News of Note
1378055 Ontario – Tax Court of Canada allocates invoices between commercial and exempt activities based on general oral testimony
Email this ContentIndividuals within the same extended family and a corporation controlled by family trusts sent vaguely worded invoices to a family company (the appellant, or “137ON”) for services rendered, without giving any allocation between the portion that related to 137ON’s exempt activity of earning exempt residential rentals, and its commercial activity of trying to get one of the residential sites developed as a commercial storage site. Sommerfeldt J concluded on the basis of relatively sparse oral testimony on this point that 75% of the invoices rendered (other than invoices rendered by a family member who was responsible for administering the residential rental activity and whose services were found to be only 25% commercial) related to the commercial development activity (which did not particularly progress in the years in question) rather than to the exempt residential rental activity, so that, subject to invoice-documentation issues, input tax credits were available as to the indicated percentages.
Respecting the form of the invoices, he found that it was not necessary to spell out payment terms (notwithstanding the requirement in s. 3(c)(iii) of the Input Tax Credit Information GST/HST) Regulations to this effect) given that there was an implied payment term:
[I]f a contractual document (which presumably includes an invoice) does not state express terms of payment, the fee or price that is the subject of the invoice is payable in cash currently or perhaps within a reasonable time.
However, the failure of some invoices to state the HST registration number of the supplier was fatal to the claiming ITCs for those invoices.
Implicitly, he found that the vague invoice descriptions of the services rendered (e.g., “administration, consultation and management services”) was sufficient to satisfy s. 3(c)(iv) of such Regs.
Neal Armstrong. Summaries of 1378055 Ontario Limited v. The Queen, 2019 TCC 149 under ETA s. 141.01(2), s. 169(1) – B(b), Input Tax Credit Information GST/HST) Regulations s. 3(c)(iii) and s. 3(b)(i).
CRA considers that a corporation with no listed shares can satisfy the Reg. 4800(2)(a)(i) test that more than 90% of its listed shares be held by insiders
Pubco was a corporation that was now closely held but nonetheless was deemed to be a public corporation under s. 87(2)(ii) given that it resulted from the amalgamation of a public corporation and another predecessor. However, at no time since that amalgamation had any class of its shares been listed on a designated stock exchange in Canada (or qualified for distribution to the public). This created a problem for its ability to elect under (c)(i) of the definition of “public corporation” in s. 89(1) to cease to be a public corporation - which was that it did not literally satisfy the requirement in Reg. 4800(2)(a)(i) that “insiders of the corporation shall hold more than 90 per cent of the issued and outstanding shares of each class … that was, at any time after the corporation last became a public corporation, listed on a designated stock exchange in Canada [or of designated surrogate qualified-for-distribution shares under Reg. 4800(2)(a)(ii)].” The problem of course was that there were no such listed (or qualified) shares of Pubco to which the 90% test could be applied. Can 90% of 0 be greater than 0?
CRA however took a “liberal” approach and ruled that the election could be made, so that on the subsequent further amalgamation of Pubco, the resulting Amalco was not tainted as a public corporation under s. 87(2)(ii) (which, in turn, meant that PUC could be distributed to non-resident shareholders of Amalco without withholding tax.)
Neal Armstrong. Summary of 2018 Ruling 2018-0752531R3 under Reg. 4800(2)(a).
Eyeball Networks - Tax Court of Canada finds that a promissory note that was backed only by intercompany debt was worthless
“Oldco,” which had both a largely defunct and worthless business (the “old business”) and a business valued at $30M (the “new business”), implemented a spin-off of the new business to a corporation (“Newco”) incorporated by its sole individual shareholder. The spin-off mechanics were conventional, and at their conclusion, there were two promissory notes for $30M owing by Oldco and Newco to each other – which then were set-off. Newco was assessed under s. 160 for a reassessment that had been made of Oldco following the spin-off.
Bocock J accepted that all the transactions up to the set-off entailed value-for-value exchanges, so that these entailed no transfer to which s. 160 applied. However, he found:
The FMV of the Oldco Note held and owned by Newco was nominal in any fair market for such negotiable bills.
Accordingly, he found that there was a transfer of property for insufficient consideration to which s. 160 applied at the time of the set-off transaction.
The $30M note owing by Oldco was supported, in turn, by the $30M note owing to it by Newco, which indeed had $30M of independent assets. He implicitly appeared to consider that since the only value underlying the $30M Oldco note was as described above, rather than there being independent asset backing, that the Oldco note only had nominal value.
Neal Armstrong. Summary of Eyeball Networks Inc. v. The Queen, 2019 TCC 150 under s. 160(1).
Masson – Federal Court finds CRA reasonably declined to grant a late s. 85 election
In finding that it was reasonable for CRA to deny the taxpayer’s request to file a late s. 85(1) election respecting transfers made by him quite a number of years previously, Roussel J stated:
Considering that no evidence was presented to show the initial intention to proceed by rollover under subsection 85(1) of the ITA and that the errors of a third party do not constitute circumstances that justify a late election, it was open to the Minister’s representative to exercise her discretion to deny Mr. Masson’s late election.
Neal Armstrong. Summary of Masson v. Canada (Attorney General), 2019 FC 887 under s. 220(3).
Income Tax Severed Letters 24 July 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Deegan – Federal Court finds that Canada’s FATCA-related legislation does not contravene the Charter
Mactavish J rejected the position of two American citizens, who had had no significant connection with the U.S. since early childhood, that the information-reporting requirements in ITA Part XVIII resulted in the unreasonable seizure of financial information belonging to U.S. persons in Canada, contrary to s. 8 of the Charter. Although she accepted that these provisions provided for the seizure of the specified account information, she considered such seizure to be reasonable after weighing the “minimally intrusive” nature of the seizure (i.e., of banking information that the individuals already could be required under US law to provide) against “the need to protect Canada as a whole from the economic consequences of FATCA” (i.e., of the disruptive 30% U.S. withholding tax that would have been imposed in the absence of arriving at the IGA).
