News of Note
CRA indicates that charges made to Canco by its non-resident parent equaling the FMV of shares distributed out of a trusteed PSP by the parent to Canco employees likely were deductible
Email this ContentEmployees of a Canadian subsidiary participated in a performance share plan (“PSP”) under which the non-resident public parent (Parentco) contributes funds to a non-resident trust, which purchases shares of Parentco on the open market, and distributes shares (within approximately three years) to the group employees as the shares vest in accordance with the performance conditions of the PSP. After finding that the arrangement was an employee benefit plan (EBP), Headquarters concluded that payments made by Canco to Parentco under a “recharge” agreement, equalling the fair market value of shares that were distributed to the Canco employees at the time they vested, were not deductible under s. 32.1, stating:
To be deductible under section 32.1, Canco’s reimbursement payment to Parentco would have to be considered to be a contribution to the EBP by Canco. Given the potentially significant differences in both the amount and timing of the reimbursement payment as compared to the actual contributions made by Parentco … the reimbursement payments are not equivalent to Parentco’s contributions to the EBP, and thus cannot be considered to be a proxy for those contributions.
However, Headquarters went on to find that the payments were deductible under s. 9, except to the extent that they related to periods during the vesting period that the employees had been employed by affiliates rather than by Canco.
Canco originally filed its returns without claiming a deduction for the reimbursement payments but, following the Transalta decision, filed requests (“TPRs”) for adjustments to its returns to allow such a deduction. Before noting that the PSP might not have been a s. 7 plan (in which case, the prohibition on deductions under s. 7(3)(b) would not have applied even before Transalta), Headquarters stated that whether the TPRs should be allowed:
depends, in part, on whether the TPRs are due to an error or are due to a change in position resulting from the Transalta decision. If it is determined that the TPRs were due to an error … the TPRs for all of the taxation years could be accepted. However, if due to a change in position, we understand that only those TPRs for income tax returns originally filed after the Transalta decision (April 4, 2012) could be accepted.
Neal Armstrong. Summaries of 1 August 2019 Internal T.I. 2018-0781951I7 under s. 7(3)(b), s. 32.1(1), s. 248(1) – employee benefit plan, s. 18(1)(a) – income-producing purpose and s. 152(4).
[corrected] 12 more translated CRA interpretations are available
We have published a further 12 translations of CRA interpretations released in March, 2011. Their descriptors and links appear below.
These are additions to our set of 1,053 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. Next week is the “open” week for January.
The PPT raises familiar issues of the relationship between a GAAR and SAAR
The author, in discussing the principal purpose test (PPT) in the Multilateral Instrument, and its relationship to specific anti-avoidance rules (SAARs), suggests:
If a purported abusive arrangement can be dealt with by the PPT and a SAAR, the SAAR should prevail, provided that the SAAR does cover the same situation. In conclusion, it can be argued that the determining factor in applying the PPT is deciding whether any SAAR would be able to deal with the facts of the specific case in question. …
The concept of beneficial ownership had been looked to as a prime tool to address Treaty shopping. Post-PPT it is suggested that:
The prima facie conclusion is that the OECD has narrowed the application of the beneficial ownership tests in favour of the use of the PPT and the LOB due to the greatly varying interpretation of the concept of “beneficial ownership” worldwide. This is evidenced by the fact that a number of examples in the Commentary on Article 29 of the OECD Model (2017), such as Examples A and B … are based on fact patterns of past cases argued on the basis of beneficial ownership clauses.
Neal Armstrong. Summaries of Ian Zahra, “The Principal Purpose Test: A Critical Analysis of Its Substantive and Procedural Aspects – Part I,” Bulletin for International Taxation, November 2019, p. 609 under Treaties – Multilateral Instrument – s. 7(1).
