News of Note
Cominar REIT announces the closing of its acquisition in a hybrid transaction
Email this ContentAfter the purchase of a portion of the assets of the Cominar REIT (a closed-end unit trust and mutual fund trust holding mostly Quebec real estate directly and through subsidiaries (mostly LPs)) by Group Mach and Blackstone purchasers, the REIT declared a special in-kind distribution to push out all the gains (which was expected to not include more than $43M of net recapture income) resulting from such sales and a s. 111(4)(e) designation, with such special distribution paid by way of issuing units (followed immediately by a unit consolidation). The Purchaser (a limited partnership) then subscribed for REIT units in consideration for cash and “Subscription Notes” issued by it to the REIT. The cash was then used to redeem the units of the public unitholders.
The other unitholders (being entities associated with the consortium owning the Purchaser) had their REIT units redeemed for notes which were set-off against notes that they owed for their subscription for units of the Purchaser once such subscription notes were assigned by the Purchaser to the REIT in repayment of Subscription Notes owing, in turn, by it to the REIT.
Neal Armstrong. Summary of Circular of Cominar Real Estate Investment Trust regarding its acquisition by Iris Acquisition II LP (the “Purchaser”) under Mergers & Acquisitions - REIT/Income Fund/LP Acquisitions - LP Acquisitions of Trusts.
Foley – Tax Court of Canada finds that the non-inclusion of surrogate parent expenses under s. 118.01 did not violate s. 15 equality rights
The taxpayer unsuccessfully claimed that the exclusion from the scope of the adoption tax credit (“AETC”) under s. 118.01 of various expenses he incurred in connection with having a surrogate mother bearing a child, derived from an embryo from him and his wife, infringed his equality rights under s. 15 of the Charter. Hogan J stated inter alia that “limiting the AETC to adoption-related expenses does not perpetuate or exacerbate any preexisting disadvantage or prejudice within the meaning of section 15.”
Neal Armstrong. Summary of Foley v. The Queen, 2021 TCC 92 under Charter – s. 15.
Airzone – Tax Court of Canada indicates a presumption that a taxpayer satisfying the “how” SR&ED tests will also satisfy the “why” test
The taxpayer (“Airzone”) provided comprehensive air quality monitoring services to government agencies, international organizations, and businesses. In connection with allowing most of Airzone’s projects, largely in connection with expanding its techniques for testing for airborne compounds, as qualifying as SR&ED, Hogan J made a number of pithy general observations, including:
- The taxpayer is required to demonstrate satisfaction both of “how factors,” namely “that the work was carried out by way of systematic investigation or search through experiment and analysis of a hypothesis … [and the] results of the work must also be preserved” and also a “why factor,” namely “that the work was carried out to resolve technical uncertainties that could not be solved through standard procedures and methods.”
- “[T]he concept of ‘experimental development’ includes activities undertaken to achieve incremental improvements to existing methods or procedures” e.g., in this context “improving methods, procedures and processes to carry out air quality detection in unique environments.”
- “[I]t is unlikely that a taxpayer would conduct experiments in a manner that respects the “how factors”, all at additional expense, if the purpose of the work was not to achieve technological advancement.”
- Technical uncertainty can be considered to be present where “the claimant may be fairly confident that the goals can be achieved, but it is uncertain which of several alternatives will work.”
- “[T]he ‘why factor’ cannot be so strictly applied that only large corporations that employ dedicated research staff can qualify for the SR&ED incentives … [as m]oving the goal post so far afield … would be contrary to the intention of Parliament.”
Interestingly, the taxpayer called the CRA research and technology advisor, who had carried out the audit of the challenged projects, as a witness in order to cross-examine him to demonstrate that his sources “were not of particular relevance” and that “his knowledge of Airzone’s specialized field of activity [was] understandably quite limited.”
Neal Armstrong. Summaries of Airzone One Ltd. v. The Queen, 2022 TCC 29 under s. 248(1) - SR&ED and General Concepts - Evidence.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in May, 2005. Their descriptors and links appear below.
