News of Note
Muir – Tax Court of Canada finds that s. 160 did not apply to moneys transferred subject to an informal arrangement to discharge liabilities of the transferor
Email this ContentA professional corporation sold all its assets for $1.2 million, with most of this sum being applied at closing to pay off corporate liabilities, but with the balance of $124,000 being paid to the corporation’s dentist shareholder (Ms. Muir) on the understanding that she would use this sum first to pay off remaining creditors who would have been difficult to deal with on the closing, e.g., returning trust accounts for orthodontic patients who did not want to continue with the purchaser’s dentist. As it turned out, there were a lot of unhappy patients, and all of the $124,000 was so applied. The next year, the Corporation was unexpectedly reassessed, and in due course, CRA assessed Ms. Muir under s. 160.
Boyle J found that the $124,000 had been paid to her in consideration for equivalent consideration (her taking on the discharge of the remaining Corporate obligations), so that the s. 160 assessment was vacated. He stated:
[I]t appears her patients and the Corporation’s creditors would have had legal rights to trace any of the monies involved had the Corporation transferred it to her for any other purpose … .
… I do not accept that it was the intention of Parliament or … Livingston to have section 160 apply in circumstances where CRA not only wasn’t but could never be … in any different position whatsoever as a result of the transfer.
Neal Armstrong. Summary of Muir v. The Queen, 2020 TCC 8 under s. 160(1).
The Explanatory Notes on s. 247(2.1) do not reflect the text
The Explanatory Notes to s. 247(2.1) indicate that where Canco makes a loan at 1% to a non-arm’s length (non-CFA) non-resident, s. 247(2) operates first to deem the interest rate to be increased to the arm’s length rate of 3% - then s. 17 is applied second, and has no application since 3% is a reasonable rate for s. 17 purposes.
But that’s not what s. s. 247(2.1) says. S. 247(2) adjustments (under s. 247(2.1)(b)) are stated to operate only on “initial amounts”, which are defined as the amounts “determined for purposes of the Act” (without regard to ss. 247 and 245). Does that mean, for example, that s. 17 is to be applied first (to increase the interest rate from 1% to the prescribed rate of 2%), with s. 247(2) then applied second (to increase the s. 17 rate of 2% to the arm’s length rate of 3%)? (This approach would generate a lower s. 247(3) penalty.)
Next, there is s. 247(2.1)(c), which states that the amounts as adjusted under s. 247(2) are then to be subjected to the provisions of the Act (other than ss. 247(2) and 245(2)). What does this mean, given that all the provisions of the Act (other than GAAR) have already been applied to make any dollar adjustments (although there would still be room for character adjustments)?
It is clear from proposed subsection 247(2.1) that in calculating the “initial amounts,” it is intended for some provisions of the Act to apply only after the subsequent application, where applicable, of adjustments under subsection 247(2). But the legislative test does not provide any clarity as to which provisions apply and which do not in determining the “initial amounts.”
Neal Armstrong. Summary of Marc Roy, “Proposed Transfer Pricing Ordering Rules,” International Tax (Wolters Kluwer CCH), December 2019, No. 109, p. 3 under s. 247(2.1).
Pangaea - Federal Court of Appeal finds that an agreement with another shareholder to enter into a share sale with a 3rd party was a restrictive covenant
A non-resident shareholder (“Pangaea”) of a Canadian corporation (“Public Mobile”) was required under the terms of the unanimous shareholder agreement to agree to any sale of the Public Mobile shares. Telus wanted to acquire 100% of the Public Mobile shares, but Pangaea professed reluctance to sell. A resident shareholder (“Thomvest”) paid Pangaea a lump sum as an inducement for its agreement to execute a share purchase agreement with Telus.
In confirming the view of Smith J that the lump sum payment was “in respect of a restrictive covenant” described in s. 56.4, so that it was subject to Part XIII tax under s. 212(1)(i), Woods JA stated (at paras 13, and 16):
[T]he language used [in the “restrictive covenant” definition] clearly applies more broadly than to non-compete agreements. …
[T]he letter agreement between Pangaea and Thomvest is a “restrictive covenant,” as defined, because the agreement is intended to affect the provision of property by Pangaea by having an effect on its disposition. The intention of the letter agreement is to require Pangaea to sell its shares of Public Mobile by executing the share purchase agreement with Telus. In this way, the agreement is intended to affect the disposition by Pangaea of its shares of Public Mobile.
Neal Armstrong. Summary of Pangaea One Acquisition Holdings XII S.À.R.L. v. The Queen, 2020 FCA 21 under s. 56.4(1) – restrictive covenant.
