News of Note
Use of partnerships to hold investment portfolios may reduce the s. 125(5.1) SBD grind
Email this ContentThe quantum of the small business deduction (SBD) grind under s. 125(5.1) based on the adjusted aggregate investment income (AAII) for the associated group may be reduced or eliminated if the investment portfolio generating the AAII is held through a joint partnership rather than a joint investment company (Investco). For example if Mr. X owns 100% of Opco (generating active business income) and 51% of Investco (with his spouse holding the other 49%), then all of the AAII of Investco will have to be accounted for in computing the SBC grind to Opco.
However, if the investment portfolio instead is held in a partnership that is owned by a 51/49 basis by respective holding companies for Mr. and Ms. X, only 51% of the AAII of the partnership will be included in computing the SBD grind of the Opco of Mr. X.
Neal Armstrong. Summary of Stan Shadrin, Alex Ghani and Josh Harnett, “Corporate Partnership May Avoid the Paragraph 125(5.1)(b) Grind,” Tax for the Owner-Manager,” Vol. 20, No. 4, October 2020, p.4 under s. 125(5.1).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in December, 2009. Their descriptors and links appear below.
These are additions to our set of 1302 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for November.
Healius – Federal Court of Australia, Full Court finds that lump sum payments made to lock-up doctors at medical centres effectively controlled by the payer were capital expenditures
A subsidiary (“Idameneo”) of an Australian public company provided medical centre facilities and services to doctors in consideration for 50% of the fees generated by them. In order to induce a doctor to join one of the medical centres operated by it, it would typically pay a lump sum in the range of $300,000 to $500,000 to the doctor in consideration for the doctor’s promise to conduct his or her practice from the medical centre for a specified period of around five years, along with an exclusivity covenant. The taxpayer entered into 505 such agreements in the four years that were assessed.
The Full Court reversed the primary judge, and found that Idameneo paid the lump sums as capital expenditures, stating that in each case, it was securing the “lasting protection for the goodwill of the [medical] Centre” and that it was “maintaining the structure of its business” by “ensuring it had in place the commitments that it needed to operate its business.”
The Court went on to state that “[i]f all that Idameneo had done was to set up the Centres and then secured practitioners as customers to occupy the Centres and pay for services then term contracts with upfront lump sum payments might indeed be seen to be analogous to those made in BP Australia,” where it was found that securing five-year agreements of gas stations to serve as BP gas stations did not give rise to an enduring benefit. However, here it was instead found that Idameneo’s “business activity was not focussed upon selling services to practitioners, it was focussed upon running the Centres and attracting patients,” so that the payments enhanced the goodwill of and built up the structure of Idameneo’s own business.
Neal Armstrong. Summary of Commissioner of Taxation v Healius Ltd [2020] FCAFC 173 under s. 18(1)(b) – capital expenditure v. expense - current expense v. capital acquisition.
Saunders – Tax Court of Canada treats award to CRA employees for being unfairly denied overtime hours as taxable
Three CRA collections employees were awarded a lump sum by the Public Service Labour Relations and Employment Board pursuant to their grievance for having been unfairly denied the right to work overtime hours. They described the conduct of the assistant director in connection with their complaints as harassing, and claimed that the award constituted damages for personal injury and violation of their rights under their collective agreement, and should be treated as a personal injury award that was non-taxable under s. 81(1)(g.1).
After referring to the Tsiaprailis surrogatum principle, Wong J dismissed the appeal, stating:
[T]he compensation award - based on an agreed number of hours - replaced the remuneration the appellants would have received had they been offered and in turn accepted overtime work. Those amounts would have been taxable as employment income at first instance.
Neal Armstrong. Summary of Saunders v. The Queen, 2020 TCC 114 under s. 81(1)(g.1).
Swift – Tax Court of Canada references the Coates test that a builder is not required to self-assess on building a home for his own occupation even where there may be a secondary resale intent
Over a 23-year period, an individual, who through a wholly-owned company (“TSC”) carried on a small construction business, bought and sold five homes in the Victoria, B.C. area. The fourth property was bought as a vacant lot in October 2009, commenced to be occupied by him and his family a year after a home had been erected and was sold three years later due to financial pressure on the taxpayer resulting from a business downturn.
Sommerfeldt J accepted the individual’s testimony that the fourth property “was… intended to be occupied as a residence, i.e., for personal enjoyment” and “as his dream home” and found that there was no adventure (or business). Accordingly, Sommerfeldt J found that the individual had not constructed that property as a builder and, in particular, not as part of an adventure in the nature of trade or in the course of a business, so that the individual was not required to self-assess under s. 191(1) upon substantial completion and occupancy.
Sommerfeldt J then considered the exception in ETA s. 191(5), which provides that an individual builder is not required to so self-assess where “after the construction … of the complex … is substantially completed, the complex is used primarily as a place of residence for the individual [or family].” He quoted the conclusions of Hogan J in Coates that:
[S]ubsection 191(5) … requires … a simple factual determination as to whether or not the property was used as a family home after it was substantially completed. …
[T[he exception cannot be interpreted as requiring that the property have been built only for purely personal reasons. This means that an individual can benefit from the exception even if he has the secondary intention, at the time of its construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed.
