News of Note
2078970 Ontario – Federal Court of Appeal indicates that an s. 152(1.4) determination’s validity awaits a factual Tax Court determination of the partnership’s existence
Email this ContentCRA determined that two limited partnerships did not exist because their partners were not carrying on business in common with a view to profit, and issued notices of determination to the partnerships under s. 152(1.4) determining that losses reported by the purported partnerships for the three years commencing in 2006 were, for this reason, nil. The following question was posed under Rule 58:
Where the Minister has at all times concluded that no partnership existed, can the Minister issue a valid Notice of Determination in respect of that purported partnership under subsection 152(1.4) … .
Webb JA essentially indicated that the real question was whether the partnership in fact existed, which was a factual determination to be made by the Tax Court, so that the question posed was premature. If, in fact, the partnerships did not exist, then no valid determinations could have been made under s. 152(1.4), so that the answer to the question clearly could not be an unqualified “yes.” Furthermore, since the Tax Court Judge had instead determined that the answer was no, it would follow that the s. 152(1.4) determinations that had been made were not valid determinations - without any finding being made as to the validity of the partnerships, so that this validity issue would be required to be addressed following CRA assessments of the multitude of partners, if it were not statute-barred from doing so. Accordingly, Webb JA concluded that the question posed was “premature,” and that the key question of the validity of the partnerships should be pursued before the Tax Court by getting on with the appeals.
Neal Armstrong. Summaries of Canada v. 2078970 Ontario Inc.,, as designated partner of Lux Operating Limited Partnership, 2020 FCA 162 under s. 152(1.4) and s. 152(1.8).
CRA indicates that the percentage of completion method can be used in computing qualifying revenue, but not marking securities to market
S. 125.7(4) requires that qualifying revenue of an eligible entity generally “be determined in accordance with its normal accounting practices.” CRA considers that:
“[R]evenue” under normal accounting practices generally requires the satisfaction of certain performance obligations, such as the sale of goods or the performance of services that would typically result in a corresponding inflow of cash, accounts receivables or other consideration.
CRA applied this test to find that the “revenue reported by the entity under the percentage of completion method would generally be considered ‘qualifying revenue’,” whereas mark-to-market valuation adjustments made by to the carrying value of investments by investment and brokerage firms would not give rise to an “inflow of cash, receivables or other consideration” under the above test, so that such (unrealized) gains or /losses would not affect qualifying revenue.
Neal Armstrong. Summary of 21 September 2020 External T.I. 2020-0855831E5 under s. 125.7(4).
CRA seems to indicate that joint tenants holding a share are one shareholder, not two
S. 130.1(6)(d) requires inter alia that a mortgage investment corporation have at least 20 shareholders. How is this test applied where a husband and wife hold a share as joint tenants (with rights of survivorship)?
After noting that under a joint tenancy, “the joint tenants have concurrent ownership and possession of the same property,” CRA stated:
[W]here two or more joint owners of a share of a corporation are considered one shareholder under relevant corporate law or are entitled to jointly receive any dividend paid on the share by the corporation, the joint owners of the share will generally be counted as one shareholder for purposes of paragraph 130.1(6)(d) … .
The first test might seem silly – obviously, they are two persons, not one. However, given the quoted acknowledgement above of the concurrent nature of ownership in joint tenancy, the second test seems to be saying that they would be regarded as one shareholder.
This approach might be relevant elsewhere, e.g., in determining whether a mooted mutual fund trust has 150 beneficiaries under Reg. 4801(b).
Neal Armstrong. Summary of 12 August 2020 External T.I. 2019-0833841E5 under s. 130.1(6)(d).
Income Tax Severed Letters 7 October 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA respects a provincial incorporating statute’s declaration of deemed property ownership by the provincial Crown for s. 149(1)(o.2)(iv) purposes
An s. 149(1)(o.2) corp. is required by s. 149(1)(o.2)(iv) to have shareholders that are registered pension plans or trusts or segregated funds for such plans - or prescribed persons, which are defined to include “Her Majesty in right of a province” (Reg. 4802(1)(e)) and a corporation all of whose shares are owned by prescribed persons (Reg. 4802(1)(g)).
CRA indicated that it considered a corporation - that was deemed in its enabling legislation to hold all its property as the property of the provincial Crown - to qualify under Reg. 4802(1)(e) (i.e., CRA respected this fiction for purposes of considering the province to own the shares of the (o.2) corp). Similarly, a wholly-owned corporation of such corporation would qualify under Reg. 4802(1)(g).
Neal Armstrong. Summary of 14 August 2020 External T.I. 2019-0829811E5 under Reg. 4802(1)(e).
Filion – Court of Quebec finds that an office holder received no taxable benefit from improper expense charges which were docked from his compensation early the next year
In 1998, a deputy got the National Assembly of Quebec to pay $23,000 in expenses which supposedly were expenses of his constituency office, but which were later established to be in significant part of a personal nature (leading to his imprisonment for fraud in 2004). The National Assembly got wind of this impropriety in January 1999, and stopped payment on a taxable transitional allowance of $53,000, that was payable to him in connection with his defeat in the election. In 2013, the Quebec Superior Court effectively found that the taxpayer was entitled to the excess of the $53,000 transitional allowance over the $23,000 which he had largely misappropriated.
Tremblay JCQ found that there was no taxable benefit at all to the taxpayer in 1998 in light of the more-than-offsetting seizure that occurred in January1999, stating:
The correspondence between the misappropriation of funds and the appropriation of the transitional allowance by the Office of the National Assembly prevents the plaintiff's economic situation being considered to have been truly altered in 1998 to his benefit as a result of his misappropriation.
