News of Note
CRA indicates that Ponzi scheme investors can generally write off their reinvested interest income in the year the perpetrators are charged
Email this ContentIndividuals had “invested” in what turned out to be a Ponzi scheme under which for many years they reported annual income inclusions for interest which they were treated as having reinvested in the scheme. They sought to have their returns for those years adjusted in order to obtain a refund of the taxes they paid on such interest income.
The Directorate indicated that because various of the taxation years were before the 10-year period referred to in s. 152(4.2), they could not be so reassessed – and, in any event, the interest had been required to be recognized in the years in which the individuals received or were entitled to receive it.
The Directorate went on to indicate that potential relief could be provided though a subsequent bad debt deduction, likely, in the year in which the promoters were charged. It stated:
[T]he CRA generally accepts that the "time" when a taxpayer can conclude that the taxpayer’s debt has become uncollectible occurs in the year in which the Crown makes charges against the perpetrator of the fraud (the "Year of Charges").
Thus, where a taxpayer has included investment income in the computation of the taxpayer’s income for the Year of Charges or for years prior to the Year of Charges and that income becomes a debt that has not has never been recovered by the taxpayer or a third party for the taxpayer’s benefit, the CRA is generally prepared to accept that the taxpayer may claim a bad debt deduction in respect of that debt under paragraph 20(1)(p) in the Year of the Charges.
Neal Armstrong. Summaries of 27 March 2018 Internal T.I. 2017-0691941I7 F under s. 152(4.2), s. 20(1)(p)(i) and General Concepts – Effective Date.
Cameco – Federal Court of Appeal finds that CRA cannot under s. 231.1(1) compel oral answers to its questions other than for aid in auditing taxpayer books and records
Cameco had appealed transfer-pricing assessments to the Tax Court. CRA then audited subsequent years, where essentially the same issues arose, and applied to the Federal Court for an order pursuant to s. 231.7(1) compelling Cameco to submit 25 listed employees of it and subsidiaries to CRA interviews. The Federal Court dismissed this application.
In dismissing the Crown’s appeal of such dismissal, Rennie JA found that s. 231.1(1)(d) was limited to providing CRA aid in its “inspection, search, examination or review of records,” whereas here, CRA sought “oral answers to oral questions” in order to facilitate its “understanding of Cameco's potential tax liability.”
The Crown submitted that the word “audit” in the power under in s. 231.1(1)(a) to “inspect, audit or examine” encompassed the authority to ask questions of employees of a taxpayer, including the employees of its overseas subsidiaries, and to require that they be answered orally.
Rennie JA instead found that the word “audit,” like the words “inspect” and “examine,” were directed to “the book and records” of the taxpayer and that “[o]ral examination is not the ordinary meaning of the word audit.” He also found it telling that 1986 amendments eliminated the word “orally” from the stated duty to answer all proper questions “relating to the audit.”
Neal Armstrong. Summaries of Canada (National Revenue) v. Cameco Corporation, 2019 FCA 67 under s. 231.1(1)(a) and Statutory Interpretation – Ejusdem generis and Redundancy.
Grondin – Court of Quebec confirms that the Quebec equivalent of s. 13(21.1)(b) applies irrespective of an intention to dispose of the underlying land
The uninsured barn of a pig farmer burned down. Lafrenière JCQ confirmed the application by the ARQ of the Quebec equivalent (in Art. 93.3) of s. 13(21.1)(b) to reduce what otherwise would have been that taxpayer’s terminal loss by one-half, stating:
[T]he exception provided in Articles 93.1 to 93.3 … applies without regard to whether the disposition is voluntary or involuntary, and also applies independently of whether or not there was a wish to dispose of the underlying land.
He also quoted with approval similar findings made by the Tax Court in 9136-6872 Québec.
Neal Armstrong. Summary of Grondin v. Agence du revenu du Québec, 2019 QCCQ 1059 under s. 13(21.1)(b).
CRA indicates that it has not been deluged by ruling requests on the s. 55(2.1)(b) purpose test
CRA repeated an earlier statement that it can provide rulings on the application of the purpose test in s. 55(2.1)(b) provided that “all manifestations of purpose and corroborating circumstances support the absence of one of the purposes described in paragraph 55(2.1)(b)” and the taxpayer represents “that the purposes for which the dividend was paid do not include one of [such] purposes.” CRA unsurprisingly indicated that it “other than rulings on loss-consolidation, the CRA has not been deluged by requests for rulings on this topic.”
The “Manual used … [in] audits of small and medium-sized businesses does not contain any information on the application of subsection 55(2) and the purpose test, in particular.”
