News of Note
Dow Chemical may raise the issue as to whether a provision that effectively gives CRA the discretion to impose tax is constitutional
Email this ContentIt is suggested that in Dow Chemical, the Supreme Court, perhaps on its own initiative, may consider the constitutionality of s. 247(10), which effectively provides the Minister with discretion to determine the amount of tax resulting from taxpayers’ transfer-pricing transactions, without express guidance on how to do so.
Note that Vanguard Coatings (rev’d on narrower grounds in the FCA) stated:
[S]ection 34 of the Excise Tax Act is no paradigm of the rule of law. It is, indeed, so contrary to the rule of law that it can surely be declared to be unconstitutional. It accords arbitrary administrative discretion, without any guidelines or directives, to the Minister whose determination is not subject to any objective second opinion as is inherent in an appeal provision.
S. 53 of the Constitution Act, 1867 provides that Parliament alone has the power to impose a tax, and a provision. such as s. 247(10), which grants the Minister discretion to override results otherwise determined by the legislation, may run counter to Canada’s system of the rule of law (expressly recognized in the preamble to the Constitution Act, 1867 - see also Provincial Judges Reference, [1997] 3 SCR 3, at para. 10 [and see also Mark Anthony]).
Neal Armstrong. Summary of Pascale Desmarais and Olivier Fournier, “Dow Chemical and the Constitutionality of Subsection 247(10),” Canadian Tax Focus. Vol. 13, No. 3, August 2023, p. 10 under Constitution Act, 1867, s. 53.
Fransen – Tax Court of Canada finds that failure to review a return in the presence of red flags was wilful blindness, not just gross negligence
The taxpayer, an employed construction engineer, claimed a fictitious net business loss of $333,418 for his 2009 taxation year with the assistance of Financial Arbitrators and DSC Lifestyles (“DSC”), thereby purportedly generating a full refund of that year’s source deductions and further refunds from carrybacks to his three previous years. He signed his return without reviewing it, and agreed to pay a fee to DSC equal to 20% of the refunds generated. He was instructed to forward any requests from CRA to DSC and to not discuss with any third party any of the tax information provided to or received from DSC.
Lyons J affirmed the imposition of an s. 163(2) penalty. After reviewing the various red flags, which did not generate any inquiries by the taxpayer, she stated:
In my view, he chose not to inquire because he strongly suspected, or suppressed a suspicion, that the inquiry would have provided him with knowledge that the statement in the Return was false thereby he would have discovered such inconvenient truth. This amounts to wilful blindness … .
She briefly found in the alternative that he had been grossly negligent.
Neal Armstrong. Summary of Fransen v. The King, 2023 TCC 107 under s. 163(2).
CRA releases the official 2023 IFA Roundtable
CRA has released the final version of the May 17, 2023 IFA Roundtable. For your convenience, the table below provides links to the official responses, and to the summaries thereof that we prepared in May.
Income Tax Severed Letters 2 August 2023
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Canafric – Tax Court of Canada finds that developing new pie recipes was SR&ED
Canafric specialized in developing frozen pies for grocery chains and restaurants. Customers would request specific targets, such as content (e.g., low fat and salt, or halal), shelf life (e.g., without preservatives), taste acceptability and texture. Canafric averaged around six projects a year in which it would elaborate a recipe designed to meet such requirements, test the recipe and send the sample product to a “taste panel” – and evaluate the reasons for any failure.
The chief beef of the CRA technical advisor was that each breakthrough made was transferrable from one product to the other so that most of the projects lacked technological uncertainty. In rejecting this view and before finding that all of the SR&ED claims at issue were to be allowed, Rossiter C.J. stated that the CEO “clearly demonstrated that this was not the case because the ingredients will react differently when used in different products.” Regarding two of the projects where the CRA technical advisor considered there to be insufficient documentation, any such gaps were filled by the testimony, with Rossiter C.J stating:
Documentary evidence is not mandatory.
More generally, all five criteria established in Northwest Hydraulics were met.
Neal Armstrong. Summary of Canafric Inc. v. The King, 2023 TCC 108 under s. 248(1) - SR&ED.
Greer – Tax Court of Canada finds a shareholder benefit regarding a transfer to an individual shown on the register as holding one of the 1000 shares
Spiro J applied the presumption in s. 181(3) of the Business Corporations Act (NB) that an entry in a share register is, in the absence of evidence to the contrary, proof that the holder shown in the register is the owner of the share, to find that the transfer of four properties (valued by Spiro J at over $2.4 million) by a corporation to the taxpayer, who was shown in the register as holding one of the 1000 shares, gave rise to a corresponding shareholder benefit under s. 15(1).