Sommerfeldt J then stated:
[T]hey used the ... Property primarily as a place of residence. Thus, Mr. Swift has satisfied the test enunciated in Coates.
Unlike Coates, this was not an informal procedure case (a distinction to which CRA, if noone else, pays heed).
Neal Armstrong. Summary of Swift v. The Queen, 2020 TCC 115 under ETA s. 123(1) – builder – (f) and s. 191(5).
CRA ultimately concludes that a loss that was suspended under s. 40(3.5)(c)(i), could not be de-suspended by a DLAD winding-up of the CFA referenced under s. 40(3.5)(c)(i)
A Canadian corporation (ACo) realized a suspended loss when it contributed its shares (i.e., in a drop-down to which s. 85.1(3) did not apply) of a controlled foreign affiliate (CCo) to another CFA (BCo), and then CCo was then liquidated under s. 95(2)(e) into BCo. In 2017-0735771I7, Headquarters considered that such loss was suspended on the basis that, for purposes of s. 40(3.5)(c)(i), Bco was a corporation “formed” on the “merger” of CCo with BCo – with the result that BCo was deemed to continue to own the shares of CCo with which it was affiliated, notwithstanding that CCo had, in fact, ceased to exist.
Headquarters was subsequently asked in 2019-0793481I7 to consider the consequences of ACo dropping its shares of Bco under s. 85.1(3) into another ACo CFA (DCo) followed by a sale by BCo of its subsidiary (Fco - whose decline in value had caused the decline in value of its own shares) to an arm’s length purchaser, and then by the wind-up of BCo into DCo and into another CFA (ECo) through which DCo had held part of its intrest in BCo. Headquarters concluded that this resulted in the loss being de-suspended, stating that “[u]pon the completion of the liquidation of BCo, it would no longer be affiliated with ACo,” so that the suspended loss was deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.
Headquarters has now realized that such winding-up of BCo likely is a “designated liquidation and dissolution” described in s. 95(2)(e) )– in which event, s. 95(2)(e)(v)(A)(III) would deem DCo to be a continuation of BCo for s. 40(3.5)(c) purposes respecting shares that were deemed under that paragraph to be owned by BCo before the DLAD (i.e., respecting its deemed continued ownership of the CCo shares) – so that the loss on the CCo shares continued to be suspended.
Neal Armstrong. Summary of 29 July 2020 Internal T.I. 2020-0852071I7 under s. 95(2)(e)(v)(A)(III).
Income Tax Severed Letters 21 October 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Vincent – Court of Quebec imputes use of the firm’s Quebec establishments to a “silent” partner having departed from KPMG Canada to France in ousting a Quebec-France Treaty exemption
In May 2012, a Quebec-resident lawyer, who theretofore had been a partner of KPMG Canada, became a resident of France and started working at KPMG France. Despite his departure, Vincent received payments from KPMG Canada of $84,721 for 2013 and $58,936 for 2014, which were described in the Quebec tax-reporting slips issued by KPMG Canada as having been paid to him as a “silent partner” (“associé passif”). He was unsuccessful in getting KPMG Canada to change this description on the slips.
Art. 14 of the Income Tax Convention between France and Quebec only exempted income derived by a resident of France from a “liberal profession” (such as law) where such income did not relate to a fixed base used by the French resident in Quebec in exercising such profession. After quoting a statement in Dunne, 2005 QCCA 739 that “when dealing with a firm, all the members, including a member not residing in Quebec, carry on the business of the firm and thereby exploit all of the firm’s establishments there,” Lareau JCQ indicated that the two amounts allocated to the taxpayer thus were taxable to the taxpayer if he was a member of KPMG Canada in 2013 and 2014. As the taxpayer did not provide any evidence on this point other than a copy of his letter of resignation, the taxpayer failed to make this case, and his appeal was dismissed. (Lareau JCQ also made the questionable statement that the taxpayer and the ARQ were bound by the “partner” label in the tax-reporting slips issued by KPMG Canada, given that the taxpayer had not secured its change.)
Neal Armstrong. Summary of Vincent v. Agence du revenu du Québec, 2020 QCCQ 3605 under Treaties – Income Tax Conventions – Art. 7 and s. 96(1)(f).
Rousseau – Quebec Court of Appeal finds that the Court of Quebec lacked jurisdiction to consider a source deduction issue
The taxpayer, who had been employed in Alberta and been subject to source deductions based on the federal and Alberta rates, was found by the Court of Quebec to be a Quebec resident. The taxpayer now submitted that the Court of Quebec should have recognized his right to deduct the Alberta portion of the source deductions made to CRA. The Court of Appeal rejected this submission on the basis that, under the Quebec equivalent of ITA s. 171(1) (TAA s. 93.1.21), the Court of Quebec lacked jurisdiction to consider this issue. After referring to federal decisions taking a similar approach (including Boucher and Paradis), the Court stated:
The same result applies here. The jurisdiction of the Court of Quebec under TAA section 93.1.21 is limited to the assessment by the Minister.
Neal Armstrong. Summary of Rousseau v. Agence du revenu du Québec, 2020 QCCA 1308 under s. 171(1).
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in December, 2009. Their descriptors and links appear below.
These are additions to our set of 1,297 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.