News of Note
Income Tax Severed Letters 2 March 2016
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
French – Federal Court of Appeal finds that it is arguable that Parliament would have intended what constitutes a gift outside Quebec to be informed by the Civil Code
The position that a Canadian individual residing outside Quebec could generate a credit for at least the cash portion of his “donations” made as part of a leveraged donation tax shelter was buttressed in his pleadings by advancing the proposition that Parliament did not intend for split gifts to receive significantly different treatment in the rest of Canada as contrasted to Quebec (where split gifts were accepted in the Civil Code) even before the introduction of the split gift rules in the Act effective after 2002.
In accepting a submission that these pleadings should not be struck, Noël JA stated that “it cannot be said with certainty that the meaning of ‘gift’ prior to the [December 31] 2002 amendments excluded the notion of split gift in the common law provinces,” and that “it would have been open to Parliament to attribute to the word gift a meaning which coincides with the civil law and...it is arguable that this is what Parliament intended.” In other instances where there are apparent differences in the common law and civil law concepts, it may also be appropriate to consider that Parliament would likely not have intended differing tax results based on which provincial law applies.
Neal Armstrong. Summary of French v. The Queen, 2016 FCA 64 under s. 118.1(1) - Total Charitable Gifts and Interpretation Act, s. 8.1.
The minority shareholders’ Canadian Oil Sands’ shares are being exchanged for Suncor shares under a 4-party "triangular" amalgamation
Suncor, a CBCA corporation, recently acquired 73% of the common shares of Canadian Oil Sands on the basis of 0.28 of a Suncor common share for each COS common share. Second stage transactions now are proposed for the COS shares of the remaining shareholders to be exchanged for Suncor shares using the same exchange ratio. There will be no Plan of Arrangement – just a triangular amalgamation.
Suncor has formed a subsidiary (“Holdco”) which holds “Newco,” both with nominal assets. Under an amalgamation of Newco with COS under the ABCA, the minority COS shareholders will receive Suncor shares for their COS shares, and the 1 common share of Newco will be converted into the same number of common shares of Amalco as were formerly held by those exchanging shareholders. Holdco will likely then amalgamate under the ABCA with Newco.
Because after the first amalgamation Amalco will not be wholly owned by Suncor, there can be no bump to the ACB of the Amalco shares of Suncor under s. 87(9)(c). It is not obvious to me why Holdco was inserted into the planned transactions.
Neal Armstrong. Summary of Canadian Oil Sands under Mergers & Acquisitions – Subsequent Acquisition Transactions – Amalgamations - Shares.
Veracity - B.C. Supreme Court finds that a “Quebec year-end shuffle” used to largely avoid provincial income tax on a capital gain was contrary to the B.C. GAAR
In order to avoid most of the B.C. capital gains tax otherwise applicable to a share sale which closed in July 2002, the B.C. shareholders rolled their shares into a Newco (“Veracity”), which had a taxation year ending on August 31, 2002 for Quebec taxation purposes, and a taxation year ending on June 30, 2003 for federal and B.C. purposes. In order that 100% of the taxable capital gain would be allocated to B.C. for Quebec purposes, small directors’ fees were paid to B.C. directors in July 2002 (i.e., before the August 31, 2002 Quebec year end). In order that 90% of the taxable capital gain would be allocated to Quebec for B.C. purposes, Veracity purchased units of a listed limited partnership with a September 30 year end, so that as at September 30, 2002 (i.e., after the Quebec year end) a pro rata portion of the gross revenues and salary expense of the LP would be allocated to Veracity qua unitholder.
In affirming CRA’s assessment to apply the B.C. GAAR to allocate 100% of the taxable capital gain to B.C., Macintosh J found that although the LP units purchased were “a reasonable, stand-alone investment,” the targeted tax savings were five-times the investment return on the LP units, and the units were purchased primarily for the purposes of these “Quebec Year-end shuffle” transactions. The transactions also were “abusive of the inter-provincial income allocation provisions,” whose allocation formula is “designed to prevent both the over-taxation and the under-taxation of income earned by a corporation which is active in more than one province.”
Quite interestingly, he also found that the choice of differing year ends represented additional avoidance “transactions,” and that the transfer of the shares under s. 85(1) into Veracity was an abuse of s. 85(1) as this “allowed for the absolute avoidance of B.C. tax, not simply a deferral under s. 85.”
Neal Armstrong. Summaries of Veracity Capital Corporation v. M.N.R., 2015 BCSC 2278 under s. 245(3), s. 245(4).
AgraCity – Federal Court of Appeal notes that the boundary between ss. 247(2)(a) and (b) is unresolved
A Barbados corporation reported substantial profits from the sale of a herbicide to Canadian farmers, and deducted amounts paid to a non-arm’s length Canadian corporation (AgraCity – which was the taxpayer in the case) as service fees. The Crown’s pleadings in support of its assessment of AgraCity stated that the Barbados corporation did not sell any herbicide, and that the fair market value of the fees received by AgraCity should be increased by all of the profit reported by the Barbados corporation. However, in pleadings in support of an assessment of the Canadian parent of the Barbados corporation, the Crown pled that the Barbados corporation sold the herbicides to AgraCity, thereby giving rise to FAPI under s. 95(2)(a.1) to the Canadian parent.
