News of Note

In Year X3, Investco sells all the shares of Opco, which was the only related business respecting the specified individual (Investco’s shareholder) and uses the proceeds in an investments business. CRA indicated that dividends paid by Investco to the individual shareholder cannot qualify for the excluded share (“tax on split income” or TOSI) exception until Year X5. For instance, in Year X4, the income of Investco was tainted because in its last taxation year (X3) it had received dividend income from Opco and, in any event, the taxable capital gain realized by it in that year was deemed by s. 120.4(1.1)(d)(i)(B) to be income derived from the Opco business.

­­­­­­­­­­­­­­­­­­Neal Armstrong. Summary of 12 June 2019 External T.I. 2019-0792011E5 F under s. 120.4(1) – excluded share – (c).

CRA has augmented its Folio on amalgamations.

It indicates, in an example, that if a predecessor with a calendar taxation year amalgamated on January 2, 2019, s. 249(3) would prevent the taxation year that otherwise would have ended on December 31, 2018 from being extended to January 1, 2019.

Notwithstanding no continuity rule in s. 87(2) to this effect, CRA will permit Amalco to make a s. 22 election respecting receivables generated by sales of a predecessor, provided that there was no disruption in the operation of the business between the time of the amalgamation and the business sale (and assuming the usual s. 22 conditions were satisfied).

Neal Armstrong. Additional summaries of Folio S4-F7-C1 under s. 249(3) and s. 22(1).

A union that was eligible for the s. 149(1)(k) exemption and that had been collecting union dues, ceased to be the accredited bargaining agent for the employer, as a result of which it is being wound-up and will be distributing its remaining assets to its members as required under its articles. CRA ruled that the amount so paid to the members will constitute proceeds of disposition of their rights as members in the union, thereby resulting in a capital gain.

Neal Armstrong. Summary of 2019 Ruling 2018-0779221R3 F under s. 149(1)(k).

The taxpayer, who had claimed substantial fictitious business losses based on an unintelligible theory espoused by the “Fiscal Arbitrators” tax preparers, stated at the outset of the trial that the only issue being pursued by him was the gross negligence penalties. The Tax Court Judge then incorrectly told the taxpayer that he had the burden of convincing the Court that the facts underlying the penalty assessment were incorrect. After thus being misled by the Court, the taxpayer presented oral testimony of himself and the creator of Fiscal Arbitrators, before his appeal was dismissed.

Webb JA noted that if the taxpayer had remained seated rather than proffering this testimony, there would have been no evidence for the Crown to have satisfied its s. 163(3) onus. He nonetheless did not direct a fresh trial, applying the principle in Mercure, 2013 FCA 102 that:

The mere fact that a breach of procedural fairness occurred is enough to warrant a new trial. This general rule has only one exception, which is the case in which the question before the court has an inevitable answer.

If the taxpayer had not testified on his own account, the Crown could have compelled him to stand up as a Crown witness which, given the extreme facts, would have been sufficient to sustain the penalty.

Neal Armstrong. Summaries of Kim v. Canada, 2019 FCA 210 under s. 163(3) and Rule 135(2).