News of Note
Ross – Tax Court of Canada finds that legal fees incurred to preserve a livelihood rather than to establish a right to salary are non-deductible from employment income
Email this ContentV.A. Miller J found that legal fees incurred by a pharmacist in disciplinary proceedings before the Nova Scotia College of Pharmacists were merely “incurred to allow her to preserve a future right to work as a pharmacist,” and “not incurred… to collect or establish a right to salary or wages,” so that they were not deductible from her employment income under s. 8(1)(b).
Neal Armstrong. Summary of Ross v. The Queen, 2016 TCC 170 under s. 8(1)(b).
Bell – Tax Court of Canada finds that bonuses received by a spouse handling back office functions were disproportionate to her contribution
A husband-wife team owned and managed a construction firm doing work in the general Vancouver area with the husband managing the business development and construction work and the wife handling the administrative and human resources work. In order to take advantage of her being a status Indian (he was not), the admin office was moved to the reserve which was closest to Vancouver. (Her own band was on a different reserve.)
The Crown did not challenge the Indian Act exemption for the regular salary paid to her (of approximately $100,000 per annum, which approximated her husband’s salary), nor did it challenge the deductibility of the bonusing of all of the firm’s remaining profits to her, including a $2 million bonus in 2008, but did challenge the exemption to her of those bonuses.
In finding that her bonuses were taxable to the taxpayer, Woods J found that there was no evidence that they were reasonably intended to compensate her for her duties of employment and, in particular, no evidence that her contribution was greater than her husband’s - and found, more generally, that there was no substantive connection between the reserve lands and the bonuses. However, she went on to note obiter that “if an Indian chooses to situate property on a reserve, the income should qualify for the exemption regardless of the individual’s motivation for doing so,” i.e., “the payment of the bonuses is abusive, but it is not abusive to locate the office on a reserve.”
It is not clear what she would have done if she had also been considering whether s. 67 denied the deduction of half or all of the bonuses, nor was she asked to address whether GAAR can apply to accessing the Indian Act exemption.
Neal Armstrong. Summary of Bell v. The Queen, 2016 TCC 175 under Indian Act, s. 87 and ITA. s. 67.
CRA asserts that Treaty-exempt receipts must be included in income and deducted from taxable income under s. 110(1)(f)(i)
In connection with the possibility that the a lump sum payment received by a recent Canadian resident out of a Malaysian pension plan might be Treaty exempt, CRA stated that in such event:
the individual who receives it still has to include the amount in income under clause 56(1)(a)(i)…but that individual can claim an offsetting deduction under subparagraph 110(1)(f)(i)… in computing the individual’s taxable income.
Neal Armstrong. Summaries of 2015-0571591E5 under s. 248(1) – superannuation or pension benefit and s. 110(1)(f)(i).
CRA confirms that a surviving spouse who has been predesignated can qualify as a RRIF annuitant even if he or she does not receive any annuity payments
Where the death of an annuitant under a RRIF is followed very shortly by the death of the surviving spouse, CRA accepts that the (briefly) surviving spouse will qualify as an annuitant under the RRIF provided that the predeceased spouse had so designated the survivor by will or in the RRIF contract – even if the surviving spouse did not receive any annuity payments before his or her death. This means that the deemed inclusion of the fair market value of the fund property will be in the hands of the second-to-die of the two spouses – except to the extent that there then is a transfer out of the fund to a financially dependent child or other eligible beneficiary (in which case, the eligible amount of the transfer is included in the transferee’s income under s. 146.3(5)(a).)
Neal Armstrong. Summaries of 2015-0592681E5 Tr under s. 146.3(1) – annuitant and s. 146.3(6.2).
Rojas – Tax Court of Canada finds that the (r.4) (preparatory/in conjunction) exclusion from GST/HST-exempt financial services does not apply where there is a single supply of a financial service
An individual worked as an agent (rather than employee) for a mortgage brokerage firm, so that she determined whether the customer qualified for a mortgage, identified potential lenders and processed the application - and then received 75% of the resulting client commission as her compensation. Although under the older aspects of the financial services definition, her activities would have qualified as arranging for the lending of money, CRA argued that para. (r.4) of the financial service definition now rendered her commissions subject to HST. This exclusion is stated to apply inter alia where the service in question (such as "customer assistance") is preparatory to the provision of an “arranging for” financial service or is provided “in conjunction” with that service.
In finding that (r.4) did not apply (so that her commissions were HST-exempt), D’Arcy J stated:
[P]aragraph (r.4) will only apply if the service in question is supplied separately from the [arranging] supply… .
[T]he Appellant only made one supply, the supply of arranging for the lending of money. She did not make a second separate supply that could be found to have been preparatory to or provided in conjunction with the supply of the service of arranging for the lending of money.
As most financial service supplies are single supplies, this approach (and the similar approach in Global Cash Access – see also Great-West) does not give (r.4) much scope to operate.
