News of Note
CRA confirms its policy of not assessing interest on loss substitutions
Email this ContentAco first applied a $1,000 non-capital loss from Year 1 to offset a $1,000 taxable capital gain realized in Year 2. However, it then realized a $1,000 allowable capital loss in Year 3 and filed an amended Year 2 return to deduct that net capital loss under s. 111(1)(b), thereby restoring its $1,000 non-capital loss from Year 1.
CRA stated that, notwithstanding that the wording of s. 161(7)(b) does not accommodate this:
[I]t remains the CRA’s longstanding administrative practice not to assess interest where there is a substitution of losses, such as the replacement of a non-capital loss from a prior year with a net capital loss from a subsequent year, provided that there was no tax payable on either the original or amended return. Therefore … in the example above, the CRA would not assess interest.
Neal Armstrong. Summary of 21 March 2018 External T.I. 2017-0736291E5 under s. 161(7)(b).
CRA discusses the relationship between the s. 15(2) and s. 80.4(2) income inclusions respecting an unpaid shareholder loan
A shareholder receives a loan from the corporation in 2017, does not repay the loan but chooses to report the loan in 2019. CRA indicated that the application of s. 15(2), so as to include the loan amount in the shareholder’s income, is suspended until the time period in s. 15(2.6) has been passed (i.e., the end of 2018). In the meantime, s. 80.4(2) “would apply for the entire period during which the loan or debt was not repaid,” so as to impute interest throughout 2017 and 2018. When the 2017 income inclusion was reported in 2019, the previous inclusions under s. 80.4(2) would be backed out of the taxpayer’s income by virtue of s. 80.4(3)(b).
Neal Armstrong. Summaries of 6 April 2018 External T.I. 2018-0738871E5 F under s. 15(2.6) and s. 80.4(3)(b).
PPP Group – Federal Court of Appeal confirms that automobile replacement “warranty” payments did not qualify for ITCs
The Court of Appeal has briefly affirmed a decision of Tardif J respecting a Quebec company (“PPP”) which, through car dealers, offered motor vehicle replacement “warranties.” In the event of the loss of the vehicle through accident or theft, the warranties covered the difference between the depreciated value of the vehicle (which was covered by the regular insurer) and the cost of a new replacement vehicle. The consumer who had purchased the PPP warranty was required to acquire the new replacement vehicle from the dealer, and the dealer was paid directly by PPP.
PPP was unsuccessful in its contention that it was entitled to input tax credits under ETA s. 175.1 for a pro rata portion (e.g., 5/105, ignoring QST) of the claims paid by it. First, s. 175.1 did not apply to "insurance policies,” which Tardif J considered to be a more apt description of this product than “warranty.” Second, s. 175.1 required that the warranty be “in respect of the quality, fitness or performance” of the product, which Tardif J unsurprisingly found was getting at things like manufacturing defects rather than loss of a vehicle from theft or catastrophic accident.
ITCs also were unavailable under more general principles (under ETA s. 169) since the person acquiring the property or services funded by the “warranty” payment was the consumer getting the replacement vehicle rather than PPP itself (although PPP valiantly argued that it was paying for a valuable claim processing service received from the dealer.)
Neal Armstrong. Summaries of PPP Group Ltd v. The Queen, 2017 TCC 2, briefly aff'd 2018 CAF 123 under ETA s. 175.1, 169(1) and General Concepts – Illegality.
Rio Tinto Alcan – Federal Court of Appeal finds that fees incurred by a public board in determining to make a bid, as contrasted to implementation, were currently deductible
Pelletier JA confirmed the distinction between fees relating to acquisition and divestiture transactions of the taxpayer (“Alcan”) that were “incurred as part of Alcan’s decision-making process” (“oversight expenses”) and fees that “were incurred in the course of putting into effect Alcan’s decision once it had been made” (“implementation costs”). Accordingly, he confirmed Hogan J’s finding that the substantial portion of investment dealer fees incurred by the Alcan board that represented input to its decision to launch a hostile bid for a French public company (i.e., 65% of the Morgan Stanley fee and 35% of the Lazard Frères fee) was currently deductible, whereas the balance of the fees relating to assistance in the bid was a capital expenditure (and, thus, an addition to the adjusted cost base of the acquired shares). $19M in fees paid to a French lobbyist firm, whose purpose “was to facilitate the implementation of the Pechiney transaction by heading off possible political and public relations issues which might derail the transaction,” also fell into the implementation cost category, and were capital expenditures.
The same principles applied to investment dealer fees incurred respecting a subsequent butterfly spin-off transaction, so that the portion of Lazard Frères fees that related to advice on various divestiture options up to the time of the final board decision to effect a butterfly spin-off was fully deductible.
Pelletier JA also confirmed Hogan J’s finding that the same oversight costs that were the applicable portion of the investment dealer fees would also have qualified for deduction under s. 20(1)(bb). This entailed accepting the proposition that fees incurred in connection with the advisability of acquiring or spinning-off a whole company qualified as being paid for “advice as to the advisability of purchasing or selling a specific share … of the taxpayer.”
Neal Armstrong. Summaries of Canada v. Rio Tinto Alcan Inc., 2018 FCA 124 under s. 18(1)(b) – capital expenditure v. expense – oversight and investment management, s. 20(1)(bb) and s. 20(1)(g).
