News of Note

In implementing a plan to maximize the utilization by family members of the capital gains exemption (“CGE”) on the sale to an arm’s length purchaser of an operating company that was indirectly held by family trusts, the trusts engaged in a dirty s. 85(1) exchange of existing low-basis common shares of a subsidiary for new shares of that subsidiary that included Class F preferred shares, with a joint s. 85 election being filed at an agreed amount that resulted in recognition of a capital gain equaling the aggregate CGE available to the trust’s beneficiaries. The Class F preferred shares were then sold at the closing for an amount equaling their stepped-up ACB to the arm’s length purchaser.

CRA subsequently reassessed on the basis that, since the capital gain had been realized by the trusts in a non-arm’s length transaction and some of the family beneficiaries had not yet attained 17 years, s. 120.4(5) of the “kiddie tax” rules applied to deem the capital gains distributed to those minor beneficiaries to be taxable dividends. To avoid this result, the trusts requested that CRA accept an amended election (beyond the three-year period set out in s. 85(7)) pursuant to s. 85(7.1) for the preliminary exchange for the Class F preferred shares to have occurred on a rollover basis, so that the capital gain was instead realized on the subsequent arm’s length sale of the Class F preferred shares such that s. 120.4(5) ceased to apply.

This request was rejected by CRA on the grounds that it represented “retroactive tax planning,” which was not permissible having regard to the jurisprudence (Canada Life) on rectification.

Before setting aside and remitted to the Minister for redetermination, Walker J stated:

… The Minister’s delegate … imports equitable requirements specific to rectification and rescission without acknowledging any difference in the remedies sought. … They requested only the amendment of the Original Elections, as contemplated in subsection 85(7.1). The Minister’s delegate erred when he stated, “[y]our request is similar to the request Canada Life put forward, in which [the] ONCA said, ‘The court cannot substitute one series of transactions for another to avoid an unintended tax result’”.

The first-level CRA review had been conducted by the immediate CRA supervisor of the auditor who had proposed the reassessments, and the second level review was conducted by the Assistant Director further up the same audit chain. Walker directed that the redetermination be made by CRA personnel who had had no audit involvement.

Neal Armstrong. Summary of Brent Carlson Family Trust v. Canada (National Revenue), 2021 FC 506 under s. 85(7.1).

The appellant (CIBC) 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 Miles) that were supplied by Aeroplan, and (2) that such property was exempted from GST as being a supply of “gift certificates.”

Webb JA rejected the first argument in light of the terms of the agreement between CIBC and Aeroplan, which he found essentially labelled the fees as being for promotional and marketing services. He stated:

The issuance of Aeroplan Miles to CIBC’s customers cannot be elevated to be the predominant supply when such issuance of Aeroplan Miles is not even mentioned in the referral activities for which the consideration was payable. …

The legal relationship between CIBC and Aeroplan is defined by the agreement between these two parties. There is nothing to suggest that this agreement is not a bona fide agreement. …

Given this finding, it was unnecessary for him to address the gift certificate argument, but he nonetheless stated that he should not in any way be considered to be endorsing the Tax Court’s views that the Miles were not gift certificates.

In his dissenting reasons, Stratas JA referred approvingly to the argument in Osler’s memorandum that "'[t]he parties cannot, by a contractual provision, bind each other or the Minister to a particular determination of the predominant element of a single composite supply for GST purposes’," and then stated:

My colleague focuses on literal contractual language and exclusively so. … Now that my colleague’s approach is law, I fear that in the future parties will add words not to change their contractual obligations or the practical, commercial substance of the supply but merely to trigger favourable GST treatment. This may be a boon for cunning drafters and their bag of tricks. …

[T]he element that gives the supply commercial efficacy—the predominant element of the supply—is the right to allocate Miles. But for the right to allocate Miles, there would have been no point in the parties performing their other obligations.

Stratas JA went on to indicate that the Miles acquired by CIBC were deemed under the gift certificate rule (ETA s. 181.2) not to be a supply, so that the fees were not subject to GST, stating:

In the commercial world, Miles function as gift certificates. … They are an exchange device because they may be used as consideration for property or services in the same way as money or a gift certificate.

Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 96 under ETA s. 123(1) – supply, s. 181.2, s. 309(1) and Federal Courts Act, s. 27(1.3).

CRA indicated that a business receiving a contribution (as a result of COVID-related liquidity issues) from a Regional Relief and Recovery Fund (“RRRF”) that is forgiven as to the remaining balance of the contribution if a required portion of the contribution is repaid by a certain date, will be required to include that forgivable portion in its income under s. 12(1)(x) in the year of receipt of the contribution, to the extent the amount was not already included under s. 9.

Neal Armstrong. Summary of 15 February 2021 Internal T.I. 2021-0879231I7 under s. 12(1)(x).

In order to reduce its municipal tax bill, a company in the business of renting self-constructed apartment buildings, registered each of the 137 units in a 12-storey apartment building in London, Ontario (that was ready for occupancy at the end of 2008) as condominium units, even though it rented the units out, rather than making condo unit sales. St-Hilaire J found that this meant that the applicable HST self-assessment rule was that under ETA s. 191(1), i.e., the company was required to self-assess HST on the FMV of each “condo” unit as each unit was occupied by its tenant, rather than self-assessing under s. 191(3) on the FMV of the whole building when the first tenant moved in (or on substantial completion, if later). Furthermore, she accepted that the best method for valuing condo units is comparable sales of condo units, and rejected a variant of the cost method of valuation proposed by the company. (She accepted that any cost-based method - which should be based on replacement cost rather than historical costs incurred - would be inappropriate given difficulties in allocating common-area costs to the individual units.)

However, the resulting per-unit value was to be reduced by a 6% “absorption discount” to reflect the effect on the market of absorbing the sale of 137 condo units over a 16-month period.

It is understood that in recent years, sales in the condo market have generally reflected higher per-square-foot valuations than sales of rental apartment buildings. If so, registration of the units as condo units in this case was costly from an HST perspective.

Neal Armstrong. Summaries of Carvest Properties Limited v. The Queen, 2021 TCC 21 under ETA s. 191(1) and General Concepts – Estoppel.