News of Note
Travel Document Service – Court of Appeal of England and Wales finds that an anti-avoidance provision based on “one of the main purposes” for holding a loan applied to a deemed loan
Email this ContentA British taxpayer (TDS) used a total return swap to cause its share investment in a subsidiary (LGI) to be deemed to be a loan. However, its hoped-for tax benefit was denied by an anti-avoidance provision that applied if “one of the main purposes” for being a party to a loan relationship was to secure relief from tax. In rejecting TDS’s submission that the anti-avoidance provision should only be applied to actual loans and not deemed loans, Lord Justice Newey referred to the dictum in Marshall v. Kerr (repeated in many subsequent cases) that “because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so.” This then meant that what was to be evaluated under the anti-avoidance rule was the purposes for which TDS held its shares of LGI.
In this regard, TDS emphasized that it had held its TDS shares long before entering into the swap and a related novation contract. In rejecting this contention, Lord Justice Newey stated:
Had the tax advantage in view been small, there might have been scope for argument as to whether an intention to use the shares to achieve it implied that obtaining the advantage was now a main purpose of holding the shares. In fact, however, the hoped-for gain was large both in absolute terms (more than £70 million) and relative to the apparent value of TDS (some £280 million).
He also rejected HMRC’s submission that "’main’ … means ‘more than trivial’," stating:
A purpose can be "more than trivial" without being a "main" purpose. "Main" has a connotation of importance.
Neal Armstrong. Summaries of Travel Document Service & Ladbroke Group International v Revenue & Customs (Rev 1) [2018] EWCA Civ 549 under Statutory Interpretation – Interpretation Provisions and s. 83(2.1).
CRA reverts to allowing employees to purchase merchandise at cost
In Folio S2-F3-C2, CRA stated:
When an employee receives a discount on merchandise because of their employment, the value of the discount is generally included in the employee’s income under paragraph 6(1)(a). The discount may be provided by the employer or by a third-party. The value of the benefit is equal to the fair market value of the merchandise purchased, less the amount paid by the employee. However, no amount is included in the employee’s income if the discount is also available to the general public or to specific public groups. [emphasis added]
This Folio was then removed from the CRA site with a notation that it was under review.
A Ministerial letter mailed in March states:
[T]he CRA has a longstanding administrative policy that employee discounts on merchandise are generally not taxed. This policy is still in place and is explained in Guide T4130.
Guide T4130 currently states that employee merchandise discounts generally are not taxable benefits unless:
You [the employer] make an arrangement that allows an employee to buy merchandise (other than old or soiled merchandise) for less than your cost
Until recently, the word we have bolded referred instead to “fair market value.”
In a similar vein, another March Ministerial letter states:
The media reports also led to confusion about the taxation of subsidized meals for employees. The CRA does not consider these meals a taxable benefit if the employee pays a reasonable charge. A reasonable charge is one that covers the cost of the food, its preparation, and service.
Neal Armstrong. Summary of 5 March 2018 Ministerial Correspondence 2017-0726641M4 under s. 6(1)(a) and of 21 March 2018 Ministerial Correspondence 2017-0729161M4 under s. 6(1)(a).
Le – Tax Court of Canada finds that an individual whose designation as a first director was defective, and who did not perform a director’s role, was not liable qua director
The taxpayer had intended to form a partnership with another party, who was under the misapprehension that a corporation was required in order to form a partnership, and drafted documents for her to sign that reflected this confusion. Russell J found that the taxpayer was not a de jure director of the corporation, notwithstanding that she had been named in the notice of articles as a first director. She had not provided a written consent to be a director and she also was not an “incorporator,” whose definition in the B.C. Business Corporations Act referenced her signing an “incorporation agreement.” The only relevant agreement that she had signed was found by Russell J to instead be a partnership agreement.
She also was not a de facto director, Russell J stated:
Jurisprudence reflects that the concept of de facto director should be limited to persons who hold themselves out as directors.
The taxpayer in fact “engaged in no acts of management … let alone any actions specific to a director.”
Accordingly, she was not liable for assessments under the ITA and ETA director’s liability sections.
Neal Armstrong. Summary of Le v. The Queen, 2018 TCC 65 under ITA s. 227.1(1).
Income Tax Severed Letters 18 April 2018
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA cross-border butterfly ruling letter contemplates two successive permitted exchanges and comments on property-type issues
A recently-released 2016 ruling letter - respecting the spin-off by a foreign public company (Foreign Pubco) of a newly-formed non-resident subsidiary (Foreign Spinco) – describes the butterflying of the Canadian spin business of Canadian DC (which is a direct sub of “Forco 2” and indirect sub of Foreign Pubco) to Canadian TC (which is the child of Foreign DC and a grandchild of Forco 2.) Immediately before this butterfly transfer, Canadian TC acquires its special shares in Canadian DC through a three-party exchange arrangement between Canadian TC, Forco 2 and Foreign DC, although it is not done this way for ITA reasons.
Foreign DC is then distributed up the chain to Foreign Pubco. Foreign Pubco then drops Foreign DC into a new subsidiary (Foreign TC) of a newly-formed LLC subsidiary of Foreign Pubco (New LLC – to which other significant foreign assets already have been contributed) pursuant to a three-party exchange agreement under which Foreign Pubco transfers Foreign DC directly to Foreign TC, Foreign TC issues shares to New LLC, and New LLC issue units to Foreign Pubco. Both this triangular exchange and the previous one are expressed to occur as “permitted exchanges” in accordance with the formula in (b)(iii) of the s. 55(1) definition.
