News of Note
Barr – Tax Court of Canada finds that broker fees paid to locate purchasers of a private company were HST-taxable
Email this ContentThe sole individual shareholder retained two brokers for the sale of his company or its assets. Whether the commissions that they charged on the ultimate sale of the shares to a purchaser whom they had found were exempt from HST turned, in part, on whether their services were those of “arranging for” the sale of the shares. In finding that this exemption for a “financial service” was not available, Pizzitelli J referred inter alia to the following factors:
- The brokers merely brought potential purchasers to the shareholder and had no involvement in negotiating or concluding the sale, including even the price.
- They did not undertake to find a purchaser for the shares as contrasted to the assets – and, in fact, when they found the ultimate purchaser, that purchaser initially made an offer for the assets (at which point the brokers dropped out of the picture) and, only later, was a share sale negotiated.
- The “brokers were not registered business or securities brokers.”
The first point (which was consistent with 106288) could be viewed as stating that the brokers here did most of what typically is done by brokers who have been retained to find a business buyer. The second point seems asymmetrical in that presumably the commissions could not have been treated as exempt if an asset sale had culminated (and also given that any GST/HST charged likely would have been creditable on an asset sale). As elements of the first two points often are present where brokers are retained to find purchasers for a wholly-owned business, this decision increases risks that commissions paid on the sale of such business may not be considered to be GST/HST exempt.
The alternative position of CRA was that the services of the brokers were excluded by (r.4) of the “financial services” definition. This exclusion refers inter alia to market research and promotional services that are preparatory to an “arranging for” financial service. Market research and promoting the company to potential purchasers was mostly what the brokers did, so that Pizzitelli J considered that the commissions also would have been taxable on this alternative ground. This broad scope accorded to (r.4) appears to be inconsistent with Global Cash Access, a leading decision which apparently was not brought to his attention (and is also inconsistent with Rojas, also not cited). Nonetheless, his decision may embolden CRA to continue applying (r.4).
Neal Armstrong. Summaries of Barr v. The Queen, 2018 TCC 86 under ETA s. 123(1) – financial service – para. (l), para. (r.4).
CRA states that the FMV of a stock option is higher than its in-the-money value
The s. 7 rules did not apply where an employee of a consulting company received, as part of his compensation, incentive stock options that had been received by the company on one of its engagements. Accordingly, the fair market value of the options was included in his employment income when received. As to determining “FMV,” CRA stated:
[T]he intrinsic value of an option is not reflective of its FMV; rather, a valuation method that is appropriate in the circumstances should be used to determine the FMV.
As to the subsequent exercise and sale, CRA stated:
The tax consequences that result from the Employee’s exercise of the Options in Year 2 and the disposition of the optioned shares in Year 3 will depend on the facts. For information, refer to Interpretation Bulletin IT-479R, Transactions in Securities.
This was less crisp (and no more poetic) than saying something like: assuming that the Employee holds the Options and optioned shares on capital account, the FMV of the options when received will be added to their cost under s. 52(1), and the resulting ACB of the options will be added to the ACB of the optioned shares on exercise under s. 49(3)(b)(ii).
Neal Armstrong. Summaries of 7 February 2018 External T.I. 2016-0673331E5 under s. 9 – computation of profit.
Income Tax Severed Letters 9 May 2018
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Moules Industriels – Tax Court of Canada finds that a numerical cap on trustees’ discretion to allocate income or capital did not stop tainting under s. 256(1.2)(f)(ii)
S. 256(1.2)(f)(ii) provides that where a beneficiary’s share of the income or capital of a trust is in the discretion of the trustees, the beneficiary is deemed to own shares held by the trust for purposes of the associated corporation rules. A trust deed provided that such share of beneficiaries who otherwise would cause corporations held by the trust to become associated was capped at 24.99%. The drafter of this clause evidently thought that it made sense that this would mean that no more than 24.99% of the trust’s shareholdings would then effectively be attributed under s. 256(1.2)(f)(ii) to those beneficiaries.
Lamarre ACJ agreed with the CRA position (foreshadowed in 2003-0052261E5) that 100% of those shares instead were effectively attributed to those beneficiaries, stating:
This clause does not have the effect of eliminating the discretionary power contemplated by … the deeds. This power, despite it being potentially subject to the 24.99% cap, remains fundamentally a discretionary power.
Neal Armstrong. Summary of Moules Industriels (C.H.F.G.) Inc. v. The Queen. 2018 CCI 85 under s. 256(1.2)(f)(ii).
Raposo – Tax Court of Canada finds that a partnership with an illegal business was void
The taxpayer and the three other members of the “Raposo clan” were involved in the sale of cocaine in the Gatineau area. The Crown took the position that, as a member of a partnership, the taxpayer was solidarily liable under ETA s. 272.1(5) for uncollected GST on the cocaine sales.
