News of Note
Insurance Institute – Tax Court of Canada finds that the parties’ subjective intention not to be employer-employee can, to some extent, override objective indicia of their relationship
Email this ContentGraham J wrestled with the implications of the finding in Connor Homes that significant weight should be given to the subjective intention of the parties as to whether they were in an employer-employee, rather than independent contractor, relationship, before applying the objective indicia of whether there was an employment relationship set out in Wiebe Door and Sagaz (i.e., control, ownership of tools, opportunity for profit, and risk of financial loss). He considered that what this meant was that where, as here, the parties (an NPO providing educational services to industry members, and an instructor retained by it) clearly intended their relationship to be that of independent contractors rather than of employer and employee, it was not fatal that an application of the above objective factors indicated that there was an employment relationship. Instead, all that was required in such circumstances was that they “carry on their relationship in a manner that is similar to [rather than the same as] what one would expect from their intentions.”
Thus, although here, application of the four objective factors by themselves would have indicated an employment relationship, that application only fell somewhat short of the mark (e.g., although the instructor had no risk of loss, he had an opportunity for gain in the somewhat limited sense of “an ability to increase his effective earnings through up-front investment and efficiencies in a manner similar to that of an independent contractor”), so that their relationship was that of independent contractors.
Neal Armstrong. Summary of Insurance Institute of Ontario v. M.N.R., 2020 TCC 69 under s. 5(1).
CRA confirms that goodwill and IP that were not on target’s tax books could be written up under s. 111(4)(e)
In connection with an acquisition of its control, Canco used a s. 111(4)(c) and(d) write-down of debt owing by a controlled foreign affiliate to designate the s. 111(4)(e) write-up of the capital cost of goodwill (Class 14.1), customer relationships (Class 14.1) and intellectual property (Class 12 – e.g., software or video copyright?). CRA indicated that this could be done even though, prior to the acquisition of control, these assets had no cost, i.e., these assets were internally generated. CRA also indicated that “the goodwill and the customer relationship … constitute a single property, being the goodwill in respect of the Taxpayer’s business.”
Neal Armstrong Summary of 19 May 2020 Internal T.I. 2020-0841791I7 under s. 111(4)(e).
984274 Alberta – Federal Court of Appeal finds that nil assessment was an “assessment” giving rise to an s. 164(3.1) overpayment
The taxpayer (“984”) reported a capital gain on its 2003 sale of land on the basis that it had acquired it from its parent (Henro) on a rollover basis. In 2010, the Minister assessed Henro (to include an income account gain) and 984 (to reverse the previously reported capital gain and refund the capital gains tax plus interest, totalling $1.7M) on the basis that the 2003 drop-down had occurred on a non-rollover basis. On March 23, 2015, the Minister implemented a settlement agreement (effectively agreeing with 984’s and Henro’s initial filing position) by inter alia assessing 984 to claim back the 2010 payment, including the refund interest, plus arrears interest since 2010, in what Noël CJ found (contrary to the Tax Court below) to be in proper reliance on ss. 160.1(1), 160.1(3) and 164(3.1).
Noël CJ noted that, although the 2010 assessment of 984 was a nil assessment, and although Okalta found that a nil assessment is not appealable, nonetheless:
[A]n assessment that levies tax and a nil assessment have the same legal effect i.e. both start the limitation period when issued as the original notice, both replace a prior assessment or reassessment when issued as the last notice, and both fix the tax payable for the year.
Given that the 2010 nil assessment was an “assessment” including for the purposes of s. 164(1)(a)(iii), it followed “that the 2010 payment was a refund authorized to be made pursuant to subparagraph 164(1)(a)(iii)”, from which it further followed “that the refund interest paid by the Minister to the respondent in 2010 can be recovered pursuant to subsection 164(3.1)”.
