News of Note
Maverick Oilfield – Federal Court quashes a CRA decision not to provide full interest relief for companies’ failure to make tax remittances due to their CEO’s incompetence and deception
Email this ContentThe applicants were an Alberta oilfield service company and a trucking company, each owned equally by Mr. Schnell and his spouse, and directed by him. In order to semi-retire, in 2012 he hired a Mr. Challis as the CEO of both companies, and a CFO. Mr. Challis ran those successful companies into the ground within a few years. Furthermore, employees, including the accountant and the CFO, deceived Mr. Schnell in order to conceal emerging problems and Mr. Challis’ incompetence. Mr. Schnell did not become aware of the companies’ failures to make the required remittance until May 2018, whereupon he fired the CEO and CFO, retook control of the companies, and entered into a payment arrangement with CRA in April 2018, and used his personal resources to make full payment by January 2020.
CRA denied the companies’ applications for relief from interest and penalties accrued during their 2014 through 2020 taxation years, made on the basis of “extraordinary circumstances leading to … financial hardship.” CRA granted relief only from interest assessed during the CRA approved payment arrangements, and took the view inter alia that “the director [Mr. Schnell] remained responsible to take the necessary measures … to ensure that all obligations [were] met when required” and failed to do so.
Zinn J found this decision to be unreasonable, so that it was quashed and the requests for relief remitted to a different decision maker. First, the CRA finding that it was within the control of Mr. Schnell as director to avoid the late remittances did not address the active concealment by Mr. Challis and other employees of the late remittances.
Second, regarding a CRA finding “that extraordinary circumstances cannot persist over several years”, Zinn J stated that “[t]here is no temporal limitation on extraordinary circumstances”.
Third, it was evident that the consequences of Mr. Challis’ actions did not immediately end with his firing (the companies simply did not have the financial resources to make the necessary payments after such firing) and CRA’s finding to the contrary was unreasonable.
Neal Armstrong. Summary of Maverick Oilfield Services Ltd. & Latigo Trucking Ltd. v. Canada 2023 FC 1728 under s. 220(3.1).
9331-0688 Québec – Tax Court of Canada finds that three corporations wholly-owned by an individual could not make an ETA s. 156 election
Jorré J found that three corporations were ineligible to make the ETA s. 156(2) nil consideration election because they were not “closely related,” i.e., their mutual shareholder was an individual rather than a corporation.
Neal Armstrong. Summary of 9331-0688 Québec Inc. v. The King, 2023 CCI 173 under s. 156(1) – qualifying group.
Income Tax Severed Letters 3 January 2024
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Madison Pacific – Tax Court of Canada finds that two companies acted in concert to effectively acquire control of and transform a Lossco so as to access its losses contrary to s. 245(4)
The appellant (“MPP”) was an insolvent, publicly traded, mining company with accumulated net capital losses of $72.7 million. In order for two companies (“Madison” and “Vanac,” which dealt with each other and MPP at arm’s length) to access those losses and shelter gains from portfolios of rental properties, transactions were implemented, which first entailed the existing MPP mining business being transferred to a subsidiary, whose shares were effectively spun-off to the existing shareholders. Now that MPP was an empty shell, Madison and Vanac transferred respective portfolios of rental properties to MPP in consideration for the assumption of liabilities and for the issuance of a mixture of Class B voting shares and Class C non-voting shares (with the same attributes other than being generally non-voting) so that Madison and Vanac collectively held (and in equal proportions, after giving effect to some catch-up transactions to equalize those holdings) 46.6% of the voting rights and 92.8% of the equity of MPP. This transaction deliberately overvalued the shares that were so issued by MPP to Madison and Vanac so as to effectively transfer around $2.8 million of equity value to the existing public Class B common shareholders of MPP, thereby paying them for the losses. Taking into account the Class B shares held by friendly parties, such as directors, Madison and Vanac effectively had more than half the voting rights and, conversely, a significant portion of the public shareholders did not exercise their voting rights.
Regarding the denial of MPP’s losses under s. 245(2), MPP argued that it had received no tax benefit from the use of non-voting shares because, even if Madison and Vanac each had received only shares in the form of Class B voting shares, each would have acquired 46.4% of the MPP equity, so that neither would have acquired de jure control of MPP. Graham J rejected this submission on the basis that Madison and Vanac had been acting in concert in the transactions, so that, under this alternate scenario, there would have been an acquisition of control of MPP by a group of persons, thereby resulting in the application of s. 111(4). In particular, they had acted together to execute a sophisticated and artificial series of transactions to achieve the objective of gaining access to the MPP losses while effectively controlling it.
