News of Note
Income Tax Severed Letters 25 September 2019
Email this ContentThis morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Wise – Tax Court of Canada finds no immediate taxable benefit to a landlord-shareholder from improvements made to the leased building by the tenant-corporation
An individual leased a building under a 5-year lease with a 5-year renewal option to a corporation (VMS) wholly-owned by her and her son. VMS then paid for substantial renovations to the building.
Smith J referenced the principle in Kennedy that “Where a tenant improves the leased premises, the extent to which, if at all, the improvement confers a benefit on the landlord will depend on the extent to which the improvement increases the value of the reversionary interest,” and then found that, here, no taxable benefit should be recognized until the termination or maturity of the lease, in which event the residual value of the reversionary interest of the taxpayer would have to be valued.
Neal Armstrong. Summaries of Wise v. The Queen, 2019 TCC 196 under s. 15(1) and General Concepts – Effective Date.
CRA acknowledges general deductibility of legal fees incurred for periodic support (but not for a lump sum settlement)
CRA acknowledges that legal fees incurred in order to make a (non-frivolous) claim for periodic support will generally be deductible in computing the claimant’s income even if the amount ultimately awarded is a lump sum that therefore (generally) does not qualify as a “support amount” – and that, conversely, legal fees incurred in order to claim a lump-sum payment that does not qualify as a support amount generally will not be deductible.
Neal Armstrong. Summary of 25 July 2019 External T.I. 2018-0787011E5 under s. 18(1)(a) – legal fees.
Chen – Tax Court of Canada finds that a protective procedure allegedly carried out on the oral advice of the presiding physician did not qualify as prescribed by a medical practitioner
The taxpayer had stem cells harvested from the umbilical cord when she was delivered of her second son. The harvesting occurred on the alleged verbal advice of the obstetrician that this was advisable due to the father’s Type 1 diabetes. Bocock J found that the taxpayer would have been entitled to a medical expense tax credit under of s. 118.2(2)(o) but for her failure to establish that this procedure occurred as prescribed by a medical practitioner.
No clinical notes were produced of the obstetrician’s recommendation, and all the taxpayer could show was a very brief letter prepared by her family doctor 17 months after the delivery of her child that noted that the stem cells were being stored for future use, and stated “All patients are advised to do this, if possible, from birth." Bocock J stated that this letter was merely “descriptive rather than directive.”
Neal Armstrong. Summary of Chen v. The Queen, 2019 TCC 192 under s. 118.2(2)(o).
Our translated CRA interpretations go back 8 years
We have published a further 7 translations of CRA interpretations released in September, 2011. Their descriptors and links appear below.
These are additions to our set of 969 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
An ECP gain potentially could have been paid out immediately as a winding-up distribution
An increase to the capital dividend account (CDA) arising out of a gain of a CCPC from the disposition of eligible capital property (ECP) did not arise until the end of the year in question, so that immediate declaration and payment of a purported capital dividend generated Part III tax. However, it is suggested that if the distribution in question was described in ss. 88(2)(a) and (b) (i.e., it occurred in the course of a winding-up of the CCPC and was of substantially all the CCPC’s property), then the bump to the CDA occurred immediately before the time of the distribution, so that no Part III tax was exigible.
It is implicitly considered that a winding-up of a corporation for s. 88(2) purposes need not commence with an authorizing resolution, and it is suggested that:
The sale of a business that included cumulative ECP gain should be viewed as a step in the course of a winding-up of the business that was sold.
Neal Armstrong. Summary of Derek T. Dalsin, “ECP-Related CDA Dividend “In the Course of a Winding Up” Pre-2017,” Canadian Tax Highlights, Vol. 27, No. 8, August 2019, p. 1 under s. 88(2)(a).
CRA finds that on-call maintenance staff who drove intraday in their employer’s pickup truck between home and the maintenance site received no taxable benefit
An employer with apartment buildings and townhouse complexes at various locations in the city expected its maintenance staff to return to their homes with the employer-provided and equipped pickup truck (which was not an “automobile” as defined in s. 248(1)) until their next maintenance call. CRA stated:
[I]t appears that the primary reason for employees returning home in between calls during a standby shift is due to [the employer’s] policy of not paying Staff for down time. … [I]t is likely that the employer is the primary beneficiary of an employee’s travel to and from home in between the first and last call out of a standby shift. As such, no taxable benefit should result from this travel.