Furthermore, it did not matter that the 2010 assessment was issued more than three years after the previous 2003 (re)assessment of 984, given that the “three-year limit [in s. 152(4)] does not apply to a notice that no tax is payable.”
Finally, it did not matter that no reassessment had been issued to bring the 2003 tax payable back from zero, as per the 2010 nil assessment, to the amount initially assessed, given that inter alia “ Markevich makes it clear that an excessive refund can be assessed even if the power to issue a reassessment for the year pursuant to subsection 152(4) has expired” (para. 77).
Accordingly, the 2015 assessment for an overpayment and interest was valid.
Noël CJ in passing agreed with the taxpayer that the FCA’s finding in Freitas that a statute-barred reassessment was voidable rather than void, was not to be followed “as the Court manifestly overlooked [the] established line of cases”.
Neal Armstrong. Summaries of Canada v. 984274 Alberta Inc., 2020 FCA 125 under s. 164(1), s. 160.1(1), s. 152(4) and General Concepts – Stare Decisis.
Income Tax Severed Letters 29 July 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Building Products – Federal Court confirms CRA’s refusal to grant more than partial interest relief for failure of CRA to point out an ability to apply NCLs
When the taxpayer was assessed to deny SR&ED deductions or credits for its 2009 taxation year, the CRA auditor failed to follow the requirement in the Audit Manual to obtain a written response from the taxpayer as to whether the taxpayer wished to apply available non-capital losses (NCLs) to offset the assessed taxable income and eliminate the tax and interest. Although there were sufficient NCLs to this end, their specific amount was unclear until January 2015, at which time the taxpayer filed its request to have the NCLs so applied. This request was denied as being filed after the end of the normal reassessment period, which ended on September 3, 2014.
Shore J considered that it was reasonable of the Minister’s delegate to grant only partial interest relief under s. 220(3.1) respecting the assessed interest, on the basis that it was ultimately the taxpayer’s responsibility to decide whether it wished to apply its NCLs before the end of the normal reassessment period, which it had failed to do. He also considered that there was no procedural unfairness in the failure of the Minister’s delegate to consult the above Manual policy before granting only partial interest relief, indicating that the delegate should not have been expected to be aware of this policy and it was up to the taxpayer to bring the Manual to the delegate’s attention, which it did not do (i.e., it is the taxpayer’s duty to bring largely internal CRA documents to CRA’s attention?).
Unlike 1455257 Ontario, Shore J did not suggest that there was no statutory authority for the CRA policy in the Manual – a policy which is broadly consistent with the right to claim discretionary reserves from reassessed income (see the Trial decision referenced in Abed Estate) and make late designations (Nassau Walnut, Lussier – also narrowly construing s. 152(6)).
Neal Armstrong. Summary of Building Products of Canada Corp. v. Canada (Attorney General), 2020 FC 784 under s. 220(3.1).
CRA rules that hospitals could access the high hospital GST/HST rebate rate under a collective property procurement arrangement
An Ontario hospital typically is entitled to a high rebate of GST/HST on its non-creditable costs in the course of its hospital activities, and to a lower rebate respecting other purchases. A group of Ontario hospitals and similar facilities entered into a group procurement arrangement under which one hospital contracted as principal with an outside supplier of property, but provided such property mostly to the other hospitals (but also partly for its own use) in their hospital or similar activities, and was reimbursed by them on an equitable basis.
But for ETA s. 259(7), the purchasing hospital would only have been entitled to rebates at the low rate on its purchases. CRA ruled that pursuant to s. 259(7), it was entitled to rebates at the high rate given that the other hospitals used the acquired property “exclusively in the course of their hospital authority activities.”
Neal Armstrong. Summary of 25 February 2020 GST/HST Ruling 202245 under ETA s. 259(7).
CRA rules on construction costs of an underground ramp as CEE
CRA gave a ruling regarding the qualification of expenditures, on an underground mineral drilling program to expand the proven and probable reserves of a mineral deposit, as Canadian exploration expense under para. (f) of the definition, including expenditures for an underground ramp which not only facilitated the underground drilling but would be used to bring ore up to the surface once production commenced.
