News of Note

An individual with no connection to Canada paid significant tuition fees while in attendance at U.S. universities prior to 2012 then, on immigrating to Canada, claimed his “unused” tuition tax credits as a deduction from Canadian tax. Those provisions referred to an individual’s “taxation year.” The Tax Court applied the Oceanspan principle that “a non-resident with no source of income in Canada, was not a ‘taxpayer’ and therefore did not have a taxation year” (para. 29). The Tax Court rejected the taxpayer’s position that s. 250.1(a) had the effect of deeming any non-resident to have a taxation year - and instead indicated that this provision only “applies where a non-resident must have a taxation year if a provision of the Act is to operate as it is intended to operate, including in respect of another taxpayer,” for example, respecting a non-resident trust with a resident beneficiary recognizing income under s. 104(13) based on when that trust has a taxation year end.

In the Court of Appeal, Stratas JA stated (at para. 3) that “Oceanspan is … directly on point … [and] binds us, just as it bound the Tax Court,” and further rejected the taxpayer’s argument - that s. 250.1 supersedes Oceanspan and has the effect of deeming every non-resident person to have a taxation year in Canada – and expressed agreement here as well with the Tax Court’s reasons.

Neal Armstrong. Summary of Marino v. Canada, 2022 FCA 115 under s. 248(1) – taxation year, and s. 250.1(a).

A monetization arrangement that was grandfathered from application of the synthetic disposition rules for deferring gain on the shareholding of a holding company (“Holdco A”) in a public company entailed a secured loan from a financial institution (“FI”) to Holdco A and a cash-settlement forward agreement between Holdco A and FI. A reference index was used in determining both the interest rate under the loan and the reference price under the Forward Agreement.

As a result of the discontinuance of the reference index, it will be replaced for such purposes by a similar index.

The synthetic disposition rules apply to agreements and arrangements entered into after March 20, 2013, and to earlier agreements or arrangements whose terms are extended after that date. CRA ruled that the index substitution would not result in the application of s. 80.6 (i.e., no loss of the deferral) - and also provided a tentative opinion “that there is a reasonable argument that Holdco A could lose the benefit of the transitional relief to the extent that the assignment of the Monetization Agreement would have the effect of novating it.”

Neal Armstrong. Summary of 2021 Ruling 2021-0880641R3 F under s. 80.6.

CRA confirmed the proposition that in assessing a person’s net tax under s. 296, it was required to allow any valid but unclaimed rebate claims of the person irrespective of whether the normal rebate application period has expired or not yet expired – and is revising its Audit Manual to further clarify this point.

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.9 under ETA s. 296(2.1).

A plan for the tax-free distribution of funds of family companies to family trusts entailed transactions that were intended to cause s. 75(2) to attribute substantial dividends, paid by the family companies to the trusts, to family holding companies so that the s. 112(1) intercorporate dividend deduction applied. However, Sommerer unexpectedly found that s. 75(2) did not apply to sales of property for their FMV (an element of the plan). CRA assessed the trusts on the basis that they had received taxable distributions from the operating companies.

Before allowing the appeal and dismissing the trusts’ petition, and in finding that the principle in Fairmont Hotels and Jean Coutu - that a “court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability” - was not limited to situations of requested rectification and applied as well to the equitable remedy of rescission, Brown J stated:

… Fairmont Hotels and Jean Coutu bar a taxpayer from resorting to equity in order to undo or alter or in any way modify a concluded transaction or its documentation to avoid a tax liability arising from the ordinary operation of a tax statute. … While a court may exercise its equitable jurisdiction to grant relief against mistakes in appropriate cases, it simply cannot do so to achieve the objective of avoiding an unintended tax liability.

Neal Armstrong. Summaries of Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26 under General Concepts – Rectification and Rescission, and s. 220(1).