Neal Armstrong. Summary of Rojas v. The Queen, 2016 TCC 177 under ETA s. 123(1) – financial service – para. (r.4).
CRA states that it will not apply a penalty for reasonably estimating an unknown amount, e.g., the “cost amount” of a pension interest
An Australian Superannuation Fund (or “Super Fund”) is a government-regulated trust that has been registered and approved by the Australian Government and is funded by contributions from employers and individuals over their working lives in order to provide retirement incomes. As the investment earnings within the Super Fund are subject to Australian tax (albeit, at a favourable rate), it does not qualify as an “exempt trust,” so that a Canadian beneficiary’s interest is considered to be specified foreign property, and the individual is required to file T1135s reporting inter alia the “cost amount” of the individual’s interest in the fund.
“Cost amount” in the case of a right (other than capital property) to receive an amount is defined as such amount. CRA stated that such amounts “include all amounts… which the individual has a legal right to receive, even if the amounts are to be received in the future,” and then stated:
[W]here it is not possible to determine the cost amount of a specified foreign property, taxpayers should use their best efforts to reasonably estimate the cost amount of the property. [CRA] will not penalize taxpayers who have made reasonable estimates based on the best available information. The onus is on the taxpayer to demonstrate the reasonableness of any such estimates, if requested.
It is unclear how closely this concept of “reasonable estimates based on the best available information” aligns with the jurisprudential concept of a due diligence defence to penalties, such as the penalty under s. 162(7) which (as interpreted in 2012-0458401I7) normally applies to materially incomplete T1135s (see Kokanee).
Neal Armstrong. Summaries of 2015-0595461E5 under s. 233.3(1) – specified foreign property - (n), s. 248(1) – cost amount – (e), s. 162(7).
CRA finds that the s. 95(2)(c) rollover is available on the drop-down of shares into a Dutch cooperative in consideration for a credit to the membership account
In 2016 IFA Roundtable Q. 10, CRA indicated that s. 95(2)(c) could apply to the drop-down of shares by a foreign affiliate to a another foreign affiliate (FA3) which was a non-share corporation even though no membership interests were issued by FA3, provided that the fair market value of the membership interest in FA3 increased by the FMV of the contributed shares. CRA has now published a somewhat similar ruling, respecting the contribution of shares of a Netherlands private limited liability company to a newly-formed Dutch cooperative (DC) in consideration for a credit to the membership accounts of the contributing foreign affiliates equal to the FMV of the contribution, in which it ruled that the s. 95(2)(c) rollover was available. (The wording of this ruling seems to imply that any increase in the FMV of the membership interest as a result of the drop-down would have been sufficient.)
CRA also explicitly ruled that DC was a corporation, on the basis of a much more detailed description than in 2015-0581151I7. The description notes that DC had separate legal personality, that under the Dutch Civil Code, “a Dutch cooperative may, by its articles of association, exclude or limit to a maximum, any liability of its members or former members to contribute to a deficit,” and that such a limitation was contained in DC’s articles. This flexibility under the Dutch Civil Code may suggest that it might be possible for some Dutch cooperatives to be considered to be partnerships.
Neal Armstrong. Summaries of 2015-0571441R3 under s. 95(2)(c) and s. 248(1) – corporation.
Income Tax Severed Letters 10 August 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that the s. 104(4)(a) deemed disposition rule for a spousal trust is engaged based on the trust terms at the time of its creation
IT-305R4, para. 8 states:
Once a trust qualifies as a spouse trust under the terms of subsection 70(6), it remains a spouse trust and is subject to the provisions affecting such trusts (for example, paragraph 104(4)(a)) even if its terms are varied by agreement, legal action or breach of trust.
CRA stated that the purpose of this wording was merely “to clarify that in applying paragraph 104(4)(a), one must look to the terms of the trust at the time of creation, such that any subsequent change in the terms of the trust would not invalidate the application of paragraph 104(4)(a).”
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.11, 2016-0645821C6 under s. 104(4)(a).
CRA generally expects Canadian taxpayers to obtain U.S. transcripts to back up U.S. FTC claims
At the June 2016 STEP Roundtable, CRA noted that, starting in 2015, it began to no longer exempt Canadian taxpayers' claims for U.S. foreign tax credits from the approach, which it already had been applying to FTC claims for other jurisdictions, of requiring a copy of the foreign tax return as well as proof of payment of the foreign tax. In its official response published last week, CRA suggested that taxpayers get U.S. transcripts (evidencing payment) even before any CRA review and stated:
According to the IRS website “Most [transcript] requests will be processed within 10 business days”. ...
[T]he IRS has a very structured process for requesting tax account transcripts online or through the mail using Form 4506-T. … In addition, the majority of the U.S. states have an online system which allows the taxpayer to print his/her “account statement” which would confirm the taxpayer’s final tax liability.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.9, 2016-0634941C6 under s. 126(7) – non-business income tax.