News of Note
Mammone – Tax Court of Canada finds that an RPP revocation beyond the normal reassessment period retroactively validated an unsupportable reassessment under s. 56(1)(a)(i)
Email this ContentThe CRA revocation of a registered pension plan (the “New Plan”) was invalid due to inadvertent failure to comply with the 30-day notice requirement in s. 147.1(12). The taxpayer argued that this meant that the contemporaneous assessment of him under s. 56(1)(a)(i) for having purportedly transferred the commuted value of his (OMERS) pension plan to the New Plan was ill-founded at the time – and that CRA’s subsequent issuance of a further retroactive deregistration of the New Plan represented a new basis for reassessment that was prohibited by s. 152(9).
Graham J rejected this argument, finding that the retroactive nature of the subsequent valid revocation caused “an altered timeline to replace the original timeline,” so that the assessment under s. 56(1)(a)(i) was retroactively validated. In rejecting the argument under s. 152(9), he stated:
The basis for reassessment is and always has been that the commuted value of the OMERS pension was transferred to a non-registered pension plan. … [D]ue to the retroactive nature of the revocation, the facts underlying that basis of reassessment were always present.
It did not matter that the second (this time, valid) revocation occurred well beyond the normal reassessment period. However, Graham J stated that if the reassessment in question had also been issued beyond the normal reassessment period, it would have been statute-barred, as the taxpayer could not be imputed with knowledge, at the time of filing his return, of the subsequent retroactive invalidation of the plan.
Neal Armstrong. Summaries of Mammone v. The Queen, 2018 TCC 24 under s. 152(1), s. 152(9), s. 152(4)(a)(i) and General Concepts – Effective Date.
CRA confirms that s. 83(2.1) does not apply to deny capital dividends sourced from life insurance proceeds
Canco, which has some undistributed cash and capital dividend account after having received life insurance proceeds, is sold to a third party (either directly, or through the sale of a Holdco). CRA confirmed that s. 83(2.1) would not apply to prevent the new owner from accessing this CDA given that the CDA was sourced from life insurance proceeds.
Neal Armstrong. Summary of 9 November 2017 External T.I. 2017-0704221E5 under s. 83(2.1).
CRA permits the commercial portion of a “housing project” to be up to 20% for MIC purposes
S. 130.1(6)(f) requires that a mortgage investment corporation hold at least 50% of the cost amount of all its property in bank deposits or other money, and in mortgages on “houses” as defined in s. 2 of the National Housing Act or on property included within a “housing project” (as defined in s. 2 as it read on June 16, 1999.) In this regard, CRA stated:
[C]ommercial facilities that form part of a housing project, such as an apartment or condominium complex should not exceed 20% of the gross floor area of the housing project.
Neal Armstrong. Summary of 12 January 2018 External T.I. 2016-0669431E5 under s. 130.1(6)(f).
CRA finds that a non-solicitation agreement was assimilated to a non-compete for purposes of the s. 56.4(7) exemption
Where s. 56.4(7) applies to an arm’s length share sale, it prevents s. 68 from applying to deem a portion of those proceeds to be paid for a non-compete covenant as described in the preamble to s. 56.4(7)(b). When presented with an agreement for the sale of the shares of a private company under which various shareholders were required to agree to a non-compete covenant (“NCC”) and a non-solicitation covenant (“NSC”), the Directorate found that “essentially, the terms of the NCC and NSC … reflect the conditions that one might normally expect to see in a typical non-competition agreement,” so that they “could be treated as a single RC [restrictive covenant] that is in respect of a non-compete covenant.” As the other conditions of s. 56.4(7) also were met, s. 68 did not apply.
The Directorate also indicated that it previously had considered that the similar description of a non-compete in s. 56.4(3)(c)(ii) would encompass an “undertaking not to solicit the clients of the corporation that is sold, but … [not] with respect to the value of an undertaking not to solicit the employees to change employment” and also a non-competition agreement that includes “both a non-competition and a confidentiality clause.”
Neal Armstrong. Summaries of 22 August 2017 Internal T.I. 2017-0688301I7 under s. 56.4(7)(b) and s. 56.4(3)(c)(ii).
CRA confirms that the required s. 7 employer withholding does not apply to s. 7(1.1) stock option benefits
S. 153(1.01) generally ensures that an amount deemed to be received as a benefit under s. 7(1)(a) is subject to the withholding and remittance requirements of s. 153(1) as if it were a bonus. CRA has confirmed that by virtue of an exception to this rule in s. 153(1.01)(b), this withholding requirement does not apply where an arm’s length employee who has exercised options to acquire shares of a Canadian-controlled private corporation, later disposes of the shares and the recognition of the s. 7(1)(a) benefit is correspondingly deferred under s. 7(1.1).
Neal Armstrong. Summary of 3 January 2018 Internal T.I. 2017-0709811I7 under s. 153(1.01)(b).
