News of Note
Keybrand Foods – Tax Court of Canada finds that if A controls de facto B and C, B controls de facto C
Email this ContentThe taxpayer and its parent (BWS) were guarantors of loans to an unrelated corporation (Vidabode) which had defaulted on loans from GE Capital.
Jorré DJ found that the taxpayer was entitled to deduct interest on a bank loan that it took out to on-lend on an interest-bearing basis to Vidabode in order for Vidabode to obtain GE Capital’s agreement to extend the period for remedying the default. He stated that at that point “the survival of Vidabode was still a possibility.” However, two months later, the taxpayer borrowed a larger sum in connection with subscribing for and acquiring common shares of Vidabode in order inter alia to fund the repayment by Vidabode of the GE Capital loans. The interest on this borrowing was non-deductible. Jorré DJ stated that at the time of this second borrowing:
the reasonable expectation … was that the company would quickly collapse. That is not consistent with a reasonable expectation of income.
A second issue was whether the taxpayer could claim an allowable business investment loss on its share investment in Vidabode. After that investment, each of it and BWS held about 40% of the Vidabode shares and BWS was party to a shareholders’ agreement with the second largest (34%) Vidabode shareholder providing that BWS would appoint two of the four directors and the chairman, who would have a casting vote. In finding that this meant that the taxpayer did not deal at arm’s length with Vidabode, so that no ABIL could be claimed, Jorré DJ stated:
The practical effect of the casting vote is the same as if BWS has the power to name three out of five directors.
… Silicon Graphics … is met. BWS had de facto control of Vidabode. It follows that BWS and Vidabode do not deal at arm’s length and, in turn, because BWS and the Appellant do not deal at arm’s length, the Appellant and Vidabode do not deal at arm’s length.
Neal Armstrong. Summaries of Keybrand Foods Inc. v. The Queen, 2019 TCC 161 under s. 20(1)(c)(i) and s. 251(1)(c).
GST/HST Severed Letters April 2019
This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their April 2019 release) is now available for your viewing.
Canadian Home Publishers – Ontario Court of Appeal notes that under the LPA (Ont.) a limited partner on dissolution can only receive a return of its capital contributions
S. 24 of the Limited Partnerships Act (Ontario) provides that “unless the partnership agreement or a subsequent agreement provides otherwise,” on a partnership dissolution the residual assets are to go to the general partner excepting for the payment to the limited partner of its contributions and unpaid profits distributions. Accordingly, Nordheimer JA found that, on a dissolution of a limited partnership that occurred as a result of the death of the limited partner (who had had a 50% profits participation), the estate of the limited partner was entitled to receive only a return of the relatively modest contributions of capital that the limited partner had made decades earlier, rather than 50% of the residual assets. The balance went to the general partner.
Nordheimer JA stated:
A limited partner enjoys protection from the liabilities of the limited partnership, unlike a partner in an ordinary partnership. In return for that protection, the limited partner is restricted to the receipt of two things under the LPA: one is their share of the profits and the other is the return of their contribution (see LPA, s. 11). A limited partner has no broader right to participate in the upside of the limited partnership, just as the limited partner has no broader obligation to suffer or contribute in the downside.
This is something to keep in mind in the relatively rare circumstance of a limited partnership agreement that does not override s. 24.
Neal Armstrong. Summary of Canadian Home Publishers Inc. v. Parker, 2019 ONCA 314 under s. 98(1)(b).
CRA indicates that a s. 88(1)(d) late designation could be made for a statute-barred year that CRA was assessing within the expanded cross-border reassessment period
S4-F7-C1, para. 1.40 indicates that it does not allow a late-filed s. 88(1)(d) designation where the particular eligible property to be bumped was disposed of in a taxation year that was statute-barred. CRA has now relaxed this position in the situation where:
- The Canadian Acquireco formed by a non-resident acquired all the shares of a Canadian public-company target (whose assets included the shares of a U.S. sub) and amalgamated with it.
- The Amalco then sold the shares of the U.S. sub to a non-resident affiliate, and did not make the s. 88(1)(d) designation at the first taxation year end following the amalgamation (“year-end #1”) because a professional appraisal indicated that there was no gain on those shares.
- The TSO proposed to reassess that sale (beyond the normal reassessment period but within the extended s. 152(4)(b)(iii period) by substantially increasing the proceeds of disposition of those shares.
After quoting from Nassau Walnut to the effect that a late designation was acceptable where the situation “does not raise the spectre of retroactive tax planning,” the Directorate stated:
[I]f the CRA has the ability to reassess the Taxpayer’s Part I income tax return for year-end #1 pursuant to subparagraph 152(4)(b)(iii) with respect to its disposition of the … US shares … the Taxpayer’s late-filed designation request could be considered.
Neal Armstrong. Summary of 30 May 2019 Internal T.I. 2019-0806761I7 under s. 88(1)(d).
