News of Note
Belchetz - Federal Court of Appeal confirms that CRA’s decision to waive “only” 15 out of over 30 years of interest was reasonable
Email this ContentTaxpayers who were the “innocent dupes” of a tax fraud, i.e., purported partnerships giving rise to large reported losses in the mid-1980s where, in fact, the partnerships were non-existent, ultimately had their Tax Court actions decided against them in 2014. A large part of the delay (including CRA not assessing the taxpayers’ returns for quite some time) was attributable to CRA and Justice wanting to bring a criminal prosecution against the promoters before dealing with the taxpayers. In the meantime (in 2004, i.e., before the 10-year limitation on interest relief in s. 220(3.1) was introduced) the taxpayers sought interest relief.
After three levels of review, CRA cancelled approximately 15 years of accrued interest. The Federal Court dismissed the taxpayers’ application for judicial review. In dismissing their appeal of that decision, Mactavish JA noted that the “Minister’s discretion must … be genuinely exercised, and must not be fettered or dictated by policy statements such as … IC 07-1R1” – but found that no such fettering had occurred here – the Minister’s delegate had “clearly turned his mind to the question of whether additional interest relief was warranted” and had “conducted a holistic review of the processing delays that had occurred,” and his “decision was transparent, intelligible and justified.”
Neal Armstrong. Summary of Belchetz v. Canada (National Revenue), 2020 FCA 225 under s. 220(3.1).
BCS Group – Federal Court of Appeal finds that a corporation must be represented by counsel in General Procedure appeals
In Masa Sushi, Graham J found that a corporation could not appear “in person” in a General Procedure matter and had to appear through counsel, so that a Rule purporting to permit a corporation to appear in person with the Court’s consent would be ultra vires. Gauthier JA essentially agreed, stating (at paras. 6, 33):
[T]he legislator did not intend to oust the common law and civil law principle that a corporation, because of its very nature, cannot appear “in person” before a court. It can only be represented by an agent who is a distinct person than the corporation. … By adopting detailed provisions dealing with representation in the Act, the legislator limited the TCC’s implied power to control who may represent the corporation in their courtroom, especially in proceedings subject to the General Procedure. …
[T]he common law/civil law concept that a corporation cannot appear in person because of its very nature strongly suggest[s] that under section 17.1 [of the TCCA], a party who is a corporation must be represented by counsel as defined by subsection 17.1(2).
Neal Armstrong. Summaries of Canada v. BCS Group Business Services Inc., 2020 FCA 205 under Tax Court of Canada Act, s. 17.1(1) and Rule 30(2).
Non-resident realty investors may be subject to Quebec rules imposing double taxation
There are particular potential pitfalls that can arise for a non-resident investing in Quebec rental properties or other investments:
- The Quebec Taxation Act departs from the federal rules by deeming Quebec rental properties to be a Quebec establishment, with the result that the rental income therefrom is subject to Quebec income tax, whereas there is no federal abatement for provincial tax if the income is considered to be income from property – hence, there is double taxation.
- A similar double-taxation problem arises when the property is disposed of.
- Non-resident inter vivos trusts that own immovable property in Quebec and earn rental income therefrom are considered to have a “specified immovable property.” On a disposition of such property by the trust, the taxable portion of the capital gain (and recapture) will be subject to federal income tax and Quebec surtax at a combined rate of 48.84% (i.e., of 24.42% on the capital gain). However, by virtue of the specified immovable property constituting taxable Quebec property, there is further tax at an effective rate of 12.875% on the capital gain, resulting in a combined effective rate of 37.30%.
- On a literal reading of the taxable Quebec property definition, that term can include a closely-held company share that derives its value principally from a Canadian resource property, even where there is no connection to Quebec, e.g., shares of a Canadian corporation holding only Alberta exploration rights. The ARQ has declined to acknowledge that it lacks the constitutional authority to impose tax in these circumstances.
It is suggested that where a non-resident wishes to invest in a Canadian property that generates active business income, such as an assisted–living facility, the unavailability of a s. 216 structure for business income can be addressed by using a headlease structure under which the non-resident headleases the property under a passive net lease to an operating subsidiary that instead carries on the active business of dealing with the residents, space tenants, hotel patrons, etc.