Friedman – Federal Court does not follow its interpretation in Lin that a requirement letter insufficiently specified who was covered
The Friedmans, a married couple, who had not filed T1135 returns, each received Requests for Information under s. 231.1(1) (“RFIs”) that were addressed to them personally, and stated inter alia:
Your personal income tax returns and any other related or associated entities have been selected for audit … . [Y]ou may have offshore holdings that you have failed to disclose … .
In order to expedite and facilitate our audit, we will require a clear understanding of all entities with which you had a connection or affiliation during the taxation years noted above. …
Please send us back the attached questionnaire fully completed within 30 days … .
The taxpayers refused to provide the requested information, noted that the RFIs’ wording was essentially identical to those at issue in Lin, and argued that, like in Lin, they should not have been required to comply because it was unclear whether the RFIs were directed to them individually or to their related entities. Pamel J rejected these submissions and found in light of the wording of the letters and a reading of the accompanying questionnaire that “the CRA is specifically directing those questions to the Friedmans in respect of their personal tax situation.”
Pamel J also rejected their submissions that the RFIs contravened s. 13 or 7 of the Charter.
Neal Armstrong. Summaries of Canada (National Revenue) v. Friedman, 2019 FC 1583 under s. 231.7(1) and Charter s. 13, s. 7.
Income Tax Severed Letters 30 December 2019
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
102751 Canada Inc. – Court of Quebec finds that legal fees incurred to recover misappropriated funds were not capital expenditures
After substantially all of the assets of a Canadian corporation (Mobile) owned by a German family were misappropriated by a Canadian director (Black), Mobile brought an action against him, with the action subsequently being settled in 2012 by the payment by Black of an agreed sum plus interest thereon at 5%. In finding, contrary to an ARQ reassessment, that the various legal and other professional fees incurred by Mobile were fully deductible rather than being capital expenditures, Cameron JCQ found that the expenses had been incurred to preserve its income-producing assets and that there had been a resulting generation of the interest of 5%.
Before so concluding, Cameron JCQ also had to address a procedural issue. A few days after Mobile had appealed the reassessment to the Court of Quebec, the ARQ issued a fresh reassessment that effectively consolidated the appealed reassessment with reassessments dealing with loss carryforwards. Cameron JCQ was inclined to agree with the proposition that the second reassessment nullified the first, so that the appeal also potentially was a nullity unless Mobile had objected to the second reassessment, which in form it had not. However, he found that Mobile should be considered to have objected to the second reassessment given that, shortly after its issuance, Mobile and the ARQ signed a protocol reaffirming the points in contention for all the reassessed years. He stated:
It would therefore be difficult for the Minister to argue that he has not received written notice of objection to [the second reassessment] as he has agreed in writing that the contest is about the subject matter of that assessment.
Neal Armstrong. Summaries of 102751 Canada Inc. v. Agence du revenu du Québec, 2019 QCCQ 7378 under s. 18(1)(b) – capital expenditure v. expense – damages and s. 169(1).
Gestions Calce – Court of Quebec departs from written terms of lease to find that a rental property was used principally in the active business of a related person
One of the exceptions from the rule that a rental property cannot qualify as a “former business property” for purposes of the replacement property rules in ITA ss. 13(4) and 44 references the situation of a “property … leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose.” The property in question had been rented by the taxpayer to third parties and to a related person (“CR”) for use in CR’s business of reselling used buses. The ARQ denied the Quebec replacement property rollover on the basis that the lease to CR covering only 39.6% of the floor area of the building and (if regard were to be had to qualitative factors) the rents received from CR represented less than 25% of the total rents.
Cameron JCQ nonetheless found that the “principally” test was satisfied:
- Taking into account the use of the external spaces (i.e., for parking the buses) “CR effectively used more than 50% of the collective usable external and internal square feet”
- As the only major tenant, CR’s use of the property was qualitatively more significant
- There was an additional unwritten lease at sufferance of the interior spaces augmenting the portion of the interior spaces leased to more than 50%
- CR’s rent was somewhat arbitrarily low given that the lessor (the taxpayer) received, in addition, a substantial amount as management fees”).