The ruling letter includes detailed guidance respecting the classification of the transferred and retained property of Canadian DC amongst the three types of property (cash and near cash, investment and business property) and the identification of liabilities to be netted against them, including:
- Positive and negative balances under cash pooling arrangements are to be determined on a net basis and treated as cash or near cash.
- 100% of properties rented by Canadian DC that are majority-used in its Canadian businesses are treated as business assets notwithstanding that portions of the properties are subleased to third parties at a loss.
- Canadian DC and Canadian TC can decide between themselves as to what portion of a term loan receivable by Canadian DC from another Canadian affiliate (that is to be included in the property transferred to Canadian TC) is to be treated as a cash and near cash asset, as contrasted to an investment asset – and there also is flexibility to balance out the property-type mix respecting the allocation of liabilities to net receivable balances.
- Deferred revenue obligations or liabilities under supplemental retirement plans will not be treated as liabilities, and net pension plan assets will not be considered as property; whereas net pension plan liabilities will be treated as liabilities.
Neal Armstrong. Summary of 2016 Ruling 2015-0616291R3 under s. 55(1) – distribution.
10 further full-text translations of CRA interpretations are available
The table below provides descriptors and links for five of the October 2017 APFF Roundtable questions released last week ,and for five French Technical Interpretations released in October 2013, as fully translated by us.
Translations of the full text of the answers of CRA to all of the questions posed at the October 2017 “regular” APFF Roundtable and the October 2017 APFF Financial Strategies and Instruments Roundtable, along with our summaries of those questions, have been available to you for the last six months. The only extra that you are getting now is translations of the full text of the questions posed rather than just summaries of them. We will provide full-text translations of the balance of the October 2017 APFF questions over the next week or so.
These (and the other full-text translations covering the last 4 1/2 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Construction S.Y.L. Tremblay - Quebec Court of Appeal finds that an attempt to relitigate an adverse TCC decision in the Court of Quebec was an abuse of process
In the federal Construction S.Y.L. Tremblay case, Bédard J found that house-repair invoices, that did not give the house address or describe the precise nature of the work performed (and that were rendered in the name of entities that did not remit the GST), failed to satisfy the requirements of s. 3 of the Input Tax Credit Information (GST/HST) Regulations, so that the appellant’s related input tax credit claims were properly denied – and also found that “the appellant did not truly acquire the supplies for which it claimed ITCs.”
The appellant then sought to establish its eligibility for input tax refunds for the QST on the same invoices in a Court of Quebec action with the assistance of 19 witnesses (perhaps in order to get at the point quoted above). Thibault JCA agreed with the finding of the Court of Quebec below that allowing this action to proceed would be an abuse of process, given that the new evidence would not solve the defective nature of the invoices that the appellant had received.
However, before so concluding, she noted that the Supreme Court in the CUPE decision (2003 SCC 63) had indicated that “There are many circumstances in which the bar against relitigation, either through the doctrine of res judicata or that of abuse of process, would create unfairness,” so that there are circumstances (not established here) in which relitigation will be permitted.
Congiu reached essentially the same result going in the opposite direction (deference to prior Quebec decision).
Neal Armstrong. Summaries of Construction S.Y.L. Tremblay Inc. v. Agence du revenu du Québec, 2018 QCCA 552 under General Concepts - Abuse of Process, Stare Decisis and Input Tax Credit Information (GST/HST) Regulations, s. 3(c).
Smith – Tax Court of Canada references the principle that income is to be computed on a “sub-source” basis
Graham J found that a status Indian, who earned exempt income from employment and non-exempt investment income, could only deduct a registered pension plan contribution in computing his employment income (and not from his income generally), so that the deduction effectively was denied. Before so concluding, Graham J referred with approval to the statement in the dissenting reasons of Iacobucci J in Hickman Motors (also picked up in FLSmidth) that there was a “requirement to segregate income according to various sub-sources” (e.g., to distinguish the income arising from each business, property or employment of a taxpayer).
Neal Armstrong. Summaries of Smith v. The Queen, 2018 TCC 61 under s. 147.2(4) and Statutory Interpretation – Headings.
CRA considers that a dietary supplement is not zero-rated
Subject to a long list of exclusions, the ETA zero-rates “supplies of food or beverages for human consumption (including … ingredients to be mixed with or used in the preparation of such food or beverages).” CRA considers that dietary supplements which are consumed for their therapeutic or preventative effects do not so qualify, so that a liquid product along such lines which was to be mixed with water and ingested was not zero-rated.
Neal Armstrong. Summary of 29 March 2017 Ruling 183173 under ETA Sched. VI, Pt II, s. 1.
Rennie Produce – Full Federal Court of Australia finds that third-party documents obtained in commercial judicial proceedings were producible under a requirement issued by the tax authority
The obligation in Harman v Secretary of State for Home Department [1983] 1 AC 280 has been described as follows:
Where one party to litigation is compelled, either by reason of a rule of court, or by reason of a specific order of the court, or otherwise, to disclose documents or information, the party obtaining the disclosure cannot, without the leave of the court, use it for any purpose other than that for which it was given unless it is received into evidence.
The Court held that the Harman obligation did not impede a taxpayer, who had documents in its possession which it had obtained from a third party pursuant to a summons, from providing those documents pursuant to a requirement for information issued to it by the Commissioner of Taxation. The same conclusion respecting the primacy of the Canadian requirement provision (s. 231.2) might obtain in Canada.
Neal Armstrong. Summary of Deputy Commissioner of Taxation v Rennie Produce (Aust) Pty Ltd (in liq) [2018] FCAFC 38 under s. 231.2(1).