News of Note
Carasco – Federal Court indicates that CRA relief under s. 152(4.2) must accord with the applicable substantive provisions
Email this ContentA taxpayer sought the deduction, in a relief application made pursuant to s. 152(4.2), of $195,000 in legal expense incurred by her in otherwise statute-barred years in connection with a human-rights action. CRA initially proposed to allow the requested deduction (and to also include the small related reward in the taxpayer’s income) but then, after the requested response period had expired, changed its view, and rejected the proposed adjustments on the basis that the legal fees did not qualify for deduction under s. 8(1)(b). In rejecting the taxpayer’s claim for judicial review, Strickland J stated:
[T]he Minister’s Delegate had no discretion and was compelled to apply s 152(4.2) of the ITA in accordance with the parameters set out in s 8(1)(b). In assessing the tax liability of a taxpayer, “the Minister generally has no discretion to exercise and, indeed, no discretion to abuse. Where the facts and the law demonstrate liability for tax, the Minister must issue an assessment” (JP Morgan …).
Neal Armstrong. Summary of Carasco v. Attorney General of Canada, 2022 FC 1665 under s. 152(4.2).
CRA finds that where a UK company remotely operated crypto-mining equipment located on a Canadian host company’s premises, the equipment constituted a Canadian PE
Hostco owned Canadian real estate that it used to host crypto-mining equipment owned (or leased) by a UK company (UKco), along with providing related services such as internet access and maintenance. UKco employees located exclusively in the U.K. could direct the use of the mining equipment remotely through the use of software.
CRA indicated that, here, the relevant factors seemed to suggest that the business was being carried on in Canada through a permanent establishment and that, in particular, it was carried on wholly or predominantly through operating the crypto-mining equipment, which was at UKco's disposal and was situate in Canada.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.7 under Treaties – Income Tax Conventions – Art. 5.
CRA indicates that the critical METC certification form will be provided shortly
Regarding the requirement under the (still) draft rules for an enhanced mineral exploration credit for individuals’ investing in flow-through shares that the required certification by a “qualified engineer or geoscientist” be “completed … no more than 12 months before the time that the agreement is made,” CRA indicated that the prescribed form is in the process of being completed and will be released to the public “very shortly.”
CRA then repeated the guidance on the filing of the required information by letter, pending the release of the form, as described in detail in 2022-0949081E5.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.5 under s. 127(9) - flow-through critical mineral mining expenditure.
We have translated 6 more CRA severed letters
We have published a translations of a ruling released by CRA last week and a further 5 translations of CRA interpretations released in January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,296 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 18 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2022-11-30 | 2022 Ruling 2022-0930901R3 F - Changes to an existing monetization arrangement | Income Tax Act - Section 80.6 | partial acceleration of a forward contract did not de-grandfather it from the synthetic disposition rules |
| 2004-01-09 | 17 December 2003 Internal T.I. 2003-0047367 F - Benefit Conferred on Non-arm's Length Person | Income Tax Act - Section 246 - Subsection 246(1) | s. 246(1) applicable to sale of assets by corporation to employee-shareholder at an undervalue |
| Income Tax Act - Section 52 - Subsection 52(1) | application of s. 15(1) or 246(1) to property distributed by corporation to shareholder would be added to the property’s ACB | ||
| Income Tax Act - Section 84 - Subsection 84(2) | s. 84(2) inapplicable on sale by defunct corporation of its assets at an undervalue to one of its shareholders | ||
| 17 December 2003 Internal T.I. 2003-0047727 F - Right of Use-Deemed Trust | Income Tax Act - 101-110 - Section 105 - Subsection 105(1) | no s. 105(1) benefit from personal use of personal-use property of a trust | |
| Income Tax Act - 101-110 - Section 105 - Subsection 105(2) | potential s. 105(2) benefit where Opco pays all of the expenses on its property to a portion of which the sister of Opco’s indirect controlling shareholder has a right of (personal) use | ||
| 9 December 2003 External T.I. 2003-0032585 - Immeuble détenu par une succession | Income Tax Act - Section 54 - Principal Residence - Paragraph (c.1) | income beneficiary of estate could be a specified beneficiary using as principal residence | |
| Income Tax Act - 101-110 - Section 107 - Subsection 107(2) | s. 107(2) rollover unavailable to an income beneficiary | ||
| 18 December 2003 Internal T.I. 2003-0044007 F - OPTION D'ACHAT D'ACTIONS RACHETEES | Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b) | full option surrender consideration included under s. 7(1)(b) even though a portion thereof never paid | |
| Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii) | unpaid and defaulted balance of stock option surrender consideration was not property used in a property or business source | ||
| Income Tax Act - Section 54 - Capital Property | employee stock option surrender proceeds were not from the disposition of capital property |
FU2 – Tax Court of Canada finds that Senate vacancies do not invalidate ITA bills passed by it
The taxpayer appealed a reassessment of its 2011 taxation year – made in reliance on a retroactive amendment made to the relevant ITA provision in 2014 – on the grounds that the amending Act was passed by a Senate that had substantial vacancies, contrary to Part IV of the Constitution Act, 1867 (which has detailed provisions respecting the appointment of specified numbers of senators from each province). In granting the Crown’s motion to strike this claim on that basis that it was plain and obvious that it had no prospect of success, Ouimet J stated:
[S]ections 33, 35 and 36 of the Constitution Act, 1867 contemplate the situation where the Senate has vacancies. Section 35 allows the Senate to exercise its powers and vote in the event of vacancies.
