News of Note

Whether the taxpayer could deduct his 92% share of the losses incurred by a Mauritius partnership (of which he was the dominant partner) from his other sources of income turned on whether the partnership was carrying on a “business,” whose definition in the Mauritian Income Tax Act 1995 relevantly referred to "any trade … or undertaking, or any other income earning activity, carried on with a view to profit." The partnership employed six people to manage its 200 acres of mountainous terrain and generate revenues from organizing annual hunts for deer on the lands (as well as from sales of live monkeys).

Before the Board, both parties agreed that, based on Grieve, [1984] 1 NZLR 101, Backman, and Ingenious Games (no mention was made of Stewart or Paletta), the question as to whether the activities of the partnership were carried on “with a view to profit” turned on the taxpayer’s subjective intention, and that the aim to make a profit need not be the sole or main aim and it could be ancillary.

Dame Philippa Whipple found that the Supreme Court of Mauritius had committed an error of law in deciding against the taxpayer on the basis that the expression "with a view to profit," although not referring to immediate profit, meant “an activity carried on with a reasonable expectation of making a profit in [the] near future.” Furthermore, she found that the panels below had not taken issue with the credibility of the taxpayer, who had testified that he had an intention of making a profit (although, in fact, the partnership had sustained significant and continued losses for the 10 years under review). Accordingly, the taxpayer's appeal was allowed.

Neal Armstrong. Summary of Galea v The Assessment Review Committee & Anor (Mauritius) [2025] UKPC 17 under s. 3(a) – business.

After CRA was given the example of auditors auditing a private company and asking for the personal banking records of all the shareholders, CRA listed the following as situations where it may require personal banking information, which it considers itself authorized to do pursuant to s. 231.1(1):

• Where it conducts an indirect verification of income, in which case it must obtain the personal banking records of the shareholders of the closely held corporation, as well as their spouses and common law partners, and all contributing members of each household unit.
• Where it is unable to rely on accounting records due to weak internal controls or the absence of segregation of duties.
• When inconsistencies are noted between the apparent lifestyle of the taxpayer and the reported income.
• In order to verify transactions between the corporation and the shareholder.

Neal Armstrong. Summary of 2024 Alberta CPA Roundtable, Q.8(a) under s. 231.1(1).

In September 2007, a company (“Nexia”), which traded in loss companies, acquired all of non-voting common shares of an insolvent public corporation (“Biomerge”) (representing 80% of its equity) and 45% of its voting common shares. In May 2009, a plan of arrangement was implemented under which the units of an income fund (“Total”), which was becoming subject to tax under the “SIFT” rules, were exchanged for new common shares of Biomerge, the existing voting common shares of Biomerge were largely cashed-out, and Total was wound-up into Biomerge (now, “New Total”) pursuant to s. 88.1(2). The former Total unitholders held 99.8% of the New Total equity.

In confirming the decision below that these transactions were an abuse of s. 111(5), Stratas JA indicated that:

• It was immaterial that Deans Knight did not deal with trust conversions, as the “object, spirit, and purpose of s. 111(5) does not change depending on the facts of the particular case nor on the status of the acquiror.”
• It was also immaterial that s. 256(7)(c)(i) (dealing specifically with a transaction of this type) was added only subsequently (“Deans Knight … did not look at other provisions enacted after s. 111(5) in order to determine the object, spirit, and purpose of s. 111(5).”
• The Tax Court had appropriately found “that this particular series of transactions frustrates the object, spirit, and purpose of s. 111(5), which is [quoting Deans Knight] ‘to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders’."

Neal Armstrong. Summary of Total Energy Services Inc. v. Canada, 2025 FCA 77 under s. 245(4).

A real estate broker carried on his practice through a wholly-owned corporation (A Co), which received all of its commissions, net of service charges, from a real estate brokerage firm (Realty Co). Realty Co was 25% owned by a holding company of the individual, and was otherwise owned by unrelated persons. Was such commission income of A Co excluded pursuant to s. 125(1)(a)(i)(B) from its active business income by virtue of being described in (a)(i)(A) of the “specified corporate income” (SCI) definition?

Given that (a)(i)(A) of the SCI definition was satisfied (the shareholder of A Co held an indirect interest in Realty Co.), this question turned on the application of (a)(i)(B) of that definition, which tested whether “all or substantially all” of the active business income of A Co for the year was from the provision of services or property to persons (other than the private corporation, i.e., Realty Co) with which it dealt at arm’s length. CRA indicated that this turned on the factual question of whether “A Co is receiving all or substantially all of its commission income from the provision of real estate services to clients with which it deals at arm’s length, and not Realty Co,” i.e., was A Co providing its services to Realty Co or to arm’s length clients?

This response perhaps implies that the SCI carve-out could be avoided with the appropriate structuring.

Neal Armstrong. Summary of 23 January 2025 External T.I. 2024-1030091E5 under s. 125(7) – SCI – (a)(i)(B).