CRA accepts the feasibility of having a back-to-back supply of essentially the same service
In its new GST/HST Memorandum on Child Care Services, CRA has provided further confirmation of the rather odd concept of a double supply of essentially the same service. A non-profit organization (NPO), which acts as liaison between parents and in-home child care providers, contracts with the self-employed child care providers for their services (and provides various administrative services to them for a commission), and also contracts for the supply of child care services with the parents, who pay all child care services fees to the NPO. From the fees paid to it, the organization keeps the 5% commission, and pays the balance to the child care provider.
CRA indicated that there was a double supply of an exempt child-care service by the child care worker to the NPO, and by the NPO to the parents (although the 5% commission was taxable). The concept of a double supply of a service was also accepted in Caithkin.
Neal Armstrong. Summary of GST/HST Memorandum 21-1 “Child Care Services“ December 2019 under ETA Sched. V, Pt, IV, s. 1.
5 more translated CRA interpretations are available
We have published a further 5 translations of CRA interpretations released in March, 2011 (all of them, from the 2010 APFF Roundtable). Their descriptors and links appear below.
These are additions to our set of 1,073 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Montecristo – Federal Court of Appeal states that “delivery” for ETA purposes had its meaning under the Sale of Goods Act
ETA Sched VI, Pt. V, s. 12(a) zero-rates a supply of tangible personal property where the supplier “ships the property to a destination outside Canada that is specified in the contract for carriage of the property.” A Vancouver retailer of expensive watches and jewellery would accommodate customers who purchased such items (the “Jewellery“) as gifts to take with them on flights back to China by essentially arranging (by going through various hoops) to have the Jewellery personally delivered to the customers just as they were about to board their flights and just after a CBSA officer stamped a customs form attesting to the immediate exportation of the Jewellery. Dawson JA affirmed the finding below that this was not good enough to satisfy the zero-rating requirement, stating:
Even on a broad interpretation of paragraph 12(a), the appellant did not ship the jewellery to a destination outside of Canada that was specified in a contract of carriage.
As the place of “delivery” of the Jewellery was in Canada (i.e., at the Vancouver airport), its sale was taxable. In this regard, she stated:
The concept of delivery … is to be interpreted in the same manner as …delivery in the applicable sales of goods legislation (Jayco…). The British Columbia Sale of Goods Act… defines “delivery” to mean the “voluntary transfer of possession from one person to another”… [which] occurred when the customer received the jewellery at the airport in Vancouver.
Neal Armstrong. Summaries of Montecristo Jewellers Inc. v. Canada, 2020 FCA 12 under ETA Sched VI, Pt. V, s. 12(a) and s. 142(1)(a).
Promutuel Réassurance – Tax Court of Canada finds that 27 insurance companies who acted in a cooperative manner were a “group of persons” for s. 256(7)(d) purposes
27 mutual general insurance companies (the “MGICs”), which were non-share corporations carrying on insurance businesses in their respective territories in Quebec, were found by Favreau J to constitute a “group of persons,” so that s. 256(7)(d) applied to their transfer of (Class A) shares, representing the voting control of a taxable Canadian trust company (“ProCap”), to a corporation without share capital (“ProRé”) engaged in the reinsurance of casualty risk and of which they were members. Since s. 256(7)(d) applied, this transfer was deemed not to entail an acquisition of control of ProCap, so that its non-capital loss was preserved.
These findings turned in significant part on the role of a non-share corporation (the “Federation”) which did not have any capital participation in ProRé, and whose affairs were administered by a board of directors consisting of 10 individuals – seven directors and three managing directors of different MGICs. In finding that the MGICs constituted a group of persons (who in fact acted in concert in the transaction), Favreau J noted that with the assistance of the Federation they operated using the same accounting and technological platform, they had a common objective, decided unanimously to implement the transaction and in the meantime had decided the basis upon which representatives on the board of the Federation were to be allocated (i.e., approximately equal representation for each of the three geographic regions of Quebec). Furthermore, Favreau J found that since the corporate Act governing ProRé specifically provided that the Board of Directors of ProRé was appointed by the Board of Directors of the Federation, it was clear that the de jure control of ProRé was held by the Federation through its Board of Directors. He concluded:
Since the MGICs, as a group of persons, controlled the Federation and the Federation controlled ProRé, the MGICs must be considered to also control ProRé by virtue of the simultaneous control principle set out in subsection 256(6.1) of the ITA, both immediately after and immediately before the disposition by the MGICs of the Class A shares of ProCap to ProRé.