The Minister had initially assessed the wrong taxation year of the taxpayer (2006), but later reassessed his 2005 taxation year (the correct year) beyond the normal reassessment period. Spiro J found that this reassessment was not statute-barred under s. 152(4)(a)(i), stating that “[h]is failure to consult a tax professional before filing his 2005 return reflects a lack of reasonable care and was, therefore, negligent.”
Neal Armstrong. Summary of Greer v. The King, 2023 TCC 100 under s. 15(1) and s. 152(4)(a)(i).
Hydro-Québec – Federal Court of Appeal finds that an s. 231.2 requirement that essentially repeated a requirement previously rejected under s. 231.2(3) was not res judicata
Hydro-Québec (2018 FC 622) found that an s. 231.2 requirement for information concerning a large grouping of Hydro-Québec customers should not be authorized pursuant to s. 231.2(3) on the grounds inter alia that they did not constitute an “ascertainable group.” In 2019, CRA provided an essentially identical requirement to Hydro-Québec, and the Minister’s motion for authorization of this requirement pursuant to s. 231.2(3) was dismissed at 2021 FC 1438 because the matter was res judicata.
In reversing this decision, and remitting the matter to the Federal Court for a determination as to whether the s. 231.2(3) authorization should be granted, Goyette JA noted that s. 231.2(3) conferred a discretion on the Federal Court, which “indicates that this is not the usual situation of a judge applying the Act in light of the facts before the court”. Furthermore, one could envisage situations in which CRA in proper fulfilment of its audit obligations could make a subsequent demand for information that was very similar to a previous one in order to respond appropriately to new information learned during the audit.
She provided further reasons in support of allowing the Crown's appeal, but her colleagues (Boivin and LeBlanc JJA) indicated that they did not endorse those reasons.
Neal Armstrong. Summary of Canada (Canada Revenue) v. Hydro-Québec, 2023 CAF 171 under s. 231.2(3).
We have translated 6 more CRA interpretations
We have translated a further 6 translations of CRA interpretations released in March of 2003. Their descriptors and links appear below.
These are additions to our set of 2,539 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 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Sindhi – Tax Court of Canada finds that a residence was not “occupied” notwithstanding weekly overnight stays
The appellant agreed in July 2016 to purchase a new home for $413,847, but by the time of the closing in March 2018, he had lost his source of employment income and broken up with his partner. He nonetheless closed with financial assistance from his parents and from a private mortgage. He did not consume any meals at the residence, and only stayed there for approximately two nights per week. The only housekeeping items on the premises were a mattress, sheets and pillows and a table. He eventually sold the residence for $455,000.
Rossiter CJ found that, although the appellant satisfied the requirement under s. 254(2)(b) of the GST/HST new housing rebate rules that, at the time of agreeing to purchase, he had intended to occupy the residence as his primary place of residence, he had not satisfied the requirement under s. 254(2)(g) that he had in fact occupied the residence as a place of residence, stating:
[O]ccupancy is something more than simply having a mattress with a set of sheets and pillowcases and a table on the premises. Although the Appellant did some measure of staying at the premises in question, two nights per week, this certainly could not classify one as occupying the premises.
Rossiter CJ went on to note that the appellant continued to live most of his time with his parents, where he kept most of his personal effects and mailing address. He accepted the “frustrating event” doctrine, but stated:
To invoke frustration, the surrounding circumstances must make the frustrating event unforeseeable, beyond the buyer’s control, and deny the buyer any alternative pathway to having the property be their primary residence … .
That test was not satisfied here.
Before denying the rebate on the above grounds, Rossiter CJ, rejected the Crown’s argument that s. 254(2)(g) required the appellant to have occupied the property as his “primary place of residence” given the telling contrast between the wording of s. 254(b) (referring to a “primary place of residence”) and s. 254(g) (referring only to a “place of residence”.)
Neal Armstrong. Summaries of Sindhi v. The King, 2023 TCC 102 (Informal Procedure) under ETA s. 254(2)(g) and Statutory Interpretation – Consistency.
CRA declines to discuss whether an intra-government “transfer” can be a non-arm’s length supply
A provincial government department constructs a school and then transfers it for nominal consideration to another department within the same government which is a school authority that will use the school primarily in exempt activities, although it is also registered because it engages in commercial activities including the supply of parking spaces.
CRA noted that ETA s. 155 would apply to deem the supply to be made for FMV consideration if this transfer was a supply between persons not dealing with each other at arm’s length, but did not discuss the issue of whether a transfer of property between two departments within the same government could be such a transaction, nor did it discuss whether a transfer within the provincial government can be a supply.
Neal Armstrong. Summary of 23 March 2023 GST/HST Interpretation 245296 under ETA s. 155(1).