News of Note
Louie – Tax Court of Canada places a temporal limitation on the advantages considered to arise from TFSA swap transactions
Email this ContentFrom May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed TFSA and her taxable trading account at a discount brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The transfers were made near the close of trading for the day, and at the high price if she was transferring out of her TFSA, and at the low price where she was transferring in. She ceased directing the swaps on the introduction of specific “swap transaction” rules effective October 17, 2009. However, she was assessed under s. 207.01(2) in amounts equalling 100% of the increase in the fair market value of her TFSA in 2009, 2010 and 2012 of $200,795, $70,841 and $29,217, respectively (her TFSA having decreased in value in 2011), on the basis that those FMV increases were “advantages” described in s. (b)(i) of the s. 207.01(1) definition.
Lamarre ACJ found that the swaps were a series of transactions described in s. (b)(i), i.e., they were transactions that “would not have occurred if the parties had been dealing at arm’s length and were acting prudently, knowledgeably and willingly” and she inferred that one of the main purposes of the series was to benefit from the ability to ultimately withdraw amounts from the TFSA tax-free.
She concluded that although it was reasonable to regard the 2009 increase in the FMV of the TFSA as being directly or indirectly attributable to the series of swaps, she did not consider that it was reasonable to so regard the 2010 and 2012 increases. She was troubled that the attributable test had “no easily defined or delineated end point … regarding the length of time during which an increase may still be attributed to an impugned transaction” and noted that “A more restrictive interpretation of paragraph (b) … avoids these difficulties.” Accordingly, she concluded that the 2010 and 2012 FMV increases should be attributed to the stock market appreciation in those years rather than to the 2009 swaps.
Neal Armstrong. Summaries of Louie v. The Queen, 2018 TCC 225 under s. 207.01(1) – advantage - s. (b)(i), s. 207.05(3), s. 248(10) and General Concepts – FMV - shares.
Lee – Tax Court of Canada rejects reassessments treating a Quebec discretionary trust as a sham
The taxpayer, Mr. Lee, a resident of B.C., engaged in a tax avoidance plan involving a spousal trust (intended to be resident in Quebec) which avoided provincial tax on a deemed dividend received on the redemption of shares in the trust’s hands. The Trust’s trustee (Mr. Paris) was a retired KPMG accountant. The Trust elected to be taxed federally on a deemed dividend from a share redemption it had distributed to its beneficiary (Mrs. Lee) but did not elect to be taxed on this same income in Québec. Since the beneficiary was not a resident in Québec, no provincial tax was paid on the distributed income. Nevertheless, the Trust received the federal abatement. The Province of Québec subsequently enacted retroactive tax legislation that deemed the Trust to have elected to be taxed on the distributed income in Québec. However, CRA reassessed Mr. Lee on the basis that the Trust that he purportedly settled did not exist either because the trust or the transfer of property to it was a sham.
In the course of rejecting the CRA position, Owen J stated:
Creating legal (or equitable) relationships to give effect to a tax plan is not the perpetration of a sham. In this case, there was no deceit on the part of the Appellant or Mr. Paris regarding the legal relationships created under Québec law. …
[E]ven if the Appellant’s sole reason (motive) for creating the Trust and transferring the … Shares to the Trust was to save tax, that is not in and of itself evidence of a sham.
Neal Armstrong. Summary of Lee v. The Queen, 2018 TCC 230 under General Concepts – Sham.
CRA characterizes the wind-up of a CFA into three shareholders as a transaction in which it is merged to form three corporations
Subject to exceptions, if a capital loss realized on the transfer by Canco of shares of a controlled foreign affiliate is suspended under s. 40(3.4), the loss will cease to be suspended when that CFA is wound-up. One of such exceptions is in s. 40(3.5)(c)(i), which effectively provides that there is no de-suspension if the CFA is merged such that there is a corporation formed on the merger (which then is deemed to own the CFA’s shares). In 2017-0735771I7 and 2018-0745501C6, the Directorate considered that s. 40(3.5)(c)(i) so applies if the CFA is wound-up on a rollover basis under s. 95(2)(e) or s. 88(3) into a parent.
CRA has now stretched s. 40(3.5)(c)(i) even further, and found that it applies if the CFA is wound-up into its three shareholders, having regard to ss. 33(2) and 3(1) of the Interpretation Act ("Words in the singular include the plural … unless a contrary intention appears.") This thus means that CRA regards all three former shareholders as being corporations that were formed on the “merger” and that own the CFA shares. CRA did not discuss what happens if one or two of the corporations subsequently ceases to exist.
Neal Armstrong. Summary of 25 June 2018 Internal T.I. 2017-0737151I7 under s. 40(3.5)(c)(i).
