News of Note
Ingenious Games LLP – Court of Appeal of England and Wales agrees with Backman that a partnership need only have an ancillary profit-making intention
Email this ContentIn order for the investors in UK limited liability partnerships that had funded films to be allowed their share of the LLP losses that had purportedly been generated, the LLPs were required to be fiscally transparent. This required that the LLPs carry “on a trade, profession or business with a view to profit" - and, in addition, for the LLPs to have been validly formed as a matter of the statutory commercial law, they also were required to represent "two or more persons associated for carrying on a lawful business with a view to profit."
Before finding that the “with a view to profit” test had been satisfied, the Court of Appeal noted the following principles:
- “[T]he words ‘with a view to profit’ import a wholly subjective test” rather than an objective test.
- "[P]rofit" has an objective meaning” so that if “putative partners only have a view to making what they wrongly believe to be profits, for example gross revenue, they will not have a view to profit.”
- “[T]here is no maximum period during which the partners must intend to make a profit, although no doubt the longer the period the more searching the inquiry into the real subjective purpose of the partners."
- “[I]n broad terms, ‘profit’ has the basic meaning of an excess of income over costs over a possibly indefinite period. It follows that the complex mosaic of generally accepted accounting practice … will generally have little part to play.”
- “[T]he view to profit need not be the predominant subjective purpose, but it must be part of the partners' subjective purpose.”
The Court noted that many of the above propositions were supported by Backman – quoting, for example, the statement in Backman that it “will be sufficient for a taxpayer to show that there was an ancillary profit-making purpose."
Although the taxpayers succeeded on this issue, the bulk of the £1.6 billion in losses that had been claimed by the investors in these and similar LLPs nonetheless were disallowed because of an unreversed finding below that most of the LLP expenditures were capital expenditures rather than being on income account.
Neal Armstrong. Summary of Ingenious Games LLP & Ors v Revenue and Customs [2021] EWCA Civ 1180 under s. 96.
Rémillard – Federal Court finds that the open court principle ousted a taxpayer’s need for privacy
Pamel J granted the taxpayer’s application to exclude various items from the common evidentiary record that created a risk of identity theft, but did not make a confidentiality order regarding the taxpayer’s financial information and certain information regarding third parties. In finding that the taxpayer had not satisfied the first of the three conjunctive Sierra Club tests, namely, that “court openness poses a serious risk to an important public interest,” Pamel J stated:
[The taxpayer’s] preference for discretion with respect to his affairs and his desire to remain out of the public spotlight are not an important public interests. …
[T]here must be an element of an individual’s privacy concerns that elevates them to a public concern, beyond personal concerns and sensibilities (Sherman at para 54).
In this case, there is simply no such element; we are not dealing with a risk to Mr. Rémillard’s personal safety, an attack on his dignity, a risk of psychological harm or a risk to his professional reputation. …
Regarding the related issue of tax secrecy, he stated:
There is no indication that [the taxpayer’s] tax information requires different protection from the usual protection for all other tax records.
Neal Armstrong. Summary of Rémillard v. Canada (National Revenue) 2021 FC 644 under Federal Courts Rules, s. 151(2).
9267-9075 Québec – Tax Court of Canada finds that failure to remit GST on reporting a sale to an insolvent purchaser precluded a subsequent bad debt credit
In 2012, a company (“9267”) sold domain names to another corporation (“9210”) that was owned equally by its individual shareholder and an unrelated individual for cash consideration to be paid in instalments. However, it did not file its GST return for that year until 2016, at which time 9210 was insolvent, and most of the purchase price was still owing. The tax so reported was assessed accordingly. Also in 2016, it filed its GST return for its taxation year beginning in 2014 in which it claimed a bad debt deduction for the unpaid GST.
D’Auray J affirmed the denial of the s. 231(1) credit on the basis that 9267 had not satisfied s. 231(1.1), i.e., when it filed its return reporting the 2012 sale, it did not remit GST on that taxable supply. Thus because it only paid the tax on the subsequent assessment rather than on filing the return, it lost the credit.
Furthermore, she found that 9267 had not taken reasonable measures to pursue collection of its debt, including claiming under its security interest, and having its debt included in the debtor claims made against 9210 in connection with the receivership and bankruptcy proceedings, so that she would have denied the credit on this ground as well.
She also found that no credit was available under s. 232(3). She rejected arguments that the purchase contract had been rescinded and further indicated:
What is clear from North Shore is that for the purposes of section 232, a credit or debit note is not sufficient, there must be an amount made available to the buyer under the note.
Here no such note had been issued, let alone one that satisfied the North Shore requirement or that set out the particulars required by Regulation.
