News of Note

The taxpayer’s wife (Mrs. Gendron) purchased 1.04M preferred shares from the taxpayer (Mr. Gervais) at a cost of $1.04M (with Mr. Gervais electing out of s. 73 rollover treatment) and was gifted a further 1.04M shares (having a $1M accrued capital gain) on a s. 73 rollover basis, so that her cost of the gifted shares was $0.04M. The transactions were reported on the basis that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there was a $0.5M capital gain attributed back to Mr. Gervais on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.

In agreeing with the CRA approach of adding “her” $0.5M capital gain to Mr. Gervais’ return, Noël CJ stated that the above result was:

contrary to the object, spirit and purpose of subsections 73(1) and 74.2(1), the purpose of which is to ensure that a gain (or loss) deferred by reason of a rollover between spouses or common-law partners be attributed back to the transferor. … Because the rollover provided for in subsection 73(1) deferred this accrued gain [of $1M] in its entirety, the whole of the gain realized on the sale to [the third party] had to be attributed back to Mr. Gervais when regard is had to the object, spirit and purpose of subsection 74.2(1).

Neal Armstrong Summary of Gervais v. The Queen, 2018 FCA 3 under s. 245(4).

Canco wholly-owns two non-resident corporations (“FA1” and “FALuxco”). FA1 is the 40% partner of “MLP,” whose other non-resident partners are not FAs of Canco. MLP borrows $200M from FALuxco, bearing interest of $10M per annum, for use in its active U.S. business.

CRA found that only 40% of the $10M interest received by FALuxco should be recharacterized as income from an active business under s. 95(2)(a)(ii)(B)(II) (resulting in FALuxco having FAPI of $6M - because only $4M of interest would be deductible in computing FA1’s earnings). CRA stated that from a policy perspective:

[S]ince a partnership is treated as a flow-through for Canadian tax purposes, for the purpose of subclause 95(2)(a)(ii)(B)(II) the interest paid by a partnership should be viewed as interest paid proportionately by each of its members. [Accordingly] to the extent that a portion of the interest paid to FALuxco by MLP is considered to be paid by a member that is not described in subclause 95(2)(a)(ii)(B)(I) [i.e., the non-FA members of MLP], that portion should not be recharacterized as income from an active business since it would not be so recharacterized if it had been paid directly by that member.

Neal Armstrong. Summary of 31 August 2017 Internal T.I. 2016-0680801I7 under s. 95(2)(a)(ii)(B)(II).

In 2014, an Irish resident earned $32,728.52 in employment income from working for a few weeks in Fort McMurray, and also received $23,002.37 from the Irish government, mostly as means-tested assistance. C Miller J found that these assistance payments qualified under s. 56(1)(u) as “social assistance payment[s] made on the basis of … means,” notwithstanding that they were not income for Irish purposes and were foreign rather than domestic assistance. Accordingly, the taxpayer could not claim full Canadian credits of $28,717, as he did not satisfy the condition in s. 118.94 that “substantially all” of his income for the year was included in computing his taxable income earned in Canada for the year.

In this regard, C Miller J stated:

… [C]ases have relied on percentages as low as 76% to be considered substantially all. In Mr. Kenny’s case, I would be stretching “substantially all” beyond any measure of elasticity if I concluded that 60% represented “substantially all”.

In rejecting counsel’s submission that this result violated the prohibition in Art. 24(1) of the Canada-Ireland Treaty against subjecting nationals of Ireland to more burdensome taxation than for nationals of Canada (and vice versa), C Miller J stated:

I read this provision as applying to nationals, not residents, to ensure that a Canadian citizen residing in Ireland and receiving the same payments (employment from Canada and social assistance from Ireland) as Mr. Kenny would not be treated any differently. I do not find subsection 24(1) of the Treaty assists Mr. Kenny in this regard.

Neal Armstrong. Summaries of Kenny v. The Queen, 2018 TCC 2 under s. 118.94 and Treaties – Articles of Treaties – Art. 25.

ETA s. 231(1.1) provides that a supplier cannot claim a bad debt deduction unless “the tax collectible in respect of the supply is included in determining the amount of net tax reported in the reporting entity’s return … for the reporting period in which the tax became collectible.” CRA considers that the quoted language means that where a supplier is assessed on audit for failure to charge and remit the tax, no bad debt deduction is available for the uncollectible tax where, for example, the customer declared bankruptcy before the audit and resulting assessment.

Not a problem! CRA stated:

[S]ection 232 does appear to offer a solution where the consideration is reduced. Where the supplier issues a credit note to the customer (which is now bankrupt) to relieve it of that debt, the supplier would be entitled to claim a deduction if all conditions set out in paragraph 232(3)(b) are met.

The point appears to be that if the supplier is willing to give up its claim against the bankrupt estate for, say, $100, it can generate a bad debt deduction for the GST/HST (say, $13) provided it issues a credit note for the $100.

Neal Armstrong. Summary of 18 September 2017 Interpretation 176502 under ETA s. 231(1.1).