News of Note
6 more translated CRA interpretations are available
Email this ContentWe have published a CRA interpretation released last week and a further 6 translations of CRA interpretations released in May 2011. Their descriptors and links appear below.
These are additions to our set of 1,011 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ½ 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 December.
Cristofaro – Court of Quebec finds that a resale of a house by a renovator within one year gave rise to a capital gain
One of the taxpayers and a friend purchased a Montreal house for $1,050,000 with the intention of renovating it and renting it out. Renovation expenses escalated to $492,000. Unable to rent it out and with expenses beyond what they could handle, they sold the property for $1,700,000 a year later. Forlini, JCQ found that the taxpayer had realized a capital gain, stating that neither the taxpayer nor his friend (Mr. Stephan) were “habitual or sophisticated real estate investors” and that:
If the intention of Jaysen Cristofaro and Mr. Stephan changed after the purchase, this is attributable to the skyrocketing renovation costs and the difficulty in finding a tenant, and not because they were motivated by realizing a profit through a quick flip.
… The evidence does not establish that in the minds of Jaysen Cristofaro and Mr. Stephan, the possibility of resale was an operating motivation for the purchase.
Essentially the same findings were made respecting a somewhat similar transaction of Jaysen’s mother.
This case followed the Hickman approach of considering that once the taxpayer has made out a prima facie case, the burden of persuasion shifts to the Minister. The Hickman approach was doubted in, for example, Morrison, Lohas and in comments of Webb JA in Sarmadi. This may be an example of a case where that approach to onus mattered, i.e., the prima facie case that the high renovation costs could not be foreseen seemingly put the burden of persuasion back on the ARQ.
Neal Armstrong. Summary of Cristofaro v. Agence du revenu du Québec, 2019 QCCQ 6242 under s. 9 – capital gain v. profit – real estate.
Holland – Federal Court finds that a taxpayer could not challenge a CRA residency determination that had not yet been assessed
The taxpayer, who left Canada in 2004 and returned in January 2010, filed a voluntary disclosure application in July 2015 covering the period from 2004 to 2014, but did not file returns for 2005 to 2009, taking the position that for those years he was a non-resident. On April 25, 2018, CRA issued a letter confirming a position taken two years earlier that the taxpayer continued his residency throughout this period.
McVeigh J confirmed the decision of the Prothonotary to strike the taxpayer’s application for judicial review of this letter on the grounds that it was premature (as the voluntary disclosure application was still outstanding, no determination had been made under s. 220(3.1)), and the Minister’s factual determination of residency could be challenged by filing tax returns for those years (which had not yet been done) and appealing assessments thereof to the Tax Court. She stated:
[H]e cannot judicially review this particular tax process when there has been no assessment and no discretionary decision.
Neal Armstrong. Summary of Holland v. Canada (Attorney General), 2019 FC 1433 under Federal Court Act, s. 18.5.
Pengrowth proposes to distribute a litigation claim immediately before Pengrowth’s sale to a purchaser
Although it has recently paid off $1.3 billion in debt, Pengrowth still owes over $0.7B to secured debtholders. A private purchaser has agreed, under an Alberta Plan of Arrangement, to pay off the secured debt and to acquire all the Pengrowth common shares for $0.05 per share ($28 million in aggregate), or less than 0.5% of their trading value a number of years ago.
What if the Pengrowth shareholders vote this down? The Circular discloses an agreement of Pengrowth with the purchaser that in such event they would seek to finalize an alternative proceeding (likely under the CCAA) which would proceed on similar terms, but under which “Shareholders may receive the nominal value of $0.001 per Share.”
Initial steps in the proposed Plan of Arrangement entail first the settling by Pengrowth of a litigation trust by assigning its claim in an action in the Court of Queen’s Bench of Alberta together with a contribution of funds (and a commitment to potentially provide further funds) for the costs of the action, and then a dividend in kind by it of the interests in that litigation trust to its shareholders. The Circular does not disclose how that dividend will be valued when it comes time for the preparation of the T3 slips. Although unclear, withholding tax on the dividend may be funded out of sale proceeds otherwise payable to the non-resident shareholders for their shares.
Neal Armstrong. Summary of Pengrowth Circular under Spin-Offs and Distributions – Taxable dividends-in-kind – Litigation trust distribution.
Encana proposes to somersault out of Canada
It is proposed that Encana effectively be converted from a CBCA public corporation to a Delaware public corporation. This would occur in three stages.
First, there would be a “somersault” Plan of Arrangement under which Encana would distribute common shares, having a nominal value, of a newly-incorporated CBCA corporation (“Ovintiv”) to its shareholders and they then would exchange their Encana common shares for shares of Ovintiv – except that, in the somewhat unlikely event that the Encana shares had traded up to above U.S.$6.30 a share (presumably corresponding to an estimate of the paid-up capital of the Encana shares), the shareholders would also receive U.S.$0.25 per share of an Ovintiv note, so that the exchange would occur on a non-rollover basis unless they elected with Ovintiv under s. 85.
Second, a U.S. subsidiary of Encana would be distributed out of Encana in consideration for the assumption of debt and as Encana-share redemption proceeds, and Ovintiv would then drop Encana (which previously had been converted into a B.C. ULC) into a new CBCA subsidiary of Ovintiv.
Third, Ovintiv would be continued to Delaware. The Circular does not anticipate that this would generate tax under s. 128.1(4) or 219.1 except in the unlikely event that a lot of Encana shareholders elected under s. 85.
The continuance (“domestication” from a U.S. perspective) would be an “F” reorg, meaning that it would generally not occur on a rollover basis to U.S. shareholders.