Regarding the abuse test under s. 245(4), Graham J concluded:
Subsection 111(4) is supposed to prevent a corporation from being acquired by unrelated parties in order to deduct its unused net capital losses against new capital gains for the benefit of its new shareholders. The series of transactions completely frustrated that purpose.
In this regard, after having noted that “the majority in Deans Knight highlighted that, while there had been no acquisition of control, there had been ‘the functional equivalent of such an acquisition of control’ by the company who effected the series of transactions (Matco)”, he indicated:
[T]he Madison-Vanac Group fundamentally transformed the Appellant. … They structured the series of transactions in a way that ensured they would receive substantially all of the benefit from the application of those losses to a completely new business. Finally, they selected the share compensation that they received in a way that ensured that, absent very unlikely circumstances, they could control the Appellant as if they had de jure control without actually taking that control.
Neal Armstrong. Summaries of Madison Pacific Properties Inc. v. The King, 2023 TCC 180 under s. 245(4) and s. 111(4).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released during June of 2002. Their descriptors and links appear below.
These are additions to our set of 2,682 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA indicates that no ITCs were available to an employer regarding any charges by an insurer to segregated funds to fund retirement benefits to employees
An employer funded its obligations under pension plans for its employees by paying premiums under insurance policies to an insurer, which invested the premiums in pooled funds (i.e., segregated funds) whose values fluctuated with the value of specified investments. The insurer agreed under the polices to pay benefits to the employer, based on segregated fund values, generally when the employees retired or died.
Amounts in respect of annual investment management fees (“IMFs”) were deducted from the unit values of pooled funds, without the insurer issuing any invoices for the IMFs.
CRA indicated that there was insufficient information to determine whether the deduction of the IMFs represented the payment of charges by the pooled funds (viewed as segregated funds that were deemed to be separate trusts by ETA s. 131) to the insurer (in which event such charges would be subject to GST/HST pursuant to s. 131(1)(c)(i)), or whether the IMFs were merely an element in computing the unit value of the pooled funds, so that they were not consideration for any supply.
However, under either interpretation, the employer was not acquiring investment management services under the policies, nor paid GST/HST on any consideration therefor, so that no input tax credits were available to it.
Neal Armstrong. Summaries of 25 April 2023 GST/HST Ruling 202403 under ETA s. 169(1) and s. 131(1)(c)(i).
Sommets du Mont-Tremblant – Court of Quebec finds that an in-kind damages payment should be treated the same as a sale of the transferred property
The taxpayer (“Les Sommets”), which had received $400,000 for granting an option to a third party to acquire various properties, later settled an action in damages against it by the current holder of the option (“Solstice”), for failure to honour the option. In the settlement, it agreed that, in consideration for the $400,000 referred to above, it would transfer a particular property (not covered by the option) to Solstice. That property had been held in its inventory at a value of $400,000.
Gosselin JCQ found that this transfer constituted an in-kind damages payment, or “dation en paiement.” However, she found that it should be treated the same as a sale of an inventory property for $400,000, giving rise to business income, given inter alia that the property was transferred in lieu of the transfer of properties (under the original option) that would have occurred in the ordinary course of its business.
Neal Armstrong. Summary of Sommets du Mont-Tremblant Inc. v. Agence du revenu du Québec, 2023 QCCQ 9061 under s. 9 – compensation payments.
CRA indicates that a property transfer as collateral generally would not entail a disposition
Before concluding that “generally speaking, a disposition would not occur when publicly traded shares owned by a taxpayer are transferred to another person for the purpose only of securing a debt or loan,” CRA stated:
A key factor in determining whether property (such as shares of a publicly traded corporation) is transferred for the purposes only as security for a debt or loan includes whether the transferor intended not to give up (and the transferee not to acquire) absolute ownership (i.e., beneficial ownership) of the property.
Neal Armstrong. Summary of 26 September 2023 External T.I. 2023-0984971E5 under s. 248(1) – disposition – (j).
CRA finds that the limitation period under the Canada-Barbados Treaty did not preclude CRA from making a transfer-pricing increase to the profits of the Canadian parent
Transactions between Canco and its wholly-owned Barbados subsidiary (“BarbadosCo”) were not on the terms that would have prevailed between arm’s length persons. Did the five-year time limitation under Art. IX(3) of the Canada-Barbados Treaty apply to preclude Canada from assessing Canco to increase its profits pursuant to ITA s. 247(2) (a “Primary Adjustment”) given that the five year period had passed – but also being mindful that BarbadosCo was an enterprise referred to in Art. XXX(3), namely, an enterprise entitled to special benefits under one of the listed Barbados statutes (a “Special Barbados Entity”), so that Arts. VI to XXIV of the Treaty (including Art. IX) were stated to not apply to it.
