News of Note
Delia – Court of Quebec finds that a director showed due diligence in relying on accounts for his corporation that did not show a remittance obligation
Email this ContentThe ARQ commenced a QST audit of a corporation (Motostar) after its voluntary dissolution by its sole individual shareholder (Delia) and assessed Motostar for some unremitted QST – and then assessed Delia for the same amount under the Quebec equivalent of ETA s. 323(1) (and ITA s. 227.1(1).) Cameron JCQ found that the assessment of Motostar was void given that the equivalent provision in the Quebec BCA to CBCA s. 226(2) did not (unlike s. 226(2)) provide that a proceeding may be brought against the dissolved corporation within X years after its dissolution, and instead merely provided that “judicial or administrative proceedings to which the corporation was a party” are continued against its shareholder on the dissolution. (As noted, the “administrative proceedings,” i.e., audit, were commenced after the dissolution.)
Nonetheless, the assessment against Delia was valid but for the due diligence defence given that the Quebec equivalent of ETA s. 323(2)(b) (and of ITA s. 227.1(2)(b)) merely required that the corporation have been dissolved (or was in the process of dissolution proceedings) and did not require that a claim for the corporation’s liability have been proved. (The ARQ dropped an argument that Delia also was liable under the BCA for the QST in his capacity of shareholder of the dissolved corporation.)
In finding that the due diligence defence was made out, Cameron JCQ indicated that it was reasonable in the circumstance for Delia to rely on his accounting staff and to treat the accounts of Motostar, which at the time of its winding-up did not disclose any QST liability, as if they were accurate.
This case, for example, supports the view that the director of a corporation - which has been attentive to its tax reporting obligations but mistakenly missed a withholding tax obligation, e.g., under Part XIII - has a due diligence defence in relying on the corporation’s accounting staff (cf. 2015-0622751I7).
Neal Armstrong. Summaries of Delia v. Agence du revenu du Québec, 2018 QCCQ 9487 under CBCA, s. 226(2), ETA s. 323(1) and s. 323(3).
4053893 Canada – Federal Court finds that CRA could not deny VDP relief to a corporation without explaining how its shareholder audit would have exposed the corporation
After Mr. Harris received a letter from CRA requesting that he file his personal returns (which he had not done for many years), he spoke briefly to CRA, disclosed that he owned an active corporation (“405” or the “applicant”) and was advised that he should file both business and personal returns. 405 was subsequently denied access to the voluntary disclosure program on the basis that, since this conversation had taken place before 405’s disclosure, such disclosure was not voluntary.
Gleeson J found that this decision was unreasonable because it lacked transparency, so that the matter was to be returned to another CRA official for redetermination. He noted that the CRA decision did not engage “in any analysis as to how the enforcement action against Mr. Harris would likely have uncovered the information disclosed by applicant.” He rejected the Crown’s submission that “the [CRA] Delegate could reasonably conclude, based on Mr. Harris’s role as the sole owner, director, and employee of the applicant alone, that the applicant’s information would have been uncovered in the course of the enforcement action against Mr. Harris,” stating:
This Court has consistently held that it is insufficient to simply conclude on the basis of an existing relationship that enforcement action against one taxpayer would uncover information contained in a second taxpayer’s voluntary disclosure.
Neal Armstrong. Summary of 4053893 Canada Inc. v. Canada (National Revenue), 2019 FC 51 under s. 220(3.1).
Reyes – Federal Court of Appeal finds that Columbia-source government pension was not exempt from Canadian tax
Gauthier JA found that Canada had the clear right under Art. 17 of the Canada-Columbia Convention to tax a former Columbia government employee (now resident in Canada) on a pension from Columbia that was exempt under the Columbia tax laws. The taxpayer lacked good arguments, so he made weak ones.
Neal Armstrong. Summary of Reyes v. Canada, 2019 FCA 7 under Treaties – Income Tax Conventions - Art. 18.
CRA indicates that completing an exploratory geothermal well ultimately used in production generates Class 43.1 costs, not CRCE
CRA indicated that the costs of both drilling and (except as noted below) completing exploratory wells for a geothermal project generally qualify as Canadian renewable and conservation expense (“CRCE”). However, in the case of a production well - or a (smaller diameter) exploratory well that nonetheless ends up being used for production (including small-scale heat or electricity production), - the costs only of drilling qualify as CRCE whereas the costs of completing such a well instead generally would be an addition to the Class 43.1 costs of the project.
Neal Armstrong. Summary of 17 July 2018 External T.I. 2018-0747311E5 under Reg. 1219(1)(h) and Schedule II - Class 14.
Income Tax Severed Letters 16 January 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA revises its CbC reporting publication
In November, CRA published a revised description in RC 4651 of country-by-country reporting (CbC) obligations. Since we have a copy of the historic CRA website (in addition to scraping the current CRA website every 4 hours), the previous 24 March 2017 version of RC4651 is also available for comparison purposes.
Additions by CRA include:
- “Given the widespread understanding of CbC reporting requirements by multinationals, any failure to file a CbC report as required under subsection 233.8(3) … will, for the 2018 and subsequent filing years, be presumed to be gross negligence [for purpose of s. 162(10) penalties] unless special circumstances exist that explain the failure to file.”
