News of Note
CRA does not accept that s. 160 cannot apply to a death payment made out of a segregated fund
Email this ContentIn Higgins, the payment of death benefits under a London Life segregated fund to named beneficiaries (the daughters of the tax debtor) was found not to constitute a transfer by the estate to which s. 160 could apply given that London Life, in paying such benefits, was fulfilling a direct obligation to them under what Rowe DJ characterized as being predominantly an insurance policy.
CRA declined to indicate that it was following Higgins and suggested that Higgins was inconsistent with Orpin v. Littlechild, 2011 ONSC 7695 - and instead stated that “with so many unique financial products, and various legislation governing them, the application of section 160 of the Act is decided on a case-by-case basis.”
Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q. 11, 2022-0928911C6 under s. 160(1).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations released in June of 2004. Their descriptors and links appear below.
These are additions to our set of 2,175 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA indicates that a renovation or alteration made to a depreciable property may qualify as accelerated investment incentive property
Would a renovation or alteration made to a depreciable property, originally acquired in a taxation year ending prior to November 21, 2018, qualify as accelerated investment incentive property (“AIIP”), notwithstanding that the taxpayer had, prior to that date, been claiming CCA on the original property?
CRA stated that it “considers there to have been an acquisition of property when there is an alteration or renovation to a particular depreciable property, even if this alteration or renovation represents an addition to an already existing property,” so that the requirement in Reg. 1104(4)(a), that the property have been acquired after November 21, 2018, would be satisfied.
CRA also indicated that Reg. 1104(4)(b) would generally be deemed by Reg. 1104(4.1) to be satisfied, provided that “no CCA or terminal loss had been deducted in respect of the alteration or renovation by any person or partnership for a taxpayer year ending before the property was acquired by the taxpayer.” Thus, the renovation or alteration would generally be expected to qualify as AIIP.
Neal Armstrong. Summary of 16 June 2022 External T.I. 2019-0819951E5 under Reg. 1104(4).
Coopers Park – Tax Court of Canada grants production of documents reviewed by the GAAR Committee in a similar case that then was applied to the taxpayer
The taxpayer, which had been assessed under s. 245(2) to deny the carryforward of losses and credits, sought the discovery of proposals made by CRA to two unrelated taxpayers that set out its understanding of the facts and its legal analysis thereof. The CRA auditor had considered such documents (which he had placed in the file) but had not relied on them in auditing the taxpayer.
In finding that they were discoverable, Owen J stated:
[I]n GAAR cases, the legal analysis of the Minister in support of the policy relied upon is subject to discovery. …
[R]eliance is not the test for relevance. … [C]onsideration of the documents in the context of the audit of the Appellant is sufficient to make them relevant for the purposes of discovery.
CRA had relied on the GAAR Committee’s analysis of a similar case in deciding to assess the taxpayer under GAAR, so that a GAAR Committee review of the taxpayer’s transactions was considered unnecessary. After noting that “[i]f the GAAR Committee had considered the Appellant’s case, there is no doubt that the Appellant would be entitled to discovery of all non‑privileged documents considered by the GAAR Committee in deciding to assess the Appellant under the GAAR,” Owen J stated:
[T]he Appellant is equally entitled to all non-privileged documents considered by the GAAR Committee in deciding to assess under the GAAR the unrelated taxpayer described in the Similar Case … because that decision directly resulted in the subsequent decision to assess the Appellant under the GAAR.
Accordingly, such documents were discoverable, subject to redaction of all information identifying third parties, and subject to any claims of solicitor-client privilege.
Summary of Coopers Park Real Estate Development Corporation v. The Queen, 2022 TCC 82 under Rule 83(1).
Stroud – Tax Court of Canada applies the Moldowan REOP tests for GST/HST purposes
Moldowan indicated that an activity should have a reasonable expectation of profit (REOP) to qualify as a business, and suggested that, in determining whether there is a REOP, the “following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.”
Although the relevance of REOP for ITA purposes was subsequently restricted by Stewart, in the meantime, the ETA definition of “commercial activity” was enacted, which excludes, in the case of an individual, “a business carried on without a [REOP].”
