News of Note
RFC 2012 – UK Supreme Court finds that payments derived from employment services are assessable even where they are agreed to be redirected to a trust with a 3rd-party trustee
Email this ContentA group of companies, which ran a Glasgow football club, implemented a scheme for their key employees to avoid income tax on their annual bonuses or other compensation. Most of the compensation package for an employee might be paid by the employer to a master trust whose trustees in their discretion would use the amount to settle a sub-trust with the class of beneficiaries (usually the employee's family members) determined by them after reading a letter of suggestion from the employee. The trustee of the sub-trust would lend all the funds to the employee under a long-term loan at LIBOR+1.5%, and the employee as sub-trust protector could change beneficiaries or the trustees of the sub-trust.
In finding that this scheme did not work, i.e., the payments to the master trust were taxable employment income subject to source deductions, Lord Hodge stated:
Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money’s worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect.
Neal Armstrong. Summary of RFC 2012 Plc v. Advocate General for Scotland, [2017] UKSC 45 under s. 6(1)(a).
News Australia – Federal Court of Australia finds that interest was “derived” on an accrual basis on a loan where it was a business asset and there was no collection uncertainty
Australia, whose statute still has a general inclusion of income “derived directly or indirectly from [a] source…during the income year,” has provided some of the jurisprudence on the meaning of “derived.” In the Carsden’s case in the Australia High Court, Dixon J expressed the view that the receipts basis of accounting would alone truly reflect the income of a medical practice if “there [was] but little certainty about the payment of fees.”
The Federal Court of Australia found that the accrual basis of taxation was instead appropriate for recognizing interest income on a large loan made by a subsidiary to its parent given inter alia that although it “did not carry on a business of investment or of lending money… its income earning activities included the lending of money to, amongst others, its parent on commercial terms for reward,” and “there was no suggestion on the evidence that payment of the accrued interest income from its parent was uncertain.”
Neal Armstrong. Summary of News Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCA 645 under s. 12(1)(c).
CRA finds that a non-severable parcel of land could not have two beneficial owners of the principal residence and business portions thereof
An individual owning a parcel of farming land that cannot be legally severed would like to transfer the farming portion of the property to a wholly-owned corporation, while retaining beneficial ownership of the farmhouse. In finding that the individual would not be able to claim the principal residence exemption on a subsequent sale by the corporation of this parcel, CRA stated:
[T]he essential rights of ownership of a property used as an individual’s principal residence cannot be transferred or retained separate from the ownership of the rest of the property because the individual does not retain the right of alienation (that is, the ability to transfer the property).
Similar issues can arise in other contexts, for example, where a corporation holding non-severable real estate would like to sell the building to a 3rd-party purchaser directly and the land “through” an affiliate with net capital losses.
Neal Armstrong. Summary of 21 June 2017 External T.I. 2017-0687961E5 under s. 54 – principal residence.
CRA finds that a dividend-in-kind of a life insurance policy avoids the policy’s disposition at FMV
A corporation (“Holdco”) holds a policy on the life of its sole shareholder with an adjusted cost basis (“ACB”), cash surrender value (“CSV”) and fair market value (“FMV”) of $200k, $240K and $450K, respectively. If Holdco transfers the policy to its shareholder as a dividend in kind, its proceeds of disposition (and his cost) will be only the CSV of $240K, since the FMV of the consideration received by it is nil (so that its gain is $40K) - whereas its proceeds of disposition would have been $450K if Holdco instead had paid a $450K dividend to its shareholder, and he had purchased the policy for $450K. (In both scenarios, he would include a $450K dividend (plus gross-up) in his income.)
CRA considers that the lower gain in the dividend-in-kind scenario might be anomalous, and has raised this with Finance.
CRA did not mention s. 52(2), which provides that property paid as a dividend in kind is deemed to have been disposed of and acquired at its FMV – perhaps because it thought it was obvious that s. 52(2) was trumped by s. 148(7).
Neal Armstrong. Summary of 7 June 2017 External T.I. 2016-0671731E5 Tr under s. 148(7)(a).
Thompson – Tax Court of Canada finds that a failure to keep asking questions constituted carelessness
In Aridi, Hogan J found that there was no "neglect" in the taxpayer’s reliance on incorrect advice from his accountant (which he had probed before accepting), so that the reassessment at issue was statute-barred.
In Thompson, Hogan J declined to extend Aridi to the situation where in Year 1 the taxpayer had inquired of his accountant, Why was his income from his newly-incorporated business lower than his cash draws, and was informed that there was an income deferral because shareholder advances had not yet been required to be converted into taxable bonuses - but had failed to inquire in Years 2 and 3, Why did his reported income continue to be low. If he had continued to ask questions, errors in his Years 2 and 3 returns would have emerged, and this “absence of oversight constitute[d] carelessness” which opened up those returns to reassessment beyond the normal reassessment period.
