News of Note
Construction PCA – Court of Quebec finds that assessing a late-filing penalty for a s. 85 election does not preclude assessing the election as invalid
Email this ContentThe ARQ issued a penalty assessment for the late filing of the Quebec equivalent of amended s. 85(1) election forms – then, when it learned from CRA that no shares had been issued by the transferee at the time of the drop-down and that such shares were only purportedly issued after the fact upon CRA identifying this deficiency, assessed the transferor taxpayer on the basis that the drop-downs had not occurred on a rollover basis (but without cancelling its separate penalty assessment).
Lareau JCQ rejected the taxpayers’ submission that, by issuing the penalty assessments, the ARQ had accepted the late elections and should not have issued further assessments now denying rollover treatment without having cancelled the previous assessment.
Neal Armstrong. Summary of Construction PCA Inc. v. Agence du revenu du Québec, 2019 QCCQ 8876 under s. 85(7).
Grewal – Federal Court finds that an accepted voluntary disclosure that included loans did not stop CRA from later assessing s. 163(2) penalties for failure to include them in income
A voluntary disclosure included a description of various loans and did not volunteer that they gave rise to taxable benefits. After the voluntary disclosure was accepted through reassessments, a subsequent audit of one of the taxpayer’s companies caused CRA to conclude that these loans gave rise to additional income under s. 246(1) of $15M to the taxpayer for years that had been covered by the voluntary disclosure, and CRA not only reassessed for these s. 246(1) benefits, but also included gross negligence penalties of over $3M.
In dismissing the taxpayer’s application for judicial review of the decision to impose the penalties, Shirzad J stated (at paras 37 and 38):
… If taxpayers could re-characterize taxable income or benefits as non-taxable benefits in their applications to the VDP and thereby escape penalties from future audits for having “disclosed” the amounts in this application, it would be contrary to the purpose of the VDP and its public policy rationale, which is meant to promote compliance with Canada’s tax laws … .
[T]o interpret the Information Circular as promising protection from penalties even on the non-taxable amounts disclosed by the taxpayer would put taxpayers applying to the VDP in a better position than the ordinary taxpayers.
Neal Armstrong. Summary of Grewal v. Canada (National Revenue) 2020 FC 356 under s. 220(3.1).
CRA denies that there is a technical glitch in the “total charitable gifts” definition
As a result of the death of the beneficiary of a (life-interest) trust described in s. 104(4)(a)(ii.1), the trust’s taxation year ended on the day of death (the “Death-Date Year”) and a new taxation commenced immediately thereafter (the “Post-Death Year”). A life-interest trust (described in s. 104(4)(a)(ii.1)) made a gift of non-depreciable capital property in the taxation year commencing immediately after the beneficiary’s death (the “Post-Death Year”) and prior to the trust’s filing-due date for the taxation year ending with that death (the “Death-Date Year”).
When asked about this, CRA did not seem to be troubled that, although (c)(ii)(C) of “total charitable gifts” in s. 118.1(1) contemplates that a gift made by the trust in the Post-Death Year could be included in the total charitable gifts of the trust in the Death-Date Year, variable B of s. (a)(iii) of “total gifts” in s. 118.1(1) (calculating the numerical maximum for recognized gifts) refers only to the proportion of an individual’s taxable capital gain for a taxation year in respect of a gift made by the individual in the taxation year (e.g., the Death-Date Year). Thus, the trust’s “total gifts” for the Death-Date Year could include the eligible amount of the gift of capital property made in the Post-Death Year.
Neal Armstrong. Summary of 27 January 2020 External T.I. 2019-0799641E5 under s. 118.1(1) - “total gifts” - (a)(iii) – B.
Finance announces that CRA is suspending most audit activity
Today’s Finance release on the response to COVID-19 included the statement:
The Canada Revenue Agency will not contact any small or medium (SME) businesses to initiate any post assessment GST/HST or Income Tax audits for the next four weeks. For the vast majority of businesses, the Canada Revenue Agency will temporarily suspend audit interaction with taxpayers and representatives.
It is unclear whether the SME definition is using the VDP cut-off of “corporations with gross revenue in excess of $250 million in at least two of their last five taxation years, and any related entities” or something else, and there is no definition of “vast majority.”
In a somewhat related CRA Memorandum to Employees dated yesterday, auditing was not mentioned as a critical function, and a move to remote work was briefly discussed.
Neal Armstrong. Summary of Canada’s COVID-19 Economic Response Plan: Support for Canadians and Businesses 18 March 2020 under s. 152(1).
Chen v. TD Waterhouse – Ontario Superior Court of Justice finds no duty of stock brokers to provide cost information on individual T-5008s
Consistent with the industry practice, TD Waterhouse sent to CRA individual T-5008 forms for each sales transaction of the taxpayer (Mr. Chen) that showed the securities’ proceeds but did not complete the box for the securities’ cost. However, TD Waterhouse provided Mr. Chen with a T-5008 Summary which provided the cost, sale price, and gain/loss figures for each series of securities in the aggregate, thereby providing the information he needed to prepare his tax return for the year in question (2009). However, in that year he had net trading losses and minimal employment income, so that his accountant advised him that it was unnecessary to file a return for that year (2009), contrary to the return-filing requirement of s. 150(1.1)(b)(ii). CRA then used the information in the individual T-5008 forms to assess Mr. Chen for $4.1M in tax and interest (i.e., effectively treating the securities as having a nil cost). Mr. Chen ultimately filed his 2009 income tax return and had the erroneous tax assessment corrected, but nonetheless sued TD Waterhouse.
