News of Note
Rocco Gagliese Productions – Tax Court of Canada finds that royalties generated by a CCPC from writing TV-episode music were active business income
Email this ContentA company which earned royalties from the daily activities of its sole shareholder and employee in writing and producing music for TV episodes was found to be earning income from an active business and not earning income from a specified investment business. D’Arcy J stated:
The principal purpose of the Appellant’s business was to earn income from Mr. Gagliese’s daily activities of originating and recording music tracks for individual television episodes. As Mr. Gagliese testified, if you take away his daily writing activities, the Appellant earned little or no income.
Neal Armstrong. Summaries of Rocco Gagliese Productions Inc. v. The Queen, 2018 TCC 136 under s. 125(7) – specified investment business, and s. 129(4) – income or loss - para. (b).
Aitchison Professional Corporation – Tax Court of Canada finds that s. 160 does not catch the transfer of valuable services to a non-arm’s length person
At a time that a lawyer (“James”) owed $2.1 million in taxes, he transferred his law practice to a professional corporation and thereafter worked for it as an unpaid volunteer or employee. His two daughters (also lawyers) worked for the corporation at market salaries and in the first three years received over $1 million in dividends as a result of “an improbable share structure and a complete disregard for dividend rights.”
In finding that James had not transferred “property” to the corporation for s. 160 purposes by virtue of choosing not to negotiate a salary for his valuable professional services, Graham J stated:
The right to negotiate is a right that everyone possesses and that is enforceable against no one. It is not “property”. If an employee negotiates a poor contract, the potential salary that he or she leaves on the table is not “property” that he or she has transferred to his or her employer. It is simply a lost opportunity.
He added:
This case demonstrates that there is clearly a gap in section 160 … [but s]imply amending section 160 to cause it to cover the non-arm’s length provision of services may have undesired consequences. …
If a tax debtor spent all of his or her free time caring for his or her aging parents, would the Minister assess the parents for the fair market value of that care?
Neal Armstrong. Summary of Aitchison Professional Corporation v. The Queen, 2018 TCC 131 under s. 160(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretation released in June 2013, as fully translated by us.
These (and the other full-text translations covering all French-language Interpretations released in the last 5 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.
There may be a wide range of a reasonable FMVs for management fees respecting a GST/HST self-assessment under ETA s. 272.1(8)
The new rules for investment limited partnerships require the general partner to self-assess based on the fair market value of the periodic management or administrative services that are supplied by it under an agreement for the particular supply of those services to the ILP. If the general partner went to the effort and expense to commission a transfer-pricing type study as to the FMV of its services:
[The] transfer pricing-like study would often generate a range of acceptable arm’s length prices for particular management and administrative services. Would the general partner then be entitled to self-assess any amount of tax within the appropriate range?
See also Henco (“A range of value makes eminent sense. And, where a taxpayer has designated a value that ultimately is found to fall within the range of reasonable fair market value, I see no reason to disturb that figure.”)
Neal Armstrong. Summaries of Alan Kenigsberg, “Changes to Tax Treatment of ILPs under the ETA,” Sales Tax, Customs & Trade, Volume XV, No 2, Federated Press, 2018, p.9 under ETA s. 123(1) - investment limited partnership, s. 217.1(1) and s. 272.1(8).
Sterritt – Tax Court of Canada states that the Ontario Superior Court of Justice or the Federal Court, not it, had the jurisdiction to order a refund
Russell J stated that he lacked jurisdiction to order CRA to pay a refund to the taxpayer:
[S]eeking that the Minister be ordered to issue the refund is not an aspect of deciding if an assessment or reassessment or a notice of loss determination is right or wrong. Thus it is not within the jurisdiction of this Court. It likely is within the jurisdiction of Ontario’s Superior Court of Justice as the Appellant resides in Ontario and as well within the jurisdiction of the Federal Court.
Neal Armstrong. Summary of Sterritt v. The Queen, 2018 TCC 117 under s. 171(1).
Heath – Tax Court of Canada finds that a notice of discontinuance could not be reversed even with Crown consent
The unrepresented taxpayer file a notice of discontinuance for her appeal of the denial of the new housing rebate after being advised by Crown counsel that her appeal was unlikely to succeed – but a day later, was informed by Crown counsel that she would be allowed the rebate. However, the Registrar refused to accept the parties’ joint consent to judgment to this effect on the basis that a notice of discontinuance had already been filed.
Smith J agreed with the Registrar, noting that Scarola, 2003 FCA 157 had established “that a discontinuance under subsection 16.2(2) [of the Tax Court of Canada Act] ‘produces the same effect as a judgment of dismissal by the Court’.”
He went on to note that CRA still appeared to have the ability to exercise its discretion to reassess to allow the rebate.
Neal Armstrong. Summaries of Heath v. The Queen, 2018 TCC 119 under Tax Court of Canada Act, s. 16.2(2) and ETA s. 298(2).