- CRA considers that a private holding company can qualify as an “ultimate parent entity” (UPE) even if there are public corporations lower in the corporate chart.
- There now is an explicit statement that “The only exemption from filing is for an MNE group with consolidated group revenue below the €750 million threshold. There are no exemptions for any specific industries, investment funds, entities with tax exempt status, non-corporate entities or entities that are not publicly listed.”
- A reporting entity is now generally permitted to report in one of the other four qualifying currencies (the euro, USD, pound or Australian dollar) even where it has not made a functional currency election.
- CRA states that a business entity “that is organized under the laws of a particular country but that is not tax resident in any jurisdiction” can be the ultimate parent entity of a multinational group, and that there is a special code for such an entity. (CRA does not explain how you can do this.)
Summaries of RC4651 “Guidance on Country-By-Country Reporting in Canada” 23 November 2018 under s. 233.8(1) – “multinational enterprise group”, – “ultimate parent entity”, s. 233.8(3), s. 233.8(6), s. 162(10), s. 241(1), and s. 247(2).
CRA notes that the travel allowance exemption in s. 6(6)(b)(i) does not include travel from a “temporary” place of residence
As noted in a previous post, CRA gave a “question of fact” response to a query as to whether employees of auditing firms are taxable on the travel allowances received for travel to and from their home and the audited premises in the context of audit engagements lasting about two weeks. This turned on whether the client premises were “regular places of employment.” In commenting further on the RPE concept, CRA stated that:
[A] work location may be considered to be a RPE for an employee even though the employee may only report to work at that particular location on a periodic basis (e.g., once or twice a month) during the year.
Turning to the exemption in s. 6(6)(b)(i) for an allowance for transportation between the taxpayer’s “principal place of residence” and a (temporary) special work site, CRA stated:
[I]f a special work site is a RPE for an employee, the value of a reasonable employer-provided allowance or reimbursement for travel between the employee’s temporary place of residence (e.g., a hotel, camp, rental home, etc.) and the special work site is included in the employee’s income under paragraph 6(1)(a) or (b).
Neal Armstrong. Summaries of 4 December 2018 External T.I. 2016-0670851E5 under s. 6(1)(b) and s. 6(6)(b)(i).
CRA indicates that the penalty for late-filing information slips references when the last slip was filed
The penalty under s. 162(7.01) for late-filing most types of information slip (e.g., the T3, T4, T4A, T5, NR4 or T4RSP) is calculated under a formula which references the number of late-filed slips and “the number of days, not exceeding 100, during which the failure continues.” CRA considers that “the failure” continues until the last slip of a particular type is filed. Thus, if 73 T5 slips are filed a few days late but a 74th slip is filed 56 days late, the penalty is calculated in the same manner as if all 74 slips had been filed 56 days late.
Neal Armstrong. Summary of 15 August 2018 Internal T.I. 2018-0748441I7 under s. 162(7.01)(b).
6 further translations of CRA interpretations are available
We have published another 6 translations of CRA interpretations – one of which was released last week and the others in December and November 2012. Their descriptors and links appear below.
These are additions to our set of 753 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Revised tracking interest rules may not permit recognition of offsetting FAPLs
Where foreign investment funds are structured as corporate umbrella funds (i.e., with each sub-fund of the corporation being a separate investment fund for commercial and regulatory purposes), it is quite possible that there would only be a few Canadian investors in a particular Canadian-dollar sub-fund (with the manager typically hedging the sub-fund’s non-Canadian assets back to the Canadian dollar), so that the Canadian investor’s shares may very well be tracking interests – because the Canadian dollar class or series would be seen as a separate tracked interest from the other interests in the sub-fund. Accordingly, such Canadian investors, holding a relatively small number of shares of the sub-fund, but more than 10% of the shares of the Canadian dollar class or series of the sub-fund, may be caught by the tracking interest rules. This issue still arises under the amended version of the tracking interest rules released on October 25, 2018.
Under s. 95(11)(e) of the new October 25, 2018 rules, where the tracked property has been deemed to be property of a separate corporation, that deemed separate corporation is deemed to have 100 outstanding shares of a single class, with each shareholder deemed to hold its "aggregate participating percentage” (as defined in s. 91(1.3)) of the shares of the separate corporation.
Given the $5,000 threshold rule in the definition of “participating percentage” in s. 95(1), the taxpayer will not have any shares of the separate corporation attributed to it if foreign accrual property income in the relevant cell does not exceed $5,000. This may imply that the taxpayer does not get the benefit of any foreign accrual property loss that might otherwise arise in a particular year.
It seems inappropriate to impute FAPI of a deemed CFA to the taxpayer but deny the taxpayer the benefit of any FAPLs of the CFA.
Neal Armstrong. Summaries of Peter Lee and Annika Wang, “The Tracking Interest Rules,” International Tax (Wolters Kluwer CCH), No. 193, December 2018, p.5 under s. 95(8) and s. 95(11)(e).