In finding that these inconsistent pleadings were acceptable, Webb JA noted that it is inherent in separate persons (including related persons) being separate taxpayers that inconsistent assessments and, thus, inconsistent pleadings may result - and that the Crown acknowledged that it did not seek to have both assessments upheld.
Webb JA also found that at the pleadings stage it was acceptable for the Crown to rely both on ss. 247(2)(a) and (c) (re terms of the transactions departing from arm’s length terms) and on ss. 247(2)(b) and (d) (re the transactions themselves being something that arm’s length persons would not have entered into), quoting with approval a statement in Cameco (2015 FCA 143):
No court has determined where paragraphs 247(2)(a) and (c) end and where 247(2)(b) and (d) begin and I agree with the Crown that it would be inappropriate to attempt to resolve this issue on a motion to strike… .
Neal Armstrong. Summaries of AgraCity Ltd. v. The Queen, 2015 FCA 288 under s. 247(2) and Tax Court Rules, s. 82.
CRA considers that telecommuters are deemed to report to work for source deduction purposes to the office from which they are paid rather than from which they are managed
The operation of the source deduction rules can be affected by whether an employee is considered to “report for work” at an actual establishment of the employer as per Reg. 102(1), or whether the employee is deemed by 100(4) to report for work at the establishment of the employer from which the remuneration is paid. In this regard, CRA considers that:
Generally… a presence on a weekly basis at the establishment of the employer, for a duration of the equivalent of a typical day’s work of the employee in fulfilling the employee’s normal workload, is sufficient to lead to a conclusion that the employee reports to work there.
Conversely “a telecommuter with a home office would not be considered to be reporting to work at an establishment of the employer when exercising his or her functions.”
Neal Armstrong. Summary of 4 February 2016 Memorandum 2015-0620821I7 F under Reg. 102(1).
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Neal Armstrong.
Justice Rothstein notes that Backman limits to a certain extent the use of foreign law in Canadian tax cases
Observations of Marshall Rothstein, who retired from the bench on August 31, 2015, on practices in the Supreme Court of Canada include:
- “The Supreme Court has indicated a willingness to depart from its own precedent where a new legal issue has been raised or where there has been a change in the facts that ‘fundamentally shifts the parameters of the debate.’”
- Signing of judgments by “The Court” as “a rule of thumb..is reserved for controversial cases of significant public importance” (e.g., assisted dying, medicinal pot).
- On rare occasions, the Court will order oral argument on leave applications, as was done in Daishowa-Marubeni, where counsel were told they were to focus on two specific issues.
- Reasons for considering foreign judgments in Treaty interpretation cases include looking to “the effects of a particular rule in action in considering the merit of arguments about likely consequences.”
- In Backman:
The Court wrote that if a partnership wants to deduct losses under Canadian law, it must satisfy the elements of a partnership under Canadian law. This precedent limits to a certain extent the use of foreign law in Canadian tax cases.
- “The judges...will not engage in blogging” [or other disreputable conduct].
Neal Armstrong. Summaries of Justice Marshall Rothstein, "An Overview of the Supreme Court of Canada," Bulletin for International Taxation (IBFD), January/February 2016, p. 20 under General Concepts – Stare decisis, Supreme Court Act, s. 40(1), Treaties – General, s. 96, s. 247(2) and s. 248(10).
CRA recognizes that a trust preserved s. 92(1) basis in shares of a CFA when it transitioned from old to new s. 94 trust rules
Where in its pre-2007 years a non-resident discretionary trust recognized FAPI under “old” s. 94(1)(c)(i)(C) from a CFA and then received a dividend from the CFA in 2007 while it was subject to “new” s. 94(3), CRA would recognize that the upward ACB adjustment to the CFA shares that occurred as a result of the FAPI recognized under the old rule could now be considered to be distributed under s. 91(5) notwithstanding the trust’s new status.
Neal Armstrong. Summary of 16 November 2015 Memorandum 2015-0598491I7 under s. 91(5).
Lee – Federal Court of Appeal states that non-judicially authorized requirements made under s. 231.2(1) can be used to obtain documents about third parties
Mandamin J in the Federal Court appears to have interpreted a requirement issued to the individual taxpayer under s. 231.2(1) as potentially asking him to include documentation about assets of corporations of which he was the principal shareholder “that he would only have access to in his capacity as a director or officer of the corporations.” He considered this to be objectionable, perhaps because it looked rather like a disguised third-party demand but without advance judicial authorization (and without the corporations being specifically named, as required by s. 231.2(2)).
Dawson J.A. did not share these concerns, stating:
[T]he scope or breadth of the Requirement is a matter for the Minister, so long as the information requested is required for any purpose related to the administration or enforcement of the Act. Moreover, it is not improper for a requirement to issue that requires information to be provided about a third party.
Neal Armstrong. Summary of MNR v. Lee, 2016 FCA 53 under s. 231.2(1).