News of Note
Colmvest – Tax Court of Canada finds that a minority shareholder could not use the ETA s. 186(1) rule to access ITCs
Email this ContentColmvest, which was the 25% shareholder of a corporation (“443307”), incurred legal fees in an arbitration between it and the 75% shareholder (“QF,” which was owned by an individual unrelated to Colmvest’s shareholder) regarding dividend distributions by 443307. Colmvest claimed ITCs relating to the legal fees in reliance on ETA s. 186(1), which required inter alia that Colmvest be “related” to 443307 by virtue of ITA ss. 251(2) to (6).
In finding that Colmvest was not so related to 443307, so that its ITC claims were properly denied, Graham J indicated that:
- QF, not Colmvest, prima facie had de jure control of 443307.
- Although there was a unanimous shareholders’ agreement, “[i]t appear[ed] that none of the governance provisions requiring unanimous consent was ever followed,” so that it was unnecessary to consider what effect those provisions would have on the control of 443307. (It is not at all apparent what difference this would have made even if he had considered those clauses.)
- The referenced phrase in s. 256(5.1) was not used in ss. 251(2) to (6), so that it was unnecessary to consider whether Colmvest had de facto control of 443307.
Neal Armstrong. Summary of Colmvest Holdings Corporation v. The Queen, 2022 TCC 70 under ETA s. 186(1).
We have translated 8 more CRA interpretations
We have published 8 translations of CRA interpretations released in February of 2004. Their descriptors and links appear below.
These are additions to our set of 2,240 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 2/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Choptiany – Tax Court of Canada allows the taxpayers’ appeal from (likely - correct) assessments on the basis that they had been repeatedly stonewalled on discovery
The three taxpayers had appealed the imposition of gross negligence penalties based on what Boyle J characterized as “nonsensical misstatements” regarding them “claiming to be agent for themselves.” Although Boyle J expressed himself more circumspectly than this, essentially it appears that CRA, with the assistance of Crown counsel, sought to hide from the taxpayers that they had been the subject of criminal investigation by CRA, then downplay that fact, in clear breach of the Rules regarding the requirement for the CRA representative on discovery to be knowledgeable and informed, and for incorrect answers given to be corrected and relevant documents provided.
The taxpayers brought two motions before Boyle J, and he issued orders directing the Crown to comply with its discovery-disclosure obligations. This third motion was now brought based on the Crown’s essential non-compliance with the two previous orders. Boyle J noted the extraordinary position of Crown counsel during the hearing of this third motion “that no remedy was warranted because all questions asked had been answered.”
In allowing the taxpayer’s appeals from their penalty assessments, with costs on a solicitor-and-client scale, he stated:
The Respondent has adopted and demonstrated a consistent pattern of non-compliance with this Court’s Orders and Rules with respect to CRA’s audits and investigations involving the Appellants. I find this to have been intentional and deliberate, and that it was undertaken to frustrate these Appellants’ rights to pre-trial discovery on the subject of CRA’s investigation involving them relevant to their appeals. …
The Respondent’s egregious history of defaults and non-compliance in these appeals, that there is no alternative available that could reasonably be expected to cause the Respondent to now comply, and that this has caused prejudice to the Appellants, are reason enough to allow these appeals. This disposition is also necessary to protect the integrity of the judicial process and the rules of law that apply to all parties.
Neal Armstrong. Summary of Choptiany v. The King, 2022 TCC 112 under Rule 95.
If commercially feasible, deferred share consideration can be used instead of a share sale occurring on a cash earnout basis
Some points made on share sale earnouts, or achieving their equivalent without having to address s. 12(1)(g), include:
- The contingent payment terms can be embedded in the terms of special shares issued by the Canadian purchaser, thereby permitting s. 85(1) rollover treatment, and with a Callco needed in the buyer structure to avoid Pt. VI.1 and IV.1, or IV, taxes arising on retraction of such shares.
- It would be important to embed the terms of the earn-out in the special shares themselves so as to not engage the derivative forward arrangement rules.
- Where the vendor has the contingent right to receive additional shares of the purchaser, the receipt of at least some purchaser shares at closing will satisfy that precondition for s. 85(1) to apply, whereas the contingent right to receive shares will not constitute boot under the s. 85(1)(b) wording, thereby permitting the s. 85(1) deferral.
- However, the election form (T2057) creates difficulties in that it refers only to the “share consideration” rather than also including rights to receive shares in that quoted phrase.
- It is suggested that s. 87(7) (which also applies to s. 88(1) wind-ups by virtue of s. 88(1)(e.2)) has the effect of deeming Amalco, as successor to the purchaser, as having incurred an earnout obligation of the latter.
