News of Note
CRA confirms that reassessing to increase closing inventory permits a s. 152(4.3) reassessment to increase the following year’s COS
Email this ContentCRA confirmed that a reassessment to increase closing inventory for Year 1 permits a consequential reassessment under s. 152(4.3) to reassess Year 2's taxes to reflect an increased cost of sales for Year 2 (which otherwise would be statute-barred).
The point of interpretation was that the definition of "balance" includes things like income and taxes payable for Year 1, but not Year 1's closing inventory balance. CRA appears to have effectvely treated the reassessment as increasing the taxes payable for Year 1 (viewed as a "balance,") and this balance can reasonably be considered to relate to the taxes payable balance for Year 2. Note that the increased Year 1 balance might not be exactly reversed in Year 2 if the effective tax rate changed.
Neal Armstrong. Summary of 29 May 2017 External T.I. 2014-0537111E5 Tr under s. 152(4.3).
Kaul – Tax Court of Canada allows an art appraiser to testify on her opinions formed in doing reports for the promoter
An art appraiser, who had been retained by the promoter to value and prepare brief appraisal reports on art to be donated in an art donation program, had previously been prohibited from acting as an expert in Tax Court proceedings respecting the fair market value of the donated art since inter alia she was not impartial. Rossiter CJ nonetheless found that she could testify to the contents of the Appraisal Reports which she had prepared many years previously for the developer, with that testimony to be limited to the opinions that she had formed while preparing those reports.
This finding was reached on the basis that she was a “participant expert” within the meaning of Westerhof v Gee Estate, 2015 ONCA 206. Under the Westerhof test, “the opinion to be given is based on the witness's observation of or participation in the events at issue; and the witness formed the opinion to be given as part of the ordinary exercise of his or her skill, knowledge, training and experience while observing or participating in such events.” This test was satisfied here as her appraisals had not been performed with a view to the subsequent Tax Court litigation.
Neal Armstrong. Summary of Kaul v. The Queen, 2017 TCC 55 under Tax Court Rules, s. 145.
2763478 Canada – Tax Court of Canada finds that not all the transactions in a value-shift scheme were infused with an estate-freezing purpose
An individual did not sell his shares of an operating company (Groupe AST) directly to a third-party purchaser. Instead he rolled his shares into a holding company (276), following which some internal transactions occurred in which the adjusted cost base of the Groupe AST shares was stepped up to fair market value - including a non-rollover drop-down of those shares to a subsidiary (9144) in exchange for high-basis common shares - with 276 realized corresponding capital gains. The Groupe AST shares were then sold to the purchaser at no additional gain.
276 then engaged in “value shift” transactions of the same general type as were struck down under GAAR in Triad Gestco and 1207192, i.e., a stock dividend of high-low preferred shares was paid on the high-ACB common shares that 276 held in 9144, thereby rendering those common shares almost worthless, and then the capital loss was realized by selling those common shares for $1 to a corporation owned by the son of 276’s shareholder.
Although, unlike Triad Gestco and 1207192, the capital gains – to be offset by the value-shift loss – were realized in internal transactions, this was not a relevant difference. In rejecting the taxpayer’s submission that there was no avoidance transaction as each transaction had an estate freezing objective, Paris J stated that although he accepted “that the global objective of the series was to effect an estate freeze,” one of the transactions was unnecessary from an estate freezing perspective.
Neal Armstrong. Summary of 2763478 Canada Inc. v. The Queen, 2017 CCI 98 under s. 245(3) and s. 245(4).
CRA indicates that a discretionary family trust may be unable to establish that expenses reimbursed by it were for the children’s benefit
A father who is the trustee of a discretionary family trust reimburses himself out of the trust funds for itemized expense of restaurant meals of the children and issues T3 slips to them.
CRA quoted its somewhat general statements in ITTN 11 (respecting trustee payments to children), which might be construed as consistent with this practice, but then quoted as “helpful” the statement in Degrace Family Trust that “the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee for a purpose which is unequivocally for the benefit of the beneficiary,” and also a statement in a 1999 technical interpretation that, where “the household expenditures [were] basically totaled and divided by the number of family members in order to determine the child’s share…it would be very difficult for the trustee to substantiate that the payments are unequivocally for the child’s benefit.”
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.10 under s. 106(6)(b).
CRA indicates that a Cdn competent authority agreement with the Cdn shareholder of an S Corp. extends to income of a qualified subchapter S Corp. subsidiary thereof
Art. XXIX(5) of the Canada-U.S. Treaty contemplates the Canadian-resident shareholder of an S Corp. agreeing with the Canadian competent authority that the income of the S Corp will effectively be attributed to him or her as foreign accrual property income, so that the U.S. taxes payable by that shareholder can be eligible for a foreign tax credit. CRA indicated that since the template S-Corp. agreements provide that the FAPI that is so attributed is the income of the S Corp. computed under the Code, such income will include the income of a qualified subchapter S Corp. subsidiary of the S Corp – so that there is no need for the Canadian shareholder to enter into a separate S-Corp. agreement respecting the QSSS.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.9 under Treaties – Art. 29.
Income Tax Severed Letters 21 June 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that there generally is no Treaty relief from double taxation for a Cdn-resident LLC with U.S.-source income and single Canadian-resident member unless it can elect to be an S-Corp
A single-member disregarded U.S. limited liability company (“SMLLC”), whose member is a resident of Canada, is factually resident in Canada and, thus subject to Part I tax, whereas U.S. source income (e.g., business income from a U.S. permanent establishment) would also be subject to U.S. income tax in the hands of the member, without the SMLLC being entitled to claim any foreign tax credit for such U.S. tax paid by its member.
Notwithstanding that from the U.S. perspective, the member is double-taxed on the same U.S. source income, CRA did not consider that there would be any potential redress under Art. 26(1) of the Treaty (re taxation not according with the Treaty).
If the member was a dual resident or U.S. citizen, and the LLC elected to be taxed as an S-Corp after electing to be taxable as a C-Corp, it would be subject to pass-through taxation for U.S. income tax purposes like a typical disregarded US LLC. However, the member might be able to request competent authority assistance pursuant to Art. 29(5).
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.8 under s. 125(1) and Treaties Art. 26 and Art. 29.
Six further full-text translations of CRA technical interpretations/Roundtable items are available
Full-text translations of five French technical interpretations and one (APFF) Roundtable item that were released between January 21, 2015 and January 14, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 29 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA confirms that an individual acting under a power of attorney is not engaged in commercial activity for GST/HST purposes
CRA indicated that as a power of attorney is an “office” for GST/HST purposes (which effectively is treated the same as employment for GST/HST purposes), an individual who charged for performing pursuant to a power of attorney was not engaged in a commercial activity, so that no GST/HST was exigible.
Neal Armstrong. Summary of 13 April 2017 Interpretation 162819 under ETA, s. 123(1) – office.
Final official answers to the 2017 IFA Roundtable have been published
Last week, CRA published in final form its responses to the questions posed at the April 2017 IFA Roundtable. Although these responses have already been mostly summarized, the following table, as a convenient reminder, lists and links these questions and responses and our summaries of the responses, and provides brief descriptors.