After reviewing the unsatisfactory evidence presented by the taxpayer, who had reported very large losses (with meagre documentary support) from a racehorse farm and modest profits from his law practice (in years before he was disbarred), Spiro J stated:
Having applied the criteria … in Moldowan, I find that each factor (other than time spent), weighs heavily in favour of the conclusion that the Appellant did not carry on his farm business with a reasonable expectation of profit.
As the taxpayer did not have a commercial activity, his input tax credit claims were properly denied.
Neal Armstrong. Summary of Stroud v. The Queen, 2022 TCC 86 under ETA s. 123(1) – commercial activity.
The normal option rules do not apply to the grant and exercise of an option on a partnership interest issuance
As a result of a partnership between A and B issuing an option to C for $50, allowing C to become a partner upon a further payment of $60, the partnership realizes a capital gain under s. 49(1) of $50, which typically would be allocated equally to A and B.
Ss. 49(3) and (4) do not apply to reverse the s. 49(1) gain when the option is exercised because the partnership cannot to satisfy the condition in s. 49(4) that the granting taxpayer (in this case, the partnership) have filed a return for the previous year “as required under section 150.” Accordingly, the capital gain on issuance of the option may remain on the partners’ returns.
S. 49(3)(a) includes “in computing the vendor’s proceeds of disposition of the property, the consideration received by the vendor for the option.” However, the issuance of an interest in a partnership would not normally be regarded as a disposition by the partnership, so that it would appear that no further gain is realized in the year of exercise.
Neal Armstrong. Summary of Will House and Janes Painter, “Granting an Option to Acquire an Interest in a Partnership,” Canadian Tax Focus, Vol. 12, No. 3, August 2022, p. 8 under s. 49(3).
Income Tax Severed Letters 10 August 2022
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Sharp – Federal Court of Appeal finds that the taxpayer failed to allege what, if any, criminal investigations of the taxpayer were assisted by information generated by s. 231.2 demands
The respondent taxpayer alleged that s. 231.2 requirement letters issued to him were invalid because they were issued for the predominant purpose of furthering criminal investigations contrary to Jarvis. In finding that the taxpayer’s statement of claim should be struck, Woods JA applied the principle that even “if … a party is a stranger to a transaction, the transaction must still be described with sufficient detail that the other party can identify it” and noted, regarding the taxpayer’s allegation that the Audit Division shared information gathered from the requirement letters with criminal investigators, that the “pleading does not link the alleged sharing of information to any particular criminal investigation.” Furthermore, although a general statement of the Minister suggested “that audits may precede criminal investigations … this is permitted in Jarvis.”
However, the taxpayer was given leave to file an amended statement of claim on the condition that “the pleading identify with particularity the facts giving rise to the cause of action.”
Neal Armstrong. Summary of MNR v. Sharp, 2022 FCA 138 under Charter, s. 8.
Chan – Tax Court of Canada finds that there is a due diligence defence under s. 162(7) where the taxpayer reasonably believed that he was not the foreign property’s beneficial owner
The taxpayer was assessed a penalty under s. 162(7)(a) for failure to file T1135 forms regarding a bank account with the Bank of China (BofC), which he had assisted his father (Joseph) to open up in his name, as well as a gross negligence penalty under s. 162(10)(a). In finding that the taxpayer was not required to file T1135s, Russell J stated:
[A]s Joseph sourced the funding of the account at all times and he alone exercised control and usage of the account, it appears reasonably clear that he alone utilized and thus enjoyed the benefit of the account. Thus I conclude that Joseph was the beneficial owner of the account, while his son the appellant merely held legal title, as his father’s nominee.
Russell J found that the penalties should be vacated for this reason, and also because, in any event, the taxpayer “had reasonable cause to believe that his father, and not he himself, held the beneficial interest in the account assets.” Accordingly, even in the case of the lower threshold for a penalty under s. 162(7)(a), “the defence of due diligence has been established – that is, the appellant reasonably believed in a mistaken set of facts that if true would have made his act or omission to act innocent.”
Neal Armstrong. Summary of Chan v. The Queen, 2022 TCC 87 under s. 162(7), s. 233.3(1) and General Concepts - Ownership.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations released in July and June of 2004. Their descriptors and links appear below.
These are additions to our set of 2,167 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).