The individuals’ s. 15 equality rights arguments also did not succeed. Although the legislation distinguished on a ground (citizenship) that was analogous to the enumerated grounds, she found that:
[I]nsulating persons resident in this country from their obligations under duly-enacted laws of another democratic state is not a value that section 15 of the Charter was designed to foster.
Neal Armstrong. Summary of Deegan v. Canada (Attorney General), 2019 FC 960 under Charter s. 8, s. 15.
Hancock – UK Supreme Court references the Luke principle that a strained interpretation can be adopted to implement clear Parliamentary intention
Lady Arden referred with apparent approval to the principle in Luke v Inland Revenue Comrs [1963] AC 557, stating:
This enables the court, when interpreting a statute, to adopt (my words) a strained interpretation in place of one which would be contrary to the clear intention of Parliament.
Although she confirmed an interpretation of a provision that effectively read the phrase “or include” out of it, she did not consider it necessary to apply the Luke principle to do so as she considered that the wording of the provisions themselves evinced an intention that effectively ignored those two words.
Neal Armstrong. Summary of Hancock & Anor v Revenue and Customs [2019] UKSC 24 under Statutory Interpretation - Redundancy.
Raposo – Federal Court of Appeal finds that the voidness under the Civil Code of a partnership with an unlawful business applied for GST purposes
The taxpayer and the three other members of the “Raposo clan” were involved in the sale of cocaine in the Gatineau area. CRA took the position that, as a member of a partnership, the taxpayer was solidarily liable under ETA s. 272.1(5) for uncollected GST on the cocaine sales. This rested on the proposition that in order for there to be a partnership, it was sufficient for the elements of the definition of a contract of partnership in Art. 2186 of the Civil Code to be satisfied, and that it did not matter that Art. 1413 provided: “A contract whose object is prohibited by law or contrary to public order is null." It considered that it was contrary to the principle of “tax neutrality” that the consequences of the activities should be affected by whether or not they were unlawful and by in which province they were carried out.
Montigny JA considered these contentions to be contrary to s. 8.1 of the Interpretation Act, which provided that a federal provision referencing property law rules should reference those of the applicable province “unless otherwise provided by law.” Examples of federal provisions which effected such ouster “by law” were ss. ITA s. 160 and ETA s. 325, which through using the broad term “transfer” rather than “sale,” “the legislator was assured that any activity, lawful or not, was covered”, whereas the legislator “did not do the same in section 272.1.”
He noted that not respecting the void character under the Civil Code of a partnership contract for carrying out an illegal activity would have the “absurd consequence” that, on the one hand, the taxpayer would be held liable for the entirely of the uncollected GST of the unlawful activity, whereas, on the other hand, “given the illegality of those activities, the taxpayer would not have any recourse … to reclaiming, from the co-debtors, their respective portion of the total debt before a civil court.” He also acknowledged that the effect of s. 8.1 could be to produce a patchwork effect across Canada.
The Crown’s s. 272.1(5) claim failed.
Neal Armstrong. Summaries of Canada v. Raposo, 2019 CAF 208 under General Concepts – Illegality, Statutory Interpretation - Interpretation Act, s. 8.1 and ITA s. 96.
CRA finds that a dividend received by a trust and immediately paid to a connected corporate beneficiary was taxed under Part IV if the connection ceased before the trust year end
On June 23, 2017, a discretionary family trust receives a dividend on its shares of Opco and immediately on-pays that amount to a family corporation beneficiary (Holdco) to which Opco is connected at that time. However, a few days later (and, crucially, before the current taxation year end of the trust and also before the (June 30) taxation year end of Holdco) there is an acquisition of control of Opco resulting in it ceasing to be connected to Holdco. The trust designates the dividend under s. 104(19) for its 2017 year.
Headquarters indicated that such dividend was subject to Part IV tax in the hands of Holdco because the time at which it was considered to have received the s. 104(19) dividend (the calendar year end of the Trust) was in the taxation year of Holdco (commencing on July 1, 2017) throughout which Opco was no longer connected to Holdco, stating:
[T]he amount designated to the beneficiary by a trust in accordance with subsection 104(19) is deemed to be received as a dividend by the beneficiary of the trust at the end of the taxation year of the trust in which the trust received the dividend. This position is based inter alia on the fact that the trust cannot make the designation under subsection 104(19) before the end of its taxation year.
Neal Armstrong. Summary of 30 April 2019 Internal T.I. 2018-0757591I7 F under s. 186(1)(a).
CRA indicates that it may no longer consider commercial printing or photocopying operations to be M&P
9406917 F indicated that:
photocopying activities from a photocopier equipped with a computer and the activities of assembling photocopies with a flange constitute the manufacturing or processing of goods for sale.
However, this position relied in part on the analogous activities of a commercial printer (including publisher) which, in IT-145R, para. 42, were considered to constitute manufacturing or processing. This position was not carried forward when IT-145R was replaced by Folio S4-F15-C1.
After also referring to Will-Kare, CRA stated:
Consequently, considering the new case law, the cancellation of IT-145R and the technological progress of the last 25 years in the field of photocopying, we cannot confirm or deny that the position taken in the Interpretation continues to reflect the position of the CRA. If we had a specific file under study, we would have to do a complete re-analysis before making a decision.
Neal Armstrong. Summary of 7 March 2019 Internal T.I. 2018-0781511I7 F under s. 125.1(3) – Canadian manufacturing and processing.