News of Note
Kaul – Tax Court of Canada finds that art work was donated at a FMV equal to its cost rather than appraised value
Email this ContentThe taxpayers bought sets of artists’ prints (each set consisting of 11 prints) at a purchase price that might be 7 or 10 times the vendor’s cost, and then immediately donated 10 out of the 11 prints in each set to registered charities at appraised values (reflected in the charitable receipts issued) around 3 times their purchase price. In confirming assessments that found the FMV of the donated art was the taxpayers’ purchase price, Rossiter CJ essentially applied the statement of Bowman ACJ in Klotz that:
Why chase the will o' the wisp of an elusive and largely hypothetical fmv through the trendy up scale art galleries of New York and ignore the best evidence that is right there before your very nose? The problem with the claim here, whereby property is acquired for $5 to $50, sold to the appellant for $300 and claimed to have a fmv two days later of $1,000, is that it is devoid of common sense and out of touch with ordinary commercial reality.
Rossiter CJ commented scathingly on the appraisals.
Neal Armstrong. Summary of Kaul v. The Queen, 2019 TCC 17 under General Concepts – FMV – Other.
Therrien – Court of Quebec finds that the adult daughter of the taxpayer’s ex-common law partner was the taxpayer’s “child”
When the handicapped daughter (“V”) of the taxpayer’s ex-common law partner was 22, she started living with the taxpayer. Whether the taxpayer (Therrien) was able to claim medical tax credits for expenses associated with V turned on whether V was a “child” of the taxpayer. The relevant part of the Quebec Taxation Act definition of “child” (which was essentially the same as ITA s. 252(1)(b)) referred to:
a person who is wholly dependent on the taxpayer for support and of whom the taxpayer has, or immediately before such person attained the age of 19 years did have, in law or in fact, the custody and control
This reference to “custody and control … in law or in fact” might have, but did not, give Massol JCQ difficulty given that V was an adult who was with him purely as a matter of choice. He simply stated:
The evidence establishes that in 2011 and 2012, V was wholly dependent on Richard Therrien and that he had custody and control of her in fact.
Accordingly, the taxpayer got the credits.
Neal Armstrong. Summary of Therrien v. Agence du revenu du Québec, 2019 QCCQ 28 under s. 252(1)(b).
Best Buy – Federal Court of Appeal finds that CITT accorded insufficient deference to WCO opinions
Brown cow reasoning occurs when a decision is distinguished on the basis that it involved a brown cow rather than a black cow.
S. 11 of the Customs Tariff Act provides that, in interpreting headings and subheadings in the Customs Tariff, “regard shall be had” to opinions of the World Customs Organization. Near JA found that the CITT essentially used brown cow reasoning in not following two WCO opinions and instead following an earlier decision of the Board. He stated:
Having “regard” … entails that the Tribunal should respect WCO opinions unless there is “sound reason” to do otherwise.
He sent the classification matter back for a fresh hearing.
Neal Armstrong. Summary of Canada (Attorney General) v. Best Buy Canada Ltd., 2019 FCA 20 under Customs Tariff Act, s. 11.
Stewart – Tax Court of Canada finds that a mortgage issued in a scam had full FMV
The RRSPs of the two taxpayers and for 117 other investors were defrauded. They were induced to purchase undivided interests in mortgages for an aggregate amount of $7 million, bearing interest at 12%, secured by mortgages on land with a value of around $5,000. Those proceeds immediately disappeared.
D'Arcy J first found that each purchased interest qualified as a “a mortgage secured by real property situated in Canada, or an interest therein” and, thus, as a qualified investment under former Reg, 4900(4) –which did not have the current requirement in Reg. 4900(1)(j) that the mortgage amount be “fully secured.” (Other mortgage provisions still lack this requirement.)
He also found that there was no income inclusion in the RRSP annuitants’ income under s. 146(9)(b), on the basis that such mortgage interests had a fair market value that equaled rather than being less than the cash consideration paid by the RRSPs therefor, stating that:
The fact that they paid a price similar to the price paid by 117 other individuals evidences that they negotiated the price in “a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length”. …
…[P]aragraph 146(9)(b) does not apply in a situation where a taxpayer directs his/her RRSP to make an investment with an arm’s length party for what the taxpayer believes is a fair market value consideration and the investment turns out to be a poor investment.
This case illustrates the proposition that the fair market value of an “investment” such as Bre-X can be rest on ignorance of reality.
Neal Armstrong. Summaries of Stewart v. The Queen, 2019 TCC 22 under Reg. 4900(1)(j), s. 146(9)(b) and General Concepts - FMV.
