News of Note
Athletes 4 Athletes Foundation – CRA is ordered to produce any irrelevant material (e.g., re other Foundations) that was before it when rejecting a registration request
Email this ContentThe appellant Foundation appealed from the refusal of the Minister to register it as a Canadian amateur athletic association on the grounds inter alia that the Minister had considered “irrelevant information in comparing the [Foundation] to other applicants and existing registered CAAAs.” It sought an order under Rule 318(4) for further disclosure.
Laskin JA found that the Rules merely required the Minister to produce the documents which were in the hands of the decision-maker when the decision was made – and not to provide various other requested documents (e.g., the constating documents of all registered CAAAs at the time of the decision).
However, the affidavit of the CRA decision maker stated that “all relevant materials upon which the CRA relied … have been produced.” Laskin JA stated:
The affidavit evidence does not foreclose the possibility that the Minister used irrelevant material relating to the other entities.
He ordered the Minister “to produce any material apart from that already disclosed that was before her when the decision was made, with the exception of properly redacted information.”
Neal Armstrong. Summary of Athletes 4 Athletes Foundation v. Canada (National Revenue), 2020 FCA 41 under Rule 318(4).
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in October and September, 2010. Their descriptors and links appear below.
These are additions to our set of 1,164 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for May.
It may be preferable for an FA held by a partnership with a Canadian corporate partner to make QROC distributions (where possible under local law) rather than pay s. 113(1)(d) dividends
Where a foreign affiliate paid a dividend to a partnership out of its pre-acquisition surplus in respect of which a Canadian corporate partner (the CRIC) claimed a s. 113(1)(d) deduction, a subsequent disposition by the CRIC of its partnership interest will result in s. 92(4) adding a matching amount to the proceeds of disposition, even where that disposition was a rollover transaction. However, a qualifying return of capital (QROC) election may be used to avoid this anomaly if the FA operates in a jurisdiction in which the relevant corporate law allows for a return of capital.
The QROC distribution effects an immediate reduction in the partnership’s ACB in the shares of FA, and there is a reduction in CRIC's ACB in the partnership interest when there is a further distribution to it. S. 92(4) does not apply to a subsequent disposition of the partnership interest because there was no s. 113(1)(d) deduction.
Similar issues apply to a disposition by a partnership of its shares in the FA regarding the operation of ss. 92(5) and (6). Again, tax-deferred internal reorganizations may not be possible without having made a QROC election.
Neal Armstrong. Summary of Ben Cen, “Planning for FA Distributions Paid Through a Partnership,” Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 6 under s. 92(4).
1074022 B.C. Ltd. v Li - BCSC finds that CRA could be directed to pay an excess s. 116 remittance to the taxpayer’s secured creditors
No s. 116 certificate was obtained on a court-approved sale of a Vancouver property (arising in connection with foreclosure proceedings) by the Hong Kong owner (Mr. Li), so that the purchaser paid 25% of the purchase price (being $200,000) to CRA. Mr. Li’s tax liability was only $46,000 and he had provided CRA with an irrevocable direction to pay the excess funds (i.e., $154,000) to his lawyer (so that such funds would then be paid, in accordance with the court order, to the secured creditors of Mr. Li, including the second mortgagee (the petitioner in this case). However, CRA refused to do so on the basis that s. 164 of the ITA and s. 67 of the Financial Administration Act required a tax refund to be paid only to the taxpayer (i.e., to Mr. Li in Hong Kong, with the effect of defeating his secured creditors) and not a third party (i.e., a mortgagee).
Before determining “that Canada is obligated to pay the excess funds to Mr. Li’s lawyer in trust in accordance with the direction to pay,” Harper M stated:
In my view, Canada’s interpretation of s. 67 of the FAA and s. 164 of the ITA is overly narrow. If CRA pays the excess funds to Mr. Li’s lawyer in trust, the payment is neither an “assignment” of the excess funds to a third party, nor a payment for the benefit of anyone other than Mr. Li. The funds remain Mr. Li’s to be dealt with in accordance with the trust conditions agreed upon between him, his lawyer and the secured creditors.
Harper M went on to indicate that “Alternatively, it is acceptable that CRA pay the excess funds into court to the credit of the proceeding, or to the petitioner’s lawyer in trust, if agreed.” In this regard, she rejected the Attorney General’s argument that “it has no discretion to pay the excess funds into court, or, in fact, to do anything other than pay them to Mr. Li.”
It is suggested that this case:
may be considered to make a more general point: taxpayers should be allowed to direct where their refunds are to be paid, just as they choose the bank account into which the funds are to be deposited.
Neal Armstrong. Summaries of 1074022 B.C. Ltd. v Li, 2020 BCSC 65 under s. 116(5) and of H. Michael Dolson, "Can a Tax Refund Be Paid to a Third Party? Section 116 and Foreclosures,” Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 8 under Financial Administration Act, s. 67.