Fortnum – Tax Court of Canada applies the residual presumption in favour of the taxpayer
S. 118.5(1)(b) accords a tuition credit to “a student in full-time attendance at a university outside Canada in a course leading to a degree” subject to exclusions for inter alia fees “paid in respect of a course of less than three consecutive weeks duration.” In the face of conflicting authority, Smith J found that this requirement was satisfied by a summer session for an MBA program at an Indiana university that consisted of 10 consecutive courses each of which was of one or two weeks’ duration. He did not consider it necessary to indicate whether this was on the basis that the singular (“course”) included the plural (per Abdalla) or on the basis that “course” should be interpreted as referring to a course of study (see Siddell, 2011 TCC 250).
He also stated:
[W]here the application of the ordinary principles of interpretation may not resolve the issue … the matter should be resolved by recourse to the residual presumption in favour of the [taxpayer, citing Placer Dome].
Neal Armstrong. Summaries of Fortnum v. The Queen, 2018 TCC 126 under s. 118.5(1)(b) and Statutory Interpretation – Resolving Ambiguity.
Hydro-Québec – Federal Court refuses to permit CRA to require Hydro-Quebec to furnish information on its commercial customers
The Minister sought judicial authorization under ITA s. 231.2(3) and ETA s. 289(3) for making a demand of Hydro-Quebec to furnish listed particulars (e.g., address for invoicing and of electricity use, late payment identification and telephone number) for all its commercial customers who were charged the regular electricity rate – so that CRA could compare this information with what it had in its own files.
Roy J declined authorization. First, he did not think that all the regular commercial customers of a utility was an “ascertainable group” as contemplated in s. 231.2(3)(a), as the defining characteristics had no discernable link to compliance with the ITA and ETA. While they were at it, why not define group members as any resident of Quebec?
In finding that the request also did not satisfy the s. 231.2(3)(b) requirement that it be “made to verify compliance,” he stated:
The particulars of the commercial customers of Hydro-Quebec are, at best, upstream from information for the audit of their compliance with the ITA.
Finally, he indicated that even if the specific s. 231.2 (and ETA) requirements had been met, he would have rejected the Minister’s submission that once such conditions were satisfied, the Court was required to issue an authorization - and have exercised his discretion against such an "intrusion in private life." He stated:
A certain form of fishing expedition is permitted, but judicial authorization, with its inherent discretion, is there to limit and temper it. To me this seems essential where a fishing expedition is of unparalleled amplitude and the requested information is remote from an audit of compliance with the Act.
Neal Armstrong. Summary of Canada (National Revenue) v. Hydro-Québec, 2018 CF 622 under s. 231.2(3).
The 2018 Budget s. 112(5.2) amendment resulted in cancellation of the outstanding SRP programs
An investment dealer holds a share of an issuer with a paid-up capital of $15, an original cost to it of $40 and a fair market value of $100. It previously realized $60 of aggregate mark-to-market gains on the share, offset by a $60 loss on a hedge. Under a private agreement with the issuer, it sells its share to the issuer for $95.
In reliance on 980394, its proceeds of disposition exclude its deemed dividend of $80. Old s. 112(5.2) only required these proceeds to be increased to its original cost of $40. Hence, it realized a loss of $60 for ITA purposes. The new s. 112(5.2) instead increases its proceeds by the full deemed dividend amount of $80; hence, no loss.
In January 2018, six financial institutions purchased $1.5B of their own shares held by other financial institutions pursuant to “share repurchase programs” ( “SRPs”) that permitted such private sales to occur for securities law purposes where a normal course issuer bid was in play. Following the February Budget announcement of the new s. 112(5.2) rule, the issuers of the outstanding SRPs issued press releases announcing their cancellation.
Neal Armstrong. Summary of Kevin Kelly and Sona Dhawan, “Share Repurchase Programs,” Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p. 9 under s. 112(5.2).
CRA now accepts that legal expenses incurred to recover salary are deductible even if no right to the salary is established
S. 8(1)(b) permits a deduction from employment income for legal expenses paid in the year and incurred to collect (or to establish a right to collect) an amount owed to the taxpayer that, if received by the taxpayer, would be required to be included in the taxpayer’s employment income.
Although IT-99R5 states that if a taxpayer is unsuccessful in court and fails to establish that an amount is owed, then no deduction is allowed, CRA now accepts that these “comments are no longer accurate based on … Loo …[which] ruled that a taxpayer’s legal action need not be successful in order to deduct an amount under paragraph 8(1)(b).”
Legal expenses paid by an individual to reinstate the individual’s former employment position are not deductible under s. 8(1)(b) when employment is reinstated without retroactive pay:
While the legal expenses paid may have facilitated the reinstatement of the individual’s employment, the legal expenses were not incurred to collect (or establish a right to collect) an amount that was owed and required to be included in employment income … .
Neal Armstrong. Summary of 11 April 2018 External T.I. 2017-0699751E5 under s. 8(1)(b).