In rejecting this position, Paris J referred to Article 1417 of the Civil Code (“A contract is absolutely null where the condition of formation sanctioned by its nullity is necessary for the protection of the general interest”), and stated that under the jurisprudence “a purpose which is contrary to the public order and which contravenes a penal provision, in the current case, of the Criminal Code, engages the absolute nullity of the contract” (here, an alleged partnership contract). No partnership – no s. 272.1(5) liability.
Thus, the taxpayer benefited from the illegality of his venture. As the contract for his engagement was void, would his Part I income be determined under s. 96, 9 (see also Eldridge) or 5 (see also Coicou)?
Neal Armstrong. Summaries of Raposo v. The Queen, 2018 CCI 81 under ETA s. 272.1(5) and General Concepts – Illegality.
Stankovic – Federal Court finds that a taxpayer with an unreported Swiss bank account was not yet under criminal investigation
CRA found out from the French authorities that the taxpayer was on the list obtained from a disgruntled HSBC employee of those with large Swiss bank accounts. The taxpayer had not reported the account or the interest thereon. When CRA sought a compliance order under s. 231.7(1) for the taxpayer to answer its requests for information issued under s. 231.1(1), the taxpayer argued that it was obvious that this was occurring pursuant to a criminal investigation of her. Russell J disagreed, stating that:
Offshore accounts are not, per se, illegal and it is the duty of the Minister under the Act to inquire and ensure that those with offshore accounts are meeting their tax liabilities. … If the Respondent’s position were accepted, it would mean that, given the government’s intent to deal with offshore tax offenders, every Canadian taxpayer with an offshore bank account would be immune from compliance with the audit requests made under s 231.1(1) because this could lead to criminal proceedings at some time in the future. …
[A] mere suspicion does not change the predominant purpose of an audit into a criminal investigation. See Jarvis … .
He also found (following a Quebec Court of Appeal decision dealing with the same list) that CRA’s use of information stolen by the disgruntled employee did not violate the taxpayer’s Charter rights.
Neal Armstrong. Summaries of Canada (National Revenue) v. Stankovic, 2018 FC 462 under s. 231.1(1) and Charter s. 7.
CRA considers that a s. 16.1 election does not cause a leased property to be a capital property
The operation of the ETA input tax credit rules can turn on whether the registrant is considered to have acquired a “capital property,” largely as defined for ITA purposes. CRA considers that a leased property for which an ITA s. 16.1 election has been made is effectively deemed to be a depreciable property for CCA purposes, but is not deemed to be generally a capital property, so that the leased property also is not a capital property for ETA purposes.
CRA noted the general principle in this regard that generally a registrant is not considered to have acquired property for ITC purposes unless ownership of the property has been transferred to it.
Neal Armstrong. Summaries of 13 December 2017 Interpretation 187306 under ETA s. 225.1(2) – B and s. 169(1).
9 further full-text translations of CRA interpretations are available
The table below provides descriptors and links for the two Technical Interpretation released last week, for the last five questions and answers for the October 2017 Financial Strategies and Instruments APFF Roundtable and two technical interpretations released in October 2013. Gaps in the numerical sequence for the APFF Financial Strategies items reflect responses from the Department of Finance, which continue to be available on our Roundtable page.
The above translated interpretations (and the other full-text translations covering the last 4 1/2 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for May.
Haifa Trust – Court of Quebec finds that a trust with an inactive Alberta trustee whose director could be replaced at will by the Quebec patriarch was resident in Quebec
A purported Alberta-resident trust for the family of Mr. Zaffir was found by Lavigne JCQ to be resident in Quebec given that there was essentially nothing to connect it to Alberta other than an Alberta corporate trustee whose Alberta-resident director did essentially nothing (nor had any real ability to do so). Lavigne JCQ noted that the following two points were by themselves sufficient to reach this Quebec residency finding:
That Mr. Zaffir was the sole shareholder of Alberta Ltd. and in that capacity he had the power to name or dismiss the director of Alberta Ltd., coupled with the fact that Mr. Zaffir was also the “protector” of the Haifa Trust, is sufficient to conclude that the effective control of the Haifa Trust was in the hands of Mr. Zaffir, a resident of Quebec and on that basis, the taxes of the Haifa Trust were required to be paid in Quebec.
Neal Armstrong. Summary of 895410 Alberta Ltd., fiduciaire de la Fiducie Haifa v. Agence du revenu du Québec, 2018 QCCQ 2581 under s. 2(1).
Melançon - Tax Court of Canada finds that the failure of a house construction company to charge a mark-up on its costs incurred for shareholder work generated a taxable benefit
The taxpayer, who was the sole shareholder of a home construction company that handled the construction of his personal residence, reimbursed his company for all of its third-party costs in constructing the home. Smith J confirmed CRA’s assessment of a shareholder benefit on the taxpayer, that was computed by applying the profit margin of 8.09% that the company averaged on its other house construction business in that year to the costs that were incurred by it on this house.
Neal Armstrong. Summary of Melançon v. The Queen, 2018 CCI 73 under s. 15(1) and General Concepts – Effective Date.