News of Note
CRA discusses the treatment of additional government compensation paid to owners who had consensually sold a portion of their lands to the government
Email this ContentA governmental authority was to acquire a number of residential, commercial, forestry, agricultural and undeveloped properties for a construction project for negotiated purchase prices, and also would agree to pay the owners additional compensation for losses sustained by them from the sale. CRA comments included:
- Compensation received for loss of value to (capital property) lands retained by the owners could be compensation in respect of injuriously affected property and, therefore, could be “proceeds of disposition” pursuant to para. (e) of the definition, in which case a reasonable portion of the ACB of the remainder would be required to be allocated to the disposed of portion pursuant to s. 43(1).
- Compensation received for expenses incurred for the purpose of earning income from the taxpayer's business or property (e.g., compensation for the time taken to restore the remainder or for clearing or levelling the land or installing a drainage system) would be included in computing income pursuant to s. 12(1)(x), except to the extent an election was made pursuant to s. 12(2.2) respecting a related expenditure.
- Although compensation for damage to property that, within a reasonable time after the damage occurred, has been expended to repair the damage is excluded from “proceeds of disposition” pursuant to para. (f) of the definitions in ss. 54 and 13(21), such compensation could be included in income pursuant to s. 12(1)(f) - and expenses made or incurred to repair damage to depreciable property (e.g., to fences) would be deducted in computing income.
Neal Armstrong. Summaries of 16 July 2020 Internal T.I. 2019-0817271I7 F under s. 54 – proceeds of disposition – (e), s. 12(1)(x) and s. 12(1)(f).
Pipeline ruling for an alter ego trust includes a preliminary deletion of a non-resident beneficiary
Around when he was placed in a long-term care facility, the “Deceased” transferred his shares of two companies with investing businesses (Aco and Bco) on a s. 73(1) rollover basis to a newly-formed alter ego trust (“AE Trust”) of which a child (“Child 1”) was the trustee, and Child 1, Child 1’s spouse and their three adult children were beneficiaries with entitlements to income and capital as determined in the discretion of the trustee (except that he could not distribute capital to himself). On the death of the Deceased, there was a deemed disposition of the Aco and Bco shares for their FMV pursuant to s. 104(4)(a).
As a preliminary transaction, it was proposed that the trustee pursuant to a provision of the Trust Deed execute an irrevocable deed to amend the Trust Deed to thereupon remove one of the grandchildren (who was a non-resident) as a beneficiary of AE Trust. The stated purpose was "to preclude the potential application of the provisions of section 212.1 that may otherwise result, to the extent that Grandchild 1 would be a non-resident beneficiary of AE Trust at any relevant time.” (Note that in 2019-0824561C6, CRA adverted to the 2 December 2019 Finance comfort letter, but noted that it did not extend to non-GRE trusts, e.g., a life interest trust, such as AE Trust.)
It was then proposed that a conventional pipeline be implemented under which AE Trust transferred its common shares of Aco and Bco on a s. 85(1) rollover basis to a “Newco” in consideration for two notes of Newco and nominal-value preferred shares with a price adjustment clause and, after the passage of (presumably) one year, Newco would be amalgamated with Aco and Bco, and the notes would then be gradually repaid.
The rulings included the application of s. 88(1)(d.3) to the amalgamation, so that securities of Aco and Bco held before the death could be bumped.
Neal Armstrong. Summary of 2021 Ruling 2019-0800431R3 under s. 84(2).
Kufsky – Federal Court of Appeal finds that a taxpayer received dividends for s. 160 purposes because she was estopped from arguing otherwise or because the corporate insolvency did not matter
A shareholder loan balance that was owing by the taxpayer was eliminated through dividend declarations backdated to the three preceding years and paid by way of set-off. CRA accepted amendments to the taxpayers’ returns to those years to add the dividend amounts, so that she thereby avoided income inclusions (and higher interest assessments) pursuant to s. 15(2).
Webb JA found that the taxpayer was estopped from now arguing that the amounts that she had treated as dividends in fact were not dividends (so that s. 160 did not apply to their payment) - because the appropriate procedures for the declaration and payment of the amounts as dividends were not followed and because s. 38(3) of the OBCA prohibited the payment of a dividend by an insolvent corporation – on the basis of the principle that:
[A] taxpayer who has benefited from having an amount included in his or her income as a dividend in a particular taxation year (and who has not objected to the assessment of tax based on having received this dividend) is estopped from claiming in any subsequent appeal related to the application of section 160 of the Act, that the previous filing position was wrong.
In her minority concurring reasons, Monaghan JA was “not certain” that estoppel applied to preclude the taxpayer from arguing that she had not received dividends, and instead found that s. 160 applied on the basis that the taxpayer had not made out a prima facie case that the dividends had not been paid - and noted that “[w]hile a breach of the solvency test may be unwise, and have consequences for the directors, shareholders or corporation, that does not mean a dividend was not declared and paid.”
Neal Armstrong. Summaries of Kufsky v. Canada, 2022 FCA 66 under s. 160(1), General Concepts – FMV – Other, Onus, and Payment and Receipt.
Income Tax Severed Letters 20 April 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that use of the GST/HST Quick Method generally results in a s. 12(1)(x) inclusions, but also increases expense deductions
When qualifying small registrants elect to use the “Quick Method” of accounting for GST/HST obligations, they thereby cease to be entitled to claim ITCs or rebates, but are entitled to remit only specified percentages, rather than all, of the GST/HST collectible by them. CRA confirmed that the resulting “net gain experienced by them” (i.e., the percentage amounts they are permitted to keep rather than remit) constitute government assistance pursuant to s. 12(1)(x) and are thus included in their income (assuming no s. 12(2.2), 13(7.1) or 53(2)(k) election). However, since ITCs (which result in income inclusions under s. 248(16)) cannot be claimed by them, the GST/HST payable on their deductible expenses is included in the amount of those expenses for income computation purposes.
