News of Note
D’Anjou – Tax Court of Canada finds that a taxpayer should have been informed by a similar loss in the Court of Quebec
Email this ContentIn connection with finding that the taxpayer had made a misrepresentation attributable to neglect when he had treated the adjusted cost base of a property he had sold as having been increased by alleged expenses such as municipal and school taxes and financing expenses incurred during the holding of the property, Favreau J noted in particular that the same types of ACB adjustments had been denied for the disposition by the taxpayer of another parcel of vacant land by the Court of Quebec in 2008 QCCQ 7197. The year of disposition thus was validly reassessed beyond the normal reassessment period.
Neal Armstrong. Summaries of D’Anjou v. The Queen, 2019 CCI 208 under s. 152(4)(a)(i) and s. 54 – ACB.
CRA indicates that Reg. 8503(26) minimum amount payments or commutation payments are lump sums ineligible for reduction under Canada-U.S. Treaty
The U.S.-resident beneficiary of her deceased mother’s individual pension plan (IPP) received monthly benefits thereunder that were eligible for the 15% Treaty-reduced rate – but thereafter the IPP was wound up by virtue of having reached the end of a 10-year guarantee period. CRA rejected the taxpayer submission that the IPP winding-up distribution was “simply an extension of the periodic guarantee payments,” and found that, since it was a lump sum payment as referenced in the definition of “periodic pension payment” in s. 5 of the Income Tax Conventions Interpretation Act, it was subject to withholding at 25%.
CRA went on to gratuitously state:
[A]ny additional payment that an IPP may be required to make in a particular year to comply with the IPP minimum amount rules in [Reg.] 8503(26) … is not considered to be a periodic pension payment. … Similarly, a commutation payment made to a member or a beneficiary of a member in full or partial satisfaction of their entitlement to benefits under a defined benefit RPP is not a periodic pension payment.
Neal Armstrong. Summary of 12 September 2019 External T.I. 2017-0732681E5 under Treaties – Art. 18.
CRA applies its view that a partner is attributed each PE of a partnership for Reg. 400/403 purposes
Under Regs. 403(1) and (3), a property insurer (or, in this case, a reinsurer) is required to allocate its taxable income to the provinces on the basis of the respective proportions of its net property insurance premiums that are arrived at by allocating its net premiums to the provinces where the insured property is situate – except that if it does not have a permanent establishment in a particular province, the net premiums for the insured property in that province are allocated to the province which has a PE to which those net premiums are “reasonably attributable.”
CRA indicated that, even in this specialized context, it considers that a limited or general partner has a PE wherever the partnership has a PE, so that the reinsurer in question was considered for Reg. 403 purposes to have a PE in various provinces by virtue of being a partner - even though the partnership in question did not carry on any insurance business.
Neal Armstrong. Summary of 8 June 2018 Internal T.I. 2018-0744881I7 under Reg. 403(3).
Income Tax Severed Letters 9 October 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Paletta – Tax Court of Canada denies a film marketing partnership loss on the basis that an alleged option was a sham
A taxpayer used U.S.$82M that had largely been indirectly financed by Twentieth Century Fox to fund, as partner, prints and advertising expenses (“P&A expenses”) respecting a film that Fox allegedly had sold to the partnership for US$128.3M, but with Fox having an alleged option to repurchase the film. The second related taxpayer, engaged in a quite similar transaction.
In denying the claimed losses, Hogan J stated:
[T]he Appellants invested in the … Partnerships solely to avail themselves of the tax savings that the promoters led them to believe they could expect and that they felt secure in the knowledge that Fox had agreed to reacquire the films prior to their commercial release.
Accordingly, I conclude that the options were shams designed to mask the parties’ agreement that Fox would reacquire the films prior to their commercial release.
Consequently, the P&A expenses allegedly borne by the partnerships were not incurred for the purpose of earning income. Likewise, the financing and other expenses incurred by the Appellants with respect to their partnership interests are not deductible.
Hogan J went on to find, in the alternative, that even if his finding on sham was wrong (i.e., the “options” were something less than binding purchase obligations of Fox), s. 231.7(6) of the tax shelter rules precluded the deduction of the losses given inter alia that no tax shelter registration had been made, the P&A expenses had been represented to be deductible and the taxpayers’ expectation of the exercise of those options gave rise to a prescribed benefit under Reg. 231(6).
Neal Armstrong. Summaries of Paletta v. The Queen, 2019 TCC 205 under General Concepts – Sham and Reg. 231(6).
Weaver – Quebec Court of Appeal applies the REOP doctrine to a “gentleman farmer”
A full-time engineer also maintained two horses, which his two daughters rode in equestrian competitions. He had visions of his elder daughter competing in the junior Olympics and making a career of her riding. Revenues from the operation averaged less than 10% of claimed expenses. In reversing the finding below that this “gentleman farmer” was entitled to his claimed losses, the Court stated:
[T]he judge did not analyze the activities of the respondent in relation to the objective factors laid out … in Stewart, namely, (1) the profit and loss experience in past years; (2) the taxpayer’s training; (3) the taxpayer’s intended course of action; and (4) the capability of the venture to show a profit.
