News of Note
Nadeau – Court of Quebec finds that lump sums paid pursuant to a CBCA oppression action of two terminated shareholder-employees were retiring allowances
Email this ContentThe Superior Court of Quebec found:
- that the two taxpayers, who were minority shareholders, employees and directors of a private family corporation (“Comairco”), were the victims of oppression in that they had been summarily dismissed from their positions in order that their sharing in the profits of Comairco through bonuses and dividends could be substantially reduced; and
- that their suit for oppression pursuant to s. 241 of the CBCA should be answered inter alia through the Court’s order that the shareholding of each be redeemed for $4.5 million and that they be paid lump sums (of $65,000 and $50,000, respectively) by reason of their wrongful dismissal.
In finding that the latter sums were taxable as retiring allowances, Dortélus JCQ stated:
The fact that the award was made pursuant to the CBCA section 241 and not under the Civil Code does not alter the reason for the award, which was to compensate the plaintiffs for damages directly resulting from the loss of their employment.
Neal Armstrong. Summary of Nadeau v. Agence du revenu du Québec, 2021 QCCQ 4638 under s. 248(1) – retiring allowance.
Income Tax Severed Letters 18 August 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that a sale of a condo purchase contract was an adventure in the nature of trade in the absence of any compelling evidence to the contrary
A non-resident (the “Assignor”) entered into an agreement to acquire a new condo (the “Strata Lot”) with the stated intention of moving into it with her family but, while the condo was being constructed, also purchased a townhouse in the same province and lived there with her family. She then assigned the agreement to purchase the new condo at a gain before the purchase closed.
In contrast to the ruling referenced in the previous post, CRA ruled that the Assignor had not established that this transaction was not an adventure in the nature of trade, so that she was a builder for GST/HST purposes, and her sale of her purchase agreement was a taxable supply. CRA stated:
In the absence of any outward indicators to support your assertion …the CRA views the Assignor’s action of selling the interest in the Strata Lot as evidence that the Assignor acquired the interest in the Strata Lot for the primary purpose of selling the interest in the course of a business or an adventure or concern in the nature of trade.
Neal Armstrong. Summary of 10 January 2020 GST/HST Ruling 190414r under ETA s. 123(1) – builder – para. (f).
CRA rules that an assignment of a condo purchase agreement did not occur as part of an adventure in the nature of trade
A couple entered into an agreement with the builder to purchase a new condo and then, before the condo project had been constructed and closed, assigned their purchase contract to an assignee at a gain. Whether their assignment of their purchase contract was exempt from GST/HST turned (under (f) of the definition of “builder”) on whether they had acquired their equitable interest in the new condo as part of an adventure in the nature of trade or in the course of a business.
CRA accepted the representations of the couple that their decision to sell out was the result of an unexpectedly successful fertility treatment, producing multiple children (who would not all fit into the condo), stating that the “CRA views the birth of the Assignors’ […][multiple children] as an unforeseen event, given the highly unlikelihood of it occurring given their ages, past fertility treatment results as well as the fertility doctor’s views” – their sale of their contract was exempt.
CRA on the GST side is bolder – their income tax siblings likely would not give a ruling like this.
Neal Armstrong. Summary of 3 December 2021 GST/HST Ruling 193347r under ETA s. 123(1) – builder – para. (f).
Jungen – Tax Court of Canada finds that the disability tax credit could be claimed for a child with ADHD and conduct disorder
The taxpayer’s son had extreme behaviour issues, being unable to maintain good relationships with anyone due to his unpredictable and aggressive behavior, and was diagnosed as having attention deficit hyperactivity disorder (ADHD), and subsequently additionally diagnosed with unspecified disruptive, impulse-control and conduct disorder. In allowing the taxpayer’s claim for the disability tax credit, Russell J focused on the aspect of s. 118.4(1) referring to a marked restriction in a basic activity of daily living including mental functioning necessary for everyday life (s. 118.4(1)(c)(i)) such as “adaptive functioning” (s. 118.4(1)(c.1)(iii)), and emphasized inter alia that the child was “seriously lacking in ability to engage in social interactions … substantially all of the time.”
Neal Armstrong. Summary of Jungen v. The Queen, 2021 TCC 16 under s. 118.4(1)(c.1)(iii).
CRA publishes a new GST/HST Memorandum on determining whether a financial institution is a qualifying institution for ITC purposes
CRA has published a new Memorandum on determining whether a financial institution is a qualifying institution. Financial institutions are subject by virtue of ETA s. 141.02 to more detailed and onerous rules for claiming input tax credits than “regular” registrants. Qualifying institutions are singled out for specially onerous rules in this regard.
Very generally, qualifying institution are banks, insurers or securities dealers which otherwise would be entitled in their two preceding fiscal years to ITCs for residual (i.e., non-exclusive) inputs at above specified thresholds expressed in terms of dollars and as a percentage of the total tax payable on such inputs.
In its Memorandum, CRA inter alia:
- Notes that the definition of an insurer does not extend to a person, such as a foreign bank, that is authorized to carry on an insurance business in its home jurisdiction but does not carry on an insurance business in Canada.
