News of Note
Haifa Trust – Court of Quebec finds that a trust with an inactive Alberta trustee whose director could be replaced at will by the Quebec patriarch was resident in Quebec
Email this ContentA purported Alberta-resident trust for the family of Mr. Zaffir was found by Lavigne JCQ to be resident in Quebec given that there was essentially nothing to connect it to Alberta other than an Alberta corporate trustee whose Alberta-resident director did essentially nothing (nor had any real ability to do so). Lavigne JCQ noted that the following two points were by themselves sufficient to reach this Quebec residency finding:
That Mr. Zaffir was the sole shareholder of Alberta Ltd. and in that capacity he had the power to name or dismiss the director of Alberta Ltd., coupled with the fact that Mr. Zaffir was also the “protector” of the Haifa Trust, is sufficient to conclude that the effective control of the Haifa Trust was in the hands of Mr. Zaffir, a resident of Quebec and on that basis, the taxes of the Haifa Trust were required to be paid in Quebec.
Neal Armstrong. Summary of 895410 Alberta Ltd., fiduciaire de la Fiducie Haifa v. Agence du revenu du Québec, 2018 QCCQ 2581 under s. 2(1).
Melançon - Tax Court of Canada finds that the failure of a house construction company to charge a mark-up on its costs incurred for shareholder work generated a taxable benefit
The taxpayer, who was the sole shareholder of a home construction company that handled the construction of his personal residence, reimbursed his company for all of its third-party costs in constructing the home. Smith J confirmed CRA’s assessment of a shareholder benefit on the taxpayer, that was computed by applying the profit margin of 8.09% that the company averaged on its other house construction business in that year to the costs that were incurred by it on this house.
Neal Armstrong. Summary of Melançon v. The Queen, 2018 CCI 73 under s. 15(1) and General Concepts – Effective Date.
CRA confirms that there is no requirement on a supplier to refund GST/HST on an excess charge
ETA s. 232(2) provides that where a supplier has charged GST/HST on consideration that is subsequently reduced, the supplier “may” then refund the GST/HST it charged on the excess consideration. CRA stated:
Note that the legislation uses the word “may”. As such, it is at the discretion of the [supplier] whether to refund the GST on the reduction in consideration.
Neal Armstrong. Summary of 21 December 2017 Ruling 167830 under ETA s. 232(2).
Stewart - Tax Court of Canada finds that partners were not necessarily precluded under the s. 152(1.7) “binding” rule from arguing that a partnership determination of loss was statute-barred
CRA issued Notices of Determination to deny losses of a limited partnership (TSI). Both TSI and its partners launched appeals to the Tax Court. However, TSI then filed a Notice of Discontinuance, which resulted in its appeal being deemed by s. 16.2(2) of the Tax Court of Canada Act to have been dismissed. The individual partners continued with their appeals, arguing that the Notices of Determination had been statute-barred.
D’Auray J first indicated that there was potential merit in the individuals’ argument that s. 152(1.7), which provides that a notice of determination is binding on the partners respecting their income, taxes and amounts refundable, did not preclude them from arguing that the Notices of Determination were invalid on procedural grounds. However, that success did not help the individuals, as she agreed with the Crown that their continuing with their appeals was an abuse of process. A previous case had found that generally “dismissal under section 16.2 of the TCC Act carries the same effect as a judgment of dismissal by the Court” – and the action which thus had constructively been decided against them was one in which they could have, but failed to, raise their statute-barring arguments.
Neal Armstrong. Summaries of Stewart v. The Queen, 2018 TCC 75 under s. 152(1.7) and General Concepts – Abuse of Process.
CRA clarifies the computation of the $150 cost per employee safe harbour for employee parties
The T4130 Employers’ Guide states that:
If you provide a free party or other social event to all your employees and the cost is $150 per person or less, we do not consider it to be a taxable benefit.
CRA confirmed that the cost per person for these purposes is computed based on the number of those attending rather than the number invited.
Neal Armstrong. Summary of 9 April 2018 Internal T.I. 2017-0731251I7 F under s. 6(1)(a).
CRA states that hockey tickets purchased by a hockey player recruiter are subject to s. 67.1
Subject to inapplicable exceptions, s. 67.1 deems amounts expended on “entertainment” to be 50% of the expenditures. CRA stated:
Since a hockey game is an athletic event, we are of the view that the amounts paid by a hockey player recruiter for the purchase of tickets to attend hockey games are subject to section 67.1 even if these amounts were paid by a taxpayer in the course of his or her employment.