The paper also discusses inter alia ss. 110.6(14)(b) and 111(4)(e) planning in a pre-substantive CCPC context, and various issues (mostly US other than under the foreign-affiliate dumping rules) regarding exchangeable share structuring.
Neal Armstrong. Summaries of Kim Maguire and Jeffrey Shafer, “Trends in Buy/Sell Transactions,” draft 2021 Conference Report under s. 12(1)(g), s. 85(1)(b), s. 87(7) and s. 110.6(14)(b).
Income Tax Severed Letters 5 October 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Use of high-PUC shares rather than a note in a pipeline transaction may be preferred
It is suggested that taking back shares with high paid-up capital (rather than a note) from the transferee Buyco in a pipeline transaction reduces whatever risk there is of s. 84(2) applying.
Neal Armstrong. Summary of Balaji (Bal) Katlai and Hugh Neilson, “Challenges and Caution: Using a Pipeline for Shareholder Remuneration” Tax for the Owner-Manager, Vol. 22, No. 4, October 2022, p. 1 under s. 84(2).
Halwachs – Court of Quebec finds that estimates of a taxpayer’s unreported income based on annual changes to his Swiss bank accounts should be translated using year end spot rates
The ARQ estimated unreported income of the taxpayer for his 2008 to 2010 taxation years from offshore investments based in part on its application of the “indirect variation method” to the bank statements which it had obtained for his Swiss bank accounts. This method was based on the change in the total value of funds held by him from the end of one year to the end of the next.
Breault JCQ found that the results of the application of this method should be converted into Canadian dollars by translating the year end fund balances using the spot exchange rates on December 31 and then taking the differences, rather than by determining the differences in foreign currency and then translating those differences using the average exchange rate for the year (as had been done by the ARQ). He stated:
In this case, since the calculation is based on the last day of each of Mr. Halwachs' taxation years in dispute, the Court is of the view that the same logic should be followed in translating the tax results obtained in this manner into Canadian dollars.
After quoting from ITA s. 261(2) and the Quebec equivalent, he further stated:
[T]he day on which the amount of the variation was determined or "arose" was December 31 of each of the 2008, 2009 and 2010 taxation years.
Neal Armstrong. Summary of Halwachs v. Agence du revenu du Québec, 2022 QCCQ 5817 under s. 261(2).
We have translated 8 more CRA interpretations
We have published 8 translations of CRA interpretations released in March and February of 2004. Their descriptors and links appear below.
These are additions to our set of 2,232 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 2/3 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 |
|---|---|---|---|
| 2004-03-05 | 25 February 2004 External T.I. 2003-0042461E5 F - Invalidité d'un actionnaire/admin./employé | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | premiums paid by corporation on disability policy on its principal employee are non-deductible |
| Income Tax Act - Section 3 - Paragraph 3(a) | disability benefits received by corporation to fund continuing salary-equivalent payments to its chief employee are not income | ||
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | taxable continued payment of salary-equivalent payments to disabled employee, but no taxable benefit from employer’s previous payment of premiums on funding disability policy | ||
| 23 February 2004 External T.I. 2003-0050641E5 F - Fiducie | Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts | no particular mortality table required re donation of a residual interest in a trust to a public charitable foundation | |
| 23 February 2004 External T.I. 2003-0051371E5 F - Déduction des intérêts | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | non-deductible personal residence interest could be converted to deductible interest through sale of rental property to spouse for money borrowed by her | |
| 16 February 2004 External T.I. 2003-0054091E5 F - Rollover for Contractors | Income Tax Act - Section 85 - Subsection 85(1.1) - Paragraph 85(1.1)(a) | construction lien holdbacks are eligible property that can be transferred at a nominal agreed amount | |
| Income Tax Act - Section 56 - Subsection 56(4) | s. 56(4) not applied where construction lien holdbacks are transferred on s. 85(1) rollover basis to transferee, which includes them when they become receivable | ||
| 2 March 2004 Internal T.I. 2003-0045921I7 F - 118(5) - impact d'une clause rétroactive | Income Tax Act - Section 118 - Subsection 118(5) | homologated order with effect of judgment that retroactively eliminated Monsieur’s support obligation re one of his children did not retroactively eliminate the s. 118(5) prohibition | |
| General Concepts - Effective Date | CRA would not apply a retroactive judgment to the affected prior period because it was inconsistent with the actual understanding at the time | ||
| 23 February 2004 External T.I. 2004-0057051E5 F - RAP - Personne séparée | Income Tax Act - Section 146.01 - Subsection 146.01(1) - Regular Eligible Amount - Paragraph (f) | separated spouse’s ownership is relevant | |
| 3 March 2004 Internal T.I. 2004-0061781I7 F - Engagement de non-concurrence | Income Tax Act - Section 9 - Exempt Receipts/Business | Manrell inapplicable where recipient of non-compete carried on the related business | |
| 2004-02-27 | 24 February 2004 External T.I. 2003-0041121E5 F - Avantages imposables-installations récréatives | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | making employer’s resort recreational facilities available to all employees not a taxable benefit |
Frucor Suntory – New Zealand Supreme Court applies the NZ GAAR to treat interest coupons under a convertible loan and forward purchase arrangement as mostly principal
The New Zealand GAAR provided that a tax avoidance arrangement (defined to include an arrangement that has “tax avoidance as its purpose or effect … [or] as 1 of its purposes or effects … if the purpose or effect is not merely incidental”) was void as against the Commissioner. However, Ben Nevis had essentially found that where an arrangement “viewed in a commercially and economically realistic way” did not have the effect of using particular provisions of the NZ Act “in a manner … beyond parliamentary contemplation,” it generally would not be a tax avoidance arrangement. (Thus, the NZ courts got to a somewhat similar result as if there had been a specific statutory safe harbour like ITA s. 245(4), but with more emphasis on economic substance.)
