News of Note
Harding – Tax Court of Canada applies the Chopp principle that a s. 15 benefit is conferred where the shareholder ought to (but did not) know of the benefit
Email this ContentThe taxpayer was the sole shareholder and director of a holding company which, in turn, was the majority shareholder of a logging company, which had been paying significant premiums on insurance policies (arranged by the taxpayer’s stepdaughter, a licensed insurance broker) on the life of the taxpayer and of his spouse and for which, at times, the beneficiaries were his spouse and stepchildren.
In confirming the reassessments of the taxpayer under s. 15(1) in the amounts of the premiums, St-Hilaire J stated:
… Chopp confirmed… that a benefit may be conferred without any intent or actual knowledge on the part of the shareholder if the circumstances are such that the shareholder ought to have known. I find that the circumstances in this appeal are such circumstances. The purchase of policies … for which significant premiums were paid and for which there were several changes to the beneficiaries over several years, is not and cannot be treated as a simple bookkeeping error.
Neal Armstrong. Summary of Harding v. The Queen, 2022 TCC 3 under s. 15(1).
De Geest – Federal Court of Appeal confirms gross negligence penalty where taxpayer’s legal argument had “no merit”
The taxpayer, who stated that he had formed the subjective activity to no longer carry on his work of installing windows and other construction work as a business, was assessed for failure to report $625,157 of business net income generated in three of his taxation years. In rejecting the taxpayer’s position, Webb JA stated:
[T]he appellant … acknowledged that the monies he received were used for his personal and living expenses. He therefore intended to receive monies in excess of the related expenditures … [I]n effect he did have the intention of earning a profit, i.e., the intention of receiving amounts in excess of his expenses.
Notwithstanding that the taxpayer was more coherent than the “natural person” cohort, Webb JA sustained the imposition of gross negligence penalties, stating that “there is no merit in the appellant’s interpretation of the Act.”
Neal Armstrong. Summary of De Geest v. Canada, 2022 FCA 22 under s. 163(2).
Lussier – Court of Quebec finds no taxable benefit in an insurance company employee attending a conference for insurance brokers in Cancun
The taxpayer, was designated by his employer (“BMO,” an insurance company) to attend a one-week conference for insurance brokers and financial advisors whom one of BMO’s managing general agents had identified as top “performers.” During his attendance, the taxpayer put on a 20-minute presentation, but spent most of the time on events, such as snorkeling and catamaran sailing, with the attendees and responding to messages from the BMO office.
In reversing the ARQ assessment to include 62.5% of the cost of the trip in the taxpayer’s income as a taxable benefit, Pilon JCQ stated:
The recreational activities were an opportunity to create or maintain relationships with advisors and brokers. …
… [T]he ARQ's … approach is somewhat penalizing and unfair to Mr. Lussier. His employer did not give him the choice to participate in a trip, on which he went alone, and where he was expected to work and develop business, which he did, both during business hours and beyond. …
[T]he ARQ's position stems either from a misunderstanding of what constitutes the steps required for business development where there is a legitimate growth objective, or from a desire to dictate to a business what its business model should be and how to achieve it. In either case, the ARQ's position is unjustified.
Neal Armstrong. Summary of Lussier v. Agence du revenu du Québec, 2022 QCCQ 9 under s. 6(1)(a).
We have translated 9 more CRA severed letters
We have published a translation of a ruling released by CRA last week and a further 8 translations of CRA interpretation released in July and June, 2005. Their descriptors and links appear below.
These are additions to our set of 1,924 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 16 2/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA finds that an input to a financial institution that was on-supplied by it on a GST-taxable basis at a loss should also be treated as acquired as a financial services input
A listed financial institution acquired technology inputs for its own use and also for making taxable supplies of network services and related equipment to subcontractors to assist them in selling its financial products. However, such taxable charges to them were less than its pro rata cost of the technology package that was being on-supplied to them.
