News of Note
Mariano – Tax Court of Canada finds that transactions comprising a gifting tax shelter were shams
Email this ContentThe taxpayers were participants in leveraged donation transactions, which were intended to result in a step-up of the adjusted cost base of courseware licences (e.g., on how to use Microsoft products) under ss. 69(1)(c) and 107(2) to their purported fair market value (with a view to avoiding s. 248(35), which generally limits gift amounts to ACB) before the licences were donated by them to a registered charity ("CCA").
In particular, a Bahamian corporation ("Phoenix") acquired various courseware licenses at a modest cost, and gifted most of them to a Canadian–resident Trust. Ostensibly, the licences then were distributed to the taxpayers as capital beneficiaries of the Trust, with the taxpayers then donating them to CCA. The participants also made cash donations to a second registered charity ("Millennium"), which redonated 80% of those amounts to CCA. The taxpayers knew that their cheques to Millennium would not be cashed until they were accepted as capital beneficiaries of the Trust and, thus, would receive the licences. The taxpayers were issued charitable receipts for three or more times their cash outlay (and perhaps 800 times the cost to Phoenix of the licences).
Pizzitelli J found that the taxpayers lacked "donative intent" as they had no intention to impoverish themselves, so that there were no "gifts" for that reason alone. Furthermore, the gifts were also invalid given that the licences which supposedly were donated had not yet been allocated to the taxpayers at the time they executed their Deeds of Gift (with the Schedule describing the gifted licences not yet attached). Their appointment as capital beneficiaries of the trust and the determinations to distribute the licences to them out of the trust property also were invalid as all this was handled by a promoter-related employee even though the trustee was not authorized in the trust deed to delegate these functions.
Notwithstanding that a capital beneficiary essentially was defined as an individual who had contributed to a registered charity in the year and had applied to be a capital beneficiary of the Trust, Pizzitelli J interpreted the class of beneficiaries as being all Canadians (or others) who had contributed in the year to registered charities, which then rendered the Trust invalid for uncertainty of objects.
The transactions for reasons grounded in the above findings were shams, with Pizzitelli J noting that it was not necessary for the taxpayers themselves to have been involved in the requisite deceit for the sham finding to stick.
The fair market value of the licences was their modest initial cost.
Neal Armstrong. Summaries of Mariano v. The Queen, 2015 TCC 244, under s. 118.1 - total charitable gifts, general concepts - sham, general concepts - fair market value, s. 104(1), and s. 107(2).
Barejo Holdings – Tax Court of Canada takes an expansive view of what is “debt”
An offshore fund, in which the taxpayer had an interest, invested in instruments (styled as "Notes") of non-resident subsidiaries of Canadian banks. Each Note did not bear interest and provided for a payment on maturity that reflected the performance of a matching actively-managed portfolio of assets held by an affiliate of the obligor.
Boyle J found that the Notes were debt for ITA purposes notwithstanding that the offshore fund could have no idea what it would receive on maturity (including any accelerated maturity) until that day arrived, as in his view it was sufficient that there be a liquidated amount only on such maturity. This has the effect of eliminating most of the distinction between debt and various derivatives which also satisfy his basic criteria for what is debt: an amount is advanced or "credited" to acquire the investment; a liquidated amount is payable when it matures (which could be a nil amount); and there is interest (albeit of nil). In fact, he stated that "the concepts of debt and derivatives are not mutually exclusive."
Neal Armstrong. Summaries of Barejo Holdings ULC v. The Queen, 2015 TCC 274, under s. 12(11) – investment contract and Interpretation Act, s. 8.1.
Income Tax Severed Letters 11 November 2015
This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
ACSIS HER (Electronic Health Record) Inc. – Tax Court of Canada finds that modifying an existing software communications package qualified as SR&ED
Campbell J found that modifying a software package, that could have been applied in an advanced country for a nation-wide health information system, so that it could handle the inferior infrastructure in Belize (giving rise to major connectivity issues), qualified as SR&ED, given inter alia that the taxpayer had no reasonable expectation of success with the project unless new knowledge could be developed.
Neal Armstrong. Summary of ACSIS EHR (Electronic Health Record) Inc. v. The Queen, 2015 TCC 263, under s. 248(1) – SR&ED.
CRA rules on transactions whose stated purpose is to shift income from an individual’s professional practice to a family management company
An individual carrying on a professional practice will transfer various employees to a family corporation, with the corporation then charging him management fees, whose stated purposes is to reduce his income, and subject such income instead to (lower) corporate tax before distribution to a family trust which is one of the shareholders.
CRA ruled that the fees incurred by him would be currently deductible under s. 9 "subject to any application of sections 18, 20 and 67." The summary contains the more helpful statement that:
Since the proposed structure does not contravene the laws and regulations governing the [professional] practice… in Quebec, the deduction of fees will not be denied as a current expense.
Neal Armstrong. Summary of 2015 Ruling 2013-0513411R3 F under s. 18(1)(a) – income-producing purpose.