… [I]t is difficult to conclude that the predominant intention of the respondent was to derive profit from the equestrian activities of his daughters and that he showed serious businesslike conduct.
Neal Armstrong. Summary of Agence du revenu du Québec v. Weaver, 2019 QCCA 1687 under s. 3(a) – business source.
Income tax issues for pension real estate corporations can arise when investing in LPs or real estate joint ventures
Observations on income tax considerations relevant to s. 149(1)(o.2) corporations include:
- A s. 149(1)(o.2)(iii) corporation is precluded from issuing “bonds, notes, debentures or similar obligations.” Hudson’s Bay v. OMERS indicates that there is no legal relationship between a limited partner (e.g., an (o.2) corp) and 3rd parties who have contracted with the limited partnership (i.e., the general partner thereof). In any event, comfort is provided by s. 253.1, which indicates that such limited partner is not considered to be carrying on any “activity” of the LP (including presumably its borrowing activities).
- Where the (o.2)(iii) corp has guaranteed debt of the LP, the guarantee likely would not be considered to be a similar obligation because there is no creditor-debtor relationship under which the guarantor is primarily liable.
- In order that a s. 149(1)(o.2)(ii) real estate corporation can avoid issues arising out of a CRA position that its activities respecting co-owned real estate should be proportionate to the interest held by it (or other quailed entities), it may headlease its interest to a headlessee which carries on the activities in question.
- Borrowing to fund a tenant inducement payment should generally satisfy the borrowing restrictions under s. 149(1)(o.2)(ii)(C), since the purpose of the borrowing is to earn rental income from the real property being leased. However, borrowing to lend money to a tenant to fund tenant improvements is not permitted, since any income earned from the loaned money will be interest income earned on the loan, not income earned from real property.
Hersh Joshi and Jack Silverson, “Understanding and Doing Business with Tax-Exempt Entities,” 2018 Conference Report (Canadian Tax Foundation), 29:1 – 35 under s. 149(1)(o.2)(iii)(C), s. 149(1)(o.2)(iii)(B), s. 149(1)(o.2)(ii)(A), s. 149(1)(o.2)(ii)(C) and Reg. 8501(2)(a).
Kurnik – Tax Court of Canada finds that legal costs of defending against of countersuit by the employer could be deducted under s. 8(1)(b)
After the former CFO of a company (Mr. Kurnik) sued the successor of his employer (“RJM56”) for reneging on its agreement to pay him a $1.5 million closing bonus on the sale of the company to a venture capitalist, RJM56 then responded by suing Mr. Kurnik in his personal capacity and as trustee of a family trust for the recovery of bonuses paid to him during his employment and distributed to him and beneficiaries of the trust. All such litigation was ultimately settled with Mr. Kurnik receiving a release and a cheque for the full $1.5 million - out of which Mr. Kurnik paid $364,442 in legal fees, including $55,552 in legal fees of trust counsel.
CRA allowed the deduction of the full amount under s. 8(1)(b) (which permitted the deduction of legal fees incurred “to establish a right to” an amount of employment income) other than the $55,552. In allowing the deduction of the latter amount as well, Bocock J stated:
[T]here is no question that the initial lawsuit spawned the subsequent one. … The primary issue within that second lawsuit is the entitlement and quantum of remuneration payable by the employer to the employee. This falls squarely within the wording of paragraph 8(1)(b) … .
Neal Armstrong. Summary of Kurnik v. The Queen, 2019 TCC 206 under s. 8(1)(b).
CRA accepts that a large employer contribution on compassionate grounds to an employee’s crowdfunding campaign to cover a child’s therapeutic requirements was not taxable
An employee, whose recently-born child had a condition that required costly therapy, established a donation-based crowdfunding campaign to help fund such costs. CRA accepted that a contribution by the employer, which was likely the largest contribution to the campaign, was received by the individual on compassionate grounds qua individual rather than qua employee and, thus, did not represent a taxable benefit.
Neal Armstrong. Summary of 23 August 2019 External T.I. 2018-0779191E5 under s. 6(1)(a).
Clevor Technologies – Tax Court of Canada accepts that using metaheuristics is not SR&ED
The taxpayer’s systematic process of trying different combinations of coding changes to its software to eliminate problems of integrating that software with that of a third party (Oracle), which had made poorly documented coding changes, was characterized by Russell J as a “trial and error” procedure that was “routine engineering” and not SR&ED.
Russell J also accepted the view of the Crown’s expert that a second mooted “SR&ED” effort to enhance the ability of the taxpayer’s software to calculate optimal timelines for concurrently run projects used an established methodology termed "metaheuristics, which in essence search the solution space based on some algorithms and converge to a solution … [and] did not involve experimentation or analyses to resolve scientific or technological unknowns,” so that for this activity as well, the claimed SR&ED credits were denied.
Neal Armstrong. Summary of Clevor Technologies Inc. v. The Queen, 2019 TCC 166 under s. 248(1) - SR&ED.