Neal Armstrong. Summary of 9 April 2018 External T.I. 2017-0714381E5 F under s. 67.1(1).
Takenaka – Federal Court requires CRA to reconsider a penalty imposed for failure to timely file a T1135 by a taxpayer with a nil Part I tax liability
The taxpayer, who had no Part I tax payable for her 2011 and 2012 years, decided in 2014 to file returns for those years in order to make Canada child tax benefit claims. With her returns she also filed the T1135s for those years reporting her co-ownership interest in a Florida property (with the other interest already having been timely reported by her husband). CRA assessed late filing penalties under s. 162(7)(a) respecting the late T1135s – and then, on a second-level review, cancelled the penalty for 2012 but not for 2011. This could be viewed as the taxpayer being penalized for not feeling guilty and, therefore, not using voluntary disclosure proceedings.
Rather than appealing the penalty (see Douglas), she went to the Federal Court. Mosley J sent the file back for a redetermination on the issue of the penalty for 2011, partly on the basis that the CRA delegate had incorrectly considered the 2011 and 2012 income tax returns to be overdue (so that there was little excuse for not also timely filing the related T1135s), whereas in his view she was under no obligation to file such returns.
Neal Armstrong. Summaries of Takenaka v. Canada (Attorney General), 2018 FC 347 under s. 220(3.1) and s. 150(1.1)(b).
CRA states that interest that can increase with commodity price is not participating debt interest until this occurs
A term loan borrowing of Canco (containing a gross-up clause) provided for the payment of regular interest, together with the payment of additional amounts (also calculated as a percentage of the principal outstanding) if a commodity price exceeded a specified level (with the percentage rate for the additional amounts increasing in a stair step manner as the commodity price increased above further specified thresholds). CRA ruled that each payment of regular interest was not participating debt interest as defined in s. 212(3) until such time as the additional amounts became payable as a result of the commodity price condition having been triggered. CRA’s reasoning was that the only interest referenced in this definition was interest that was “paid or payable” – so that the contingent interest could be ignored until it became payable by virtue of the occurrence of the price trigger.
Somewhat oddly, CRA went on to indicate that once this triggering event had occurred, all regular interest paid thereafter would be tainted - even apparently if the commodity price went back down again.
This ruling apparently was all that Canco sought, so that there were no comments on the application of the relevant Treaty.
Neal Armstrong. Summary of 2016 Ruling 2016-0664041R3 under s. 212(3) - participating debt interest.
Income Tax Severed Letters 2 May 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finding, that an interest-free loan from a CFA of Canco to a NR sister of Canco was subject to Part XIII tax, is debatable
In 2015-0622751I7, a foreign subsidiary of Canco (Opco) in turn wholly-owned a non-resident “Finco,” which made an interest-free loan to a non-resident sister of Canco (Foreign Sub), that was repaid within two years. As the loan was not exempted under the inter-foreign affiliate exemption in s. 80.4(8), the deemed interest-free benefit imputed under s. 80.4(2) was, in turn, deemed by s. 15(9) to be a benefit conferred on “a” shareholder, which CRA interpreted as being Foreign Sub. S. 214(3)(a) then deemed this benefit to be paid “to the taxpayer as a dividend from a corporation resident in Canada.” CRA considered Foreign Sub to be the “taxpayer” and effectively treated Finco as the deemed corporation resident in Canada, so that Finco was liable under s. 215(1) for failure to “withhold” and remit Part XIII tax on the imputed benefit.
The latter part of this logic, beginning with the bolded sentence, could be questioned:
[A]rguably, this provision should not be read as deeming Finco to be "a corporation resident in Canada"; it only restates the basic (resident payer) requirement of part XIII after deeming the benefit to be a dividend in order to engage subsection 212(2). If Parliament had intended to apply withholding tax to this clearly extraterritorial situation, it would have deemed Finco to be a person resident in Canada in respect of the benefit conferred on Foreign Sub under subsection 212(13). Absent such explicit provision, basic principles of territoriality dictate that Canada cannot tax the amount (Oceanspan…)
Neal Armstrong. Summary of Michael N. Kandev, “NIB Loan to Non-FA-Related Non-Resident,” Canadian Tax Highlights, Vol.26, No. 4, April 2018, p. 5 under s. 214(3)(a).