CRA also indicated that a taxable (carpooling) benefit generally would occur where two staff were required for a call and the first picked up (or dropped off) the second at their home for the first (or last) call of the day, stating that “a reduction in the value of the travel benefit may be warranted based on loss of privacy or quiet enjoyment, additional travel time, etc.” and then stated (deadpan) that “Employees and employers should keep records on employee travel in support of the particular position taken.”
Neal Armstrong. Summary of 31 July 2019 External T.I. 2019-0798361E5 under s. 6(1)(a).
SPE Valeur – Tax Court of Canada finds that criminally seized documents could be used in a subsequent civil reassessment under s. 163(2)
The Criminal Investigations Directorate seized records of taxpayers in connection with its investigation, but ultimately returned the file to the audit branch based on a cost-benefit analysis. As it happened, the individual responsible for the criminal investigation was transferred to the audit branch at the same time, and while now working for the audit branch, he used copies of the seized records in reassessing the taxpayers, including for a gross negligence penalty.
In finding that there had been no infringement of the taxpayer’s s. 8 Charter rights, so that the seized documents were admissible and not excluded under s. 24(2) of the Charter, D’Auray J noted that “Brown [2013 FCA 111] … determined that documents seized in a criminal search could be admitted into evidence on the appeal of an assessment,” and that the taxpayers had no reasonable expectation of privacy respecting the seized documents.
The seized records included emails on the company server that had been received from a third party and that concerned the transactions at issue in the reassessments. D’Auray J also rejected the taxpayers’ submission that because the seized emails were not records required to be maintained by ITA s. 230, therefore they should have their confidential character preserved,
Neal Armstrong. Summaries of SPE Valeur Assurable Inc. v. The Queen, 2019 CCI 174 under Charter s. 24(2), s. 8 and s. 7.
Investment limited partnerships (and other DIPs) should send out requests for investor percentages to their larger unitholders by October 15
Investment limited partnerships (ILPs) with unitholders in HST-participating and non-participating provinces have now become selected listed financial institutions (SLFIs) and distributed investment plans (DIPs). The ILP must compute its final provincial HST (or QST) liability for a year, which is based on the imputed provinces of residence of its unitholders, so that, for example, if half of its investors were resident in western Canada (with a 0% provincial HST rate) and half in Ontario (an 8% rate), the actual provincial HST that it paid during the year is refunded or upwardly assessed pursuant to the special attribution amount (SAM) formula so as to result in a final blended provincial HST rate of 4%.
All this requires the ILP to determine the “investor percentages” for its units, i.e., its deemed percentage ownership by ultimate stakeholders in each province (or abroad). There effectively is a deadline for requesting the investor percentage information from most of the larger ($10M or over) unitholders by October 15, 2019. If the requests are not made by then, the relevant formula (e.g., in SLFI Regs. s. 30(1)(b)A4 -C(ii)) generally operates to produce less favourable investor percentages (i.e., more allocation to high-rate provinces).
In order for the investor percentages for the ILP’s 2019 year to be based on investor percentages as at September 30, 2019 rather than September 30, 2018, the ILP should make a reconciliation election under SLFI Regs. s. 50 (assuming that it did not obtain the investor percentages a year previously).
Some of the unitholders may not be prepared for these notices from the ILP. For example, a registered charity or a NPO must compute its investor percentage - related information based on how its income would have been allocated between provinces under Pt IV of the ITA Regs for its preceding taxation year had it been taxable.
Neal Armstrong. Summaries of PwC Tax Insights: GST/HST and QST alert: Investment plans are required to obtain investor percentages – action required by October 15, 2019, September 03, 2019, Issue 2019-31 under SLFI Regs. s. 52(10), 52(4) and s. 48(1)(b)A6
Income Tax Severed Letters 18 September 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.