News of Note
Lewski – Full Federal Court of Australia finds that a trust income declaration that was subject to a tax contingency did not result in an income inclusion to the beneficiary
Email this ContentOn June 30, 2006, the trustee of an Australian trust declared a distribution to the taxpayer of all its income for the year then ended and at the same time made a further resolution that in the event the Australian taxation authority denied a deduction to the trust, the trust income for that year was instead to be deemed to have been distributed on the same 2006 date to an alternate beneficiary. This contingency in fact materialized, i.e., the ATO denied a loss carryforward by the trust, so that all the income of the trust for that year was now a material amount. The Court accepted that the further resolution made the distribution declaration contingent, so that it did not cause the (now material) income amount to be included in the taxpayer’s hands as an amount to which she was “presently entitled” on that (June 30, 2006) date.
The taxpayer had delegated the handling of all her affairs to her husband, and did not find out about the purported income distribution until over seven years later, at which point she promptly executed a disclaimer of any interest in the distribution. The Court found that she should be imputed with the knowledge of her agent (her husband), so that she had not promptly disclaimed - so that if (contrary to the finding above) the income distribution to her had otherwise been valid, her purported disclaimer thereof would have been ineffective.
Neal Armstrong. Summaries of Lewski v Commissioner of Taxation, [2017] FCAFC 145 under s. 104(24), s. 248(8)(b) and s. 18(1)(a) – incurring of expense.
Evolve Bitcoin ETF will track the results of continually rolling CBOE-traded futures
Evolve Bitcoin ETF, an Ontario unit trust that has applied to be TSX-listed, proposes to have exclusive exposure to the most current month of Bitcoin futures, except that it will be necessary, as the contract approaches maturity each month, to sell it and purchase the next month’s contract. As the Bitcoin futures trade in Chicago, the Trust will take the position that it will not use the futures or any other property in the course of carrying on a business in Canada and, therefore, will not be a "SIFT trust."
Having said that, it will realize gains on income account each month if the futures keep appreciating (unless it elects under draft ss. 10.1(1) and (4) respecting its “eligible derivatives” to annually recognize income on a mark-to-market basis under s. 142.5(2)). Since it will not make any regular cash distributions, it will need to push out its income in late December of each year (in cash or in units) to the extent of income that has not been allocated on unit redemptions. To facilitate this, it will elect under s. 132.11(1) to have a December 15 year-end (so that income distributions made in the following stub period are back-dated to December 15.) Perhaps this will lead to increased trading surrounding that date.
Units are redeemable at any time at NAV provided that they are tendered in multiples of a specified minimum number (a “PNU”) – but to provide greater certainty on open-ended (s. 108(2)(a)) unit trust status, units in smaller quantities are redeemable at any time at 95% of their trading price. The tax disclosure assumes that the units are capital property to individuals.
Neal Armstrong. Summary of Evolve Bitcoin ETF preliminary prospectus under Offerings – Commodity Funds – Cryptocurrency Funds.
CRA rules that drilling on an existing, currently uneconomic, mine site would qualify as CEE
A mine ceased production quite some time ago as a result of the grade of the production being too low to justify continued production. The underground workings were allowed to flood and other historic shafts were sealed. The existing tracks would be unusable without significant work.
The new owner will conduct an exploration program, much of it focused on the existing mine site, in order to expand the “mineralization” (with any reserve identification being much further down the road). CRA ruled, subject to its detailed provisoes, that the expenses of this work would qualify as exploration (under s. 66.1(6) – Canadian exploration expense - para. (f).)
Neal Armstrong. Summary of 2017 Ruling 2016-0635341R3 under s. 66.1(6) – CEE - para. (f).
CRA’s view of what is mandate is coloured too much by the common law of agency
P-182R sets out CRA’s views on determining whether a relationship of agency or mandate is present. It is suggested that in some respects, the CRA position is insufficiently responsive to the differences between the two (common law v. civil law) concepts. In particular:
The CRA's third essential criterion of control by the mandator, as well as the additional indicators relating to fiduciary relationship, remuneration, and best efforts, to name a few, are elements that are exclusive to the common law notion of agency and should not fall under the Quebec civil law concept of mandate.
Neal Armstrong. Summary of Emmanuel Sala and Judith Lemieux, “The Impact of Quebec Civil Law on the Recognition of Mandator-Mandatary Relationships by Quebec and Canadian Tax Authorities,” Tax Topics (Wolters Kluwer), No. 2375, 14 November 2017, p. 1 under General Concepts - Agency.
Offshore clients are putting their funds into U.S. trusts in order to avoid CRS reporting
Various clients are establishing trusts in the U.S. (which has not agreed to exchange information under the Common Reporting Standard) in order to avoid reporting under the CRS.