Neal Armstrong. Summary of Encana Proxy Statement and Ovintiv Prospectus under Other – Continuances/Migrations – Outbound continuances.
CRA finds that income derived from a prior year’s sale of an excluded business is not excluded from the TOSI rules
Under the split-income rules, an “excluded amount” in s. (e)(ii) of the definition includes an amount “derived directly or indirectly from an excluded business of the individual for the year.”
CRA acknowledged that the “derived directly or indirectly” phrase was quite broad and adverted to the rule in s. 120.4(1.1)(d)(ii) that includes within that phrase an amount derived (in turn) from an amount that arose from the disposition of an excluded business. CRA nonetheless concluded that where Mr. X’s company (ABC Inc.), which had a (construction) excluded business and used the proceeds of sale of that business to establish an investments business in which Mr. X had no involvement, the dividends now paid to Mr. X out of the income of that business were not excluded amounts. CRA stated:
[T]o the extent that it could be determined that the amount in question was derived from the investment business carried on by ABC Inc., that amount could not constitute an "excluded amount" by virtue of subparagraph (e)(ii) of the definition … .
[I]t would not be possible to consider that an amount distributed by a corporation in a year subsequent to the disposal of the activities of the business is derived from that business for the year. … [S]ince the construction business was not carried on in the year in which the dividend was received by Mr. X, it could not qualify as an excluded business of Mr. X for the year.
Does CRA think that the s. 120.4(1.1)(d)(ii) exclusion only applies to income derived in the stub period immediately following, and in the year of, the sale?
Neal Armstrong. Summary of 6 August 2019 External T.I. 2019-0792001E5 F under s. 120.4(1) – excluded amount - (e)(ii) and s. 120.4(1.1)(a).
An employer is more exposed to CPP and EI assessments than for income tax source deduction assessments
Two differences between an employer’s income tax, and CPP and EI, withholding or remittance obligations:
- If the employer misses the 90-day deadline to file an appeal to the Tax Court from an income tax assessment, it can file an application for a one-year extension under ITA s. 167(5) – whereas there is no such potential extension under the EI Act or CPP Act.
- The Minister may assess employers for failing to deduct or withhold and remit source deductions for EI premiums and for CPP contributions - but cannot assess an employer for income tax source deductions for resident employees if it has failed to withhold them.
Neal Armstrong. Summaries of Gergely Hegedus and Keith Hennel, “Employer Source Deductions: No Ordinary Tax Debts,” Canadian Tax Focus, Vol. 9, No. 4, November 2019, p.5 under s. 167(5) and s. 153(1)(a).
Income Tax Severed Letters 20 November 2019
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA appears to indicate that obtaining a clearance certificate does not relieve an executor of personal liability for estate GST/HST obligations
After noting that:
- s. 267.1(2) generally creates personal liability of a trustee (including the executor of an estate) for the GST/HST obligations resulting from the trustee’s acting as a trustee of the trust (or estate)
- s. 270 provides that a representative such as an executor should not distribute property under the representative's control before obtaining a clearance certificate certifying that all amounts, that are, or can reasonably be expected to become, payable or remittable under Part IX in respect of the reporting period during which the distribution is made, or any previous reporting period, have been paid (or acceptable security therefor provided)
- failure to obtain the certificate renders the representative personally liable for the payment or remittance of those amounts to the extent of the value of the property or money distributed.
CRA stated:
That being said, the fact that a clearance certificate is issued to a representative of an estate, does not free the estate from any outstanding obligations under Part IX and as such, the trustee would still be liable to satisfy these obligations pursuant to subsection 267.1(2).
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.32 under ETA s. 270(4).
Denis – Court of Quebec does not accept the CRA view that a triplex is a single property for tax purposes
The taxpayer sold a triplex in 2011 at a gain, which he reported as being fully exempt under the Quebec principal residence exemption. The basement unit, which represented 54% of the triplex, had been occupied by him for use as his residence and a home office since his purchase of the triplex in 2002. The two upper units had been rented out by him to third parties until 2007, and he provided unconvincing evidence that thereafter they should be regarded as having been used as part of his principal residence.
In confirming the ARQ’s reassessment made on the basis that only 54% of the taxpayer’s gain was eligible for the principal residence exemption, Breault JCQ stated:
[I]n order for two housing dwellings or units in the same immovable to be considered a single housing unit for the purposes of TA section 274 (or ITA 54), they must be sufficiently integrated, one with the other, such that the owner can benefit from full enjoyment of the entirety. …
[N]o transformation or modification of much significance was made to the Triplex in order for the three units to be linked in some manner to each other.
This decision likely is inconsistent with the CRA view (e.g., in 2011-0417471E5 and 2016-0651791C6 – both referred to by Breault JCQ) that a duplex or triplex is a single property for tax purposes.
Respecting an unsuccessful argument of the taxpayer that his rental of one of the upper units to his friend for 14 months in 2008-2009 at his alleged cost should be ignored, Breault JCQ stated:
It is sufficient to note that the unit or property generated revenue to conclude that it was used for the purposes of producing rental income.
The taxpayer made an alternative argument that the upper units, viewed now as separate properties from the basement unit, had undergone a change of use for purposes of the Quebec equivalent of ITA s. 45(1) in 2007, so that their cost had been stepped up to their fair market value on that date. Breault JCQ noted not only that such a change of use had not been established, but that it was inappropriate for the taxpayer to now seek to benefit from a deemed gain and step-up that he had not declared in his 2007 return.
Neal Armstrong. Summary of Denis v. Agence du revenu du Québec, 2019 QCCQ 6708 under s. 54 – principal residence.