News of Note
Hébert – Tax Court of Canada finds that a corporation whose only activity was unsuccessful efforts to sell its remaining equipment was carrying on an active business
Email this ContentThe market for the business of the taxpayer’s corporation (“Radio Progressive “) of selling and repairing radio telecommunication equipment had virtually disappeared by 2007, so that from that time on, it did not make any sales, and essentially its only activity related to the efforts of the taxpayer (Mr. Hébert) to sell off its remaining stock of equipment. It was dissolved in August 2011.
Ouimet J found that Radio Progressive qualified as a “small business corporation” at some point within the preceding 12 months, so that Mr. Hébert’s loss on its dissolution qualified as a business investment loss. Since the stock of unsold equipment (which was essentially its only asset) related to its previous commercial activity of selling (and repairing) such equipment, Mr. Hébert’s efforts to sell that stock represented the continued carrying-on of that business, notwithstanding that no sales resulted.
Neal Armstrong. Summary of Hébert v. The Queen, 2018 CCI 48 under s. 248(1) – small business corporation.
CRA rules that a terminal loss denied under s. 13(21.1)(a) can be used to bump the land elected amount
Subco has entered into an agreement for the sale to an arm’s length purchaser of a property containing parcels of land with accrued capital gains and buildings thereon with accrued terminal losses. Since its Parent has accrued losses, the property is spun-off to a Newco subsidiary of Parent in reliance on s. 55(3)(a), with Newco then wound-up under s. 88(1) so that the capital gains can be realized in Parent’s hands.
On the spin-off of the property by Subco to Newco, CRA indicated that the s. 13(21.1)(a) rule for denying a terminal loss was to be applied after applying s. 85(1) without regard to s. 13(21.1)(a). For example, suppose that a parcel of land had an ACB and FMV of $200 and $400, and that the accrued terminal loss on the building thereon was $50. Subco and Newco would designate an s. 85(1) agreed amount for the parcel of $250. S. 13(21.1)(a) then kicks in to deny the $50 terminal loss but also to reduce the deemed proceeds to Subco from $250 to $200. Insofar as Newco is concerned, the agreed amount is still $250, so that in effect the terminal loss is used to bump the land ACB to Newco (and ultimately to Parent) by $50.
The loss suspension rule in s. 13(21.2) would be irrelevant because the sale to the purchaser would occur shortly thereafter.
Another interesting feature is that a preliminary s. 86 reorg was effected through an exchange of the “old” common shares of Subco for newly created common shares (having more votes per shares) and preferred shares pursuant to a share exchange agreement rather than by virtue of articles of amendment changing the old shares into the new shares. In other words, a “dirty” s. 85 exchange mechanic was used, but no s. 85 election was made so that s. 86 applied instead.
Neal Armstrong. Summaries of 2016 Ruling 2016-0635101R3 under s. 13(21.1)(a), s. 55(3)(a) and s. 86(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for a French Technical Interpretation released in November 2013 and for five questions from the October 2013 APFF Roundtables, as fully translated by us.
These (and the other full-text translations covering the last 4 1/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for April.
Choice Properties is proposing to acquire CREIT with a choice of cash, or Choice units issued on a s. 132.2 merger
The proposed acquisition of CREIT (which is a closed-end REIT holding most of its properties directly or through subsidiary LPs) by Choice Properties - which is an Ontario open-end REIT holding a partial interest in a property-holding LP (Choice Properties LP) - would occur for aggregate consideration of approximately $1.7B in cash and Choice Properties units valued at around $2.1B. REIT unitholders would have a choice between receiving cash or Choice Properties units, subject to proration. Those unitholders whose election for units was accepted would participate in a s. 132.2 merger of CREIT into Choice Properties.
Resident CREIT unitholders whose units will be redeemed for cash by CREIT (funded with a loan from Choice Properties LP) will be indifferent to the quantum of capital gains distributions allocated to their cash redemption proceeds. Accordingly, CREIT will engage in transactions at the commencement of the Plan of Arrangement to deliberately trigger gains on units in subsidiary partnerships or perhaps land, in order to achieve a basis step-up. As with other such merger transactions, CREIT is seeking CRA permission to have short fiscal periods for its subsidiary LPs, so that those pre-merger gains realized at lower levels can still effectively be allocated to the cash-redeemed unitholders.