Ignoring interim financing steps, a NZ “Buyco” (DHNZ) in the Danone group financed about ¾ of its acquisition of a NZ target company with a $204 million interest-bearing advance from Deutsche Bank pursuant to a note that was convertible into non-voting shares of DHNZ. Contemporaneously with the advance, the Singapore immediate parent of DHNZ (DAP) paid Deutsche Bank $149 million pursuant to a forward purchase agreement to acquire the shares to be issued on maturity of the note.
William Young J indicated that the economic substance of the arrangements was that Deutsche Bank advanced only $55 million to DHNZ (being the difference between the $204 million advance and the $149 million paid by DAP under the forward purchase agreement) and that the $66 million in “interest” coupons paid by DHNZ to Deutsche Bank over the term of the $204 million advance amounted to repayment of that $55 million and interest on an amortizing basis.
In finding that there was thus a tax avoidance transaction (so that the Commissioner appropriately treated $55 million of the “interest” payments as being non-deductible), he stated:
[T]he effect of the arrangement was that DHNZ sought to obtain deductions in relation to $55 million in principal repayments. These are provided for in the Act to meet financing expenses and not repayments of principal. DHNZ was thus claiming deductions for expenses which, in economic substance, it had not incurred. This use of the relevant deduction provisions of the Act lay outside of parliamentary contemplation as to the use of those provisions.
This decision perhaps has the greatest interest in the context of the announced intention of Finance “to add an explicit economic substance rule to the GAAR.” Its finding that the Parliamentary intent was to provide deductions only for real financing expenses is also somewhat reminiscent of Global Equity (finding that it is an abuse of s. 9 to recognize losses not corresponding with commercial reality).
Neal Armstrong. Summary of Frucor Suntory New Zealand Limited v Commissioner of Inland Revenue, [2022] NZSC 113 under s. 245(4).
CRA indicates that whether a virtual medical service is rendered at the location of the health professional or of the patient requires a review of the provincial licensing requirements
S. 118.4(2)(a) indicates, respecting references in various provisions to listed types of health-care professionals, that “where the reference is used in respect of a service rendered to a taxpayer,” the reference to an authorized health care professional refers to authorization “pursuant to the laws of the jurisdiction in which the service is rendered.” In the context of services rendered virtually, is this referring to the health care professional’s location at the time of rendering the services, or to the location of the patient at such times? CRA stated:
It is a question of fact whether a virtual medical service is considered rendered at the location of the health care professional, the location of the patient, or both. Many governing bodies regulate virtual medical services performed within their province. This can include licensing requirements for professionals performing virtual medical services within their province, licensing requirements for professionals in their province performing virtual medical services for a patient in another province, licensing requirements for professionals performing virtual medical services from outside their province for an individual within their province, and so on. Each of these requirements must be considered before a determination can be made.
This indicates that CRA does not want to address in the abstract the question of whether health-care professionals are “authorized” if they are licensed in the location where they are sitting at their screens but not where their patient is located, or vice versa, without reviewing the actual licensing rules.
Accordingly, this interpretation does not illuminate the question as to whether a professional working outside Canada can be considered to be rendering services in Canada to Canadian clients for purposes of Reg. 105.
Neal Armstrong. Summary of 29 June 2022 External T.I. 2022-0923441E5 under s. 118.4(2)(a).