News of Note
Heath – Tax Court of Canada finds that a notice of discontinuance could not be reversed even with Crown consent
Email this ContentThe unrepresented taxpayer file a notice of discontinuance for her appeal of the denial of the new housing rebate after being advised by Crown counsel that her appeal was unlikely to succeed – but a day later, was informed by Crown counsel that she would be allowed the rebate. However, the Registrar refused to accept the parties’ joint consent to judgment to this effect on the basis that a notice of discontinuance had already been filed.
Smith J agreed with the Registrar, noting that Scarola, 2003 FCA 157 had established “that a discontinuance under subsection 16.2(2) [of the Tax Court of Canada Act] ‘produces the same effect as a judgment of dismissal by the Court’.”
He went on to note that CRA still appeared to have the ability to exercise its discretion to reassess to allow the rebate.
Neal Armstrong. Summaries of Heath v. The Queen, 2018 TCC 119 under Tax Court of Canada Act, s. 16.2(2) and ETA s. 298(2).
Fortnum – Tax Court of Canada applies the residual presumption in favour of the taxpayer
S. 118.5(1)(b) accords a tuition credit to “a student in full-time attendance at a university outside Canada in a course leading to a degree” subject to exclusions for inter alia fees “paid in respect of a course of less than three consecutive weeks duration.” In the face of conflicting authority, Smith J found that this requirement was satisfied by a summer session for an MBA program at an Indiana university that consisted of 10 consecutive courses each of which was of one or two weeks’ duration. He did not consider it necessary to indicate whether this was on the basis that the singular (“course”) included the plural (per Abdalla) or on the basis that “course” should be interpreted as referring to a course of study (see Siddell, 2011 TCC 250).
He also stated:
[W]here the application of the ordinary principles of interpretation may not resolve the issue … the matter should be resolved by recourse to the residual presumption in favour of the [taxpayer, citing Placer Dome].
Neal Armstrong. Summaries of Fortnum v. The Queen, 2018 TCC 126 under s. 118.5(1)(b) and Statutory Interpretation – Resolving Ambiguity.
Hydro-Québec – Federal Court refuses to permit CRA to require Hydro-Quebec to furnish information on its commercial customers
The Minister sought judicial authorization under ITA s. 231.2(3) and ETA s. 289(3) for making a demand of Hydro-Quebec to furnish listed particulars (e.g., address for invoicing and of electricity use, late payment identification and telephone number) for all its commercial customers who were charged the regular electricity rate – so that CRA could compare this information with what it had in its own files.
Roy J declined authorization. First, he did not think that all the regular commercial customers of a utility was an “ascertainable group” as contemplated in s. 231.2(3)(a), as the defining characteristics had no discernable link to compliance with the ITA and ETA. While they were at it, why not define group members as any resident of Quebec?
In finding that the request also did not satisfy the s. 231.2(3)(b) requirement that it be “made to verify compliance,” he stated:
The particulars of the commercial customers of Hydro-Quebec are, at best, upstream from information for the audit of their compliance with the ITA.
Finally, he indicated that even if the specific s. 231.2 (and ETA) requirements had been met, he would have rejected the Minister’s submission that once such conditions were satisfied, the Court was required to issue an authorization - and have exercised his discretion against such an "intrusion in private life." He stated:
A certain form of fishing expedition is permitted, but judicial authorization, with its inherent discretion, is there to limit and temper it. To me this seems essential where a fishing expedition is of unparalleled amplitude and the requested information is remote from an audit of compliance with the Act.
Neal Armstrong. Summary of Canada (National Revenue) v. Hydro-Québec, 2018 CF 622 under s. 231.2(3).
The 2018 Budget s. 112(5.2) amendment resulted in cancellation of the outstanding SRP programs
An investment dealer holds a share of an issuer with a paid-up capital of $15, an original cost to it of $40 and a fair market value of $100. It previously realized $60 of aggregate mark-to-market gains on the share, offset by a $60 loss on a hedge. Under a private agreement with the issuer, it sells its share to the issuer for $95.
In reliance on 980394, its proceeds of disposition exclude its deemed dividend of $80. Old s. 112(5.2) only required these proceeds to be increased to its original cost of $40. Hence, it realized a loss of $60 for ITA purposes. The new s. 112(5.2) instead increases its proceeds by the full deemed dividend amount of $80; hence, no loss.
In January 2018, six financial institutions purchased $1.5B of their own shares held by other financial institutions pursuant to “share repurchase programs” ( “SRPs”) that permitted such private sales to occur for securities law purposes where a normal course issuer bid was in play. Following the February Budget announcement of the new s. 112(5.2) rule, the issuers of the outstanding SRPs issued press releases announcing their cancellation.
