News of Note
MacDonald – Tax Court of Canada finds that “the law still requires a close linkage between the purported hedging instrument and the underlying asset”
Email this ContentAn individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. However, the “storm clouds,” which he had correctly anticipated, blew away more quickly than feared and, approximately eight years later, he closed out the forward at a loss. Consistently with his intentions all along, he continued to hold his BNS stake thereafter.
This loss was fully deductible unless the forward was a hedge of a capital investment (his BNS shares). Lafleur J stated that to be such a hedge, an instrument must be “directly linked (or symmetrical) to the underlying asset that is the subject of the hedge in terms of both quantum and timing.” She found that this test was not satisfied here given inter alia that “the settlements [under the forward] were not based on any anticipated sale of the BNS shares and the sale of BNS shares by Mr. MacDonald did not occur in close proximity to the settlements.”
Neal Armstrong. Summary of MacDonald v. The Queen, 2017 TCC 157 under s. 9 – capital gain v. income – futures/forwards/hedges.
Income Tax Severed Letters 9 August 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Teitelbaum – Cour du Québec finds that that a deceased’s RCA was a right or thing that, due to its tardy distribution, was received free of tax by an estate beneficiary
ITA s. 70(3) provides that a right or thing is taxable to an estate beneficiary if it is distributed to the beneficiary before the time for making a right or thing election under s. 70(2) has passed. In the will of the deceased common law partner (Lewin) of a Quebec taxpayer (Teitelbaum), Lewin designated Teitelbaum as a beneficiary of “all pension plans and any annuities purchased therefrom.”
Both Teitelbaum and the ARQ considered that Lewin’s right to $1.4 million under a retirement compensation arrangement was a right or thing at his death. However, the ARQ considered that this amount had become property of Teitelbaum, and thus had been distributed to Teitelbaum, directly on Lewin’s death by virtue of the quoted designation in Lewin’s will.
Teitelbaum relied on the fact that the $1.4 million, in fact, had not been distributed to her until about two years’ after Lewin’s death (due to a debate between the executors and the RCA trustees as to whether Teitelbaum was an “eligible spouse” under the terms of the RCA), so that the Quebec equivalent of s. 70(3) did not apply to include the amount in her income.
Fournier JCQ agreed with Teitelbaum. Although there were provisions in the Civil Code providing for a beneficiary to become designated directly as an annuitant of a retirement plan (or insurance policy) rather than receiving such property as a distribution to her by the executors, here no annuity had yet been purchased out of the $1.4 million, so that Teitelbaum received her $1.4 million as a legacy out of the estate.
Neal Armstrong. Summary of Teitelbaum v. Agence du revenu du Québec, 2017 QCCQ 8039 under s. 70(3).
Seven further full-text translations of CRA technical interpretations/Roundtable items are available
Full-text translations of the French technical interpretation released last week, of a further five items from the October 10. 2014 APFF Roundtable, and of a technical interpretation released on December 17, 2014, are listed and briefly described in the table below.
These (and the other translations covering the last 32 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for August.
Eagle Credit Card Trust securitization of PC Bank credit card receivables includes an optional discount sale option
Eagle Credit Card Trust (the “Trust”) has issued a short form base shelf prospectus for the securitization of credit card receivables generated by President's Choice Bank ("PC Bank" - a Sched. I bank wholly-owned by Loblaw) from PC Mastercard credit cards. The Trust will issue different series of credit card receivables-backed notes (the "Notes"), which will have recourse only to an undivided co-ownership interest in a revolving pool of credit card receivables generated under by PC Bank and certain related assets – and the Note proceeds will be used to acquire that co-ownership interest form PC Bank. PC Bank will continue to service the receivables.
A somewhat unusual feature of this securitization (as contrasted, for example, to the recent short form base prospectus of Glacier Credit Card Trust for Canadian Tire credit card receivables) is that the “Originator” (i.e., PC Bank) can, at its option, elect that the receivables will be sold to the Trust at a discount (rather than at par) to their principal amount. The tax disclosure contemplates that this discount would in effect be passed through as a discount on the issue price for the Notes, and indicates that whether the discounts would be taxable on an accrual or receivable basis could depend on “the facts and circumstances giving rise to the discount.”
The tax disclosure also does not express a view as to whether interest on the Notes would be subject to Part XIII tax as being participating debt interest.
Neal Armstrong. Summary of Eagle Credit Card Trust 2 August 2017 Short Form Base Shelf Prospectus under Offerings – Securitization Trust Notes – Credit Card Receivables.
Mark Anthony – Tax Court of Canada chooses the significantly, rather than hugely, absurd interpretation permitted by the text of an excise exemption
Mark Anthony’s Canadian production of alcoholic beverages included cider which was fermented from Canadian apples but had some concentrate from non-Canadian apples that had been added after fermentation. CRA denied an excise duty exemption for “wine” (which was defined so as to include cider) that was “produced in Canada and composed wholly of agricultural or plant product grown in Canada.” The CRA position was that the quoted test required that, at the time of packaging, all of the agricultural or plant products in the wine had been grown in Canada, so that the addition of the foreign juice after fermentation but before packaging put the cider offside.