Neal Armstrong. Summaries of 9267-9075 Québec Inc. v. The Queen, 2020 CCI 53 under ETA s. 231(1.1) and s. 232(3).
CRA has published a new Memorandum regarding ITC claims by qualifying institutions
CRA has published a new Memorandum on the rules applicable to determining the input tax credit claims, pursuant to the detailed rules in ETA s. 141.02, of qualifying institutions. Very generally, these are banks, insurers or securities dealers that otherwise would be entitled in their two preceding fiscal years to ITCs for residual (i.e., non-exclusive) inputs at above specified thresholds expressed in terms of dollars and as a percentage of the total tax payable on such inputs.
CRA has a leaning towards interpreting an input under the s. 141.02 rules as being a direct input (generally, an input to the making of a combination of taxable and exempt supplies) rather than being a non-attributable input (generally, one that cannot be attributed to the making of supplies), stating in this regard:
A business input that might be considered an indirect input for cost allocation purposes (for example, certain overhead expenses) is a direct input for purposes of section 141.02 if the business input is not an excluded or exclusive input and can be attributed in whole or in part to the making of a particular supply or supplies. [CRA’s emphasis]
CRA provides various examples, all of which are illustrative of basic propositions apparent from the legislation, rather than addressing interpretive points.
Neal Armstrong. GST/HST Memorandum17-13 [17.13] Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions, 23 July 2021 under s. 141.02(1) – exclusive input, direct input, s. 141.02(8) and s. 141.02(32).
Official CRA version of 2021 STEP Roundtable is available
We provided summaries of most of the 2021 Roundtable responses on a piecemeal basis in June. For your convenience, here is a table linking to the items as now published by CRA and our summaries, and showing our descriptors.
Income Tax Severed Letters 25 August 2021
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Miller – Federal Court issues a s. 231.7 compliance order for a description of the terms of an oral contract
Mr. Miller did consulting work for a European client (“Casala”). He also received payment of his professional fees from other clients through deposits in trust with two Canadian law firms.
Walker J granted a compliance order pursuant to s. 231.7(1) regarding an extensive list of items that CRA had demanded including information regarding the terms and conditions of his oral contract with Casala and copies of the trust ledgers from one of the law firms.
Regarding her order to disclose the terms of his oral contract with Casala, she stated that this was information “that Mr. Miller ought to have documented in his records,” that the “requests do not stray into the problematic type of questions identified in Cameco and BP Canada” e.g., an attempt “to compel Mr. Miller to reveal his ‘soft spots’,” and that a “request for the information that would have been included in any written contract and issued invoices is the Minister’s mechanism to ensure her access to basic information necessary for the Audit.”
Regarding the required disclosure of the trust ledger accounts with the law firms, she stated:
I do not agree that the Cameco decision establishes that a taxpayer discharges their obligation to satisfy a request that is otherwise within the scope of subsection 231.1(1) with a response that they simply do not have those documents in their possession. … [A] taxpayer is required to exercise reasonable efforts to obtain and provide to the Minister information and documentation that should be in its books and records.
Walker J declined to make a compliance order for a description of the development of Mr. Miller’s business relationship with Casala.
Neal Armstrong. Summary of Canada (National Revenue) v. Miller 2021 FC 851 under s. 231.1(1).
Tellza – Federal Court finds that it was not unreasonable for CRA’s to exercise its audit power by requesting a copy of all electronic records for a 20-month period
CRA issued a letter to Tellza under ETA s. 288(1) (similar to ITA s. 231.1(1)) to obtain all of Tellza’s electronic accounting data for a 20-month period. Fuhrer J rejected Tellza’s position that this letter was a "requirement" and not a "request" and hence, should have issued under the ETA s 289(1) (similar to ITA s. 231.2(1)), instead of the ETA s 288(1), and found that it was not unreasonable for CRA to have issued the letter under the latter provision instead. In this regard, she indicated that, although s. 288(1) was narrower in scope than s. 289(1), s. 288(1) nonetheless “grants an authorized person the power to request or require a taxpayer to provide information in any form,” and further stated that “the authorized person is not limited, in a modern, electronic era, to an inspection, audit or examination of the taxpayer’s documents and records at their premises.”
After having noted that the word “document” (used in s. 288(1)), was effectively defined in s. 123(1) to include “any other thing containing information, whether in writing or in any other form” (her emphasis), she also rejected the contention of Tellza that “the request for records in an electronically readable format, along with the system administrator’s user ID and password, where applicable, falls outside the scope of the inspection power in the ETA s 288(1).”
Neal Armstrong. Summary of Tellza Inc. v. Canada (National Revenue) 2021 FC 853 under ETA s 288(1).