In finding that Mr. Chen had no cause of action, Myers J stated:
Mr. Chen offers no basis to argue that the law might recognize a duty of care on stockbrokers to provide cost information in T-5008 reporting slips to protect the customers from the risk of harm if they unlawfully failed to file their income tax returns and then CRA took aggressive enforcement positions. TD Waterhouse provided Mr. Chen with all applicable cost information in its T-5008 Summary so that he could file his income taxes as required by law.
Neal Armstrong. Summary of Chen v. TD Waterhouse Canada Inc., 2020 ONSC 1477 under Reg. 230(2).
Income Tax Severed Letters 18 March 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Denso – Federal Court finds that CRA had reasonably not accepted a late ETA s. 156 election where the companies had carelessly not found out about the new filing requirement
S. 156(4)(b)(ii) permits the Minister to allow a late-filed ETA s. 156 nil consideration election. Due to confusion as to the required effective date of the new requirement to file such elections with CRA rather than merely keeping signed copies on hand, and in response to a CRA audit inquiry in this regard, two closely related companies filed (somewhat late) an election with a stated effective date of January 1, 2016, not January 1, 2015. On a subsequent audit of the 2015 year, CRA focused on this error, and (in November 2017) the companies filed a request to have an amended election accepted with the correct effective date (of January 1, 2015). This was rejected, and assessments for over $30M were made of the 2015 year.
In rejecting a request for judicial review of CRA’s refusal to accept the late-filed amended election, Zinn J stated:
The Denso Companies say that their actions were not negligent nor careless given they had hired and relied on the advice of tax consultants who provided them erroneous advice. … [T]he consultant was contacted after a well-published deadline had already passed, and only after the Denso Companies were alerted to the need by the review officer in February 2016. It was open to the Minister to conclude, as was done, that the Denso Companies had not taken adequate precautions to keep abreast of their compliance obligations, actions that amount to carelessness and negligence.
Neal Armstrong. Summary of Denso Manufacturing Canada Inc. v. Canada (National Revenue) 2020 FC 360 under ETA s. 156(4)(b)(ii).
CRA is now letting professionals’ authorizations continue after a deceased individual’s death effective February 2020
In May of last year, CRA stated:
Starting in May 2019, online authorizations for deceased business taxpayers will not be terminated upon receipt of the date of death. They will continue until 1) they are cancelled by a legal representative (ex. an executor) or by the authorized representative themselves, or 2) upon the arrival of the expiry date that was provided on the signed consent form.
The same criteria will be extended to authorizations for individual (T1) clients in February of 2020.
Neal Armstrong. Summary of May 2019 CPA Alberta CRA Roundtable, ITA Session – Q.20 under ITA s. 70(2).
CRA indicates that adding a closely related party to ETA s. 156 elections does not require revocation of previous elections
CRA indicated that when the parties to a nil consideration (ETA s. 156) election (say, Company A and B) wish to add another member of the closely related group (Company C) as an electing party, it is not necessary to revoke the existing election, and it is sufficient for “Company C [to] simply file a new election naming Company A and B as closely related members.” However, if one of the three companies wished to leave the group, the filing of two revocations would be required.
Neal Armstrong. Summary of May 2019 CPA Alberta CRA Roundtable, GST Session – Q.20 under ETA s. 156(4).
BHP Billiton – High Court of Australia finds that one company is influenced by the other under a stapled structure where both companies are contractually bound to act in concert
BHP Billiton Limited ("Ltd"), an Australian corporation, was part of a dual-listed company arrangement (the “DLC Arrangement") with BHP Billiton Plc ("Plc"). The question of whether Ltd. was required to recognize the approximate Australian equivalent of FAPI on the resale profits of a Swiss subsidiary (in which it indirectly held a 58% interest and Plc indirectly held a 42% interest) on commodities that the Swiss sub had purchased from Plc subsidiaries turned on whether those subsidiaries were “sufficiently influenced” by Ltd. The definition of this concept stated:
a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts).
This definition is perhaps somewhat broader that the reference in ITA s. 256(5.1) to “any direct or indirect influence that, if exercised, would result in control in fact.”
In finding that this test was satisfied, the Court noted inter alia that under the agreements governing the DLC Arrangement, Ltd and Plc were required to operate "as if they were a single unified economic entity", through common boards of directors, and were also required to operate through "a unified senior executive management.”
The Court stated:
[T]he fact that Ltd and Plc operated in this way pursuant to a contract does not preclude a finding that they "sufficiently influenced" each other – otherwise, any company would be able to place itself outside the reach of the statute (of being "sufficiently influenced" by another company) by forming a contract to govern their relationship.
The Court implicitly rejected a dissenting view in the Court below that “to act in concert with a common aim and mutuality of interest was not to act in accordance with the directions, instructions or wishes of another entity.”
Neal Armstrong. Summary of BHP Billiton Limited v Commissioner of Taxation [2020] HCA 5 under s. 256(5.1).