Neal Armstrong. Summary of 2 November 2021 External T.I. 2021-0898151E5 under s. 248(16).
Salama – Court of Quebec finds that the principal residence exemption was available for the whole of a duplex
The ARQ took the position that a duplex sold by the taxpayer consisted of two distinct units – the second storey, occupied by her and her son, and the ground floor (with a separate municipal address) occupied (with its own kitchen, bathroom etc.) by her mother – so that she was only entitled to the principal residence exemption on half the gain.
Davignon JCQ acknowledged that there was some support for the ARQ position in the jurisprudence, under which "housing unit" [logement] has generally been interpreted “as being a self-contained living space, including all the amenities normally associated with it, namely a sleeping area, a kitchen and a bathroom” so that the courts “have generally held that only one separate self-contained dwelling unit in the same building can come within this definition.”
However, before granting full exemption to the taxpayer, he found on the evidence that in fact the taxpayer had occupied the entire duplex as the residence of her and her son, stating:
Mrs. Salama's daily life was not separated from that of her mother and in fact, she lived in the entire building. For all practical purposes, she ate all her meals with her mother and son on the first floor. The three of them lived together and even when she or her son had friends over, it was no different.
Neal Armstrong. Summary of Salama v. Agence du revenu du Québec, 2022 QCCQ 718 under s. 54 – principal residence.
We have translated over 2,000 CRA interpretations
We have published a further 8 translations of CRA interpretation released in February, 2005. Their descriptors and links appear below.
These are additions to our set of 2,004 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 17 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Carter – High Court of Australia finds that trust beneficiaries were taxable on income to which they were entitled at year end notwithstanding their subsequent disclaimer
The Australian tax legislation, as judicially interpreted, required (somewhat similarly to ITA s. 104(24)) the inclusion in a beneficiary’s income of the beneficiary’s share of the trust’s income for a year if, at the end of the trust year, the beneficiary’s interest in the trust income was both vested in interest and in possession, and the beneficiary had a present legal right to demand and receive payment of the income. The High Court of Australia found that this test was met where, under the terms of the trust, the trust beneficiaries (the children of the settlor) were entitled at the end of the trust’s income year to receive pro rata portions of the trust’s income for that year – even though, subsequently to that year end, they disclaimed all right, title and interest to that income.
The beneficiaries’ submission that the above test should be applied on the basis that “for ‘a reasonable period’ after the end of the income year, later events could subsequently disentitle a beneficiary who was presently entitled immediately before the end of the income year” was rejected on the basis inter alia that this interpretation “would give rise to uncertainty in the identification of the beneficiaries presently entitled to a share of the income of a trust estate.”
Neal Armstrong. Summary of Commissioner of Taxation v Carter, [2022] HCA 10 under s. 104(24).
Shell – Tax Court grants a confidentiality order respecting JV documents whose public disclosure would breach a confidentiality agreement
Shell realized a capital loss on its disposition of its interest in a partnership to Canadian subsidiaries of PetroChina in connection with establishing a joint venture with the PetroChina group for the development and production of natural gas. Shell and PetroChina did not wish their competitors to know the details of their JV and, to that end, made various confidentiality agreements and covenants.
CRA denied the above capital loss pursuant to GAAR and, in order to challenge this assessment in the Tax Court, Shell needed to disclose various JV documents. It brought a motion for a confidentiality order pursuant to s.16.1 of the general-procedure Tax Court rules so that such documents could be disclosed to the Crown on discovery, but shielded from public view.
After referring to the “open courts” principle set out inter alia in Sherman Estate, and before allowing the motion, Sommerfeldt J stated:
I am satisfied that Shell has established that, if a confidentiality order is not granted, there will be a serious risk to one or more of the following important public interests:
(a) the general commercial interest of preserving confidential information;
(b) the general public interest of protecting the right to a fair trial, also described as the public interest of enabling “commercial litigants to vindicate their legal rights without exposing themselves to the real risk of harm”;
(c) the public interest of enabling a litigant, when “compelled by the rules of discovery to divulge sensitive and confidential information, ... to maintain the confidentiality of that information”;
(d) the public interest of promoting commercial certainty and protecting proprietary information; and
(e) the public interest of protecting fair competition.
He also referred sympathetically to the dilemma faced by Shell that “in order to put its best foot forward in this Appeal, Shell will need to breach the confidentiality agreements” absent the motion being granted.
Neal Armstrong. Summary of Shell Canada Limited v. The Queen, 2022 TCC 39 under Tax Court of Canada Rules (General Procedure), s.16.1(1).
CRA indicates that annual balance sheet translation adjustments to FX-denominated balances are not included in qualifying revenue for CEWS purposes
CRA indicated that the annual adjustments made on the balance sheet of an eligible entity in translating FX-denominated balances to the current FX spot rate are not included in “qualifying revenues” for CEWS purposes, whose definition “requires … an inflow of cash, receivables or other consideration.” However, this inflow requirement would be satisfied, for example, “if an entity realizes a foreign exchange gain on the collection of an account receivable that arose on the sale of goods.”
Neal Armstrong. Summary of 23 January 2022 TEI Roundtable, 2021-0913421C6 under s. 125.7(1) – qualifying revenue.