It had been filing its annual GST/HST returns on the basis of claiming ITCs respecting this on-supply equal to the GST/HST it collected from the subcontractors. It later changed its mind and started claiming a pro rata portion of the HST on its technology inputs as an ITC so that it, in effect, was asking CRA to share in the loss it took on that on-supply.
CRA first indicated that going back to change to the ITC method applied in the earlier years violated ETA s. 141.02(17), stating in this regard that “it is clear that the intention of the legislation is not to allow a retroactive ITC claim by a financial institution.” Furthermore, it did not consider the changed method to be acceptable even on a prospective basis, stating that it could be considered that the financial institution:
recognized that a portion of the technology package provided to [subcontractors] was related to its own business when it agreed to share the costs with [the subcontractors] instead of fully billing [the subcontractors] for the cost of the technology inputs. [The Financial Institution] would only incur such a loss on a continuing basis if its real purpose in acquiring the technology inputs was not to earn revenue from supplying the technology package but to earn revenue from the sale of its financial products that must be sold using the technology inputs.
In other words, the discounted pricing to the subcontractors reflected the reality that some of the pro rata cost of the technology inputs was being incurred by the financial institution for the purposes of its own financial services business, so that the previous method had properly capped the amount of the ITC claims.
CRA did not discuss whether this interpretive approach was consistent with the London Life decision (where the fact that an input was on-supplied on a taxable basis trumped the fact that such taxable supply indirected supported a financial services business).
Neal Armstrong. Summaries of 17 August 2020 GST/HST Interpretation 194307 under ETA s. 141.02(17) and ETA s. 141.02(12).
CRA notes that overheads may be direct rather than non-attributable inputs to financial institutions
In the context of general comments on whether a new ITC allocation method proposed by a financial institution for claiming its excluded, direct and non-attributable inputs would qualify as a "direct attribution" (i.e., permitted) method under the somewhat detailed input tax credit methodology rules in ETA s. 141.02, CRA noted that an input treated as an indirect input for cost allocation purposes (for example, certain overhead expenses) may nonetheless qualify as a direct input for s. 141.02 purposes, i.e., “overhead” expenses may often be regarded by CRA as contributing to the making of supplies.
Regarding the use of “causal” allocation of inputs (where tracking of inputs does not work), CRA indicated that “using an allocation base of the relevant employees’ time may be appropriate and could reflect the use of the input; however, an allocation base of employees time may not be used for an input unless the input is used equally amongst all employees included in that base.”
Neal Armstrong. Summary of 9 November 2020 GST/HST Interpretation 210124 under ETA s. 141.02(12).
CRA rules that lump-sum assistance paid to a member of a religious community, who had taken vows of poverty, on his return to secular life, is not income
A member of a religious order, who (along with all the other members) had taken vows of perpetual poverty, would receive a lump sum gift, upon his departure from the community after having decided to return to the secular world, as assistance to compensate for his lack of financial resources (resulting from such vow). The departure amount is determined as: a basic amount plus an additional amount for each year spent in the order; and an amount for each qualifying year the member did not contribute to a pension or retirement plan.
CRA ruled that the lump sum was not includible in his income
Neal Armstrong. Summary of 2021 Ruling 2021-0894621R3 F under s. 3(a).
GST/HST Severed Letters October 2021
This morning's release of 10 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their October 2021 release) is now available for your viewing.
Osborne – Federal Court sets aside a CRA decision to not extend a s. 216 return filing deadline, because CRA did not address the taxpayers’ arguments
Two residents of Bermuda owning a Canadian rental property filed their s. 216 returns nine days after the filing deadline (which was six months after the taxation year end as a result of their having given undertakings under s. 216(4).) In requesting an extension to this deadline under s. 220(3) they alleged that CRA had misapplied their withholding tax payments to their general account rather than their non-resident account, and that much of their delay in filing their returns was attributable to their holding off on filing their returns (with some encouragement from their accountants) until this error was remedied (and they also proffered an excuse of sorts for the remaining portion of the delay).