Superior Plus – Federal Court of Appeal confirms that a taxpayer which was assessed under GAAR for a loss shifting transaction was entitled to see the correspondence between CRA and Finance on the subsequently-introduced s. 256(7)(c.1)
When the Superior Plus Income Fund was converted into a public corporation, the chosen corporate vehicle was a public corporation ("Old Ballard") with substantial losses. The transactions were engineered so that there was no acquisition of control of Old Ballard by a group of persons (unless the former income fund unitholders were factually regarded as a group) and so that the former Ballard shareholders and the old assets were removed from Old Ballard.
CRA assessed inter alia under GAAR. The Federal Court of Appeal has now confirmed the finding of Hogan J below that the taxpayer (whose position includes that s. 256(7)(c.1) was originally considered as an "extension" rather than a "clarification" of the loss-streaming rules) is entitled to disclosure of a wide range of documents (and answers to questions) relating to the policy deliberations (not just the final recommendations of the GAAR Committee) that preceded the GAAR assessment of the taxpayer, and respecting CRA cajoling Finance into introducing s. 256(7)(c.1) in response to this transaction. Noël CJ stated that "information pertaining to the policy of the Act, even where it is not taxpayer specific, can be relevant on discovery."
Noël CJ also appears to have found that production by a taxpayer of a particular piece of written legal advice received by it does not entail a waiver of solicitor-client privilege for all its other written legal advice unless allowing the selective disclosure would produce "unfairness and inconsistency."
Neal Armstrong. Summaries of The Queen v. Superior Plus Corp., 2015 FCA 241, under s. 245(4) and s. 232 – solicitor-client privilege.
CRA considers that general insurance agents may not claim a s. 32(1) commission reserve re future claims adjusting services
S. 32(1) permits an insurance agent or broker to deduct a reserve from unearned commissions otherwise included in income under s. 12(1)(a) respecting insurance contracts (other than life insurance contracts) equal to the lesser of a pro rata portion of the commission based on remaining term of the contracts and the amount which otherwise would have been computed under s. 20(1)(m).
CRA considers that the s. 20(1)(m) branch of the reserve "must be [for] an amount described in paragraph 12(1)(a)…that relates to a binding obligation to provide specific types of client support services after the end of the year," so that "services that might be required in relation to claims under the policies (for example, claims adjusting) would not be eligible since they normally would be contingent amounts…[under] paragraph 18(1)(e)." On a global basis, this future rendering of claims-related services might be reasonably anticipated and quantifiable, but would be highly contingent for any particular policy. CRA did not discuss any argument that s. 33(2) of the Interpretation Act (singular includes plural) accommodates such a global approach.
Neal Armstrong. Summary of 20 August 2015 T.I. 2015-0588871E5 under s. 32(1)(b).
CRA rejects CAE and considers that conversion of house inventory to personal use does not give rise to business income then or on subsequent sale
C.A.E. has not changed CRA’s view that the s. 45(1) deemed disposition rules do not apply where a home builder, who initially held a property as inventory, commences to use it a personal use property (PUP), and that "the treatment of any gain on the ultimate sale of the particular PUP would not give rise to a gain or loss on income account."
Neal Armstrong. Summary of 25 September 2015 T.I. 2015-0596921E5 under s. 45(1)(a).
CRA appears to accept that a s. 20(1)(m) reserve can be claimed for an amount included under s. 9 rather than 12(1)(a)
A distributor receives a payment from the manufacturer in consideration for a somewhat diffuse obligation to participate in stipulated marketing activities over the following eight years. Is there an immediate income inclusion, or can it recognize the income over eight years?
CRA indicated that if the amount was received "free of conditions or restrictions respecting its use from the commencement of the contract," it would be included in income under s. 9, and if instead the "acts and obligations which the distributor corporation had to accomplish after the end of the taxation year were sufficiently significant to reach a conclusion that the sum was not earned in that year," then it "could" be included in income under s. 12(1)(a). CRA then stated:
[A]n amount included in the computation of income [under s. 9] by virtue of the realization principle could also come within paragraph 12(1)(a). In such a case and subject to subsection 20(7), the distributor corporation could have the right to deduct a reasonable amount as a reserve if the situation was described in one of subparagraphs 20(1)(m)(i) to (iv).
This indication that an income inclusion under s. 9 might also be regarded as occurring under s 12(1)(a) (in which case a reserve would be available for related future services to be rendered) appears to be an implicit rejection of Burrard Yarrows (suggesting that if income was included under s. 9, no s. 20(1)(m) reserve was available) and an implicit acceptance of Doteasy and Ellis Vision (taking the opposite approach).
Neal Armstrong. Q.9 of 9 October 2015 APFF Roundtable under APFF Roundtable.
CRA does not require 3rd party commitment letters for loss transfer rulings
When asked whether, in a loss consolidation transaction, it matters whether the lossco has a source of funds to cover dividend payments other than the interest income paid by the profitco, CRA responded that in upstream shareholding situations, it will "generally ask for a representation that the issuer of the shares will have other assets from which the dividends will be funded" – and when asked whether it requires a commitment letter issued by a third party to confirm that the proposed transactions are commercially plausible, it responded:
[T]ypically the CRA will request a representation relating to borrowing capacity. In some cases, such as situations where the amount of the debt is substantial, CRA may request a signed letter from a director or other documentation.
Neal Armstrong. Summary of 19 August 2015 T.I. 2015-0589611E5 under s. 111(1)(a).