The National Assembly did indeed pay out sums to third parties on the basis of misrepresentations … from the plaintiff, but it recompensed itself through set-off in the first days of 1999.
At the time the plaintiff filed his return in April 1999 for his 1998 taxation year, he did not retain a taxable benefit resulting from his [mis]conduct … .
Neal Armstrong. Summary of Filion v. Agence du revenu du Québec, 2020 QCCQ 3024 under s. 6(1)(a).
We have translated 7 more CRA Interpretations
We have published a further 7 translations of CRA interpretations released in January, 2010. Their descriptors and links appear below.
These are additions to our set of 1,285 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. You are currently in the “open” week for October.
Mandel v. 1909975 Ontario Inc. – Ontario Superior Court declines jurisdiction in a requested shareholding rectification whose raison d’être was a CRA assessment
In order to avoid a deemed disposition under the s. 104(4) 21-year deemed realization rule, two family trusts for the children of Mr. Mandel or Ms. Pike distributed their shares of a holding company (holding the respective family interest in the Opco) under s. 107(2) to the respective children beneficiaries, who then transferred those shares on a s. 85(1) rollover basis to a newly-incorporated “Child Corporation” (of which Mr. Mandel or Ms. Pike held special voting shares) in consideration for non-voting common shares of the Child Corporation. However, Mr. Mandel or Ms. Pike then subscribed a nominal amount for a large number of convertible shares of the Child Corporation whose conversion (which they professed might occur only if a divorced spouse of a child received the non-voting common shares) would substantially dilute the entitlements of such non-voting common shares.
CRA reassessed Mr. Mandel and Ms. Pike on the basis that these transactions generated a taxable benefit under s. 15(1) to each of approximately $15 million. Each objected – but no appeal to the Tax Court had yet been launched.
Koehnen J declined to assume jurisdiction respecting a requested rectification of the corporate records of the Child Corporations (made on the basis that the shares therein of Mr. Mandel or Ms. Pikes had never been paid for by them, contrary to s. 23(3) of the OBCA), stating:
… [T]he Tax Court has jurisdiction to interpret s. 23(3) of the OBCA. …
Parliament has created a specific court with expertise in tax matters and has created a specific process to address tax issues. Given that the raison d’être of this application is the tax assessment, the issues should in my view be determined by the body with specialized expertise in that area.
Koehnen J went on to indicate that, even if he had assumed jurisdiction, he would have declined the application, referencing in this regard, “the unexplained conflict in the evidence before me about whether the applicants had paid for their shares, the absence of any dispute within the corporations and the potential for unknown consequences in granting a retroactive declaration… .”
In addition to seeking rectification on equitable grounds, the applicants had also relied on OBCA s. 250, which contemplates “an order requiring the registers or other records of the corporation to be rectified.” Koehnen J stated:
In this case, rectification is not appropriate because the corporate records accurately reflect what the parties intended in 2014 and 2015. At that time, the applicants intended to be the controlling shareholders of the Child Corporations. They signed several documents reflecting that intention.
… [T]he applicants do not require a court order to correct the books and records of the Child Corporations. They can and in fact have changed those records to show that the applicants are no longer controlling shareholders.
Neal Armstrong. Summary of Mandel v. 1909975 Ontario Inc., 2020 ONSC 5343 under General Concepts – Rectification.
Gardner – Tax Court finds that car travel expenses between a home office and the employer offices were deductible
A cosmetics sales rep, who did most of her work based out of her home office but travelled around once or twice a week to the company offices 72 kilometres away (where no office was set aside for her) for meetings with the sales team or her boss, was found to be able to deduct (with the requisite Form T2200 employer certification) her “commuting” expenses of around $13,000 for the year, as they thus were incurred in the course of her employment. Russell J noted that Campbell (which he had argued for the taxpayer) “established that when the work circumstances reasonably require that the worker have an office, and an office is not provided by the employer, then the worker can locate the required office somewhere including in their home and have it regarded as an employment location.”
Neal Armstrong. Summary of Gardner v. The Queen, 2020 TCC 108 under s. 8(1)(h.1).
McNeeley – Tax Court of Canada finds that a substantial distribution from an EBP to the founding shareholder was made to him qua employee, and was taxable
A distribution to an employee under an employee benefit trust (EBP) is taxable under s. 6(1)(g) rather than being subject to the usual trust distribution rules in s. 107. However, there is a carve-out from the EBP definition which, as explained by Russell J, effectively indicates that s. 6(1)(g) does not render, as taxable, a distribution which, in the absence of the EBP rules, would not have been taxable to the beneficiary under s. 6(1)(a).
The founding shareholder (Mr Baker) of a software company, who received the lion’s share of a distribution of the company shares held by an EBP, argued that he was not taxable on the distribution because it was received by him qua founding shareholder rather than qua CEO (he received about 70% of the distribution so that there was no unacceptable dilution.)
In rejecting this argument, Russell J, after first citing Savage, stated:
[T]he broad wording of paragraph 6(1)(a) requires only the slightest connection between the benefit and employment. That does not preclude benefits received where, in addition to the required connection between benefit and employment, there also may have been considerations extraneous to employment.
Here, the absence of the slightest connection to Mr. Baker’s employment was not established given that the EBP, by its very terms, restricted beneficiaries to employees, and Mr Baker had not established that the two other trustees making the unanimous distribution decision had not taken into account his substantial contribution to the company over the past 12 years qua CEO.
Neal Armstrong. Summaries of McNeeley v. The Queen, 2020 TCC 90 under s. 248(1) – EBP and Reg. 4800.1.