Income Tax Severed Letters 27 June 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Canada Life- Ontario Court of Appeal finds that a transaction resulting from a tax mistake should not be remedied under the Court’s general equitable jurisdiction
A Canada Life subsidiary (CLICC) had sought to realize an accrued loss on its LP interest in a subsidiary partnership by winding it up. This was accomplished by transferring pro rata interests in the partnership to its two partners, namely, CLICC and a wholly-owned GP, based on their respective 99% and 1% interests - followed immediately by a winding-up of the GP corporation into CLICC. CRA reassessed to deny the loss on the basis that the s. 98(5) rollover applied.
All that CLICC requested was for the Ontario Court of Appeal to cancel the winding-up of the GP, rather than to rectify the transactions. It argued that Fairmont “left open the ability for a court, in the exercise of its general equitable jurisdiction, to correct a mistake.” Before concluding that no remedy was available, van Rensburg JA construed the scope of Fairmont and Jean Coutu quite broadly, stating:
[I]it is not possible to alter corporate transactions on a nunc pro tunc basis to achieve particular tax objectives. In other words, the Supreme Court has signaled that retroactive tax planning by order of the Superior Court exercising its equitable jurisdiction is impermissible.
She also found that the remedy of equitable rescission of voluntary dispositions was unavailable.
Neal Armstrong. Summary of Canada Life Insurance Company of Canada v. Canada (Attorney General), 2018 ONCA 562 under General Concepts – Rectification & Rescission.
CRA rules on a combined pipeline and split-up butterfly
CRA ruled on a combined pipeline and split-up butterfly transaction respecting DC, which invested in marketable securities, and the shares in which passed to the estate with their adjusted cost based having been stepped-up under s. 70(5). DC then transferred its marketable securities to three transferee corporations (TCs) for the three beneficiaries in consideration for “butterfly shares” – but with DC holding onto the notes that it received on the immediate redemption of the butterfly shares for a redacted period of time. After that, DC was wound-up into the TCs, thereby resulting in deemed winding-up dividends and in the notes being extinguished on their being assigned to the TCs.
DC had refundable dividend tax on hand. This sequencing of the two deemed dividends (coupled with the appropriate choice by the TCs of their first year end) avoided Part IV tax circularity issues.
The ruling letter specified that thereafter, the TCs sell their remaining investments and distributed the proceeds on a specified gradual basis.
Neal Armstrong. Summary of 2017 Ruling 2016-0646891R3 under s. 84(2).
Ritchie – Tax Court of Canada finds that an early signing bonus was part of the proceeds of disposition of the subject property
A farmer, who rented his farm to his corporation, received an early “signing bonus” of $255,790 from Enbridge for entering into an agreement with Enbridge by the stipulated deadline under which he granted an easement for a pipeline to Enbridge. The Agreement stipulated that the $255,790 was “an incentive for early signing of the easement agreement” rather than part of the (separately stipulated) compensation for the easement.
Notwithstanding this clause, D’Arcy J found that in substance, the “signing bonus” was part of the taxpayer’s proceeds of disposition for disposing on an interest in land (the granting of the easement) and, thus, gave rise to a capital gain.
This case is helpful to the view that inducements paid to security holders for their agreement to exchange or tender their securities early are part of their proceeds rather than fee or inducement income.
Neal Armstrong. Summary of Ritchie v. The Queen, 2018 TCC 113 under s. 12(1)(x)(viii).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretation released in July 2013, as fully translated by us.
These (and the other full-text translations covering all French-language Interpretations released in the last 4 3/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for July.
CIBC – Tax Court of Canada finds that Visa’s fees to CIBC were subject to GST given inter alia that it was not a “person at risk”
CIBC issued Visa credit cards and utilized a credit card payment system that was operated and managed by Visa Canada. Visa Canada essentially acted as a largely automated go-between between the “issuer,” who provided the funds for a purchase at a merchant by a cardholder, and the “acquirer,” who used such funds to pay the merchant. Visa Canada added $18M in GST or HST to its charges for its services to CIBC in the years in question, and CRA denied CIBC’s s. 261 rebate claim therefor.
Rossiter CJ found that the services of Visa were “quintessentially administrative in nature” so as to be excluded from being a financial service by virtue of s. 4(2)(b) of the Financial Services and Financial Institutions (GST/HST) Regulations. Furthermore, Visa did not qualify as a “person at risk” so as to be excluded from the application of this Regulation: Rossiter CJ accepted a statement by Finance “that the person at risk exception is not meant to apply to risks which have only a remote chance of occurring.”
But for this Regulation, the services supplied by Visa Canada would have qualified as exempt “financial services” under para (l) of the definition (arranging for payment) or para. (i) therof (services relating to an agreement for which credit card vouchers were issued). As in Global Cash Access, the exclusions from financial service that were added in paras. (r.3) to (r.5) of the financial services definition did not have much traction.
Neal Armstrong. Summaries of CIBC v. The Queen, 2018 TCC 109 under ETA s. 123(1) – supply, asset management service, financial service – s. (l), s. (i), s. (r.3), s. (r.4), s. (r.5), Financial Services and Financial Institutions (GST/HST) Regulations, s. 4(2)(b), s. 4(3)(c), s. 4(1) – person at risk.