Neal Armstrong. Summary of 9 May 2018 CPA Roundtable Q. 11, 2018-0765271C6 under s. 55(2.1)(b).
Income Tax Severed Letters 3 April 2019
This morning's release of five letters from the Income Tax Rulings Directorate is now available for your viewing.
Kerry (Canada) – Federal Court finds that a request to hold notices of objection in abeyance pending Canadian competent authority review amounted to implied waivers
A Canadian company (Kerry Canada) was reassessed under s. 247 to increase its income from product sales to a US affiliate and disallow deductions for royalties paid to an Irish affiliate. Kerry Canada objected to these reassessments, but requested that its objections be held in abeyance pending a decision by the Canadian competent authority (CCA) of these transfer-pricing issues. In its ensuing application to the CCA, Kerry Canada reiterated that it had requested such abeyance.
After the CCA agreed with Kerry Canada on the product transfer pricing issue, CRA issued second reassessments to give effect to that adjustment. Kerry Canada did not object to the second reassessments. Subsequently, the CCA also agreed with Kerry Canada on the deductibility of the royalties, but CRA refused to implement this favourable decision because the taxation years in question were now statute-barred.
Walker J found that Kerry Canada’s request to keep the objections in abeyance until a CCA decision on the two issues amounted to an implied waiver for those years, so that CRA was still permitted under s. 152(4)(c)) to reassess those years by virtue of having received the waivers. Kerry Canada had made the mistake of not objecting to the second reassessments. However, this was essentially irrelevant to the point that the implied waivers nonetheless had been given (albeit, in connection with objecting to reassessments that were replaced by, and, therefore, voided by, the second reassessments.)
Since CRA had not addressed this point, the matter was referred back to CRA for reconsideration of the request of Kerry Canada to reassess it to implement the favourable CCA decision.
Neal Armstrong. Summary of Kerry (Canada) Inc. v. Canada (Attorney General), 2019 FC 377 under s. 152(4)(c).
CRA states that taxpayers should be able to handle the allocation of costs between pipelines and pipeline appendages
CRA noted that although its published policies distinguish between pipelines (Class 49 properties) and attachments to a pipeline that are not an integral and component part of the pipeline ("pipeline appendages") (which are often Class 7 properties), it has provided no “guidance as to how costs are allocated between pipelines included in class 49 and equipment included in class 7” – but went on to state:
However, it is our understanding that there is sufficient information at the disposal of taxpayers, such as detailed engineering documents, progress reports, authorizations for expenditures and invoices, to enable a reasonable allocation of costs, including general contractor costs.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.8 under Sched. II, Class 49.
CRA indicates that refinery catalysts are Class 26 property notwithstanding their short useful life
In response to a submission that “Most modern refinery catalysts have a useful life of 1 to 3 years and are disposed of at the end of this period,” CRA stated:
Our position remains that the cost of catalysts is properly classified as Class 26, deductible on a declining basis at 5% per year. … We suggest you make a submission to the Department of Finance.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.7 under Sched. II, Class 26.
CRA indicate that dispositions by oil and gas corporations of properties generally do not give rise to terminal losses
Although CRA noted that the determination of whether a person is carrying on a single business or multiple separate businesses is a question of fact, it indicated that in the context of Reg. 1101(1):
We do acknowledge that, in the oil and gas industry, it is common for businesses to acquire properties and dispose of non-core properties on a continual basis. Generally, the acquisitions and dispositions during the normal course of business would not be considered acquisitions or dispositions of separate businesses.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.5 under Reg. 1101(1).
CRA appears to be prepared to accept that natural gas and oil are similar properties for s. 111(5)(a)(ii) purposes
When commenting on how it has applied the “sale, leasing, rental or development…of similar properties” test in s. 111(5)(a)(ii), CRA noted that it still considers the “similar properties” term to reference a narrower meaning than “having characteristics in common” and that it instead references properties “of the same general nature or character.”
In discussing how it has applied this test, CRA noted that 9234795 stated that oil or gas from wells located in different provinces would be considered to be a “similar property,” and that although CRA has not taken a position on whether the different types of hydrocarbons are similar to each other, in 9314945 it “opined that where a corporation carries on the business of mining and selling metallurgical coal as well as the business of mining and selling other minerals, income therefrom will be considered to be derived by those businesses from the “sale, leasing, rental or development…of similar properties” for the purposes of subparagraph 111(5)(a)(ii) provided that the other conditions in paragraph (a) are met.” This appears to suggest that natural gas and oil would be accepted as similar properties.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.4 under s. 111(5)(a)(ii).