Neal Armstrong. Summary of 2020 Ruling 2019-0826011R3 under s. 66.1(6) – Canadian exploration expense – (f).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in May and April, 2010. Their descriptors and links appear below.
These are additions to our set of 1,230 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¼ 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 August.
1455257 Ontario – Tax Court of Canada suggests that a CRA policy to adjust loss carrybacks, to a reassessed year, beyond the s. 152(6) period, has no statutory authority
The validity of a s. 160 assessment of the taxpayer turned on whether the affiliate from which the taxpayer had received a transfer of property in 2003 should be regarded as having had its taxable income for 2000 reduced by a portion of its non-capital loss for 2002 that the affiliate had not claimed because the taxpayer and the affiliate had not found out about that additional loss until 2011, when the taxpayer made an ATIP request following the s. 160 assessment of it.
The taxable income of the affiliate for 2000 had arisen as a result of a 2005 settlement which had reduced a 2001 non-capital loss (and, thus, reduced the loss carryback to 2000), thereby leaving 2000 unsheltered. Although St-Hilaire J considered that there was no statutory authority for this (given the time limits in s. 152(6)), the CRA policy in such circumstances was to allow a taxpayer (i.e., the affiliate) to increase loss carry backs from other years, to offset the increased 2000 income. It made a request to carry back a loss from 2003 to 2000 (which CRA ultimately acceded to), but this was not enough to fully offset the 2000 taxable income.
Because it did not request the carryback of the additional 2002 loss in 2005 (even though CRA knew about it), this policy was to no avail. Furthermore, it was not possible to somehow treat the original request shortly after 2002 to carryback a smaller loss from that year to 2000 as carrying with it an implied request to carry back a larger loss (“discovered” in 2011) when, as a result of the 2005 settlement, use of that additional loss was now required.
In dismissing the taxpayer’s appeal, St-Hilaire J stated:
…[T]he Court is left with legislation that does not satisfactorily address the circumstances and an administrative policy that seemingly seeks to address the lacunae but for which there is no legislative authority. …
Neal Armstrong. Summaries of 1455257 Ontario Inc. v. The Queen, 2020 TCC 64 under s. 152(6), s. 160(1)(e)(ii) and General Concepts – Onus.
CRA rules that fees paid by an introducing broker to a carrying broker were GST/HST taxable
An Agreement between a carrying broker and the introducing broker contemplated that the introducing broker would effect all of its trades on all of the exchanges and in the over-the-counter markets that were checked off in a Schedule, and that the carrying broker would provide clearing services (deliveries and settlements of cash and securities respecting trades made for the introducing broker’s clients), segregation/safe-keeping services (holding securities and/or cash of the introducing broker’s clients and of the introducing broker in segregation or safekeeping) and record keeping/information services (preparing and issuing confirmations of trades, monthly statements and statements in respect of inactive accounts to the introducing broker’s clients in the name of the introducing broker).
After finding that the introducing broker was making an exempt “arranging for” financial services supply to its clients, CRA went on to find that, on general principles, there was a single supply of an administration service by the carrying broker to the introducing broker, so that the fees charged by it to the introducing broker were GST/HST taxable rather than being an exempt financial service. Although it thus was unnecessary to consider the exclusion from a financial service under para. (t) of the definition thereof and under the Financial Services and Financial Institutions (GST/HST) Regulations, that exclusion, if relevant, would also have applied given that (in light of a reasonably comprehensive indemnity provided by the introducing broker) the carrying broker was not a person at risk.
Neal Armstrong. Summaries of 24 January 2020 GST/HST Ruling 194625 under ETA s. 123(1) – financial service – para. (l) and Financial Services and Financial Institutions (GST/HST) Regulations, s. 4(1) – person at risk.