Applewood – Tax Court of Canada finds that a car dealer who promoted and processed credit insurance to its customers was supplying a GST/HST exempt “arranging for” service
A car dealer entered into a “Dealer Agreement” with a distributor of credit insurance products under which it was agreed that it would “up sell” the insurance products and assist the car customers in applying for the insurance in consideration for a commission of over 50% of the insurance premium. Pizzitelli J applied the single supply doctrine in finding that the predominant element of what was being supplied by the dealer was an exempt supply of arranging for the insurance – and that the exclusion in (r.4) of the definition of an exempt financial services for promotional and various administrative services did not apply. He stated:
…[T]he “purchaser” whose perspective one must objectively look through is the consumer of the end supply that is the subject matter of the transaction. In our case, that is the car buyer who buys the insurance product and he would clearly and objectively know he was buying insurance, not the expertise or training, or commercial efficacy or profitability of the Dealer or its staff as the predominant elements of the transaction, notwithstanding that such services … may have an ancillary role to play in his decision making process… . There is simply no merit to the Respondent’s argument that the services or duties under the Dealer Agreement that may be said to be owed to [the distributor] from the Appellant constitute the predominant element of the services to be provided under the Dealer Agreement… .
Neal Armstrong. Summary of Applewood Holdings Inc. v. The Queen, 2018 TCC 231 under ETA s. 123(1) – financial service – (r.4).
CRA confirms that outside basis is not lost on a horizontal short-form amalgamation
CRA noted that its position in S4-F7-C1, para. 1.74 that
Where shares of a predecessor corporation are cancelled for no consideration pursuant to a short-form horizontal amalgamation, the adjusted cost base of such cancelled shares to the shareholder will be added to the cost of the common shares of the new corporation which are deemed to have been received by the shareholder on the amalgamation under subsection 87(1.1).
is based on a 1999 Technical Interpretation (9830205).
Neal Armstrong. Summary of 15 August 2018 Internal T.I. 2018-0749931I7 under s. 87(4).
Tournier – Tax Court of Canada finds that file storage fees incurred after business cessation were deductible
A retired member of Nova Scotia bar was permitted to deduct $1200 of annual storage fees for client files notwithstanding that her practice had ceased two years’ previously. After noting that retention of the client files was professionally recommended, Bocock J stated that deductibility was “consistent with the notion of unavoidable expenses necessarily expended in future years referable to previous income contemplated in … Poulin, Raegele and Langille.”
Neal Armstrong. Summary of Tournier v. The Queen, 2018 TCC 229 (Informal Procedure) under s. 18(1)(a) - start-up and liquidation costs.
Income Tax Severed Letters 21 November 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Mazraani – Supreme Court of Canada finds that the Tax Court’s pressuring witnesses to speak in English, not French, required a new hearing
A laid-off “independent contractor” (Mazraani) appealed to the Tax Court on the basis that he had instead been employed in insurable employment for EI purposes. At the hearing, his alleged employer (Industrial) was an intervenor and called witnesses whose testimony in French would not have been understood by Mazraani. Rather than providing Mazraani with an interpreter, the Tax Court Judge exerted pressure on Industrial's witnesses to testify in English, which counsel for Industrial communicated was problematic. Industrial’s counsel also had to make his legal arguments in English, even though this was difficult.
Before affirming the decision of the Federal Court of Appeal ordering a new hearing before a different judge in response to these violations of the witness’s and counsel’s language rights under s. 133 of the Constitution Act, 1867, s. 19 of the Charter and s. 14 and 15 of the Official Languages Act, Gascon and Côté JJ stated:
[E]ven if there was no error in the decision on the merits, the language rights in question would be compromised if no remedy was granted
… [A] new hearing will generally be an appropriate remedy for most language rights violations. …
The judge’s insistence that [Industrial’s counsel] speak English during most of his argument constitutes a flagrant violation of the lawyer’s language rights.
… [T]he order for a new hearing was fully justified. … The violations were numerous and, in some cases, serious and repeated, and they brought the administration of justice into disrepute.
Neal Armstrong. Summary of Mazraani v Industrial Alliance Insurance and Financial Services Inc. et al, 2018 SCC 50 under Charter s. 19.
The B2B loan rules can render funding received from a non-resident bank subject to withholding tax
A borrowing by Canco directly from a non-resident bank would not give rise to Part XIII tax on the interest. However, if the bank lends to a non-resident corporation in the group (NR1), and NR1 in turn on-lends to group companies including Canco, Canco’s borrowing may now become subject to withholding tax.
In particular, suppose that CA and NR2 (another group company) pledged assets to secure NR1's borrowing, so that the bank has a right to sell the pledged assets on default. If the bank has a "specified right" granted by NR2 which secures repayment of NR1's borrowing, then the bank would not be an "ultimate funder". As the grantor of a specified right, NR2 would become a "relevant funder."
The NR2 pledge supports NR1’s borrowing, and not CA’s borrowing, and such NR1 borrowing does not appear to be an amount described in the relevant exclusions from the “specified right” definition. Accordingly, the B2B rules would apply, and withholding tax would generally apply.
Had the bank lent the funds directly to Canco, with NR2 provided security for that borrowing, the carve-outs from specified right likely would have applied.
Neal Armstrong. Summaries of Nik Diksic and Sabrina Wong, “Cross-Border Lending Practices,” 2017 CTF Annual Conference draft paper under s. 212(3.6)(a), s. 212(3.8), s. 212(3.1)(c)(ii), s. 212(3.1)(d) and s. 20(1)(c)(i).
6 further translations of CRA French-language interpretations are available
The table below provides descriptors and links for six Interpretations released in January 2013 (including three 2012 APFF Roundtable items), all as fully translated by us.
These are additions to our set of 690 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 5 3/4 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.