Piché – Court of Quebec finds that a family realized capital gains from the sale of 3 newly-constructed residences in 3 years
A closely-knit family, who collectively constructed and sold three single family residences over the course of three years without reporting anything on their returns, and were assessed by the ARQ for having realized gains from adventures in the nature of trade, were able to come up with convincing stories as to how, due to various “vicissitudes” and unexpected twists and turns in their personal lives, all that had occurred. They were not “building entrepreneurs” and their appeals were allowed.
The principal residence exemption was not discussed.
Neal Armstrong. Summary of Piché v. Agence du revenu du Québec, 2020 QCCQ 1283 under s. 9 – capital gain v. profit – real estate.
CRA states that a PSB can deduct the “cost” of car loan interest under s. 18(1)(p)(ii) to the extent of the benefit conferred on the individual qua employee rather than shareholder – but not CCA
Under s. 18(1)(p)(ii), a corporation carrying on a personal services business is entitled to deduct “the cost to the corporation of any benefit … provided to an incorporated employee … that would, if the income of the corporation were from a business other than a [PSB] be deductible in computing its income.” CRA was asked whether this permitted the corporation to deduct the costs of leasing an automobile provided to the individual, or interest on a loan financing an automobile provided to the individual.
The word “cost” was less than apt to describe loan interest. Nonetheless, CRA was of the view that, in either situation, the leasing or interest “cost” was deductible to the extent of any related benefit provided to the individual qua employee (provided that the general deductibility tests were satisfied), whereas there could be no such deduction if the auto was provided to the individual qua shareholder.
CRA went on to indicate that no CCA could be claimed by the corporation (stating that “a capital cost allowance amount is not the cost of a benefit”) – except that if the corporation had a sales business, CCA could generally be deducted under s. 18(1)(p)(iii) to the same extent as CCA claims could have been made under s. 8(1)(j)(ii) if the marketing activity had been carried on by the individual as a sales employee.
Neal Armstrong. Summary of 9 March 2020 External T.I. 2013-0490301E5 F under s. 18(1)(p)(ii).
Income Tax Severed Letters 29 April 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Employees may need to be required to work at home for 6 months during COVID-19 to deduct their home office expenses
Can employees who are now working from home deduct their home office expenses? In addition to needing to meet the requirements of s. 8(1)(i) or (f) and for a form T2200, s. 8(13)(a)(i) or (ii) must be satisfied. Notwithstanding the subsequent elevation of Webb J, 2013-0481171E5 did not address his comment in Landry that the home office “meeting” requirement in s. 8(13)(a)(ii) can be satisfied with phone calls.
As for the alternative requirement under s. 8(13)(a)(i) that the home office be “the place where the individual principally performs the duties of the … employment,” it is suggested that perhaps:
the "principally" test should be determined over the course of the full period of employment in the calendar year, rather than for just the part of the year during which the employee is required to work from home for that employment. This would imply … at least 6 months in order to meet the test.
Neal Armstrong. Summary of Jiani Qian, “COVID-19 and Employees' Home Office Expenses,” Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 2 under s. 18(13)(a).
CRA considers a referral bonus received by a registered plan to be a directed contribution to the plan
S. (a)(v) of the advantage definition in s. 207.01(1), as paraphrased by CRA in Folio S3-F10-C3, excludes “a promotional incentive under a program offered to a broad class of persons in a normal commercial or investment context.” When asked to elaborate, CRA indicated inter alia that:
[W]hether an incentive offered only to a “select group” of clients would qualify for the exception would depend on the size of the group relative to the financial institution’s client base as a whole as well as on the particular criteria used to select eligible investors. A recent example we considered not to be an advantage was an investment fee incentive offered only to members of a particular professional group and their immediate family members.
and that:
[F]actors indicating that an incentive program is not commercially reasonable would include disproportionate benefits relative to investment size, parties acting in concert and other commercially unreasonable behaviour that suggests a main purpose of the arrangement is to allow the investor to benefit from the registered plan’s tax exemption.
CRA also indicated that a referral bonus paid into a registered plan is a contribution to the plan. It reasoned:
[A] referral bonus is paid as a consequence of the relationship between the existing investor and the new investor. When a registered plan is involved, it is actually the plan’s controlling individual who earns the referral bonus, not the plan itself. Therefore, if payment of the referral bonus is directed to the registered plan, we would consider it to be a contribution or premium paid to the plan by the controlling individual.
Neal Armstrong. Summaries of 3 April 2020 External T.I. 2019-0830101E5 under s. 207.01(1) – advantage - (a)(v), and s. 146(1) – premium.
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in October 2010. Their descriptors and links appear below.
These are additions to our set of 1,158 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for May.