News of Note
CRA is reviewing whether a hotel would have a services business for TOSI purposes
Email this ContentThe definition of an excluded share for TOSI purposes requires inter alia that less than 90% of the business income of the corporation have been derived from the provision of services. Paul Wilson indicated that a business of car leasing would not be regarded as a services business, whereas a landscaping business (or insurance broker business) likely would be regarded as a services business. CRA has traditionally looked at a hotel business as being a services business, but is considering whether this would be the case in the TOSI context where the only activity of the hotel is renting rooms.
Neal Armstrong. Summary of 2 December 2019 CTF Conference - Paul Wilson in "New Taxation Rules for Private Corporations: So far, so reasonable?" under “Scenario 3” et seq. under s. 120.4(1) – excluded shares – (a)(i).
CRA auditors may apply a low threshold for determining whether there is a business for TOSI purposes
Paul Wilson (Director, Medium Business Audit Division, Small and Medium Enterprises Directorate), in discussing the audit approach to the new tax on split income (TOSI) rules, provided comments on inter alia the scenario where a $5 million investment portfolio (held by a corporation owned equally by four mature shareholders who are siblings) is professionally managed by a third party investment manager and earns a large dividend return, with the shareholders meeting with the investment manager once a quarter to review the investment strategy and also meeting once a year to determine the annual dividend.
He indicated that given that the courts have indicated a very low threshold for when a corporation has a business, the corporation would likely be considered to have a business for TOSI purposes. However, he conceded that if the corporation only held GICs, it would be considered to earn income from property, so that the TOSI rules could not apply.
Neal Armstrong. Summary of 2 December 2019 CTF Conference - Paul Wilson in "New Taxation Rules for Private Corporations: So far, so reasonable?" under “Scenario 2” under s. 120.4(1) – related business.
12 more translated CRA interpretations are available
We have published full-text translations of the 10 items from the 11 October 2019 APFF Financial Strategies and Instruments Roundtable that were officially released by the Rulings Directorate last week. We published full translations of the answers to these questions, along with summaries of the questions posed, in October. Now you also have the full-text translations of the questions posed. The answers to the remaining two questions (Q.1 and Q.3) have not yet been released by CRA. We have also published a further 2 translations of CRA interpretations released in March, 2011 (being two items from the 8 October 2010 APFF Roundtable). The descriptors and links appear below.
These are additions to our set of 1,041 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.
GST/HST Severed Letters July 2019
This morning's release of three severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their July 2019 release) is now available for your viewing.
Income Tax Severed Letters 23 December 2019
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
FCR is converting to a REIT using an exchangeable unit structure
The shareholders have approved a conversion of First Capital Realty Inc. into a REIT to occur on December 30, 2019 under a Plan of Arrangement. The shareholders will transfer their shares of FCR on a taxable basis in exchange for units of a newly-formed Ontario unit trust (the REIT) – except that those who legitimately seek rollover treatment can elect to receive exchangeable units of a newly-formed subsidiary Ontario LP of the REIT (FCR LP). The number of exchangeable LP units that may be issued is capped at 20% of the currently outstanding number of FCR common shares. The REIT and FCR LP then transfer (under s. 85(2) in the case of FCR LP) their common shares of FCR to a Newco in consideration for notes and shares of Newco. In addition to other tidying-up steps, Newco then amalgamates with FCR.
The final structure portrayed in the Circular is of the REIT holding Amalco directly and through FCR LP. The exchangeable units of FCR LP must be exchanged by December 23, 2023.
As part of the steps, the REIT will become bound by the terms of the FCR’s Debenture Indenture, with FCR (then Amalco) remaining as a co-principal debtor, but being released from numerous covenants. The common shares held by FCR LP and the REIT in Amalco will be retractable.
Neal Armstrong. Summary of First Capital Realty Circular under Offerings – REIT and LP Offerings – Domestic REITs.
Latulippe – Quebec Court of Appeal finds that subdividing a rental property to substantially enhance the sales proceeds did not entail conversion to inventory
Three individuals who had purchased an eight-unit rental property in co-ownership, determined around 4 ½ years later to sell the property due to a change in personal circumstances of one of them. A real estate broker advised that they could achieve a higher price if they instead sold the eight units separately. This was accomplished by entering into an “indivision agreement,” which meant that each purchaser purchased as a co-owner but with rights of exclusive access to a particular unit. As a result of effectively subdividing the property, they increased their aggregate proceeds by around 25%.
