News of Note
Revenue Quebec interprets the purpose test in the Canadian exploration expense definition narrowly
Email this ContentRevenue Quebec considers that expenses which are incidental to mineral exploration work qualify as Canadian exploration expense only if they are necessary for the performance of the work (which implicitly entails a review of the company’s business judgment). This interpretation does not appear to accord with the CEE definition which, in its relevant aspect, requires only that the expense have been incurred for the purpose of finding or assessing a mineral resource.
Subpara. (v.1) of (f) the CEE definition excludes an expense, incurred before a new mine comes into production in reasonable commercial quantities
that results in revenue or can reasonably be expected to result in revenue earned before the new mine comes into production in reasonable commercial quantities, except to the extent that the total of all such expenses exceeds the total of those revenues.
The apparent CRA position is that this provision can extend to revenue (e.g., from the sale of gold recovered in sampling operations, or from mill operations prior to a quarter in which it has not operated continuously at 60% of capacity) that arises in a year subsequent to that in which the expenses are incurred. This can give rise to very difficult allocation and matching issues.
Neal Armstrong. Summaries of Emmanuel Sala, "Flow-Through Share Financing: Recent Developments, Traps and Tips," 2015 CTF Annual Conference draft paper under s. 66.1(6) – Canadian exploration expense – (f), s. 66(12.6)(a), s. 66(15) – flow-through share.
Joint Committee Submission provides illustrations of the potential lack of integration under the new s. 55(2) rules and potential circularity issues arising on late capital dividend elections
The Part IV tax exception from the application of s. 55(2) has been narrowed so that it does not apply where there has been a refund of the Part IV tax as a consequence of a dividend payment by the corporation , even where this occurs on the payment of a taxable dividend to an individual shareholder.
A Joint Committee Submission attaches examples which the Committee had informally provided to Finance earlier in 2016. They illustrated concerns that this change to the Part IV exception distorted the integration system, producing results that could be either more or less favourable than intended. The more favourable results depend in part on having the ultimate individual shareholder accessing the capital dividend account generated from the application of s. 55(2) under the new rules.
The submission also illustrates the uncertainty regarding potential circularity arising in connection with late capital dividend elections: after the generation of a full dividend refund on a dividend paid to an individual so that the paying Holdco becomes subject to a s. 55(2) capital gain, a late s. 83(2) election is made to convert part of the dividend into a capital dividend based on s. 55(2) having generated a capital gain – but this reduces the amount of the s. 55(2) gain.
Neal Armstrong. Summary of Bruce Ball, Ken Griffin, Rick McLean, Eric Xiao, “Subsection 55(2) material and Part IV,” Submission of the Joint Committee, 13 October 2016 under s. 55(2).
CRA confirms that AgriInvest accounts do not taint mooted family farm or fishing corporations
Under the AgriInvest program (and the similar Québec program), if a farmer contributes up to 1% of his allowable net sales (or $15,000, if less) to an AgriInvest account, the federal and provincial government will together fund a matching contribution. The account can accumulate from year to year until it is used to recover from small income shortfalls, or make investments to reduce on-farm risks. CRA indicated that, as these accounts are "net income stabilization accounts,” their amounts are deemed by s. 110.6(1.1) to be nil for purposes of the "share of the capital stock of a family farm or fishing corporation" definition, i.e., a corporation would not be tainted by holding such an account.
Neal Armstrong. Summary of 30 June 2016 External T.I. 2015-0583561E5 Tr under s. 110(1.1).
Aubrey Dan Family Trust – Ontario Superior Court finds that an original assessment not dealing with tax in a particular province starts the normal reassessment period for that province
A purported Alberta trust which wanted to have more time to make submissions to CRA that it was not resident in Ontario provided a related waiver on the prescribed (T2029) federal form. When it was ultimately reassessed for Ontario income tax (with the previously assessed Alberta tax being reversed) it unsuccessfully argued that the waiver was invalid because the T2029 form did not refer to the fact that it was a prescribed form for provincial purposes.
More interestingly, Lederman J also rejected the counter-argument of the Crown that, as the 2008 assessment had not dealt with Ontario taxes, it was the 2012 “reassessment” which in fact was the original assessment of the taxpayer’s Ontario tax (so that the normal reassessment period did not start running until then). He stated (at para 17):
… If the original notice does not constitute notification of no tax payable in all provincial or territorial jurisdictions, then a taxpayer receiving such a notice, could be assessed for income taxes in any other province or territory indefinitely. …
Neal Armstrong Summary of Aubrey Dan Family Trust v. Minister of Finance, 2016 ONSC 3801 under Taxation Act, 2007, s. 158 and ITA s. 152(4).
Debt forgiveness could trigger Ontario CMT
A forgiven amount will increase a corporation’s adjusted net income for Ontario corporate minimum tax purposes (assuming that the forgiven amount is income under GAAP).
Neal Armstrong. Summary of July 2016 External T.I. 2015-0595481E5 under Taxation Act, 2007, s. 54(2)(a).
Older severed letters are being uploaded
We will gradually be going backwards in time and uploading older CRA severed letters. The severed letters that originally were released in the March to September 2012 period are now available. If you want to see how many people have looked at each bundle, you can go to the STATS page.
CRA states that no s. 110(1)(d) or (d.1) deduction is available when an employee stock option is settled through the issuance of shares for its in-the-money value
A Canadian-controlled private corporation issues treasury shares to the employee holder of a stock option (with a fair market value exercise price) equal in value to the in-the-money value of the option. CRA found that as s. 7(1)(b) rather than s. 7(1)(a) applied to this disposition of the employee’s rights, the s. 110(1)(d.1) deduction was not available – and then went on to find that the s. 110(1)(d) deduction was not available for the same reason, stating:
[S]ubparagraph 110(1)(d)(i) will not be satisfied as an employee does not “acquire the share under the agreement”, as required under subparagraph 110(1)(d)(i).
S. 110(1.1) was not discussed.
Neal Armstrong. Summaries of 3 August 2016 External T.I. 2015-0572381E5 under s. 7(1)(b), s. 110(1)(d) and s. 110(1)(d.1).
Income Tax Severed Letters 12 October 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Further full-text translations of severed letters are available (2016-10-12 update)
The table below links to this week's new translations of French severed letters. The translations are paywalled in the usual (4-days per week) manner.
Lamarre ACJ states that judges should only question witnesses after the completion of cross-examination
In a paper, Lamarre ACJ commented on procedures for the questioning of witnesses from the bench:
Some Tax Court judges do intervene in the questioning of witnesses. For instance, when a taxpayer lacks credibility, the judge can ask him or her more questions. However, in such cases, the judge must be cautious to only intervene at the end of the witness's examination and cross-examination. The judge must then offer the parties the opportunity to ask any questions to the witness on the particular points raised by the judge. In specific cases where the taxpayer and his or her witness are credible but there is doubt as to why the minister assessed, more questions can be posed to counsel and witnesses for the Crown.
Neal Armstrong. Summary of Lucie Lamarre and Isida Ranxi, "Taxpayer Rights and Voluntary Compliance: The Example of the Canadian Judiciary," Tax Notes International, 3 October 2016, p. 61 under General Concepts – Evidence.