News of Note

The ARQ issued a penalty assessment for the late filing of the Quebec equivalent of amended s. 85(1) election forms – then, when it learned from CRA that no shares had been issued by the transferee at the time of the drop-down and that such shares were only purportedly issued after the fact upon CRA identifying this deficiency, assessed the transferor taxpayer on the basis that the drop-downs had not occurred on a rollover basis (but without cancelling its separate penalty assessment).

Lareau JCQ rejected the taxpayers’ submission that, by issuing the penalty assessments, the ARQ had accepted the late elections and should not have issued further assessments now denying rollover treatment without having cancelled the previous assessment.

Neal Armstrong. Summary of Construction PCA Inc. v. Agence du revenu du Québec, 2019 QCCQ 8876 under s. 85(7).

As a result of the death of the beneficiary of a (life-interest) trust described in s. 104(4)(a)(ii.1), the trust’s taxation year ended on the day of death (the “Death-Date Year”) and a new taxation commenced immediately thereafter (the “Post-Death Year”). A life-interest trust (described in s. 104(4)(a)(ii.1)) made a gift of non-depreciable capital property in the taxation year commencing immediately after the beneficiary’s death (the “Post-Death Year”) and prior to the trust’s filing-due date for the taxation year ending with that death (the “Death-Date Year”).

When asked about this, CRA did not seem to be troubled that, although (c)(ii)(C) of “total charitable gifts” in s. 118.1(1) contemplates that a gift made by the trust in the Post-Death Year could be included in the total charitable gifts of the trust in the Death-Date Year, variable B of s. (a)(iii) of “total gifts” in s. 118.1(1) (calculating the numerical maximum for recognized gifts) refers only to the proportion of an individual’s taxable capital gain for a taxation year in respect of a gift made by the individual in the taxation year (e.g., the Death-Date Year). Thus, the trust’s “total gifts” for the Death-Date Year could include the eligible amount of the gift of capital property made in the Post-Death Year.

Neal Armstrong. Summary of 27 January 2020 External T.I. 2019-0799641E5 under s. 118.1(1) - “total gifts” - (a)(iii) – B.

Consistent with the industry practice, TD Waterhouse sent to CRA individual T-5008 forms for each sales transaction of the taxpayer (Mr. Chen) that showed the securities’ proceeds but did not complete the box for the securities’ cost. However, TD Waterhouse provided Mr. Chen with a T-5008 Summary which provided the cost, sale price, and gain/loss figures for each series of securities in the aggregate, thereby providing the information he needed to prepare his tax return for the year in question (2009). However, in that year he had net trading losses and minimal employment income, so that his accountant advised him that it was unnecessary to file a return for that year (2009), contrary to the return-filing requirement of s. 150(1.1)(b)(ii). CRA then used the information in the individual T-5008 forms to assess Mr. Chen for $4.1M in tax and interest (i.e., effectively treating the securities as having a nil cost). Mr. Chen ultimately filed his 2009 income tax return and had the erroneous tax assessment corrected, but nonetheless sued TD Waterhouse.

In finding that Mr. Chen had no cause of action, Myers J stated:

Mr. Chen offers no basis to argue that the law might recognize a duty of care on stockbrokers to provide cost information in T-5008 reporting slips to protect the customers from the risk of harm if they unlawfully failed to file their income tax returns and then CRA took aggressive enforcement positions. TD Waterhouse provided Mr. Chen with all applicable cost information in its T-5008 Summary so that he could file his income taxes as required by law.

Neal Armstrong. Summary of Chen v. TD Waterhouse Canada Inc., 2020 ONSC 1477 under Reg. 230(2).

S. 156(4)(b)(ii) permits the Minister to allow a late-filed ETA s. 156 nil consideration election. Due to confusion as to the required effective date of the new requirement to file such elections with CRA rather than merely keeping signed copies on hand, and in response to a CRA audit inquiry in this regard, two closely related companies filed (somewhat late) an election with a stated effective date of January 1, 2016, not January 1, 2015. On a subsequent audit of the 2015 year, CRA focused on this error, and (in November 2017) the companies filed a request to have an amended election accepted with the correct effective date (of January 1, 2015). This was rejected, and assessments for over $30M were made of the 2015 year.

In rejecting a request for judicial review of CRA’s refusal to accept the late-filed amended election, Zinn J stated:

The Denso Companies say that their actions were not negligent nor careless given they had hired and relied on the advice of tax consultants who provided them erroneous advice. … [T]he consultant was contacted after a well-published deadline had already passed, and only after the Denso Companies were alerted to the need by the review officer in February 2016. It was open to the Minister to conclude, as was done, that the Denso Companies had not taken adequate precautions to keep abreast of their compliance obligations, actions that amount to carelessness and negligence.

Neal Armstrong. Summary of Denso Manufacturing Canada Inc. v. Canada (National Revenue) 2020 FC 360 under ETA s. 156(4)(b)(ii).