Income Tax Severed Letters 30 January 2019
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA expands its comments on the disclosure of tax accrual working papers
In the final version of his response to a question dealing with tax accrual working papers, Gordon Parr expanded his comments respecting solicitor-client privilege to include the bolded text below (as compared to the answer orally presented at the annual CTF conference):
A taxpayer may claim that the tax accrual working papers include information that is subject to solicitor-client privilege. The CRA cannot compel production of privileged communications, but a taxpayer has the right to waive privilege. The taxpayer’s list of uncertain tax positions that relates to the tax reserves in the taxpayer’s financial statements is considered to be part of the taxpayer’s books and records and is not a privileged document unless otherwise demonstrated.
This perhaps makes it clearer that CRA would acknowledge that it would be appropriate to redact any portion of the “list” that summarized tax advice received from a law firm.
Neal Armstrong. Summaries of 27 November 2018 CTF Roundtable Q. 11, 2018-0779971C6 under s. 231.1(1) and s. 232(1) – solicitor-client privilege.
CRA positions on plain vanilla domestic structures may not be portable to offshore structures
A response co-authored by Len Lubbers stated:
[W]here reliance is placed on a published view regarding a plain vanilla domestic tax arrangement, taxpayers should not be surprised that the CRA might take the view that the underlying facts and issues in an offshore structure would be sufficiently distinguishable to result in a challenge to taxpayer’s self-reported assessment of tax. …
The response also referenced CRA’s “commitment … to resolve disputes at the earliest possible stage.”
Neal Armstrong. Summary of 27 November 2018 CTF Roundtable Q. 7, 2018-0779951C6 under s. 152(1).
CRA publishes the final version of its 2018 CTF Roundtable answers
Although most of these responses were commented on by us in late November after they were presented orally in more abbreviated form at the annual CTF Conference, for convenience of reference the Table below provides the descriptors and links for the final versions of the answers that were published last week.
CRA confirms that it will not apply s. 112(3) to a dividend that has been subjected to s. 55(2) and discusses animating policy considerations
In its published comments on its further conclusions on various questions posed to it on the s. 55(2) rules, CRA provided some more detail than in its oral presentation at the 2018 Annual Conference. For instance, after describing the stop-loss rule in s. 112(3), CRA stated:
Denying a loss on a share that is caused by a dividend that has been subject to tax under subsection 55(2) would seem to be contrary to the scheme of subsection 112(3) which aims to deny losses caused by non-taxable dividends.
The CRA will consider that a dividend that has been subject to the application of subsection 55(2) is not a taxable dividend referred to in subparagraph 112(3)(b)(i).
CRA also was more loquacious on the policy considerations underlying its interpretations. For example, respecting its position that where a dividend in kind paid by a corporation is subject to s. 55(2), the dividend recipient will be considered to have acquired the distributed property at a cost under s. 52(2) equal to its fair market value, CRA stated:
It would not be logical to say that a property received as a dividend in kind that was subject to the application of subsection 55(2) because its purpose was to increase cost or to reduce gain because of the increase in cost would, in turn, not have a cost.
More generally, it stated:
The evolution of the role of subsection 55(2), as reflected in the 2015 legislative amendments to subsections 55(2), 52(3) and paragraph 53(1)(b), invites the conclusion that the application of subsection 55(2) to a dividend should not result in the denial of cost to the property that is received by the dividend recipient on the payment of the dividend.
Neal Armstrong. Summaries of 27 November 2018 CTF Roundtable Q. 2, 2018-0780071C6 under s. 112(3)(b)(i), s. 52(2), s. 52(3), s. 53(1)(b)(ii) and s. 89(1) – capital dividend account - (a)(i)(A).
Jencal Holdings – Tax Court of Canada finds that one of the main reasons for the existence of a holdco for one of five children was SBD multiplication
A reorganization was implemented so that a family company (“KT Holdings”) that indirectly carried on a tire business became held equally by holdcos for each of the five children. Whereas previously the small business deduction was not enjoyed, now each holdco generated the $500,000 deduction through loans being made to generate $500,000 in interest income from KT Holdings that was converted into active business income under s. 129(6)(b). In a planning memo prepared by KPMG, the multiplication of the small business limit was the only identified objective that required the use of holdcos.
Graham J considered that estate planning for the five children was likely a main reason for the separate existence of the holdcos “in general.” However, as the child for the particular holdco {“Jencal”) that was before him did not testify, he could not make any finding that estate planning was a main reason for the separate existence of Jencal. Accordingly, he confirmed the application by CRA of s.256(2.1) to deem Jencal to be associated with KT Holdings, so that s. 125(5.1) applied to reduce the small business limit available to Jencal to nil.
Neal Armstrong. Summary of Jencal Holdings Ltd. v. The Queen, 2019 TCC 16 under s. 256(2.1).