News of Note
CRA finds that an interest-free loan made outside a corporate group did not give rise to an imputed income benefit
Email this ContentCRA has found that the making of an interest-free loan by a Canadian corporation (owned by a discretionary trust) to another Canadian corporation (owned by the individual who was the sole trustee and a beneficiary of that trust) did not give rise to any taxable benefits. CRA appears to accept the reasoning in Cooper that if there is no imputed interest under a specific provision such as s. 80.4, income should not be imputed under the more general conferral-of-benefit provisions.
Neal Armstrong. Summaries of 12 December 2012 Memorandum 2012-0464411I7 under ss. 246(1) and 20(1)(e).
Intra-group loss shifting transactions for FTC utilization purposes were not abusive
CRA found that using somewhat conventional intra-group loss-shifting techniques in order for a Canadian corporation to generate additional income so as to fully claim foreign tax credits (and generate non-capital losses in its Canadian subsidiaries who did not have a foreign tax credit problem) was not abusive. CRA also noted that its GAAR analysis on loss-shifting transactions was that "since we would normally allow for such losses to be utilized under an amalgamation, two entities who choose not to amalgamate for business reasons, should not be disadvantaged."
Neal Armstrong. Summaries of 18 December 2012 Memorandum 2012-0461651I7 under ss. 111(1)(a) and 110.5.
Humber College - Tax Court finds that it was absurd not to allow a college to apply its GST rebate retroactively
Humber College was late in reporting the GST payable by it on the purchase of several properties, and in claiming the related 67% rebate. The Minister charged interest from the filing deadline, but only applied the rebate from Humber's actual filing date. If Humber had not filed for the rebate but waited instead for the Minister's assessment, s. 296(2.1) of the ETA would have compelled the Minister to apply the rebate as of the filing deadline.
C Miller J found that this basing of the interest calculations on the gross GST owing, rather than the net amount after rebate, contradicted the "inescapable conclusion that subsection 296(2.1) of the Act simply presumes the college applying for the rebate would naturally have the retroactive treatment." Accordingly, Humber's approach, of retroactively netting the rebate for interest computation purposes, worked.
S. 296(2.1), respecting the deduction of available rebates on CRA assessments, is similar to s. 296(2), respecting the deduction of available input tax credits on CRA assessments. However, Paquin found that in a late-filed return situation, ITCs did not reduce interest charges until the time they actually were claimed. C Miller J distinguished Paquin on the basis that, unlike rebates, "ITC’s are not inextricably linked to the transaction giving rise to the GST." In other words, the right to the rebate (which effectively is like a rate reduction) is somewhat automatic, whereas potentially difficult conditions must be satisfied in order to earn ITCs.
Neal Armstrong. Summaries of Humber College Institute of Technology & Advanced Learning v. The Queen, 2013 TCC 146 under ETA ss. 280(1) and 296(2.1).
CRA applies Salada Foods to assumption by taxpayer of affiliate's FX risk
CRA has applied Salada Foods to find that an agreement under which a taxpayer agreed to hedge the FX risk of a euro-zone affiliate which had borrowed in U.S. dollars, by making or receiving annual payments, resulted in the annual realization by it of gains or losses on income account. Since it was not hedging its own risk from its stand-alone perspective, this was an adventure in the nature of trade.
Neal Armstrong. Summary of 21 December 2012 Memorandum 2012-0465561I7 under s. 9 - capital gain v. profit - foreign exchange.
CRA follows Demers in treating selling-shareholder repayment of Target debt as disposition expense
In the situation where an agreement for the sale of all the shares of a corporation (Aco) requires the share sale proceeds to be applied first to repay a bank loan owing by Aco together with an early repayment penalty, CRA accepts (following Demers) that these amounts are disposition expenses of the selling shareholder (and that Aco is not entitled to s. 18(9.1) deductions for the early repayment penalty).
Neal Armstrong. Summaries of 11 January 2013 T.I. 2012-0436771E5 under ss. 40(1)(a)(i), 18(9.1) and 20(1)(e).