- Provides a mortgage broker as an example of a financial institution that is not an insurer or other prescribed-class person.
- Notes that for the residual ITC threshold computation purposes referred to above, selected listed financial institutions generally take into account only the federal tax paid by them and their federal tax ITCs, and ignore provincial HST.
- Provides an example illustrating that the election made under s. 141.02(9) - by a non-qualifying institution that is a bank, insurer or securities dealer to have its ITCs for residual inputs limited in the same manner as if it were a qualifying institution - can be revoked before the return due date for the year for which the election was made.
- Provides numerous examples of the operation of the continuity rules in ss. s. 141.02(4) and (5) for amalgamations and wind-ups.
Neal Armstrong. Summaries of GST/HST Memorandum 17-11 [17.11] Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02 23 July 2021 under s. 141.02(1) – qualifying institution, residual input tax amount, tax credit amount, s. 141.02(4), s. 141.02(9), s. 141.02(24), Input Tax Credit Allocation Methods (GST/HST) Regulations, s. 1 – bank, insurer.
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in May and April, 2007. Their descriptors and links appear below.
These are additions to our set of 1,672 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 14 1/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Deans Knight suggests that CRA may attack Bill C-208 surplus-stripping transactions on the basis that the stripper retains “actual” control of the small business corporation
The requirement in s. 84.1(2)(e) that the children or grandchildren merely have legal control of the purchasing corporation suggests a surplus-stripping transaction in which Mr. A, who owns all the shares (having nominal tax basis and paid-up capital) of a private company carrying on an active business, forms Newco, in which his children invest $100 in preferred shares giving them voting control, with Mr. A then selling his shares to Newco for $1 million in cash and common shares issued by Newco, and claiming the capital gains exemption.
Deans Knight decided that the object, spirit and purpose of s. 111(5) is to restrict the tax losses of a corporation if a person acquires “actual control over the corporation’s actions, whether by way of de jure control or otherwise.”
[I]n light of Deans Knight, the CRA could take the position that, under GAAR, the relevant question is: whose business is it? Do the children have “actual control” over the actions of the family business, or do the parents?
Neal Armstrong. Summary of Allan Lanthier, "The general anti-avoidance rule and family surplus strips", Canadian Accountant, 12 August 2021 under s. 84.1(2)(e).
CRA discusses the consequences of a sabbatical leave plan being offside the SDA rules
After finding that a sabbatical leave plan did not satisfy the requirements of Reg. 6801(a) as a deferred salary leave plan (for multiple reasons including the length and timing of the sabbatical leave and provision for notional employer contributions to match the salary amounts that the participating employees elected to defer), CRA went on to discuss the consequences of the leave plan being a salary deferral arrangement:
- The amount of salary that an employee deferred in a particular taxation year together with the amount of any matching notional employer contribution, would constitute a “deferred amount,” to be included in computing the employee’s income for that year pursuant to ss. 6(11) and 6(1)(a).
- The employer receives a s. 20(1)(oo) deduction for the same year as the s. 6(1)(a) inclusion.
- Amounts received by an employee during the sabbatical leave that were previously included in income as deferred amounts are (per s. 6(1)(i)) excluded from the employee’s income on such receipt.
- On the forfeiture of all notional employer contributions on the early termination of participation in the Plan, the amount of the employer contributions (previously included in the employees income) would be deductible by the employee pursuant to s. 8(1)(o). The employer, who would have previously taken a s. 20(1)(oo) deduction, would now have a s. 12(1)(n.2) inclusion. However, the lump-sum received by the employee on early termination would be excluded on receipt under s. 6(1)(i) given the previous inclusion under ss. 6(11) and 6(1)(a).
Neal Armstrong. Summaries of 23 April 2021 External T.I. 2020-0872371E5 under Reg. 6801(a) and s. 6(11).
Pavages Vaudreuil – Court of Quebec finds that an operation of washing, sorting and crushing aggregate was separate from a road construction operation
In addition to being involved in construction (maintenance of roads, streets and bridges), the taxpayer owned several natural gravel quarries and sand pits and processed sand, river gravel, crushed stone and earth for sale to third parties and for use in its construction operations. It purchased three pieces of equipment for use exclusively for the handling of materials already gathered by a cable shovel in connection with the washing, sorting and crushing of the various products.
In order for the purchases to have generated an investment tax credit for Quebec purposes, they were required inter alia to qualify as Class 29 property, i.e., they were required to have been acquired for use primarily in the manufacturing or processing of goods for sale. Under the Quebec equivalent of Reg. 1104(9)(c), “manufacturing or processing” was deemed to exclude “construction."
In finding that this exclusion did not apply because the taxpayer’s construction and processing operations were distinct, Bourgeois JCQ noted that the operations’ respective customers differed, the processing occurred at sites distinct from the situs of the construction projects, only 27% of the processed product was used in the construction operation, the two operations could have been operated independently of each other, and there was separate accounting. The appeal was allowed.
Neal Armstrong. Summaries of Pavages Vaudreuil Ltée v. Agence du revenu du Québec, 2021 QCCQ 3890 under Reg. 1104(9)(c) and Reg. 1104(9)(e).