These are additions to our set of 1,950 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 16 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Glenogle Energy – Federal Court decision effectively penalizes a taxpayer for filing s. 97(2) elections on a timely basis rather than late
In January 2015, the taxpayer transferred resource properties to a limited partnership that was wholly-owned by it, directly and indirectly. The s. 97(2) elections that were filed approximately 18 months later (in July 2016) designated nominal agreed amounts. In November 2016, the taxpayer applied to amend the elections so as to increase the agreed amounts by approximately $32 million. Despite CRA requests, no detailed explanation was provided to CRA as to the reasons for the requested amendments, and ultimately, in May 2021, the Minister’s delegate denied the request on the basis inter alia that it involved retroactive tax planning (indicating that the amended elections circumvented the successor rule in s. 66.7) and that the taxpayer’s submission did not support that the requested amendments were “just and equitable” as required by s. 96(5.1).
In dismissing the taxpayer’s application for judicial review, Aylen J stated:
I am satisfied that the Applicant’s “explanation” was so devoid of particulars that it did not amount to an explanation at all. …
The Applicant … failed to explain in any meaningful way why it would be just and equitable for the Minister [to grant the request].
… I am not satisfied that the Applicant has demonstrated any error by the Minister’s delegate in his finding that the amendment requests constituted an attempt to circumvent the successor rule stipulated in section 66.7 … .
Doubtless it has occurred to the taxpayer that it would have been better off to have filed the s. 97(2) elections four months later and paid the additional penalty under s. 96(6) of $100 per month.
Neal Armstrong. Summary of Glenogle Energy Inc., 2022 FC 198 under s. 96(5.1).
Daville Transport – Tax Court of Canada finds that a settlement offer not made on a principled basis should be ignored for cost award purposes
The taxpayer submitted that it was entitled to “substantial indemnity costs” from the Crown per Rule 147(3.1) (i.e., perhaps 80% of its actual legal costs, as adjusted) on the basis that it had achieved greater success in its tax appeal than reflected in a settlement offer it had made. However, Russell J characterized that offer as an “arbitrary settlement offer,” i.e., as “a ‘let’s split it down the middle’ settlement offer” that thus violated the principle “that the Minister … can only assess tax consistent with his/her view of the underlying facts and law.” Accordingly, “this settlement offer was not within the scope of Rule 147(3.1).”
However, although the taxpayer thus was only entitled to party and party costs, Russell J increased the Tariff items by a factor of 1.6 to reflect that the Tariff had not been updated for some time.
Neal Armstrong. Summary of Daville Transport Inc. v. The Queen, 2022 TCC 5 under Rule 147(3.1).
Iris Technologies – Federal Court of Appeal finds that a Federal Court action to compel CRA to pay a net tax refund was obliterated when CRA then assessed
Iris appealed a Federal Court order, dismissing its request for mandamus to compel the release of $21.85 million in GST/HST tax refunds pending the conclusion of an on-going audit and assessment.
At the outset of the appeal to the FCA, the Minister was granted permission to file the affidavit of a CRA official indicating that Iris’ net tax for the relevant reporting periods had now been assessed and there was no net tax refund shown as owing. Rennie JA found that this affidavit met the usual tests for admission of fresh evidence at the appellate level, namely:
The evidence could not have been adduced at trial, it is relevant in that it bears on a decisive or potentially decisive issue on appeal, is credible, and could reasonably be expected to have affected the result in the Federal Court.
In going on to find that Iris’ appeal, in the light of this affidavit, should now be dismissed as moot, he stated:
The assessments are determinative of Iris’ net tax liability until the Minister makes a reassessment or the assessment is vacated by the Tax Court … .
…There is no credible basis on which it can be argued that this Court can compel the payment of the refunds claimed in the face of an assessment that the refunds are not owing.
Neal Armstrong. Summaries of Iris Technologies Inc. v. Canada (National Revenue), 2022 FCA 39 under Federal Courts Rules, Rule 351 and Federal Courts Act, s. 18.5.
