News of Note

CRA, which had been auditing the taxpayers -Dr. Smith, a physician and his Ontario professional corporation - learned of a USB key that included accounting data for Caymans corporations controlled by Dr. Smith. Dr. Smith initially had brought the USB key to Canada and provided it to his Canadian accountants, but they had sent it to their Buffalo office, which had the requisite software to extract the information on the key. The Minister issued request letters in October 2020 effectively requesting, pursuant to s. 231.1, information on the USB key along with certain other information. Although the Minister brought compliance applications in April 2021, this hearing dealt only with the taxpayers’ application for judicial review of the request letters.

After having indicated that the reasonableness of the letters turned on a test of whether there may be considered to be “a rational connection … between the information sought and the administration and enforcement of the ITA,” Fothergill J rejected a submission that the request letters sought foreign-based information and that they should have been issued under s. 231.6, stating:

I am satisfied that Dr. Smith is being audited with respect to potential unreported income and assets from his offshore holdings. His long association with, and ownership interests in [the two offshore companies] are sufficient to establish that the requests for information respecting the two entities are rationally connected to the audit of Dr. Smith personally. ...

… I am not persuaded that the evidence in this case is so compelling that it was unreasonable for the Minister to proceed otherwise than under s. 231.6 of the ITA. … [A] taxpayer cannot transform domestic-based information into foreign-based information merely by moving it outside the country.

He went on to note that, in dismissing the judicial review application, all he was deciding was that the request letters were not unreasonable - and that Dr. Smith would still have an opportunity (e.g., by adducing evidence relevant to the location of the material) “to equip the Court to decide whether a compliance order should be issued” in the subsequent hearing.

Summary of Frank C. Smith Medicine Professional Corporation v. Canada (National Revenue), 2022 FC 29 under s. 231.1(1).

Reg. 6801(a)(v) requires the terms of a qualifying deferred salary leave plan (“DSLP”) must provide for the employee to return to regular employment after the DSLP leave of absence for a period of not less than the leave period - so that it is impermissible for the employee to retire immediately following the leave. CRA indicated:

• If it was evident that an employee had entered into the arrangement with an intention to immediately retire following the leave, then the arrangement would never have qualified as a DSLP and CRA, on this view of matters, would assess on the basis that no salary had been deferred at all under the purported DSLP.
• Conversely, if the arrangement initially met the DSLP conditions but, later, the employee or employer ceased to abide by the conditions, the employer would be required to terminate the arrangement and pay all deferred amounts plus any unpaid interest under the arrangement (less source deductions) to the employee within a reasonable period of time (thereby resulting in an employment income inclusion to the employee in that year).
• CRA generally “would consider 60 days to be a reasonable period of time for the employer to terminate the arrangement and pay the amounts to the employee.”
• If the payment was not made within a reasonable period of time, the arrangement would become subject to the salary deferral arrangement rules in the taxation year when it first became known that the arrangement no longer satisfies the DSLP rules, resulting in employment income inclusions for that year.

Neal Armstrong. Summary of 14 June 2021 External T.I. 2021-0896151E5 under Reg. 6801(a)(v).

A registered charity (not qualifying as a hospital authority) which currently operated a palliative care facility and had applied for and received the public service bodies rebate (of 83% of its GST costs) for the period after its commencement of operation, also applied for that rebate (rather than only the “ordinary” charity rebate of 50%) regarding its costs incurred during the construction period. It argued that it had acquired property and services during the construction period for the purpose of making eligible facility supplies (i.e., very broadly, exempt health care services provided under practitioners’ supervision).

In ruling against this claim, CRA noted that the definition of qualifying facility for a fiscal year included a requirement that the supplies of services ordinarily rendered “during that fiscal year” qualified as facility supplies, so that the facility did not qualify during the pre-opening phase.

Neal Armstrong. Summary of 13 July 2021 GST/HST Ruling 212992 under ETA s. 259(2.1).

2020-0861031C6 indicated that, in a spin-off by a “distributing corporation” (DC) to the “transferee corporation” (TC), CRA will monitor whether there has been an appropriate reduction in the adjusted cost base (ACB) of the shares of DC. Leaving aside safe income matters, CRA considers there to be a misalignment if the aggregate ACB of DC shares held by the taxpayer before the spin-off exceeds the aggregate ACB of the remaining DC shares held by the taxpayer after the spin-off, plus the ACB of the spin property (on the assumption that TC is wound up, resulting in the taxpayer directly holding the spin property).

However, CRA indicated that the additional ACB that may be created by the capitalization of safe income (so as to become ACB) must be taken into account. It would appear that, to be compliant, the ACB of the DC preferred shares (which will be cross-redeemed and cancelled under the spin-off), plus the direct safe income (DSI) and indirect safe income (ISI) transferred (i.e., in the case of ISI, through the transfer of shares) to TC, should at least equal the ACB of the spin property (including, where the spin property is shares, safe income that can be capitalized).

The conventional spin-off mechanics involve the creation of cross-shareholdings and a cross-redemption, resulting in the aggregate ACB of the DC shares held by the taxpayer after the spin-off equaling the aggregate ACB of the DC shares held by it before the spin-off minus the ACB of the DC preferred shares created (e.g., under a s. 51 or 86 reorg) and then cancelled under the reorganization.

A more recent interpretation (2021-0889611E5) included an example of a less conventional spin-off transaction entailing a spin-off (through a succession of steps) by Opco (a “child” of Holdco 2 and a “grandchild” of Holdco 1) of one of its properties to Holdco 1. Included is a numerically detailed account (although somewhat cryptic in places) of the computation of the transferred DSI and ISI and of what the normative reduction in the ACB of the shareholdings should be. Analogously to a conventional spin-off transaction, the steps entailed a reduction in the ACB of the Opco shares held by Holdco 2, and in the ACB of the Holdco 2 shares held by Holdco 1, in an amount equaling the cost amount of the spun property.

CRA further indicated that there potentially could be a misalignment - even where ACB equal to that of the spun property is eliminated under the spin-off steps (as occurred here) - if the spun assets had disproportionately high safe income. (On the numbers, that did not occur in this particular example.) Accordingly, “an estimate of such safe income is always necessary to fully assess the situation being ruled upon” regarding a proposed spin-off transaction.

Neal Armstrong. Summaries of 28 May 2021 External T.I. 2021-0889611E5 and of Joan E. Jung, “Changing the Analysis for a Typical Spinout,” Tax for the Owner-Manager, Vol. 22, No. 1, January 2022, p. 2 under s. 55(2.1)(c).