Another preliminary step is to amend the CREIT declaration of trust to make its units redeemable, having regard to the subsequent redemptions of its units for cash and on the s. 132.2 merger.
Neal Armstrong. Summary of Circular of Canadian REIT under Mergers & Acquisitions - REIT/Income Fund/LP Acquisitions – REIT Mergers.
Wesdome - Quebec Court of Appeal finds that exploration from an uneconomic mine permitting it to recommence processing qualified as “f” CEE - and that a reassessment of a wound-up and dissolved sub binds its parent
A company (“Wesdome”) acquired the Kiena mine in Quebec, which had been put on care and maintenance when its reserves had been exhausted over a year earlier, in order that it could extend an existing mine shaft to go under a lake and drill gold targets on its own exploration property to the north. This was a success, and the purchased Kiena mining facilities started processing ore from the new finds several years later. The ARQ had denied CEE deductions under the Quebec equivalent of ITA, s. 66.1(6) – Canadian exploration expense – (f)(vi), which applied to “any expense that may reasonably be related to a mine…that has come into production in reasonable commercial quantities or to an actual or potential extension of such a mine.”
Levesque JCA affirmed the finding below that this exclusion did not apply, so that the CEE deductions were available, but on the basis of a narrower interpretation of the exclusion (stating that “the fact that the mine was open, closed or on care and maintenance does not form part of the criteria provided in T.A. paragraph 395(c) for determining if exploration expenses are eligible for credit.” The correct test apparently was this:
[I]n order for the exclusion in T.A. paragraph 395(c) to apply, there must be a concurrence between the time when the exploration expenses were incurred and the reaching of production in reasonable commercial quantities from the mine.
It therefore should be concluded that if a mine had already reached a level of commercial production in the past, but at the time when the expenses were incurred that level was no longer being achieved, the expenses would be eligible for the tax credit.
For two of the four taxation years in question, Godbout J below had also found that the assessment for each of the two years was invalid “as the Agency had not addressed such Notice of Assessment to the right legal entity,” given that the Notice was issued in the name of Wesdome shortly after its dissolution in voluntary dissolution proceedings for its winding-up into its sole parent. Levesque JCA found that such assessments were not void on this ground (although, as noted above, they were nonetheless to be reversed on the substantive CEE grounds). S. 313 of the Business Corporations Act (Quebec) (which is to somewhat similar effect as s. 226(2) of the CBCA) provided that “As of the dissolution of the corporation, its rights and obligations become those of the shareholder, and the shareholder becomes a party to any judicial or administrative proceeding to which the corporation was a party.” He stated:
The dissolution of Wesdome was effected on March 14, 2011. This did not have the effect of obliterating the tax debt of Wesdome and of annulling the debt. That debt was assumed in conformity with B.C.A. section 313 by the respondent, the sole shareholder of the corporation that had ceased to exist.
This did not directly answer the point of Godbout J that the assessments had been issued in the name of the wrong entity (the dissolved sub rather than the parent). However, Levesque JCA had earlier stated that “the judge had concluded that an audit procedure was in progress at the time of its dissolution” (his emphasis), so that his point might have been that these assessments were to be viewed as part and parcel of the administrative proceedings that, on dissolution, were deemed to be proceedings against the parent.
Neal Armstrong. Summaries of ARQ v. Wesdome Gold Mines Ltd., 28 March 2018, No. 200-09-009254-167 (Queb. C.A.) under s. 66.1(6) - CEE - (f)(vi), s. 152(1), and Canada Business Corporations Act, s. 226(2).