Income Tax Severed Letters 14 August 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
SLFI Group – Federal Court of Appeal finds that the Invesco group successfully reduced their HST-taxable management fees by having a third party take over the funding of broker commissions
A non-resident bank (Citibank) agreed to fund the payment of the upfront brokerage commissions that were payable on the issuance of units in the Invesco/Trimark funds (the “Funds”) in consideration for receiving an assignment of a portion of the amounts that otherwise would have been earned by the Invesco manager as management fees. More precisely, the manager agreed to reduce its management fees (i.e., reduce its percentage charge of NAV), and the Funds agreed to pay the same percentage amounts to a special purpose non-resident Citibank-formed vehicle (“Funding Corp”) essentially in consideration for Funding Corp paying the brokerage commissions. Funding Corp then immediately sold its fee-amount entitlements to Citibank.
The Tax Court had essentially found that taking care of the brokerage commissions was part and parcel of the management duties of the manager, and that delegating that duty to Funding Corp did not detract from its performance being a management function. Therefore, the consideration paid by the Funds to Funding Corp was tainted as Funding Corp was providing a management service.
Woods JA found that history is bunk, i.e., it was irrelevant that what Funding Corp was receiving was in a sense in lieu of what previously had been paid by the Funds as management fees. She stated:
[T]he character of the supply is determined by its dominant element, which … is in the nature of a financing service provided by third party financial institutions.
The amounts paid by the Funds to Funding Corp were for an exempt “financial service” under para. (a) or (l) of the definition.
Although the facts grounding this finding in this case were unique, Woods JA made a finding with broader ramifications, namely that the denial under s. 261(2)(b) of the right to claim a rebate for tax that has been assessed applied even where it is another person to whom the assessment was issued.
Neal Armstrong. Summaries of SLFI Group v. Canada, 2019 FCA 217 under ETA s. 123(1) financial service – para. (l), para. (q), s. 261(2)(b) and Statutory Interpretation - Interpretation Act, s. 8.1.
Moose Factory – Tax Court of Canada finds that arrangements were not structured to give rise to a debt
After quoting the statement in Sattva that “While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement,” Owen J found that, contrary to the taxpayer’s understanding of the arrangements as reflected in its financial statements, the arrangements at issue had not in fact been structured so as to give rise to a debt owing to the taxpayer by a corporation that subsequently became bankrupt. Hence, no business investment loss (or capital loss).
Neal Armstrong. Summary of Moose Factory Restaurant Properties Ltd. v. The Queen, 2019 TCC 156 under s. 39(1)(c)(iv) and s. 12(11) – investment contract.
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 November, 2011 (all of them, from the October 2011 APFF Roundtables). Their descriptors and links appear below.
These are additions to our set of 933 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 3/4 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Royer – Court of Quebec finds that the principal residence did not include the portion thereof occupied by the grandmother performing an essential care function
Similarly to the federal principal residence exemption, the Quebec exemption requires that “the housing unit is ordinarily inhabited in the year by the individual, his spouse or former spouse or his child.” The house of the taxpayers (a couple with two children, one of them disabled) had a basement apartment that was occupied by the grandmother in order to enable her to take care of the disabled child on a full-time basis. Boutin JCQ found that, because the rest of the family essentially did not use this basement apartment (it was almost exclusively the private quarters of the grandmother), the portion of the capital gain realized by the couple on the sale of their house that was allocated by the ARQ to the basement apartment was not eligible for the exemption.
A second issue related to the fact that, on the sale, the taxpayers were granted a usufruct by the purchaser, which permitted them to continue using the residence for nine years, and with somewhat under half of the purchase price not coming due until this usufruct expired. Boutin JCQ rejected the taxpayers’ argument that because they had this usufruct following the sale, therefore they had not yet disposed of the property.
Neal Armstrong. Summary of Royer v. Agence du revenu du Québec, 2019 QCCQ 4163 under s. 54(1) – principal residence - (a) and s. 248(1) – disposition.
Connolly – Tax Court indicates that there may be no authority for a Notice of Confirmation to pass on subsequent taxation years
Before going on to grant the taxpayer’s claim for a disability tax credit for her 2014 taxation year (but not the three earlier years), Jorré DJ noted that the Minister in her Notice of Confirmation had indicated that the taxpayer was eligible for the DTC for her 2015 and later years even though the Notice of Confirmation was dated before her filing-due date for her 2015 year, and stated obiter:
[I]t would be surprising if on a proper interpretation the relevant statutory provisions gave the Minister the power to make a determination with respect to future eligibility. However, I can see nothing that would prevent the Minister from determining that the person was eligible in certain past years and informing the person that the Minister’s present intention was to assume that the person would continue to be eligible for certain future years.
Neal Armstrong. Summary of Connolly v. The Queen, 2019 TCC 160 under s. 118.3(1)(b).