ruling 2022-0933261R3 F - Subsection 104(4) and pipeline transaction | Income Tax Act - Section 84 - Subsection 84(2) | pipeline transaction for a trust realizing a s. 104(4)(b) gain and using a non-controlled Newco |
| 2003-06-20 | 16 June 2003 Internal T.I. 2003-0007867 F - COMPENSATION LORS DU DECES D'UN PARENT
Also released under document number 2003-00078670.
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| Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(g.1) | compensation for loss of financial support due to parental death did not qualify | ||
| 2003-06-13 | 11 June 2003 External T.I. 2002-0175975 F - TRANSFERT-ENT. EXPLOITEE ACTIVEMENT
Also released under document number 2002-01759750.
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Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(ii) | application of 24-month test where assets of business transferred to partnership of individuals, transferred to corporation under s. 95(2), partnership wound-up under s. 98(3) and shares sold |
| Income Tax Act - Section 79.1 - Subsection 79.1(6) - Paragraph 79.1(6)(b) | meaning of expenses incurred to protect creditor's rights | ||
| 13 June 2003 External T.I. 2002-0177045 F - BOISSONS OFFERTES AUX EMPLOYES
Also released under document number 2002-01770450.
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Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | FMV of free beverages marketed by employer and provided to its employees included in their income | |
| Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(d) | FMV of free beverages provided to employees included in their income, so that cost of beverages to employer deductible from its income | ||
| 27 May 2003 Internal T.I. 2003-0005357 F - TRANSFERT DE PROPRIETE EFFECTIVE
Also released under document number 2003-00053570.
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Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (e) | whether a preliminary transfer of shares of the target to spouse represented a disposition to her turned on whether there was a transfer of ownership under the Civil Code | |
| 15 May 2003 Internal T.I. 2003-0014507 F - DEDUCTIBILITE DES INTERETS
Also released under document number 2003-00145070.
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Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | interest deductible on money borrowed to acquire non-dividend-paying common shares | |
| 3 June 2003 Internal T.I. 2003-0181487 F - DEDUCTIBILITE DES INTERETS GARANTIE
Also released under document number 2003-01814870.
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Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | guarantee of wholly-owned corporation’s debt given for income-producing purpose is satisfied with borrowed money on which interest may be deductible | |
| Income Tax Act - Section 20.1 - Subsection 20.1(1) | s. 20.1(1)(b)(iv) deductibility where guarantee of wholly-owned corporation’s debt given for income-producing purpose is satisfied with borrowed money and subrogated claim is worthless |
CIBC – Federal Court of Appeal finds that s. 40(3.6) applied to deny an FX loss arising on shares
CIBC realized an FX loss of C$126.4 million in 2007 when shares of a US subsidiary for which it had subscribed US$1 billion approximately 11 months’ earlier were redeemed for US$1 billion. The Tax Court had rejected the CIBC position that such loss was deemed by the previous version of s. 39(2) to be a capital loss from foreign currency and, therefore, was excluded from the application of the s. 40(3.6) stop-loss rule (which applied only if the loss were viewed as having arisen from the disposition of the subsidiary’s shares.)
In dismissing CIBC’s appeal, Webb JA stated:
There is nothing in subsection 40(3.6) of the ITA that would require the application of subsection 39(2) of the ITA before the loss realized on the redemption of shares is deemed to be nil by subsection 40(3.6) of the ITA. … As a result, the loss realized by CIBC on the redemption of shares is deemed to be nil and, therefore, there is no loss that could have been deemed to be a capital loss under subsection 39(2) of the ITA.
This result contrasted with BMO, which found that s. 39(2) deemed the loss from a disposition of shares arising from a foreign exchange fluctuation to be a capital loss from a disposition of foreign currency and not from the disposition of shares, so that there was no capital loss from shares to which the stop-loss rule in s. 112(3.1) could apply. Webb JA distinguished BMO on the basis that s. 112(3.1), by its terms, only applied to “that share of the loss determined without reference to this subsection,” i.e., there effectively was a statutory direction to apply s. 39(2) first (to deem the loss to be an FX loss rather than a share loss), before applying s. 112(3.1), whereas there was no similar ordering rule in s. 40(3.6).
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. Canada, 2023 FCA 91 under s. 40(3.6), Statutory Interpretation – Interpretation Provisions, Double Inclusions/Deductions.
Freedman – Federal Court of Appeal confirms neglect or carelessness where shares transferred 3 weeks prior to filing the IPO preliminary were valued at 5% of the IPO price
On April 1, 2006, some executives of Gluskin Sheff+Associates Inc. sold a portion of their shares to family trusts at a price that was approximately 4.8% of that at which company shares were sold under an initial public offering that closed on May 26, 2006, following the filing of the preliminary prospectus on April 18, 2006. The pricing for the sale to the trusts applied a valuation formula that had been used in agreements under which they (and other executives) had purchased their shares from the founders a few years previously. The Board had the right to require them at any time to sell their shares back to other executives at an amount determined under the same formula.