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in April and March, 2007. Their descriptors and links appear below.
These are additions to our set of 1,682 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 14 ½ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2007-04-06 | 21 March 2007 External T.I. 2005-0142121E5 F - Don au décès d'un contribuable | Income Tax Act - Section 118.1 - Subsection 118.1(18) | gift of shares to a charity is not of non-qualifying securities if immediately after the ownership transfer, the estate now deals at arm's length with the corporation |
| Income Tax Act - Section 118.1 - Subsection 118.1(5) | bequest of shares to spousal trust, with the shares then directed to a registered charity on the spouse’s is treated as a gift of an equitable trust interest by the deceased | ||
| 20 February 2007 External T.I. 2006-0210291E5 F - Remboursement des billets d'avion | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | no taxable benefit for business class ticket reimbursement – but benefit if employee is reimbursed for 2 economy tickets for the employee and spouse | |
| 21 February 2007 Internal T.I. 2006-0218421I7 F - Pension alimentaire - date d'exécution | Income Tax Act - Section 56.1 - Subsection 56.1(4) - Commencement Day | retroactive nature of a divorce judgment is to be respected | |
| General Concepts - Effective Date | divorce judgment with stated retroactive effect caused the amounts to “be required to be made” on the earlier date | ||
| 2007-03-30 | 14 March 2007 External T.I. 2007-0219601E5 F - Police d'assurance-vie cédée en garantie | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.2) | borrowing must be by the taxpayer |
| 14 March 2007 External T.I. 2006-0169821E5 F - REÉÉ - définition de souscripteur | Income Tax Act - Section 146.1 - Subsection 146.1(1) - Subscriber - Paragraph (c) | legatees of subscriber are subscribers | |
| 2007-03-16 | 26 February 2007 External T.I. 2005-0163391E5 F - Choix en vertu du paragraphe 256(2) de la LIR | Income Tax Act - Section 256 - Subsection 256(2) | making election does not preclude s. 129(6)(b)(i) applying to deem property income to be active business income |
| 2 March 2007 External T.I. 2006-0185471E5 F - Frais de représentation - 67.1 | Income Tax Act - Section 67.1 - Subsection 67.1(1) | confirmation of 1998 agreement as to portion of remote work site daily allowances to be treated as for meals rather than accommodation | |
| Excise Tax Act - Section 236 - Subsection 236(1) | ITA s. 67.1 agreement as to portion of remote work site daily allowances to be treated as for meals rather than accommodation also applies to ETA s. 236 | ||
| 27 February 2007 External T.I. 2006-0216481E5 F - Montant payable à des retraités (annul ass. malad) | Income Tax Act - Section 6 - Subsection 6(3) | compensation for termination of retirees’ benefit plan not includible under s. 6(3) | |
| Income Tax Act - Section 3 - Paragraph 3(a) | compensation for termination of retirees’ benefit plan was not income from a source | ||
| 9 March 2007 External T.I. 2006-0218501E5 F - Application de 75(2) lors d'une émission d'actions | Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2) inapplicable to a corporation issuing shares to a trust of which it may become a beneficiary because it did not own the shares before their issuance | |
| 2007-03-09 | 26 February 2007 External T.I. 2005-0159431E5 F - Renonciation aux revenus d'une fiducie | Income Tax Act - 101-110 - Section 106 - Subsection 106(2) | s. 106(2) inapplicable to renunciation of income not yet realized |
| Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Testamentary Trust - Paragraph (c) | renunciation of income not yet realized is not a contribution to the trust |
Making a Reg. 5901(2)(b) election in order to be “cautious” could have adverse consequences
Non-dividend distributions from foreign subsidiaries often occur under the foreign corporate law as a return of “paid-in capital” ( PIC), e.g., contributed surplus, share premium, or additional PIC, so that use of the QROC election under s. 90(3) in such circumstances is problematic.
Interpreted literally, Reg. 5901(2)(b)(ii) precludes the election - for a whole dividend paid by a foreign affiliate (FA) of a corporation resident in Canada (a “CRIC”) to come out of preacquisition surplus – if any other CRIC (or a foreign affiliate of any other CRIC) is a member of a partnership that is a shareholder of the FA, regardless whether the other CRIC is related to the particular CRIC, or the partnership is a recipient of any portion of the dividend. However, the Explanatory Notes implicitly suggest that only the electing CRIC (or CRICs jointly filing the election), and any foreign affiliates thereof, are to be taken into consideration. Nonetheless, CRA considers that the election would not be available where a dividend was paid by the FA on a single class of shares to a Canco, and an LP with an unrelated CRIC as a member.