Before returning the CRA rejection of their extension request (the “Decision”) for redetermination by another decision maker on the basis that (to quote Vavilov) the Decision did not “exhibit the requisite degree of justification, intelligibility and transparency”, Go J stated:
No mention was made [in the Decision] of the Applicants’ argument about the error made by the CRA in allocating withholding tax remittances to the wrong account or the delay by CRA in remediating the problem with the remittances. It may well be the case … that the error in the tax remittances was not made by the CRA or alternatively …that the Applicants could have filed the NR Returns before the filing deadline. However, that was not stated in the Decision.
Neal Armstrong. Summary of Osborne v. Canada (Attorney General), 2022 FC 122 under s. 220(3).
CRA releases its initial list of notifiable transactions
Draft s. 237.4 provides a requirement for taxpayers, advisors and others to report transactions to CRA that are designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance as transactions of a notifiable type. Although s. 237.4(3) is stated to be effective January 1, 2022, the substantial penalties applicable under draft s. 237.4(8) (subject to the due diligence defence under draft s. 237.4(12)) do not apply to transactions entered into before Royal Asset. The transaction types set out so far are:
- A corporation holding assets that are or will become investment assets continues from Canada to the corporate laws of a foreign jurisdiction, thereby ceasing to be a “Canadian corporation” and a CCPC (so that it is not subject to additional tax under ss. 123.3 and 123.4).
- Alternatively, it issues special voting shares, redeemable for a nominal amount, or options to acquire a majority of its voting shares, to a non-resident person or a public corporation so as to avoid CCPC status.
- A taxpayer seeks to avoid the s. 18(19) straddle-transaction rules by acquiring a partnership interest in a partnership that had an accrued loss and gain on the two legs of an FX straddle, with the closing of such acquisition being immediately preceded by the closing out by the partnership of the gain leg so that such gain is allocated to the vending partner pursuant to s. 96(1.01) – and with the loss leg realized after the acquisition and allocated to the taxpayer.
- With a view to effectively extending the 21-year period under s. 104(4):
- A Canadian resident trust (“Old Trust”) transfers capital property or land inventory to Holdco (which is held by a new Canadian resident trust (“New Trust”) and is also a beneficiary of Old Trust) on a tax deferred basis under s. 107(2); or
- A trust having non-resident beneficiaries transfers property (other than as described in s. 128.1(4)(b)(i), (ii) or (iii)) to a corporation (Holdco) of which such beneficiaries are shareholders and which also is a trust beneficiary, so that there is an indirect transfer out to the non-residents; or
- Opco, is held by Old Trust, one of whose beneficiaries is Holdco (also Canadian-resident), which is a beneficiary of Old Trust and whose shares are held by New Trust. Opco redeems its shares held by Old Trust for a promissory note or cash, and Old Trust distributes and designates the resulting s. 84(3) dividend under s. 104(19) so that Holdco receives the s. 112(1) deduction and receives high-basis assets.
- There is a temporary assignment of a debtor into bankruptcy to avoid a forgiven amount under the exception in (i) of the forgiven amount definition, with the bankruptcy then being annulled, for example, upon a court approval of a proposal.
- There are various listed transactions which are aimed at identifying situations where taxpayers rely on “one of the main reasons” or a “one of the reasons” tests in ss. 256.1(2), 256.1(4), and 256.1(6) not being satisfied so as to conclude that the “attribute trading” rules in s. 256.1(3) or 256.1(6) do not apply to transactions or events that would otherwise have satisfied all of the other conditions enumerated within those provisions.
- A relevant non-resident in respect of a taxpayer (NR1) enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
- Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.
Neal Armstrong. Summaries of Income Tax Mandatory Disclosure Rules Consultation: Sample Notifiable Transactions (Finance Release Webpage), 4 February 2022 under s. 123.3, s. 18(19), s. 104(4)(b), s. 80(1) – forgiven amount – (i), s. 256.1(6), s. 18(4) and s. 212(3.1).