News of Note
We have translated 6 more CRA interpretations
Email this ContentWe have translated 6 translations of CRA interpretations released in February of 2003. Their descriptors and links appear below.
These are additions to our set of 2,558 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 20 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
632738 Alberta – Tax Court of Canada confirms the refusal of a company to not disclose its reasons for engaging in transactions on grounds of privilege
The taxpayer was assessed under s. 103(1). The individual wholly-owning it refused to answer questions posed on his examination for discovery, that were aimed at eliciting the reason for which various transactions were engaged in by the taxpayer and other group companies, on the grounds that he and the taxpayer did not have any information pertaining to those questions that could be provided without disclosing information that was protected by solicitor-client privilege.
Sommerfeldt J found, in the context of a Crown motion brought for an order for the individual to answer the questions, that the taxpayer had not impliedly waived solicitor-client privilege by disputing the s. 103(1) assessment (which put in issue its principal reason for the transactions) given that in its pleadings and on discovery it had not relied on legal advice as part of its position. He then stated:
Although I will not issue an order that would require the Appellant, in response to any of the Disputed Questions, to disclose information that is subject to solicitor-client privilege, I will note that … unless the Appellant furnishes the information in writing to the Respondent no later than ten days after this Appeal is set down for trial, the Appellant will require leave of the trial judge [under Rule 96(1)], in order to introduce that information at trial.
I suspect that the Appellant is of the view that it can make its case without introducing the privileged information at trial.
It is quite unclear how the trial judge could impose the suggested potential Rule 96(1) “penalty,” for not disclosing its reasons on discovery, if at trial the taxpayer simply advances its reasons for the transactions without referring to any related legal advice.
Neal Armstrong. Summaries of 632738 Alberta Ltd. v. The King, 2023 TCC 117 under General Concepts – Solicitor-client privilege, Purpose/intention.
CRA indicates that s. 56(1)(r)(i) rather than s. 5(1) applies to inducement payments made by the government directly to a prospective hospital employee
CRA indicated that where a provincial government sponsors a program that is designed to deliver incentive payments or earnings supplements directly to eligible nurses, such amounts are included in their income under s. 56(1)(r)(i) (“earnings supplements provided under a [government-sponsored] project … to encourage individuals to obtain or keep employment”) whereas if it sponsors a program designed to have employers deliver the payments directly to them, such amounts are included in their employment income under s. 5(1). This distinction is significant, in part, because in the first case, no source deductions are required for Canada pension plan or employment insurance premiums.
CRA noted that the Ontario Community Commitment Program for Nurses (CCPN) (which paid $25,000 to nurses to induce them back into practice) fell into the second (s. 5(1)) category.
Incentive amounts to someone who already is an employee paid by someone other than the employer generally still constitute employment income to the employee (see, e.g., Philp). However, s. 6(3)(b) apparently assimilates to employment income only inducement payments made by the employer to a prospective employee rather than by a third party. The above interpretation may be more aligned with s. 6(3)(b) having a limited scope rather than being an application of the interpretive principle that the more specific provision, if it applies, supplants the more general provision (see, e.g., Onenergy).
Neal Armstrong. Summary of 23 March 2023 External T.I. 2023-0967391E5 under s. 56(1)(r)(i).
Bonnybrook – Federal Court of Appeal finds no reviewable error in CRA’s decision that failure to file returns for 13 years was not justified by major health problems
For its 2003 to 2015 taxation years, Bonnybrook did not file corporate tax returns and, consequently, was not entitled to receive dividend refunds. The Minister’s denial of Bonnybrook’s initial application in May 2016 for relief (based on the serious health issues for many years of its sole director) was found at 2018 FCA 136 to be based on the incorrect view that s. 220(3) does not accord the Minister the discretion to extend the limitation in s. 129(1) in order to obtain the dividend refunds. The FCA directed the Minister to reconsider. The Minister then requested and received details of the director’s health problems. In her reconsideration decision, the Minister acknowledged that the health issues were serious but concluded that taxpayer relief was not warranted because the director was capable of arranging for assistance in filing the returns and should have done so.
In finding that there were no reasonable grounds for interfering with this decision, Woods JA applied the Vavilov principle that in order for the Minister’s decision to be reasonable “the outcome should be considered in light of the underlying rationale to ensure that the decision as a whole is transparent, intelligible and justified” - and concluded that the decision satisfied those requirements. She also stated:
The fact that the Minister did not discuss the harshness of the tax result does not mean that it was not considered and does not render the decision unreasonable.
Neal Armstrong. Summary of Bonnybrook Park Industrial Development Co. Ltd. v. Canada (National Revenue), 2023 FCA 145 under s. 220(3).
It may be desirable to deliberately taint a non-resident estate (through a small bequest to a distant Canadian relative) as a s. 94(3) trust so as to access s. 164(6)
CRA has considered (e.g., in 2010-0384531E5) that a non-resident estate of a deceased resident may only use s. 164(6) to reduce or offset the deceased’s gain under s. 70(5), by carrying back a capital loss realized by it on shares, where such shares are taxable Canadian property (TCP).