Graham J found that the text of the quoted test required that, at the time of testing, all the ingredients in the cider or other wine must be agricultural or plant product grown in Canada – so that if the time of testing is the packaging, the previous addition of even economically-trivial additives -such as preservatives, colouring, carbonation or water - which were not plant products, would scupper the exemption. To avoid this extremely absurd result, Graham J determined that the time of applying the quoted test was the time of fermentation. However even this approach produced results which Parliament would not have intended (i.e., the better of the two interpretations still was absurd). It would mean, for example, that spirits could be imported free of duty on the basis that they would be used to fortify a domestically-produced wine, even though the resulting fortified wine was 1% wine and 99% imported spirits. Furthermore, the addition of (non-Canadian) sugar during the fermentation process would likely deny the exemption.
Neal Armstrong. Summary of Mark Anthony Group Inc. v. The Queen, 2017 TCC 141 under Excise Act, 2001, s. 135(2)(a).
Halsall v Champion Consulting – High Court of England and Wales finds that knowledge that advice – that investing in a tax shelter was a “no brainer” - was negligent, commenced when HMRC started investigating
Investors in a UK charitable gift tax shelter subscribed for shares of a shell company and then, a short number of days later after the shell company had been listed on the AIM, donated their shares to a charity and claimed tax reductions on the basis that the shares had appreciated in value by four times. The scheme depending on this appreciation in fact occurring, and this 4X valuation was based on small trades that had contemporaneously occurred in those shares on the AIM market. However, trading was extremely thin, and the claimants’ expert speculated that the trades were bogus, i.e., had occurred between related persons. However, this point was never tested as the HMRC's complete denial of the claimed tax relief had ultimately been accepted by the investors.
The tax accountant, whose firm was sued in negligence, had orally advised the investors that it was a “no brainer,” which referred to there being “100% assurance that their tax liability would be reduced,” rather than to the acumen of the investors, who were lawyers who had not read the prospectus and claimed to have not appreciated the risk.
Moulder J accepted a statement in the House of Lords that there is no liability of a professional “for damage resulting from what in the result turns out to have been errors of judgment, unless the error was such as no reasonably well-informed and competent member of that profession could have made," but, unsurprisingly, found that that standard had been breached here given the failure to warn that the scheme had a share valuation risk. She also rejected an argument that this valuation risk should have been apparent to the claimants.
However, she dismissed the claims on the basis that (under the applicable limitations rule) they had not been made within three years of knowledge of negligence coming to light. Moulder J found that this time occurred when the claimants became aware that the charity scheme was under investigation by HMRC - and at that point they should have investigated rather than accepting the tax accountant’s assurances “that the Revenue was misguided and they would achieve substantial tax mitigation.”
Moulder J arrived at similar conclusions respecting a 2nd tax shelter that the claimants had participated in, notwithstanding that another tax accountant at the same defendant firm had more conservatively advised “that the prospects of success of the film scheme were 75%.”
Neal Armstrong. Summary of Halsall & Ors v Champion Consulting Ltd & Ors [2017] EWHC 1079 (QBD) under General Concepts – Negligence.
CRA considers that ABM licence fees generally are GST/HST taxable
CRA considers that licence fees received by a store owner for hosting an ABM machine generally are consideration for a taxable supply for GST/HST purposes notwithstanding that it is indirectly providing cash-dispensing services to its customers.
Neal Armstrong. Summary of Excise and GST/HST News - No. 102 July 2017 under ETA s. 123(1) – financial service – para. (l).
CRA has stopped issuing GST/HST refunds to FIs (including deemed FIs or SLFIs) that have not filed their annual return/VDP announcement in Fall 2017
Since May 2017, CRA has been applying non-compliance holds (i.e., freezing any GST/HST refunds on a registrant’s account) for all non-compliant GST/HST registrants including financial institutions that are GST/HST registrants that have outstanding annual information returns such as Form GST111 (the general FI annual return) or RC7291 (the usual selected listed financial institution annual return). CRA also notes that for these (and other) purposes, corporations can be deemed to be financial institutions as a result of a s. 150 election.
After indicating that the public consultation period on the voluntary disclosure program will expire next week, CRA also stated that “it is expected that the CRA will announce formal changes to the program in the fall of 2017.”
Neal Armstrong. Summaries of Excise and GST/HST News - No. 102 July 2017 under ETA s. 229(2) and s. 281.1(2).
Dr. Brian Hurd Dentistry – Tax Court of Canada finds that an orthodontist did not make separate supplies of orthodontic appliances and services
Campbell J found that an incorporated orthodontic practice was making a single supply of exempt orthodontic health services rather than (as argued by it) two supplies comprised of a zero-rated supply of medical equipment (the orthodontic appliance) and of exempt orthodontic services (e.g., adjustment and maintenance services). (Zero-rating would have generated input tax credits.) She stated:
Neither the appliance nor the service on their own can achieve the patient’s goal or objective of correcting or treating their dental issues.
Neal Armstrong. Summaries of Dr. Brian Hurd Dentistry Professional Corp. v. The Queen, 2017 TCC 142 under ETA Sched. V, Pt. II, s. 5 and Sched. VI, Pt. II, s. 11.1.