News of Note
CIBC – Tax Court of Canada finds that Aeroplan Miles were supplied by Aeroplan to CIBC as a GST taxable service
Email this ContentCIBC was charged by Aeroplan for the number of Aeroplan Miles that were credited to the cards of CIBC cardholders. CIBC argued that these fees were (1) consideration for intangible personal property (the Aeroplan Miles) that were supplied by Aeroplan, and (2) that such IPP was exempted from GST as being a supply of “gift certificates.”
CIBC perhaps should have succeeded on the first argument – but did not, because two things went against it. First, the drafting of its agreement with Aeroplan was unhelpful: it stated that the fees were paid for referral and arrangement (i.e., promotional) services of Aeroplan and that all other services of Aeroplan were “incidental.” Second, a key CIBC witness testified that the Aeroplan Program allowed CIBC “to attract more customers.”
Based on his finding that CIBC received a taxable service, it was unnecessary for Visser J to consider the second argument – but he did anyway, and found that the Aeroplan Miles did not qualify as gift certificates, stating:
Parliament intended a gift certificate to be an equivalent to money, and to have attributes similar to money. … Aeroplan Miles … fatally ... do not have a stated monetary value.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. The Queen, 2019 TCC 79 under ETA s. 123(1) – supply, s. 123(1) – service, s. 181.2.
Income Tax Severed Letters 24 April 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Trover – Tax Court of Canada finds that a dividend by a sole director could not be backdated to when there was another director
While Ms. Trover was separated from Mr. Trover, their jointly-owned company (Cove) paid amounts into their joint bank account. That same year, she ceased to be a shareholder and director of Cove, and in the subsequent year Mr. Trover, who was now Cove’s sole director and shareholder, purported to sign a resolution that retroactively treated a portion of the amounts paid into their joint bank account as having been a dividend payment by Cove to her. She had not agreed to this treatment.
In finding that Ms. Trover had not received this amount as a dividend (and in reversing the assessment including that amount in her income), Monaghan J stated:
I accept that practice in the “real world” does not always conform with best practice. … [and] that directors and/or shareholders may make a decision and act upon it, even though they may not record that decision in writing until a later date. But that cannot be said to have happened here. All of the evidence is that the only two relevant people, Mr. and Ms. Trower, never agreed that the transfers would be dividends. The decision was a unilateral one by Mr. Trower. He did not have that power before he became the sole shareholder and director.
Neal Armstrong. Summary of Trower v. The Queen, 2019 TCC 77 under s. 82(1)(a).
CRA shows some flexibility as to allocating out of Canada net premiums
Reg. 403(4), in its application to a non-life insurer whose only permanent establishments are in Canada but which earns net premiums from insuring risks outside Canada (“out of Canada net premiums,” or “OCNP”), requires the insurer to allocate the ONCP to the provinces for the Canadian permanent establishments to which they are “reasonably attributable in the circumstances.”
CRA has indicated some flexibility in applying the quoted phrase. It stated that the phrase “denotes … a direct causal connection … between the OCNP and the PE taking in account all the applicable facts of the case.” However:
[W]here a taxpayer has made an allocation under subsection 403(4) and the taxpayer’s approach is reasonable, the CRA should not require the taxpayer to use a different method of allocation. …
[T]he allocation of the OCNP based on where the policies are underwritten … appears to be a reasonable method. Similarly, allocation of the OCNP on some other basis, such as where the contracts are negotiated or serviced … may also be reasonable … .
Neal Armstrong. Summary of 24 October 2018 Internal T.I. 2018-0741041I7 under Reg. 403(4).
CRA finds that an award received by unionized employees based on an unfair labour practice of their employer was a non-taxable receipt
Before concluding that lump-sum awards that the Labour Board ordered an employer to pay to employees for having committed an unfair labour practice would likely “constitute non-taxable damages that are excluded from income,” CRA noted that the awards were made pursuant to a provision of the applicable Labour Relations Act that was “limited to situations where an employee has not otherwise suffered a loss of income, benefits, etc. as a result of the unfair labour practice.”
Neal Armstrong. Summary of 19 March 2019 External T.I. 2018-0748731E5 under s. 3.