At the level of ProCap, the evidence revealed that the MGICs, as a group, also controlled ProCap, immediately prior to the disposition by the MGICs of the Class A shares of ProCap to ProRé. ProCap's shareholders' agreement and the amendments made to it demonstrate that the MGICs had the power to exercise control of the corporation through their ability to appoint the majority of the members of the board of directors of the corporation.
Before concluding that s. 256(7)(d) applied on the above basis, he rejected an alternative basis for the application of that provision, namely, that the Federation itself (as contrasted to the MGIC group of persons) controlled ProCap before the transaction (false), and controlled ProRé both before and after the transaction (true). Although there was a shareholders agreement giving the MGICs the right to appoint the board of the Federation from amongst their board members, this agreement did not constitute a unanimous shareholders agreement (and, thus, was to be ignored for de jure control purposes) given that nothing in the corporate statute governing ProRé “allowed ProCap's shareholders to enter into agreements to take away or restrict the powers normally vested in ProCap's directors.”
Neal Armstrong. Summaries of Promutuel Réassurance v. The Queen, 2020 CCI 13 under s. 256(7)(d) and s. 256(8.1).
Frank-Fort Construction – Tax Court of Canada reverses gross negligence penalty for failure of new home builder to report two sales
D’Auray J found that a one-man corporation that had a business of constructing (through using third-party contractors) and selling about 10 or 20 new homes per year had not been demonstrated by the Crown to be liable for gross negligence penalties for failure to report in its GST returns two of the home sales it made in the 2 ½ year audit period. Factors noted by her included:
- all the necessary information for preparing the tax returns and financial statements had been provided to the taxpayer’s CPA firm
- due to an inexplicable error on the part of the CPA firm, the receipts from the two sales had been recorded as proceeds of mortgage loans received by the taxpayer
- the GST returns were prepared and signed by an accountant at the CPA firm, which delegation did not constitute gross negligence on the part of a taxpayer whose principal had no accounting background and a modest education
- although there also had been failures to report sales in preceding reporting periods for which QST penalties had been assessed, the taxpayer had been assured by a different accountant at the CPA firm that he would now personally attend to the file
Neal Armstrong. Summary of Frank-Fort Construction Inc. v. The Queen, 2020 CCI 6 under ETA s. 285(1).
CRA finds that the making of a loan at the prescribed rate under s. 189(1) does not prelude a penalty under s. 188.1(4)
S. 189(1) generally imposes tax on a taxpayer to the extent that the interest paid on loan made to the taxpayer that is a non-qualifying interest was less than the prescribed rate. Under s. 188.1(4), where an “undue benefit” (defined in s. 188.1(5)) has been conferred on a person by a registered charity, the charity is liable to a penalty equal to 105% (or 110%) of the value of the undue benefit conferred.
Headquarters rejected the proposition that where a registered charity that is a private foundation makes a loan at the prescribed rate of interest when the loan recipient receives the loan because of that debtor’s relationship with the private foundation or the foundation’s board of directors, the avoidance of any s. 189(1) tax on the debtor (because of the prescribed rate being used) means that there cannot be a penalty for undue benefits imposed on the private foundation under s. 188.1(4) in respect of the loan.
Neal Armstrong. Summary of 5 December 2019 Internal T.I. 2017-0683831I7 under s. 188.1(4).
[Corrected title] CBS – Federal Court of Appeal finds that Galway did not permit the Crown to resile from a settlement agreement negotiated in good faith
The Justice Department entered into a settlement agreement with the taxpayer in which it agreed to permit the taxpayer to carryforward an agreed portion of a $23.4M non-capital loss – and then promptly sought to repudiate the agreement on the basis that CRA had discovered that the non-capital loss in question did not exist, so that implementing the settlement would be contrary to law, which Galway said was bad. In affirming the decision below that the Crown was bound by the settlement agreement, Woods JA stated:
Galway does not address the circumstances in which one party seeks to resile from an agreement.
Second, the parties in this case intended to enter into an agreement that applied the law to the facts. The agreement was not intended to be a compromise settlement of the type considered in Galway.
Third, the Crown does not suggest that the defect within the settlement agreement is self-evident to the Court as it was in Galway. …
The general rule is that parties should be bound by the agreements that they make.
She also found that a Tax Court order implementing a provision in the settlement agreement that tax was to be increased in a subsequent year did not violate the Last principle that the Crown was not permitted to appeal its own reassessment.
Neal Armstrong. Summaries of CBS Canada Holdings Co., 2020 FCA 4 under s. 169(3) and s. 171(1)(b).