Income Tax Severed Letters 15 May 2013
This morning's release of 28 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Imperial Tobacco - Tax Court finds that privilege was lost when emails of an Osler tax lawyer were sent to PWC Australia
D'Arcy J found that solicitor-client privilege was lost when emails of an Osler tax lawyer addressed primarily to an individual at the Canadian taxpayer's UK parent were also sent to PWC Australia. Having regard to the Susan Hosiery principle, the taxpayer was unable to establish "that PWC Australia's role, whatever it was, extended to any function which could be said to be integral to the solicitor-client relationship."
Scott Armstrong. Summary of Imperial Tobacco Canada Ltd. v. The Queen, 2013 TCC 144 under s. 232 - solicitor-client privilege.
Prescient Foundation - Court of Appeal finds that participation of a charitable foundation in tax-planning transactions was inconsistent with having an exclusive charitable purpose
A registered public charitable foundation participated with other charites in transactions which were intended to avoid capital gains tax on the assets of a private company by the charities purchasing its shares, and having the appreciated assets "donated" to the charities, with the charities using the sales proceeds of the assets to pay the share purchase price (or something like that - the actual implementation of the plan was execrable). Mainville JA found that the foundation's participation in these transactions was inconsistent with its obligation to operate only for charitable purposes, so that the proposed revocation of its registration was justified.
Mainville JA also rejected (in dealing with an unsuccessful attempt of CRA to apply a draft amendment) the submission of the Justice lawyer that "to qualify as charitable, a charitable public foundation must…only disburse funds to a qualified donee." This position was inconsistent with CRA's published policy that a charitable foundation can carry on charitable activities, rather than being restricted to writing cheques to qualified donees (see T4063).
Neal Armstrong. Summaries of Prescient Foundation v. The Queen, 2013 FCA 120 under s. 149.1(1) - charitable foundation and related business, and s. 230(2).
CIBC - Federal Court of Appeal severely restricts the doctrine that expenses of "egregious or repulsive" conduct are non-deductible
Iacobucci J stated, obiter, in 65302 that conduct of a taxpayer may be so "egregious or repulsive" as to indicate that resulting fines were not incurred for the purpose of producing income.
Sharlow JA has struck a Crown pleading which stated that alleged conduct of CIBC in aiding Enron in falsifying its financial statements was so "egregious and repulsive" that damages of $3 billion paid by CIBC in settlement of Enron-related suits could not be considered as having been incurred for an income-producing purpose. She stated that "characterization of the morality of CIBC's conduct is not legally relevant to the application of paragraph 18(1)(a)," and that what Iacobucci J was getting at was that "certain conduct may, because of its egregious or repulsive nature, be so disconnected factually from the taxpayer's actual business (or any business) that an expense the taxpayer incurs because of that conduct cannot meet the income earning purpose test." She didn't give examples, but something like expenses of a call girl or hit man would not have any acceptable connection to a legitimate business.
Neal Armstrong. Summary of CIBC v. The Queen, 2013 FCA 122 under s. 18(1)(a) - income-producing purpose.
Application of the fill-in-the-hole rule may necessitate use of the suppression election
Eric Lockwood and Maria Lopes have provided excellent numerical examples of the application of the proposed qualifying liquidation and dissolution (QLAD) rules respecting the winding of a non-resident subsidiary (Foreignco 1) into a Canadian parent (Canco). Canco generally will realize a capital gain on the disposition of its shares of the disposing affiliate (Foreignco 1) – even on an elected QLAD - where the adjusted cost base of Foreignco 1 in the distributed property, i.e., the inside basis, exceeds Canco’s ACB of its Foreignco 1 shares, i.e., the outside basis - unless it makes the "suppression election" under proposed s. 88(3.3).
For example, the suppression election may be required on the liquidation of a foreign affiliate (Foreignco 2), with a "blocking deficit," into Foreignco 1, followed by a liquidation of Foreignco 1 into Canco on an elected QLAD basis, because the application of the fill-the-hole rule in proposed Reg. 5905(7.2) can result in the inside basis being greater than the outside basis – and in fact they "suspect that the suppression election was specifically intended to apply to circumstances such as these."
Neal Armstrong. Summary of Eric Lockwood and Maria Lopes, "Subsection 88(3): Deferring Gains on Liquidation and Dissolution", Canadian Tax Journal (2013) 61:1, 209-28 under Reg. 5905(7.2) and s. 93(1).