News of Note

The taxpayers unsuccessfully argued that as they could not apply GAAR to themselves without CRA intervention, interest did not start accruing respecting denied capital losses until the CRA GAAR assessments. The taxpayers’ arguments were based on s. 245(7), which Hogan J stated had been found by "authoritative dicta" in S.T.B. to apply only to third-party assessments rather than of the primary taxpayers.

The taxpayers did not argue that the "reasonable" tax consequences under s. 245(2) to a tax avoider can only be determined in CRA’s discretion rather than being self-assessed by the taxpayers. Similarly, Hogan J paraphrased s. 245(2) as if it applied automatically rather than depending on an exercise of CRA discretion.  Does automatic application mean that the taxpayer is required to self-assess itself under GAAR in its return for a year in which it has engaged in tax avoidance?  Keeping in mind that the whole point of s. 245(2) is to depart from the specific provisions of the Act and to apply its broader policy, if the taxpayer is required to self-assess, what is it supposed to do other than to report on the basis of any bona fide view it has as to what is reasonable under the policy of the Act?

Neal Armstrong.  Summaries of J.K. Read Engineering Ltd. v. The Queen, 2014 TCC 309 under s. 245(7), General Concepts – Stare decisis and s. 161(1).

Long-term disability payments made by a Canadian employer to an employee who, after becoming disabled, became a U.S. resident, would be considered by CRA to be remuneration ("because they would be amounts arising out of the employment relationship") and therefore usually would be subject to regular source deductions under Reg. 102.

However, the term the term "pensions" is defined in Art. XVIII of the Treaty to include "an amount paid under a sickness, accident or disability plan." Accordingly, the U.S. resident  "could file a Canadian income tax return in order to obtain a refund of any withholdings made in excess of the 15% amount specified in paragraph 2 of Article XVIII."

Neal Armstrong.  Summaries of 26 September 2014 T.I. 2014-0531441E5 under s. 115(2)(c) and Treaties – Art. 18.

The taxpayer incurred legal fees in order to protract the settlement of claims of his separated wife. Although this sounds like a personal matter, Graham J found that the fees had been incurred in order to avoid having to liquidate a private company investment on a disadvantageous basis, so that they were incurred for an income-producing purpose.  However, as by the same token, the fees were incurred to preserve a capital asset, they were non-deductible capital expenditures.

Thus, two generations later, there is continuing fall-out from the misquoting by Kerwin J in Dominion Natural Gas of the traditional formulation of capital expenditure – which referred to "an expenditure… made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade" (British Insulated and Halsby Cables) – as instead including expenditures made "with a view of preserving an asset or advantage for the enduring benefit of a trade."

Neal Armstrong. Summary of Kondor v. The Queen, 2014 TCC 303 under s. 18(1)(a) – legal fees.

The TSX-listed North American Financials Capital Securities Trust achieved indirect exposure to a portfolio of subordinated bank debt instruments by entering into a forward purchase and sale agreement with BMO respecting Canadian securities (which it did not own).  The underlying portfolio was managed by its manager. This forward agreement will cease to be grandfathered from the character conversion rules at the end of 2014. Accordingly, it will be terminated, and there will be a special distribution of the resulting net realized capital gain – and the Trust will acquire the portfolio securities directly and start distributing the net interest income to the unitholders rather than making "tax efficient" distributions.

The disclosure seems to contemplate that the cash portion of the special distribution will be equal only to the tax liability of unitholders resulting from the associated allocation of taxable capital gains.

Neal Armstrong. Summary of North American Financials Capital Securities Trust Circular under Public Transactions – Other – Conversions – Forward Fund to Conventional Fund.