This issue might be addressed by drafting the will such that the non-resident estate will have a “resident contributor,” so that the estate will be deemed by s. 94(3) to be resident, thereby permitting (per 2012-0437211I7) the estate to elect under s. 164(6) even if the shares are not TCP.
Given that the deceased likely would qualify as a “resident contributor” and that the definition of “beneficiary” in s. 94(1) includes those who are “beneficially interested” in the estate (as expansively defined in s. 248(25)), a minor or contingent bequest to a distant resident beneficiary should result in there being a “resident beneficiary” so as to engage deemed residency for the estate.
Neal Armstrong. Summary of H. Michael Dolson, Balaji (Bal) Katlai, and Leanne Rodrigo, “Will Planning, Subsection 164(6), and Non-Resident Trusts,” International Tax Highlights, Vol. 2, No. 3, August 2023, p. 15 under s. 164(6).
Income Tax Severed Letters 16 August 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Rules referencing OECD guidelines may expand somewhat the OECD influence on ITA interpretive questions
Current or draft ITA rules referencing OECD guidelines now include:
- s. 270(2), which specifies that the provisions in Pt. XIX are to be interpreted consistently with the common reporting standard rules published by the OECD, unless the context otherwise requires
- similar provisions in the anti-hybrid mismatch rules, the draft reporting rules on digital platform operators and the Pillar 2 implementation legislation.
Although this by itself would not have much impact (Canada’s tax treaties are interpreted in light of the OECD commentaries where relevant, without a specific provision to that effect), what is more significant is that these rules refer to the relevant OECD recommendations “as amended from time to time” – which raises the possibility of an interpretive expansions of the rules in the Act through OECD later-in-time materials.
Somewhat conversely, s. 247(2.03) of the draft transfer-pricing rules refer to them being “applied” (not “interpreted”) so as to achieve consistency with the 2022 OECD transfer pricing rules. This seems to direct “the CRA to use a particular vintage of the OECD transfer-pricing guidelines in the application of Canada’s transfer-pricing rules.”
Given the exception in s. 247(2.03) for where “the context otherwise requires,” Canadian courts may not confirm such application where, for instance, they consider that it departs from the arm’s-length principle.
Neal Armstrong. Summary of Michael Kandev, “Interpretation or Delegation: The Increasing Prevalence of Formal References to OECD Materials,” International Tax Highlights, Vol. 2, No. 3, August 2023, p. 9 under ITA s. 247(2.03).
Azzopardi – Tax Court of Canada finds that a limited partner was bound by the settlement made by the partnership’s designated member
After the Minister made an initial determination that the losses of a film partnership for its 2001 fiscal period were $134.9 million rather than the claimed amount of $255.8 million, the partner who was the designated member filed a notice of objection on behalf of the partnership, resulting in the Minister redetermining the loss to be $194.9 million. The taxpayer, who had an interest in the partnership of under 0.115%, took the position that he was entitled to have a say in how the partnership loss was redetermined.
Spiro J rejected the various arguments advanced by the taxpayer, who had an interest in the partnership of under 0.115%, that he should not be bound by the redetermination, including that:
- the Minister should not have accepted the designated member as the taxpayer’s representative (Spiro J found that the designated member was designated as such in the partnership information return or otherwise authorized by the partnership to so act and that it was unnecessary for the taxpayer to have separately authorized that partner to so act under the “streamlined process” contemplated by s. 165(1.15)); and
- the Minister should not have taken 10 years to reassess the taxpayer (Spiro J found that s. 152(1.7)(b) allows the Minister one year to reassess from the time that a redetermination becomes final and binding, and the Minister was well within the one year period).
Neal Armstrong. Summary of Azzopardi v. The King, 2023 TCC 51 under s. 165(1.15).
CRA finds that a non-resident supplied software licences directly to Canadian users rather than to non-resident sales representatives
ACo, a non-resident that was registered under the regular GST/HST registration provisions and had no physical presence in Canada, appointed non-resident representatives to solicit orders from Canadian business end-users to use its software permitting safe access to their company networks. Some aspects of the arrangements made it appear as if Aco was selling the software licences to the representatives rather than the end-users, i.e., it charged an agreed price for each licence to the representative, who established the price at which the licence would be sold to the end-user – and it was the representative who invoiced the end user and was responsible for collecting the invoice.
However, CRA considered that Aco was not making supplies of the licences to the representatives but rather to the end-user in Canada and that GST/HST applied to such supplies. In this regard, it noted that ACo retained all ownership rights in the software, the representative was not granted a licence to use or reproduce or distribute the software, and it was Aco who was solely authorized to provide the related support services to end-users.
Neal Armstrong. Summary of 21 February 2023 GST/HST Ruling 217305 under ETA s. 142(1)(c).
We have translated 6 more CRA interpretations
We have translated 6 translations of CRA interpretations released in March and February of 2003. Their descriptors and links appear below.
These are additions to our set of 2,552 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 20 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).