Yao – Tax Court of Canada excludes an “expert report” of an immigration lawyer – but admits reports of sociology and psychology professors
In the context of a challenge under s. 15 of the Charter to the denial of child tax benefits to refugee claimants, Bocock J admitted, as expert reports, two reports of a sociology and psychology professor; on the basis that they could be helpful to the Court in determining whether the refugees were a relevantly disadvantaged group.
However, he did not admit the report of an immigration lawyer (containing a legislative history and context concerning various federal statutes; and providing observations on wait times, durations and pathways for refugee determination) on the basis that “an expert opinion should be information that is outside the experience or knowledge of the judge” and that the “overall necessity and probative value of [such] evidence from a lawyer is low relative to the time and cost of having an additional expert testify on topics already covered in the context of social science [reports].”
Neal Armstrong. Summary of Yao v. The Queen, 2022 TCC 23 under General Concepts – Evidence.
7958501 Canada - Quebec Court of Appeal finds that software that was not depreciable property to the transferor because it was written off as SR&ED was not subject to s. 13(7)(e) to the NAL transferee
A private company (“SherWeb”) transferred software, which it had developed and then used in its business, to a newly-formed sister company (“501”) at a gain (with such software licensed back to it for continued use in its software services business).
The Court found that although the acquired software was depreciable property to 501, it had not been depreciable property to SherWeb because SherWeb, rather than claiming capital cost allowance respecting the software, had treated its software development expenses as deductible SR&ED expenses, so that the software had been excluded from treatment in its hands as depreciable property pursuant to the Quebec equivalent of Reg. 1102(1)(d) (which so excludes any property that was acquired by expenditures in respect of which the taxpayer was allowed a deduction under s. 37). Accordingly, Taxation Act s. 99 (imposing the equivalent to the ½ step-up rule in ITA s. 13(7)(e) – with both provisions required that the property have been depreciable property to the transferor) did not apply to reduce the capital cost to 501 of the acquired software. The Court stated:
One cannot escape the fact that, to SherWeb, the Software has never been treated as a depreciable asset, and so continually until the time "immediately before the transfer" to the respondent.
The Court further rejected an ARQ submission that the Reg. 1102(1)(d) equivalent was intended only to preclude a double deduction (for SR&ED and CCA) and not to avoid the ½ step-up rule.
Neal Armstrong. Summaries of Agence du revenu du Québec v. 7958501 Canada Inc. 2022 QCCA 315 under s. 13(7)(e) and s. 13(21) – depreciable property.
CRA is reviewing how to deal with an error on its T1135 form, and its impact on other foreign reporting forms
CRA has released the official versions of the 2021 CTF Roundtable. For convenience of reference, we set out a chart below with links to the items and our summaries and to descriptors that we prepared shortly after the conference.
There is one change to the official answers (as compared to an earlier version) that caught our eye.
Q.14 of the Roundtable dealt with the T1135 form and related disclosure stated that specified foreign property “does not include … a share of the capital stock or indebtedness of a foreign affiliate,” without disclosing that the definition “foreign affiliate” for these purposes is narrower than the definition in s. 95(1). For example, if a Canadian corporation holds debt of a foreign “grandchild” subsidiaries whose shares are held by its immediate Canadian subsidiary, then (by virtue of s. 233.4(2)(a) as it applies pursuant to para. (k) of the “specified foreign property” definition in s. 233.3(1)), it will not be considered to be holding debt of a “foreign affiliate,” so that such debt will be required to be disclosed on the T1135 form.
In its preliminary response, CRA indicated that applications for cancellation of interest or penalties for taxpayers that were misled by the T1135 wording would be entertained by CRA, and that it also encouraged taxpayers to voluntarily correct past filing errors through submitting adjustments or applying under the voluntary disclosure program.
In its final version, CRA added:
At this time, the CRA is in the process of consulting internal stakeholders to evaluate and potentially develop a position on this issue, while giving consideration to the impacts on other foreign reporting forms.
Neal Armstrong. Summary of 3 November 2021 CTF Roundtable Q. 14, 2021-0911951C6 under s. 233.3(1) – specified foreign property - (k).