Neal Armstrong. Summary of Kevin Kelly and Sona Dhawan, “Share Repurchase Programs,” Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p. 9 under s. 112(5.2).
CRA now accepts that legal expenses incurred to recover salary are deductible even if no right to the salary is established
S. 8(1)(b) permits a deduction from employment income for legal expenses paid in the year and incurred to collect (or to establish a right to collect) an amount owed to the taxpayer that, if received by the taxpayer, would be required to be included in the taxpayer’s employment income.
Although IT-99R5 states that if a taxpayer is unsuccessful in court and fails to establish that an amount is owed, then no deduction is allowed, CRA now accepts that these “comments are no longer accurate based on … Loo …[which] ruled that a taxpayer’s legal action need not be successful in order to deduct an amount under paragraph 8(1)(b).”
Legal expenses paid by an individual to reinstate the individual’s former employment position are not deductible under s. 8(1)(b) when employment is reinstated without retroactive pay:
While the legal expenses paid may have facilitated the reinstatement of the individual’s employment, the legal expenses were not incurred to collect (or establish a right to collect) an amount that was owed and required to be included in employment income … .
Neal Armstrong. Summary of 11 April 2018 External T.I. 2017-0699751E5 under s. 8(1)(b).
CRA confirms that the substituted loan exception in s. 18(9.1)(a) does not apply re a prepayment penalty incurred in refinancing with another arm’s length lender
S. 18(9.1) may deem a penalty that can reasonably be considered to relate to the amount of interest that would have been payable on a loan for subsequent taxation years to be deductible interest in those years – subject to an exception that applies where the penalty can reasonably be considered to have been made respecting the substitution of the debt obligation. In confirming that this exception did not apply where a taxpayer incurred an early repayment penalty on one loan from a financial institution on refinancing it with the proceeds of a loan from another arm’s length financial institution , CRA stated that it considers that:
a penalty incurred by a taxpayer who borrows money from one arm's-length party to pay a pre-existing debt owing to another arm's-length party would not constitute a substitution of a debt obligation for the purposes of paragraph 18(9.1)(a).
Neal Armstrong. Summary of 31 May 2018 External T.I. 2018-0755631E5 under s. 18(9.1)(a).
CRA is imposing GST on B.C. sales tax applicable to sales of expensive autos
In general terms, ETA s. 154 excludes provincial sales tax from the consideration on which GST/HST is imposed if the sales tax is imposed at no more than the general sales tax rate for the province. B.C. is now imposing sales tax at 20% on cars sold for more than $150,000 and at 15% between $125,000 and $150,000. Thus the effect of s. 154 is that GST is also charged on this B.C. sales tax.
Neal Armstrong. Summary of Excise and GST/HST News, No. 104, July 2018 under ETA s. 154(2).
CRA indicates that most new home warranties are GST/HST taxable
The ETA definition of an (exempt) insurance policy refers to “a policy or contract of insurance … issued by an insurer” but excludes “a warranty in respect of the quality, fitness or performance of tangible property, where the warranty is supplied to a person who acquires the property otherwise than for resale.” CRA has confirmed that the exclusion has the effect of rendering most new home warranties GST/HST taxable even where they are provided by an insurer.
Neal Armstrong. Summary of Excise and GST/HST News, No. 104, July 2018 under ETA s. 123(1) – insurance policy – (a).
Income Tax Severed Letters 11 July 2018
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
BCS Group – C Miller J disagrees with some of his colleagues in finding that a corporation can appear “in person” without counsel
In Masa Sushi, Graham J found that a corporation could not appear “in person” in a General Procedure matter and had to appear through counsel, so that a Rule purporting to permit a corporation to appear in person with the Court’s consent would be ultra vires. He considered that the concept of a corporation appearing “in person” was nonsensical, stating:
A human can be physically present in court. A corporation, being a creation of law with no physical substance, cannot.
C Miller J disagrees, stating:
Yes, there is common law jurisprudence to the effect that “in person” can only mean by the presence of a visible person … but there has been no such jurisprudence, until Masa Sushi, from the Tax Court of Canada.
…Surely we can give the drafters of the legislation and the drafters of the Rules credit for recognizing the uniqueness of the Court, unencumbered by the traditional common law findings of other Courts.
He went on to permit the corporate taxpayer to appear in person through its individual shareholder/director. He noted that this issue has been appealed in another case (Suchoki) to the Federal Court of Appeal.
Neal Armstrong. Summary of BCS Group Business Services Inc. v. The Queen, 2018 TCC 120 under Rule 30(2).