Pizzitelli J in the Tax Court (in sub nomine Lauria) had accepted the opinion of the Crown’s expert that it was appropriate to value the shares sold to the trusts at an amount that worked out to the equivalent of a 40% discount to the IPO price, and in this regard Pizzitelli J noted that on the valuation date (April 1, 2006), the prospects for a successful IPO were high (and of the founders requiring the taxpayers to sell their shares back at the formula price, quite fanciful). Thus, their reporting gain based on the lower value was a misrepresentation. Turning to the neglect or carelessness branch of s. 152(4)(a)(i), he stated:
[T]he Appellants did not seek an independent valuation and cannot be said to have thoughtfully, deliberately and carefully considered whether the proposed IPO would affect the share price. In fact, the Appellants just seemed to ignore it, when in my opinion, having regard to their skills in and knowledge of the securities industry from working as executives for a wealth management firm and the multiple other circumstances or red flags that went up … they were clearly aware of the impact of the IPO’s value on their holdings.
In affirming these findings that the CRA assessments were not statute-barred, Boivin JA stated that “[w]e all agree with his conclusions for essentially the same reasons.”
Neal Armstrong. Summary of Freedman v. Canada, 2023 FCA 81 under s. 152(4)(a)(i).
CRA indicates that individuals might recover ITCs for construction work performed prior to the formation of their partnership by claiming a s. 257 rebate on the partnership formation
Three individuals acquired a lot, engaged a contractor to demolish the existing house, subdivided the lot into two, and engaged another contractor to start building two houses, each of which would be used as a primary place of residence of an owner or owners. However, partway through the construction of the houses, they decided that, once the construction was completed, each lot with the finished house would instead be sold. After such decision, the property owners registered a partnership for GST/HST purposes with CRA.
CRA ruled that the partnership, if indeed it had been formed, could not claim ITCs respecting various costs that had been incurred prior to the partnership formation. CRA indicated that if any transfer of beneficial ownership of the land to such a partnership (albeit, with registered title remaining with the individuals) occurred in the course of a business (rather than in the course of an endeavour of constructing personal residences), the transfer would be a taxable supply, so that the individuals (assuming they were not registered) could be entitled to a rebate under ETA s. 257 of the tax previously paid on the construction planning and work.
Neal Armstrong. Summaries of 15 November 2022 GST/HST Ruling 231643 under ETA s. 257(1) and General Concepts - Ownership.
CRA rules that member organizations were recipients of the insurance arranged through their umbrella association
A non-profit umbrella association (the “Association”) of member organizations (the “Organizations”) contracted to acquire directors’ and officers’ liability insurance for those of its members who were interested. Both it and such participating Organizations were named in the policy as the insureds and it was billed global premiums by the insurer which it would then bill out to the member participants based on an allocation worked out by the insurance broker. If a participating member wished to initiate an insurance claim, it would reach out directly to the broker.
In ruling that the Association was not required to charge HST on the reimbursement payments received by it, CRA stated:
[I]t is the Insurer that is making a supply of insurance to the Organization and the Association is making a separate supply of the membership to the Organization.
Such supply by the insurer was an exempted supply of an insurance policy.
Neal Armstrong. Summary of 3 August 2022 GST/HST Ruling 229371 under ETA s. 123(1) – recipient.
CRA rules on a pipeline transaction for a trust realizing a s. 104(4)(b) gain and using a non-controlled Newco
Trust 1, a discretionary inter vivos trust for the family of A, holding preferred shares of a Holdco (which, in turn, wholly-owned Opco) was deemed pursuant to s. 104(4)(b) to have disposed of, and reacquired, all its property including those preferred shares at FMV on its 21st anniversary. The common shares of Holdco were held by a second discretionary inter vivos family trust (Trust 2), which apparently had not reached its 21st anniversary.
CRA provided the usual rulings on a pipeline transaction pursuant to which:
- A company controlled by A (Newco 1) will incorporate Newco 2 and subscribe for special voting shares.
- Trust 2 will transfer its Holdco common shares to Newco 2 on a s. 85(1) rollover basis for non-voting common shares, and Trust 1 will transfer its Holdco preferred shares to Newco 2 in consideration for non-voting preferred shares of Newco 2 whose PUC will equal the ACB of the transferred shares.
- One year later, Newco 2 will start making phased reductions of the PUC of its preferred shares, which will be distributed in part by Trust 1 to its beneficiaries.
Neal Armstrong. Summary of 2022 Ruling 2022-0933261R3 F under s. 84(2).