S. 93(1.1)(b) contemplates that any s. 40(3) capital gain that would otherwise would be deemed to be realized by the CRIC as a result of a Reg. 5901(2)(b) election is automatically converted back into a dividend to the extent of the net surplus of the foreign affiliate that is deemed to be otherwise available at the time of the distribution. However, s. 93(1.1)(b) may not entirely restore the tax treatment of the dividend that would have arisen if the Reg. 5901(2)(b) election had not been made.
For example, Canco wholly-owns all the shares (having an ACB of $50 million) of FA 1, which has no surplus balances other than $10 million of taxable surplus, with FA 1 owning all the shares of FA 2, which has no surplus balances other than $20 million of taxable surplus. FA 1 pays a $100 million dividend to Canco.
If Canco does not elect under Reg. 5901(2)(b), $10 million and $90 million of the dividend are deemed to be paid from taxable surplus, and preacquisition surplus, respectively, thereby triggering a $40 million capital gain.
If Canco instead elects, the $100 million dividend is treated as having been paid from preacquisition surplus, triggering a $50 million gain – but s. 93(1.1)(b) then applies to recharacterize a portion of that gain as a distribution from taxable surplus. However, because s. 93(1) takes into account the “consolidated” net surplus of FA 1 and its subsidiaries, the portion of the gain recharacterized as a taxable surplus dividend also includes the additional $20 million of taxable surplus of FA 2, so that Canco is deemed to receive a taxable surplus dividend of $30 million (not $10 million), and to have realized a s. 40(3) capital gain of only $20 million.
There can be adverse (or favourable) consequences of making the Reg. 5901(2)(b) election rather than using surplus.
Example 1
Canco (which has not made a functional currency election) holds all the shares (having an ACB of $150 million) of a single class of shares of FA, which pays a US$ 100 million dividend (equivalent to Cdn.$140 million) at a time that its only surplus/deficit accounts (which it maintains in US dollars) is an exempt surplus balance of US $100 million. If it subsequently realized operating losses of US$ 100 million (thereby wiping out any unutilized exempt surplus balance), it would have been better off not to have elected (so that the dividend came out of exempt surplus) - as maintaining the ACB of $150 million would permit FA to distribute up to that amount to Canco as preacquisition surplus dividends notwithstanding FA’s exempt deficit.
Example 2
Rather than there being subsequent operating losses, the only relevant subsequent change is that the Canadian dollar appreciates relative to the US dollar. If Canco does not make the election, it will have a greater relative benefit from having maintained most of its Canadian dollar basis in the FA shares rather than maintaining a US dollar exempt surplus balance.
Example 3
FA, a US subsidiary, which has exempt earnings, pays two dividends of US$ 100 million in the same year: the first being subject to 5% US withholding tax because it is paid out of earnings and profits for US purposes; and the second being not subject to withholding because it was not paid out of E&P. Respecting the first dividend, the ACB reduction will only be $95 million if the Reg. 5901(2)(b) election is made, whereas if the election is not made, the exempt surplus balance is reduced by the gross amount of the dividend irrespective of whether there is withholding tax. Accordingly, it may be preferable to make the election only respecting a dividend that is subject to withholding tax.
Example 4
Canco, which in accordance with s. 261 computes its Canadian tax results in US dollars, holds cumulative preferred shares of FA with a face value and ACB of US $100 million. The dividends come out of exempt surplus unless Canco makes the Reg. 5901(2)(b) election. If it makes the election, it might seem that this would increase the amount of exempt surplus it could access so as to shelter under s. 93(1) the resulting gain when the preferred shares are subsequently redeemed. However, the rules in Reg. 5902 might limit its access in that redemption scenario to exempt surplus only in the amount of the accrued but unpaid dividends on the shares at the time of redemption, thereby resulting in the realization of a capital gain that could have been avoided if the election instead had not been made.
It may be beneficial for the payer of an interaffiliate dividend, who has sufficient tax-free surplus, to pay a dividend to a higher-tier foreign affiliate from such tax-free surplus, so as to elevate tax-free surplus up the foreign affiliate chain, thereby making such surplus more readily available to shelter the payment of any subsequent dividends to the CRIC – and also safeguarding that tax-free surplus from erosion by any subsequently-incurred losses of the payer affiliate – but a counter-example is provided.
Neal Armstrong. Summaries of Tim Fraser and Jim Samuel, “The Preacquisition Surplus Election: More Than Meets the Eye?” Canadian Tax Journal (2021) 69:2, 595 - 627 under s. 90(3), Reg. 5901(2)(b)(i), Reg. 5901(2)(b) and s. 93.1(1.1)(b).