Neal Armstrong. Summary of Gestions Calce Ltée v. Agence du revenu du Québec, 2019 QCCQ 7377 under s. 248(1) – former business property.
CO2 Solution Technologies – Tax Court of Canada finds that a declaration of trust requiring the trustees to be the Pubco directors gave Pubco de jure and de facto control of a trust investment
A high-tech public company (CO2 Public) carried on its SR&ED through a private company (CO2 Technologies) that was held by a discretionary trust whose beneficiaries were CO2 Public and special-purpose subsidiaries thereof. Smith J found that CO2 Technologies was a “a corporation controlled, directly or indirectly in any manner whatever” by a public corporation (CO2 Public) and, thus, was not a Canadian-controlled private corporation (CCPC) – even before getting to the one-sided terms of the research agreement between the two corporations.
Of particular interest was a provision in the Declaration of Trust, that provided that each trustee was required to be a director of CO2 Public. Smith J found that this provision, by itself, was sufficient to give CO2 Public de jure control, i.e., the Declaration of Trust could be looked to for such purposes in the same manner as the constating documents of CO2 Technologies. Smith J went on to find that this provision also constituted “a legally-enforceable agreement whose object was to assure the control of the appellant by a public corporation, within the meaning of subsection 256(5.1).” Furthermore, the research agreement was similar to the development agreement in Aeronautics, which was found in that case to “constitute … a legally-enforceable arrangement capable of establishing de facto control under subsection 256(5.1)” – and the facts here were similar to Lyrtech and Solutions Mindready.
Respecting the argument, in the alternative, of the Crown, that the declaration of trust constituted an agreement referred to s. 251(5)(b)(i) and, having regard to there being a discretionary trust, s. 248(25) deemed CO2 Public to be beneficially interested in CO2 Trust, Smith J stated that although it was unnecessary for him to address this argument:
It appears to me however that this Court is bound by the decision … in … Propep.
Neal Armstrong. Summary of CO2 Solution Technologies Inc. v. The Queen, 2019 CCI 286 under s. 127(1) - Canadian-controlled private corporation – (a).
Auditors should not analyze a reasonable return for TOSI purposes if the taxpayer has made a good faith attempt
An excluded amount for tax on split income (TOSI) purposes includes, where the specified individual has attained age 24, a “reasonable return” in respect of the individual. Paul Wilson (Director, Medium Business Audit Division, Small and Medium Enterprises Directorate) elaborated on the statement in 2018-0771851E5 that “CRA does not intend to generally substitute its judgment of what would be considered a reasonable amount where the taxpayers have made a good faith attempt to do so... .”
Auditors are instructed to, first, question the taxpayers to determine what steps they took to verify that there was or was not split income, and if there has been a good faith attempt, then the auditors do not need to question further. Only if there has not been a good faith attempt will the auditor examine the contribution of the relevant factors such as of property or labour, and risk incurred.
Neal Armstrong. Summary of 2 December 2019 CTF Conference - Paul Wilson in "New Taxation Rules for Private Corporations: So far, so reasonable?" under “Reasonable return” under s. 120.4(1) – “reasonable return”.
Schwartz – Quebec Court of Appeal indicates that the Court of Quebec lacked the jurisdiction to cancel interest attributable to its own delays
A Court of Quebec judge cancelled part of the interest included in the ARQ assessment attributable to a delay in the hearing due to the illness of the judge and counsel for the ARQ. The Court of Appeal found that the Court of Quebec lacked the jurisdiction to do so, and that a taxpayer who wished to have interest cancelled should consider submitting an application to the Minister of Revenue for waiver (which, if declined, might then potentially be subject to a judicial review application in the Superior Court).
Neal Armstrong. Summary of Agence du revenu du Québec v. Schwartz, 2019 QCCA 2068 under s. 220(3.1).