Neal Armstrong. Summaries of Michel Ranger and Rhonda Rudick, “Federal and Provincial Tax Considerations Relating to Non-Resident Investment in Canadian Real Estate”, 2019 Conference Report (Canadian Tax Foundation), 32:1 – 39 under Reg. 805, s. 216(1), s. 248(1) – taxable Canadian property – (c), (a).
We have translated 4 more CRA Interpretations
We have published a further 4 translations of CRA interpretation released in June 2009. Their descriptors and links appear below.
These are additions to our set of 1,358 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for January.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2009-06-26 | 27 May 2009 External T.I. 2008-0296731E5 F - Rachat d'actions: 20(1)c) | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | corporation must allocate contributed capital of redeemed shares proportionately to borrowed money and redemption notes, but can disproportionately allocate its accumulated profits |
| 12 June 2009 External T.I. 2009-0316511E5 F - Charges sociales et autres retenues France | Treaties - Income Tax Conventions - Article 18 | list of pension plans recognized for French tax purposes re Art. XXIX(5) of French Treaty | |
| Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax | social security contributions do not qualify as income taxes – but French "contribution sociale généralisée" and "contribution pour le remboursement de la dette sociale" so qualify | ||
| 2009-06-19 | 10 June 2009 External T.I. 2008-0300041E5 F - Paiements ou remboursement de frais de formation | Income Tax Act - Section 5 - Subsection 5(1) | bonus taxable even where employee requests that it be spent on skills training |
| 10 June 2009 External T.I. 2009-0308031E5 F - Admissibilité partagée de la PFCE | Income Tax Act - Section 122.6 - Eligible Individual - Paragraph (f) | factors in Reg. 6302 applied to determine which parent has primary care responsibility – if indeterminate, CRA applies its shared eligibility policy |
Development Securities plc - Court of Appeal of England and Wales locates the residence of Jersey subsidiary in the UK given that its directors took instructions from the UK parent on a transaction not in its commercial interests
A U.K. tax avoidance scheme entailed special-purpose Jersey subsidiaries acquiring assets from their UK parent (DS Plc) or its U.K. subsidiaries at prices corresponding to the assets’ historical cost plus an inflation-indexation adjustment and then, after the Jersey-resident directors had resigned, selling those assets back to the DS group at their much lower fair market value, thereby triggering a tax loss that could be used in the DS group. The scheme depended on considering that these subsidiaries had their central management and control (“CMC”) and, thus, residence, in Jersey at the moment of the acquisitions. Their directors consisted of the UK-resident secretary of DS Plc and three Jersey residents who also served as directors of numerous other client companies. The board held a three-hour meeting in Jersey to review and approve the transactions, and three briefer meetings to approve the granting and then exercise of the call options, and the replacement of the Jersey directors by UK-management directors (when the time came in the PwC plan for the subsidiaries’ CMC to shift to the UK).
In reversing the Upper Tribunal and reinstating the decision of the First-Tier Tribunal that, at the acquisition times, the CMC of the subsidiaries was exercised in the UK by the parent’s management and not in Jersey, David Richards LJ stated:
The clear conclusion to which the FTT came … was put by the FTT at [422], "the Jersey directors were acting under what they considered was an 'instruction' or 'order' from the parent".
The inevitable conclusion from that finding was … that the decision to enter into the relevant transactions was taken by the parent in the UK, not by the directors in Jersey. They were, of course, concerned to ensure that what they were being instructed to do was lawful. … Likewise, the directors were concerned to ensure that there were no unexpected liabilities for the Jersey companies, such as stamp duty, and to ensure that the documents were in proper order. None of that detracts from the FTT's finding as to who made the decision to enter into the transactions and where that decision was made.
The applicable principle was stated in the concurring reasons of Newey LJ:
A company may be resident in a jurisdiction other than that of its incorporation not only where a constitutional organ exercises management and control elsewhere, but if the functions of the company's constitutional organs are usurped, in the sense that management and control is exercised independently of, or without regard to, its constitutional organs, or if an outsider dictates decisions (as opposed to merely proposing, advising and influencing decisions). [emphasis added]
Neal Armstrong. Summary of R & C Commrs v Development Securities plc & Ors, [2020] EWCA Civ 1705 under s. 2(1).