Before finding that the limitation period in Art. IX(3) did not apply to preclude such assessment of Canco, the Directorate first noted that, as a result of the 2011 protocol to the Treaty, BarbadosCo now qualified as an “enterprise” of Barbados for Treaty purposes, so that the requirement in Art. IX(3) - that for the limitation period in Art. IX(3) to apply, the disputed transaction must be between enterprises of a contracting state - no longer precluded the limitation period from applying.
However, CRA indicated that interpreting the limitation in Art. IX(3) as now precluding Canada from assessing a Primary Adjustment would imply that Art. IX(3) produced “asymmetrical outcomes,” i.e., that “Article IX(3) would only apply where the enterprise whose profits are subject to the Primary Adjustment is resident in Canada, and only Canada would be required to provide relief from Double Taxation associated with a Disputed Transaction.” In particular, CRA noted:
On the one hand, Canada would always be prohibited pursuant to Article IX(3) from making a Primary Adjustment beyond the Limitation Period to Canco on the basis that BarbadosCo qualifies as an enterprise of Barbados despite the fact that it is a Special Barbados Entity. Conversely, the BTA [Barbados Tax Authority] would never be prohibited from making a Primary Adjustment on the profits of BarbadosCo beyond the Limitation Period since BarbadosCo is excluded from the application of Article IX [as a Special Barbados Entity]. On the other hand, Double Taxation would never be relieved when the CRA makes a Primary Adjustment on Canco’s profits before the expiry of the Limitation Period as the BTA would never be required to make a Corresponding Adjustment under Article IX(2) [again, because BarbadosCo was a Special Barbados Entity].
Thus, the Protocol did not change the non-application of the Art. IX(3) limitation.
Neal Armstrong. Summary of 13 October 2023 Internal T.I. 2019-0819351I7 under Treaties – Income Tax Conventions – Art. 9.
We have translated 8 more CRA severed letters
We have translated a CRA ruling released at the end of November and an interpretation released last week along with a further 6 CRA interpretations released during June of 2002. Their descriptors and links appear below.
These are additions to our set of 2,676 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2023-12-20 | 6 November 2019 Internal T.I. 2019-0798021I7 F - Assessment under 159(3) | Income Tax Act - Section 159 - Subsection 159(3) | trustees were liable under s. 159(3) notwithstanding having obtained a post-distribution s. 159(2) certificate |
| 2023-11-29 | 2023 Ruling 2022-0923451R3 F - 55(3)(a) internal reorganization | Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) | indirect spin-off of subsidiary groups to 2 transferee corporations held by holding companies for 2 brothers while such transferee corporations are controlled by father with special voting shares |
| Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | proration of DSI on s. 55(3)(a) spin-offs based on the net cost amount of the property spun off | ||
| 2002-06-21 | 9 July 2002 External T.I. 2002-0147985 F - ACTIONS PRIVILEGIEES CONVERTIBLES | Income Tax Act - Section 7 - Subsection 7(1.5) | no disposition for purposes of s. 7(1.5) when employee’s preferred shares converted to common shares |
| Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) | s. 7(1)(a) benefit when employee’s convertible preferred shares converted to common shares | ||
| 5 July 2002 External T.I. 2002-0121115 F - CREDIT-BAIL | Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property | lessor rather than lessee under a financing lease was entitled to CCA | |
| 11 July 2002 External T.I. 2002-0126795 F - RESSOURCES INTERMEDIAIRES REVENU EX | Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(h) | contributions paid to a Quebec intermediate resource have been treated as means-based assistance | |
| 11 July 2002 External T.I. 2002-0131085 F - ASSURANCE INVALIDITE | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | employer can pay an employee additional remuneration equal to the premiums payable by the employee under employee-pay-all plan | |
| 8 July 2002 External T.I. 2002-0131835 F - Investissements détenus à l'étranger | Treaties - Income Tax Conventions - Article 22 | Canada could tax income and gains of a Canadian resident from a French life insurance policy | |
| 8 July 2002 External T.I. 2002-0136615 F - Par. 250(5) - Déclaration de revenus | Income Tax Act - Section 250 - Subsection 250(5) | individual deemed to be non-resident by s. 250(5) is not required to report world income |