Neal Armstrong. Summary of FU2 Productions Ltd. v. The King, 2022 TCC 148 under Constitution Act, 1867, s. 35.
CRA finds that remotely servicing a Canadian customer did not give rise to a services PE in Canada
Canco licensed software of a US affiliate (USco), which it used to provide data analytics services to its Canadian customers. The software and Canadian customer data were kept on Canadian servers. USco personnel, physically situate at all times in the US, accessed the servers in order to maintain and (as required) upgrade the software and provide related quality-control services. Could part of the services rendered by USco be considered “services… provided in that other State" for purposes of Art. V:9(b) of the Canada-U.S. Tax Treaty?
CRA noted that the 2008 US Treasury Department Technical Notes included a comment on Art. V:9(b) that “[w]here, for example, an enterprise provides customer support or other services by telephone or computer to customers located in the other State [Canada], those would not be covered by paragraph 9 because they are not performed or provided by that enterprise within the other State.” On this basis, it appeared that USco would not have a sufficient presence in Canada to engage Art. V:9(b).
Although the speaker moved back from the microphone at a key moment, CRA appeared to also consider that payments made by Canco to USco would not be subject to Reg. 105 withholding due to the remote and accessory nature of USco’s services.
Neal Armstrong. Summaries of 29 November 2022 CTF Roundtable, Q.4 under Reg. 105(1) and Treaties – Income Tax Conventions – Art. 5.
CRA rules that providing for a partial acceleration of a forward contract did not de-grandfather it from the synthetic disposition rules
A monetization arrangement that was grandfathered from application of the synthetic disposition rules for deferring gain on the shareholding of a holding company (“Holdco A”) in a public company entailed a secured loan from a financial institution (“FI”) to Holdco A and a cash-settlement forward agreement between Holdco A and FI. A reference index was used in determining both the interest rate under the loan and the reference price under the forward agreement.
The synthetic disposition rules apply to agreements and arrangements entered into after March 20, 2013, and to earlier agreements or arrangements whose terms are extended after that date. CRA ruled that the index substitution would not result in the application of s. 80.6 (i.e., no loss of the deferral).
CRA ruled that amendments (represented not to give rise to a novation) to the forward agreement to provide for the right to accelerate the maturity date under the forward agreement in respect of part of the reference shares would not engage the application of s. 80.6.
Neal Armstrong. Summary of 2022 Ruling 2022-0930901R3 F under s. 80.6.
CRA treats the cancellation of escrow shares as triggering a deemed dividend
Under an agreement for the sale of the target solely for shares of the purchaser, a portion of such shares were placed in escrow at the time of their valid issuance – then were subsequently cancelled to satisfy an obligation of the vendor to repay a downward adjustment to the purchase price equal to such shares’ value (which exceeded their paid-up capital).
CRA indicated that the vendor would be deemed to have received a dividend under s. 84(3) to the extent that the amount paid by the purchaser on the cancellation of the escrow shares exceeded their PUC, and that the amount so paid would equal the amount of the downward adjustment: the vendor should be viewed as having received an amount equal to the downward adjustment on the cancellation of the escrow shares in order to satisfy its obligation to repay the overpayment of the purchase price.
The wording of the question begged the question by describing the transaction as a repayment rather than adjustment of the purchase price, but there was nothing in the wording of the response to suggest that CRA was sensitive to how the question was framed.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.3 under s. 84(3).
CRA confirms that it generally will not provide advance guidance on TCP status
CRA confirmed that it does not offer a program to confirm, before the transfer of property (or an audit), whether it is taxable Canadian property, so that a purchaser may consider that it needs to withhold under s. 116 where there is uncertainty as to whether the purchased property is TCP. Although Rulings will not make determinations of fair market value or of facts, it could be contacted for a pre-ruling consultation, in response to which it could provide a view on its ability to rule or not, and on what information would be expected from the taxpayer.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.2 under s. 116(5).
CRA elaborates slightly on its policy re annual reversing loans by an LP to its limited partners
We have published a page setting out the questions posed at yesterday’s CRA Roundtable at the Annual CTF Conference together with abbreviated summaries of CRA’s oral responses.
Q.1 repeated CRA’s now well-known position (announced at the 2022 APFF Roundtable, Q.5) accommodating the making of loans by a limited partnership to its limited partners to avoid negative ACB gains that would have arisen by making the same payments as draws. In addition to summarizing its 5 conditions for the APFF-announced policy to apply, CRA made some short oral editorial comments in relation to the 1st and 4th conditions, that perhaps shed further light on their interpretation. These two conditions are laid out below, together with a paraphrase of the two related oral comments in bold:
1. The loan should not be made in satisfaction of a return of contributions of capital of the partner. (This position is meant to permit only the distribution of profits.) …
4. The loan should be made primarily for the purpose of avoiding a deemed gain under s. 40(3.1) that would be realized by the partner at the end of the partnership’s fiscal period, and that would solely be due to the timing difference between the addition in, and deduction from, the calculation of the ACB of the partnership interest related to the partner’s share of the partnership-adjusted income, and the distributions to the limited partner in respect of the period on their side. (This administrative position enables the partner to enjoy the income being earned during the year because of the technical mismatch between the timing of the income inclusion and the distributions.)
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.1 under s. 40(3.1).