Kyard Capital – Court of Quebec finds that it was unnecessary to waive privilege in order to substantiate the nature of legal services provided
The individual taxpayer (“Fontaine”), who was the president and majority shareholder of a corporation (“Kyard”), was assessed under the Quebec equivalent of s. 15(1) when Kyard paid his fees for defending against an action brought against him by his ex-spouse. He did not disclose to the ARQ the text of the legal accounts on the grounds of privilege. In this regard, Chalilfour JCQ noted that this decision to not waive the privilege made Fontaine’s task more difficult but should not be “fatal,” stating that “Otherwise taxpayers would be required to waive professional privilege.” Cf. Orth.
She then accepted Fontaine’s testimony (without any real documentary corroboration) that the action had been defended as a threat to Kyard’s business - so that he had not received a taxable benefit.
Neal Armstrong. Summaries of Kyard Capital 2007 Inc. v. Agence du revenu du Québec, 2019 QCCQ 1617 under s. 15(1) and s. 6(1)(a).
CRA’s policy re employee discounts on merchandise does not extend to discounted services, e.g., no commissions on insurance
CRA stated that as its “administrative position concerning discounts on merchandise and commissions from personal purchases does not apply to discounts on services,” employees of an insurance broker who acquired insurance coverage for personal purposes (e.g., home or automobile insurance) should generally recognize a taxable benefit equal to the commission customarily charged by their employer for such coverage and which was not charged to them.
Neal Armstrong. Summary of 26 March 2019 External T.I. 2017-0729441E5 under s. 6(1)(a).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in March 2012. Their descriptors and links appear below.
These are additions to our set of 837 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Resource Capital Fund IV LP – Full Federal Court of Australia finds that the effecting of a share sale pursuant to an Australian Scheme of Arrangement pointed to an Australian source
Two Caymans investment LPs with mostly U.S.-resident limited partners realized income-account gains from the disposal, pursuant to an Australian Scheme of Arrangement, of a significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held leases in Australia and carried out an operation there of mining lithium ores and processing them. Pagone J had found that such gains were derived from an Australian source notwithstanding that significant decisions were made outside Australia by the general partner’s investment committee and that the manager was outside Australia.
In affirming this finding, the Full Court stated:
Here, each respondent’s “enforceable right” to the proceeds of the sale of the interests and shares in Talison Lithium arose from the scheme of arrangement. That arrangement took place in Australia, and accordingly, because the scheme was the “proximate” origin of the profits earned, and because of the other connections with Australia summarised by the primary judge … including the location of the mine in Western Australia, those profits had a source in Australia.
Pagone J had also found that the shares of Talison Lithium were not taxable Australian real property because their value was attributable more to the “downstream” lithium processing operations than to the “upstream” mining operations. The Full Court reversed this finding, partly based on its view that the on-site processing operations were part of the mining operation, so that most of the processing assets also were mining assets (and the associated leases, effectively mining leases).
Neal Armstrong. Summaries of Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51 under s. 152(1), s. 115(1)(a)((ii) and s. 248(1) – taxable Canadian property – para. (d).
CRA recognizes the binding nature of audit settlement agreements
CRA has released its communiqué on audit settlement agreements (i.e., an agreement between the taxpayer and CRA for settlement of an audit issue). CRA recognizes that Rosenberg found audit agreements to be binding. However, CRA does not explicitly acknowledge the point made in Savics and the cases cited therein that, notwithstanding s. 169(2.2), “if a settlement-implementing reassessment is not in keeping with the agreement that the taxpayer and the fiscal authority have reached, a waiver of the right to appeal will not preclude the taxpayer from appealing in respect of the aspect of the reassessment that does not coincide with the settlement agreement.”
CRA recognizes the Galway principle, stating:
Auditors cannot contravene provisions of the ITA or ETA in negotiating and finalizing an audit agreement. They must assess taxes on the basis of the facts as determined, in accordance with legislation and [in a CRA editorial addition] CRA policies. This means that audit agreements normally relate to subjective audit issues.
In what may be a similar point, CRA also states that “Taxpayer relief requests are to be dealt with on their own merit separately and solely on the basis of the taxpayer relief provisions.”
Additional considerations arise in transfer-pricing disputes, where a Treaty mutual agreement procedure may be engaged.
Neal Armstrong. Summaries of AD-19-01 Audit Agreement and Waiver of Objection Rights Guidelines 2019-02-19 under s. 152(1) and s. 169(2.2).