They reported capital gains. The ARQ (but not CRA) reassessed on the basis that the gain that arose after the indivision agreement was business income (i.e., on the basis that the property at that time had been converted to inventory).
In finding that the taxpayers realized capital gains, Rochette JCA noted the absence of any connection between the taxpayers’ employment and real estate or of prior dealings in real estate, their initial intention of generating additional income on retirement and the decision to sell being brought on by changed circumstances, the low cost in dividing into co-ownership units and the low commercial risk associated with this step, and the sale of all the units occurring within the same year.
Neal Armstrong. Summary of Latulippe v. Agence du revenu du Québec, 2019 QCCA 2177 under s. 9 - Capital Gains v. Profit - Real Estate.
Atlas Tube (on no privilege for tax due diligence reports) could be overturned
In Atlas Tube, the Federal Court found that a tax due diligence report - that EY had prepared on a target in advance of its acquisition – could be required to be provided to CRA. Southcott J found inter alia that, as the report’s “dominant purpose when commissioned and generated was to inform the decision whether to proceed with the transaction and at what price” rather than to assist Stikeman in structuring the acquisition, it was not protected by solicitor-client privilege.
Arguments before the Federal Court of Appeal challenging the correctness of this decision may include the following:
- There was no requirement that legal advice be the due diligence report’s dominant purpose. Gower v. Tolko Manitoba Inc. (2001 MBCA 11) stated:
Nowhere in the definition of legal advice privilege is there any requirement that the communications between the lawyer and his/her client be for the dominant purpose of litigation. Rather, what must be present is the provision of legal advice as one of the purposes of the document….
- The characterization of the primary purpose of the report as being to inform the buyer’s business decision as to whether to buy the target (and at what price) is questionable. Instead, tax due diligence reports are an input to the commercial terms of the purchase agreement so as to inform what representations and indemnities are sought.
- Commercial use of legal advice (for which a tax due diligence report is an input) does not detract from it being legal advice.
Neal Armstrong. Summary of Steve Suarez, “FCA To Hear Atlas Tube Appeal,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 2 under s. 232(1) – solicitor-client privilege.
Alberta Queen’s Bench finds that an executor had no right of implied indemnity from the beneficiaries for estate taxes that should have been withheld
After litigation as to what, if anything, the separated spouse (Ms. Muth) of the deceased was entitled to receive under his estate, a mediated settlement was reached pursuant to which she applied for probate and distributed the estate 55% to her and 45% to her nieces and nephews. However, she withheld an insufficient amount for estate taxes before distributing without an indemnity, and subsequently sued her nieces and nephews for 45% of the deficiency.
After noting that under ITA s. 159 “Parliament could have chosen to make all beneficiaries of the estate liable as well but chose not to do so,” Little J found that the nieces and nephews were under no obligation to indemnify Ms. Muth for these taxes, stating:
… Ms. Muth had a statutory obligation to obtain a clearance certificate and failed to do so.
.. [I]f the beneficiaries did not instigate or request the breach, they cannot be obligated to indemnify the trustee. In a fiduciary relationship such as that between a trustee and a beneficiary, the logic of that corollary is that as between the two parties, one who had the obligation to perform a duty and failed and one who had neither the obligation nor the means to satisfy it, it is the former who should bear the consequences of the action or inaction.
Little J denied Ms. Muth’s motion for summary judgment and “caution[ed] the Applicant that if she continues the lawsuit, she may face a significant costs award if another judge comes to the same conclusion at the end of the suit.”
Neal Armstrong. Summary of Muth Estate, 2019 ABQB 922 under s. 159(3).
Loyer Succession – Federal Court allows review application for failure of CRA to consider a penalty-waiver agreement of the ARQ for the same unreported income
The estate of a suspected drug dealer, who had been murdered, was assessed by the ARQ for income that he had not reported. CRA followed suit with assessments made on the same basis – but CRA did not follow the ARQ’s lead when the latter agreed with the estate to waive all gross negligence penalties - and did not even mention the Agreement to this effect between the estate and the ARQ in its second level review of the estate’s request under s. 220(3.1) for relief. Before remitting the matter to another delegate for redetermination, LeBlanc J stated:
[The estate] has the right to see the Agreement considered and to know why it was not applied in this case, if that was the CRA viewpoint. The failure to do neither … had the effect… of “depriving the process of justification, transparency and intelligibility,” to adopt … Telfer … .
Neal Armstrong. Summary of Loyer (Succession) v. Canada (Attorney General), 2019 CF 1528 under s. 220(3.1).