CRA applies the proportionate value approach to determining whether shares of a foreign holding company are derived more than 50% from Canadian immovable property for Treaty purposes
A Netherlands corporation (BVCo) holds 1/3 of its assets as shares of an Australian subsidiary (“AusCo”), whose Australian real estate assets represent 5/6 of the consolidated assets, but also with high liabilities, and holds 2/3 of its assets as shares of a Canadian subsidiary (“TCPCo”) whose Canadian real estate assets represent 1/6 of the consolidated assets, but with low leverage. In determining whether the shares of BVCo are taxable Canadian property, CRA would first apply the “gross asset value method” to determine that 100% and 0% of the gross assets of TCPCo and AusCo, respectively, are taxable Canadian property (“TCP”). Next, it would apply the “proportionate value approach” to multiply such percentages by the FMV of the shares of TCPCo and AusCo to conclude that 2/3 of the FMV of the BVCo shares was derived from TCP, so that the BVCo shares were themselves TCP.
CRA concluded that the same methodology should also be applied in determining that more than 50% of the value of the shares of BVCo held by a UK company were derived from Canadian immovable property, so that those shares would not be exempted in the UK company’s hands under the Canada-UK Treaty.
Neal Armstrong. Summary of 22 September 2017 External T.I. 2016-0668041E5 under s. 248(1) – taxable Canadian property – (d) and Treaties – Articles – Art. 13.
Income Tax Severed Letters 24 January 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Matthew Boadi Professional Corp. – Federal Court finds that CRA failed to consider whether late T1135s were filed “voluntarily” for earlier years notwithstanding subsequent years being under review
A taxpayer had a history of filing its T2 returns late and had been subject to various CRA demands to file them. It then became aware that it should have been filing T1135s respecting some foreign real estate, and it filed late T1125s in March 2015 for its 2005 to 2013 taxation years in reliance on the voluntary disclosure program. CRA denied VDP relief on the basis that this disclosure was not voluntary, i.e., the related T2 returns were subject to CRA “enforcement action” for having been filed late.
Gascon J found that this approach was reasonable respecting the T1135s for 2011 to 2013 given that the related T2 returns had finally been filed at that point, but had not yet been assessed. He stated that “the enforcement action taken by the CRA [i.e., assessing these T2 returns] would likely have uncovered its obligation to file T1135 returns” for those years. However, he was unwilling to make the same inference with respect to the earlier years, and there was no evidence that CRA had thought adequately about the proposition that it was perhaps unlikely that in assessing the later returns it would not have focussed on the absence of T1135s for the earlier years – and, in fact, the CRA officer appeared to not realize that those earlier years had already been assessed or, at any rate, was indifferent to that fact.
Accordingly, the matter was referred back to a different CRA delegate for reconsideration.
Neal Armstrong. Summary of Matthew Boadi Professional Corporation v. Canada (Attorney General), 2018 FC 53 under s. 220(3.1).
Paypal - Federal Court grants an authorization for CRA to demand transaction summaries for the PayPal business account users
Gascon J granted an authorization for CRA to issue a requirement under ITA s. 231.2 and ETA s. 289 on Paypal Canada to disclose the names and addresses (etc.) of corporations and individuals holding a business account with PayPal that had used PayPal's online payment platform in the course of their commercial activities during the period from January 2014 to date, and to provide the total number and value of payments received and made for those years. He stated that "the expectation of privacy with respect to business records … is very low" and that "the information sought … is required in the context of verification activities undertaken … to determine whether the Unnamed Persons have filed their required tax returns."
Neal Armstrong. Summary of MNR v. Paypal Canada Co., Docket T-564-17 (FCTD), 10 November 2017 under s. 232.2(3).
LLPs and LLLPs have various partnership attributes
CRA’s position, that Delaware and Florida LLPs and LLLPs are corporations, is being questioned.
Their partnership attributes include that they are created and dissolved by contract (rather than statute), the partners (unlike shareholders) have mutual agency and can only assign their economic interest (as contrasted to full partner status) and they owe each other and the partnership a duty of loyalty. As for their separate legal personality (like corporations, but also like Scottish partnerships), s. 35 of the Interpretation Act provides that the word "corporation" "does not include a partnership that is considered to be separate legal entity under provincial law."
There is a strong argument that the IA definition applies for greater certainty to ensure that LLLPs and LLPs are not treated as corporations. Further, the phrase "a partnership which is considered to be a separate legal entity under provincial law" does not necessarily limit the application of the IA definition to partnerships governed by provincial law.
Although the Delaware and Florida statutes provide “full shield” protection, limited liability nonetheless is less absolute than for corporations. For example, if a general partner of an LLLP is culpable of tortious conduct toward third parties in the execution of its duties as the manager of the LLLP's business, it is not protected by the LLLP shield. Furthermore, the failure to make filings may result in the loss of limited liability, whereas corporate limited liability is intrinsic to a corporation.
Neal Armstrong. Summaries of Angelo Discepola and Robert Nearing, "A Reply to the CRA's Classification of Florida and Delaware LLLPs and LLPs as Corporations," 2016 Conference Report (Canadian Tax Foundation), 24:1-39 under s. 96 and s. 248(1) – corporation.