Neal Armstrong. Summary of Thompson v. The Queen, 2017 TCC 115 under s. 152(4)(a)(i).
The scope of the s. 212(3.6)(b) rule for converting royalties into interest is unclear
S. 212(3.6)(b) extends the back-to-back loan rules to a situation in which an intermediary, who is a “relevant funder,” is a licensee rather than borrowing on a back-to-back basis. It is quite unclear what factual circumstances, if any, will come within the provision:
[I]t is utterly mysterious how a...royalty can be determined, in whole or in part, by reference to an amount of interest or how a relevant funding arrangement can be entered into because a specified royalty arrangement was entered into. While interest is compensation for the use or retention by one person of a sum of money owed to another...a royalty is compensation for the use of property… . It is not clear how a logical or legal connection between interest, on the one hand, and...royalties, on the other, can exist as suggested by paragraph 212(3.6)(b).
It also is unclear whether the rule in s. 212(3.6)(a) for converting upper-tier common share dividends into interest applies where the lower-tier "particular debt" had already disappeared by the time of the dividend declaration.
Neal Armstrong. Summary of Michael N. Kandev, "Canada Expands Back-to-Back Regime: Examining the Character Substitution Rules," Tax Notes International, June 19, 2017, p.1087 under s. 212(3.6)(b).
Income Tax Severed Letters 5 July 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Six further full-text translations of CRA technical interpretations are available
Full-text translations of the three French technical interpretations released last week and of three released on January 7, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 30 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for July.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2017-06-28 | 30 March 2016 Internal T.I. 2014-0547931I7 F - Voyages offerts par une compagnie | Income Tax Regulations - Regulation 200 - Subsection 200(1) | company providing free trips to incorporated sales reps is required to T4A the individuals if they received the trip qua employee (but not shareholder) of their corporation |
| Income Tax Act - Section 9 - Nature of Income | full value of incentive trips, including business portion, included in income of recipient personal corporations | ||
| 9 March 2017 External T.I. 2017-0689241E5 F - Avantages imposables relatifs aux automobiles ou autres véhicules | Income Tax Act - Section 248 - Subsection 248(1) - Automobile | emergency vehicle's markings must clearly mark it as police or fire vehicle | |
| Income Tax Act - Section 6 - Subsection 6(2) | even where a vehicle available 24 hours a day to a fire chief is clearly marked as a firefighter car, the employer must still estimate whether there is a personal-use benefit | ||
| 15 May 2017 External T.I. 2016-0645891E5 F - Services rendered to a State | Treaties - Article 18 | public-sector nurse did not provide services “to Switzerland” for purposes of Art. 18(2)(a) of the Canada-Swiss Treaty | |
| 2015-01-07 | 27 October 2014 External T.I. 2013-0507001E5 F - Obligation de remplir un T2200 pour un employé | Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(h.1) | employer expected to provide T2200 if applicable |
| 27 October 2014 External T.I. 2012-0471391E5 F - Entreposage d'inventaire à domicile | Income Tax Act - Section 18 - Subsection 18(12) | separate samples storage room part of home office | |
| Income Tax Act - Section 8 - Subsection 8(13) | inventory storage part of work place | ||
| 2 October 2014 External T.I. 2013-0491411E5 F - Allocation pour une automobile | Income Tax Act - Section 3 | compensation for car rides not received in the course of employment or a business | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) | compensation for providing car rides not received in course of employment |
CRA applies general principles for determining whether TFSA trading is a business
S. 146.2(6) provides that if a TFSA “carries on one or more businesses” then Part I tax is payable on its business income.
After noting that CRA has reassessed more than $75 million in additional taxes resulting from audits of TFSAs, CRA indicated that the general principles in IT-479R apply to determining whether securities trading is a business, so that there is no need for guidance specific to TFSAs on this issue.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.13 under s. 146.2(6).
Rona – Federal Court of Appeal agrees that an objectionable CRA tactic to gather input for a requirement letter did not preclude a s. 231.2(3) authorizing order
CRA officials obtained a copy of a form used to open commercial credit on the pretext that they were building contractors, and subsequently used that form in the preparation of a requirement letter to be issued to the taxpayer respecting its business clients.
Boivin JA affirmed the order of Martineau J authorizing the issuance of the requirement letters under s. 231.2(3). Although the CRA stratagem in obtaining the form was objectionable, the form was blank and generally available to the public, the taxpayer was not being audited, and there was no risk that the administration of justice would be brought into disrepute if the requirement letter were served.
Neal Armstrong. Summary of Rona Inc. v. Minister of National Revenue, 2017 CAF 118 under s. 231.2(3).