CRA confirms that the intergenerational transfer of a farming business or corporation can occur where one individual worked on more than one farm
The transfers of Canadian farming property or of shares of a family farm or fishing corporation or an interest in a family farm or fishing partnership by a Canadian taxpayer on a rollover basis under s. 70(9.01), 70(9.21), 73(3.1) or 73(4.1) to a child reference a requirement that the taxpayer have been “"actively engaged on a regular and continuous basis" in the farming (or fishing) business. CRA has confirmed that the fact that the individual owns multiple farm properties and farm corporations, would not, in and of itself, limit his ability to transfer the properties or shares on a rollover basis pursuant to these provisions, nor would the fact that he works on more than one farm, by itself, indicate that he was not actively engaged on a "regular and continuous basis" on any of the farms.
Neal Armstrong. Summaries of 8 February 2018 External T.I. 2016-0670841E5 under s. 70(9) and s. 73(4).
Tozer – Tax Court of Canada confirms that bankruptcy does not start the two year director’s assessment period running
Smith J confirmed that the appointment of a receiver upon a corporation’s bankruptcy did not cause the taxpayer to cease to be a director, so that the two-year time limitation for assessing director’s liability for unremitted corporate GST did not start running at that point. As to the due diligence defence, the taxpayer was required to take active efforts to pursue the timely remittance of the GST rather than relying on his CFO once he became aware of the corporation’s financial difficulty, which did not occur in this case.
The relevant ITA directors' liability provisions are essentially the same.
Neal Armstrong. Summaries of Tozer v. The Queen, 2018 TCC 56 under ETA s. 323(5) and s. 323(3).
Stewardship Ontario – Tax Court of Canada finds that statutorily-mandated waste recycling charges were consideration for a taxable supply
Stewardship Ontario (“SO”) was a not-for-profit corporation that operated, as part of a regime governed by the Waste Diversion Act, 2002 (Ontario), an Ontario program for recycling various types of waste such as paints, solvents, batteries, empty propane tanks and antifreeze. It collected the waste and paid for its processing or disposal. “Stewards,” being persons who had a commercial connection with such waste, were statutorily responsible for paying fees to SO to reflect their reasonable share of the associated costs.
In rejecting the Crown’s argument that SO was not making supplies but instead merely performing a statutory duty, D’Arcy J stated:
…[T]he only question that is relevant when determining whether a person made a supply is whether the person provided something. The reason why a person provided the something is irrelevant… .
As to the Crown’s argument that the “Steward Fees” were a “regulatory charge” rather than a “user fee,” he stated that they were payable by “operation of law” (i.e., under the Waste Diversion Act) and thus came within the definition of consideration.
Since SO’s costs clearly related to its cost recovery charges (the Steward Fees), CRA was directed to allow SO’s claim for full input tax credits for the HST on its costs.
Neal Armstrong. Summaries of Stewardship Ontario v. The Queen, 2018 TCC 59 under ETA s. 123(1) – supply, consideration, service, s. 141.01(2).
Income Tax Severed Letters 28 March 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Fournier – Court of Quebec finds that a taxpayer could reverse an assessment for a taxable benefit by subsequently engaging in self-help rectification
The ARQ assessed the taxpayer and his wife for taxable benefits for a period of approximately 2 ½ years on the alleged basis that during that period they occupied on a rent-free basis a condo that was owned by a non-arm’s length corporation. (Along with many other missing key facts, including the role of the taxpayer’s wife, the judgment did not describe the corporation’s ownership or why the taxable benefit was assessed under the Quebec equivalent of s. 56(2) rather than s. 15(1).) Apparently well after these assessments, the taxpayer entered into a “correcting” notarial deed with the corporation to move back the date of the transfer of ownership of the condo unit to him from the corporation from the end to the beginning of this 2 ½ year period.
Guénard JCQ found that this amendment “did not rewrite history” but instead “achieved an accurate reflection of what the parties wished to write down from the outset” in light of convincing testimony of the taxpayer that it was intended that he be the owner “from Day 1,” which was corroborated by him and his wife having borne the utilities and municipal taxes during the 2 ½ year period, and by a hypothec, where the taxpayer was named as the grantor. No taxable benefit was applicable.
Neal Armstrong. Summary of Fournier v. Agence du revenu du Québec, 2018 QCCQ 786 under General Concepts – Rectification.