La Mancha Group – Federal Court of Australia finds that an absorptive merger of a Dutch into a Lux company rendered the Lux survivor as the “taxpayer” for continuing or launching objections
A condition precedent to the merger of a Netherlands private limited company (“LMGI”) into its sister company (“LMA”), which was a Luxembourg private limited liability company (with LMA as the survivor) was that the Federal Court of Australia confirm that LMA as legal successor would be able to exercise all objection or appeal rights in relation to current and pending assessments of LMGI’s taxation years by the Australian Commissioner. Before providing such declaration, Davies J stated, based on the expert law testimony:
Under European law, Luxembourg law and Dutch law, pursuant to the principle of universal succession … all liabilities of LMGI to tax, including under foreign law (that is, the relevant Australian tax acts), will transfer to LMA by operation of law pursuant to the principle of universal succession upon completion of the merger, as will the rights and obligations of LMGI in respect of such tax liabilities … .
After summarizing the relevance of the character of the merger under such foreign law to the Australian common law choice of law rules, she stated:
In consequence, the tax liabilities of LMGI will be assumed by LMA as a result of the merger. Moreover, LMA, as the “taxpayer” under s 175A of the Income Tax Assessment Act 1936 (Cth) … will be entitled to object against assessments which have been issued to LMGI, or which are issued to LMA in its place, and will be “the person” entitled to appeal … in relation to objections from those assessments … . Although those liabilities and obligations (on the one hand) and rights and capacities (on the other) arise under Australian law and are governed by Australian law, Australian law will recognise the operation of Dutch and/or Luxembourg law following the merger as having clothed LMA with the necessary attributes or identity to subject it to those obligations and liabilities and to enable it to exercise those rights and capacities for the purposes of Australia’s tax acts.
Although the parent of the two merging companies was a Luxembourg public limited company, if the parent had been a Canco, the description of the merger suggests that it could have qualified as a foreign merger under ss. 87(8) and (8.2).
Neal Armstrong. Summary of La Mancha Group International B.V. v Commissioner of Taxation [2020] FCA 1799 under s. 165(1).
CRA finds that sponsorship of a PSB’s staged production was not subject to GST/HST
ETA s. 135 deem a supply by a public sector body (PSB) of a service, or a licence of copyright, a trade-mark, trade-name or other similar property to a “sponsor” for exclusive use by the sponsor in publicizing the sponsor’s business, to not be a supply – except that this rule is stated not to apply where the consideration for this supply by the PSB to the sponsor is “primarily” for radio, TV, newspaper, or magazine advertising.
CRA dealt with a situation where, in order to ensure the success of an event mounted on a stage, a PSB enlisted the participation of sponsors. The agreements typically provided for consideration payable by that sponsor and for sponsorship rights, which included: acknowledgement as official sponsor of the event, logo visibility on event signage on a website, in newspapers, and in social media; the sponsor’s name being on a stage; a licence to use real property to promote its brand by offering samples; and VIP invitations to attend the event.
CRA found that notwithstanding the newspaper element, “the dominant element is the promotional services that the sponsor acquired” of the permitted character, so that the s. 135 no-supply rule applied.
Neal Armstrong. Summary of 10 August 2020 GST/HST Ruling 210848 under ETA s. 135.
CRA indicates that an arbitration award made in the normal course following a collective bargaining process could qualify for lump-sum averaging
Ss. 110.2 and 120.31 may provide relief to individuals receiving taxable lump-sum payments from their employer relating to services that were performed in prior years. The relief is through calculating the tax liability based on the lower rates applicable had the sums been earned over the course of those years rather than as the lump sum. An employee bargaining unit and the employee, after their collective bargaining process, agreed to resolve the remaining issues by referring them to a three-person binding conciliation board, which awarded salary increases and wage adjustments.
In finding that these could constitute “qualifying amounts” for s. 110.2 purposes, the Directorate stated:
[I]f the particular lump-sum amount is paid to the individual as the result of an arbitration award resulting from a bona fide arbitration process, such a lump-sum amount could be a qualifying amount. This could apply even when the arbitration process is part of a normal collective bargaining process.
Neal Armstrong. Summary of 21 August 2020 Internal T.I. 2019-0834911I7 under s. 110.2(1) – qualifying amount.
CRA indicates that a corporate charity cannot establish RESPs
CRA indicated that an incorporated registered charity could not establish RESPs for needy children given that only an individuals and a “public primary caregiver” (which it was not) can qualify as an “RESP subscriber.”
Neal Armstrong. Summary of 1 September 2020 External T.I. 2019-0832221E5 under s. 146.1(1) – subscriber – (a).
Income Tax Severed Letters 30 December 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.