The motivation of these individuals is the privacy and protection of their families who are resident in the home countries to which CRS reporting will be provided. For countries whose controls on disclosure of financial information are easily subverted, CRS reporting is particularly problematic. Disclosures regarding the foreign assets of these individuals invite extortion, and in some cases kidnapping. Where these concerns are not present, often political risk is.
Neal Armstrong. Summaries of Robert E. Ward, "The Common Reporting Standard Comes to Canada", Tax Management International Journal, 2017, p. 538 under s. 270(1) – reportable jurisdiction person and s. 271(1).
Tax Court of Canada finds that there were no ITCs respecting services of criminal counsel which permitted an individual to resume a business
Operations at an individual’s swimming school were suspended as a result of charges brought against him respecting alleged misconduct with a 15-year old female instructor – and he incurred significant fees in obtaining an acquittal. Although Favreau J accepted that the individual intended to resume the operations of his business when possible, he nonetheless found that, as the legal fees were “incurred to defend the Appellant’s reputation,” the legal services did not qualify as being acquired in the course of commercial activities and for the purpose of making taxable supplies, so that no input tax credits were available.
Neal Armstrong. Summary of Thim… v. The Queen, 2017 TCC 164 under ETA s. 141.01(2).
Repsol – Federal Court of Appeal applies the “integration principle” to find that a jetty was a “processing” asset
Woods JA found that the LNG terminal in St. John qualified as a Class 43 property because it was engaged in "processing" (i.e., a conversion of LNG into gas form, viewed as representing a change in the goods that rendered them more marketable) and because the terminal was not a "distribution" asset (i.e., “distribution” did not commence until at least the delivery of the (converted) gas to the transmission pipeline.)
In finding that the jetty at which the tankers discharged the LNG was part of the terminal asset rather than a separate (Class 3) “jetty” asset, she applied “the judge-made integration principle … that processing includes all activities that are necessary and integral to the processing operation.” This perhaps is similar in effect to the single supply doctrine applied in the GST cases.
Neal Armstrong. Summary of Canada v. Repsol Energy Canada Ltd., 2017 FCA 193 under Sched. II, Class 1(n).
CRA extends the effective date for applying advantage tax, where RRSP or TFSA fees are paid by the annuitant or holder, to 2019
In 29 November 2016 CTF Roundtable Q. 5, 2016-0670801C6, CRA indicated that it now considered the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder to be an “advantage” for Part XI.01 purposes (i.e., giving rise to a tax equal to 100% of the fee amount) but that to give the investment industry time to make the required system changes, it would defer applying this new position until January 1, 2018.
CRA has now announced that it has extended this effective date by one year (to January 1, 2019) to give more time to consider investment-industry submissions.
Neal Armstrong. Summary of 15 September 2017 External T.I. 2017-0722391E5 under s. 207.01(1) – advantage – (b)(i).
Income Tax Severed Letters 27 September 2017
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Finance provides various clarifications on its July 18, 2017 proposals
Comments made by Finance officials at the Roundtable held on Monday afternoon on the July 18, 2017 Consultation Paper and legislative proposals of the Department of Finance include:
Q.4 There is an intent for the passive income proposals not to affect existing investments held in a corporation.
Q.7 If, for example, mother provides start-up capital for her son’s company, Finance accepts that it would be reasonable for her to receive a high return to reflect the high risk.
Q.8 There will not be a complete carve-out for pipelines, but Finance is thinking about some form of relief to avoid the double taxation (first on the deceased, and second on the estate) that could arise, especially where a death occurred before July 18, 2017.
Q.9 Finance is not aware of any plans to increase capital gains rates. Finance is struggling with whether it is possible to provide relief for intergenerational transfers of businesses without generating quite substantial losses of tax revenues.
Q.10 S. 246.1 was developed because the courts were not observing the scheme of the Act to prevent surplus stripping or, at least, the conversion of dividends into capital gains.
Q.11 The surplus stripping changes are intended to focus on non-arm’s length transactions, so that they would not apply, for example, where an arm’s length purchaser uses the assets of the target to pay off acquisition debt. S. 246.1 is not intended merely as a backstop to s. 84.1 so that, for example, it could apply, for example, if there were s. 84(2) avoidance.
Q.12 The passive income discussion in the Consultation Paper was just a “diagnostic,” so that the next stage is to see whether the government is interested in advancing that proposal.
Some of the above points were also made or elaborated on in the morning session of Finance speakers. An additional point made in the morning session is that, although Finance considers that its passive income proposals advance integration, it should be kept in mind that if a self-employed individual earns 46% after-tax on her business earnings and then invests those earnings, her investment return thereon will also be subject to income tax, so that fairness suggests that the total tax borne on reinvested corporate business earnings that are similarly reinvested and ultimately distributed should also ultimately bear tax of well over 50%.
Neal Armstrong. 25 September 2017 CTF Finance Roundtable on 18 July 2017 proposals and Morning Session on Setting the Stage.