News of Note
Gervais – Tax Court of Canada finds that a basis averaging scheme to transfer half of a capital gain to the taxpayer’s wife was an abusive circumvention of the attribution rules
Email this ContentThe taxpayer’s wife (Mrs. Gendron) purchased 1.04M preferred shares from the taxpayer (Mr. Gervais) at a cost of $1.04M (with Mr. Gervais electing out of s. 73 rollover treatment) and was gifted a further 1.04M shares on a s. 73 rollover basis, so that her cost of the gifted shares was $0.04M. The transactions were reported on the basis that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there was a $0.5M capital gain attributed back to Mr. Gervais on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.
In affirming CRA’s GAAR assessment to add “her” $0.5M capital gain in Mr. Gervais’ return, Jorré J found that this scheme “thwarts the purpose of subsection 74.2(1) and the scheme of the Act by avoiding the attribution of part of the taxable capital gain to Mr. Gervais which would normally have occurred at the time Mrs. Gendron sold the shares,” and also stated:
In the context of the attribution rules, the purpose of the [s. 73] election is to permit a taxpayer to defer or not the realization of a gain, and not to permit a taxpayer to avoid attribution. Here, the election was made in order to circumvent attribution. This is an abuse.
Neal Armstrong Summaries of Gervais v. The Queen, 2016 CCI 180 under s. 245(4), s. 245(3) and s. 245(1) – tax benefit.
Acornwood – UK Upper Tribunal softens a judicial rule that the income-producing purpose test should not track the actual use of the expenditure by the expenditure’s recipient
A UK tax shelter entailed the investors using borrowed money of 80 and their own funds of 20 to fund an LLP, which used 95 of this sum to purchase rights to a future stream of payments from a company (“Shamrock”) whose business it was to exploit IP. Shamrock used the 95 to purchase rights from an artistic production company. However, that company spent only 10 on the production. The balance of 85 went back to Shamrock as the consideration for a share of revenues from the production, with Shamrock using 80 of that sum to purchase a deposit which was used, as to the interest thereon, to fund the required stream of income payment to the LLP (which matched the investors’ interest expense) and, as to the deposit’s principal, to ultimately make a final payment to be applied to fund the repayment of their principal owing.
Nugee J affirmed that the expenditure of the 80 by the LLP was not an expense incurred wholly and exclusively for the purposes of the LLP’s trade, given that only 10 was needed to secure the production, so that that the 80 funded through the LLP members' borrowings “was not in any sense used by Shamrock in fact for exploitation.” He stated:
That last point of course does indeed look at what the recipient does with the money, but in circumstances where this is to the knowledge of, and indeed intended and required by, the payer. …There is no commercial difference between the members paying 15 for Shamrock’s services without having borrowed 80 and without any rights to guaranteed repayment of the 80, and the members paying 95, of which they have borrowed 80 and are guaranteed to be repaid 80.
Neal Armstrong. Summary of Acornwood LLP & Ors v. Revenue and Customs Commissioners, [2016] BTC 517, [2016] UKUT 0361 (Tax and Chancery Chamber) under s. 18(1)(a) - income-producing purpose.
CRA indicates that fees paid by a land developer to a regional municipality to obtain approvals preliminary to receiving GST/HST-exempt permits from the local municipality are not also exempt
Sch V, Pt VI, s. 20(c) exempts the supply of a municipal permit and related processing services from GST/HST. Where a land developer is applying for a final building or service permit of the local municipality, it may first have to obtain the approval of the land development agreement by the regional municipality, for which it is charged separate fees. In rejecting a submission that such additional fees are part of the consideration for a single supply of the ultimate permits, CRA noted that “the provision of property and/or services by two or more suppliers generally indicates that multiple supplies are being made, even if the various supplies are provided together,” and that “many of the fees identified are payment for a separate supply, e.g., approval of a plan amendment or a condominium conversion.”
Neal Armstrong. Summaries of 27 May 2016 Interpretation 130865 under ETA Sch V, Pt VI, s. 20(c), Sch V, Pt VI, s. 21 and s. 189.1.
CRA considers that psychological counselling services provided to an injured athlete including re an upcoming competition generally would qualify for HST/GST exemption
The definition of a qualifying health care supply includes a service supplied for the purpose of assisting in coping with an injury, illness, disorder or disability.” Although CRA generally would consider psychological counselling services for the purpose of confidence building for an athletic competition to not qualify, it would consider that such services supplied “to assist an individual in mentally preparing for an upcoming competition following an injury, illness, disorder or disability sustained by the individual” would qualify.
Neal Armstrong. Summary of 16 March 2016 Interpretation 170748 under ETA Sch V, Pt II, s. 1 - qualifying health care supply.
CRA rules on a split-up butterfly entailing an immediate sale of distributed shares by one TC to the other
Features of a ruling letter for the butterfly split-up of DC (a CCPC with three types of property including tenant receivables) equally between the family holding companies (Shareholder1 and Shareholder2) for two unrelated families include the following features:
- The redemption by DC of the common shares held in it by the two respective transferee corporations (TC1 and TC2) is handled so as to result in TC2 but not TC1 receiving a capital dividend, i.e., the CDA is not split pro rata.
- Deferred revenue (presumably prepaid rent) for which a s. 20(24) election is made on the distribution by DC is treated as boot.
- The shares of Subco2, which might be a significant subsidiary of DC, are split 50-50 between TC1 and TC2 on the butterfly, then TC1 sells its shares of Subco2 to TC2 for FMV consideration.
- On the winding-up of DC, it distributes the remaining notes owing to it by TC1 and TC2 (resulting from the redemption of the preferred shares issued by them on the butterfly distribution) to TC1 and TC2, respectively, with CRA ruling that this does not give rise to a forgiven amount (i.e., implicitly the notes are treated as if they were repaid in full by way of set-off against the winding-up distribution).
Neal Armstrong. Summary of 2015 Ruling 2014-0552871R3 under s. 55(1) – distribution.
CRA indicates that a kilometer-based minimum car allowance must be intended to compensate for actual expenses
S. 6(1)(b)(x) deems an employee’s car allowance to be unreasonable if it “is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment.” Did 2012-0460481E5 (which found that a fixed allowance of $4.60 for each trip made of less than 10 kilometres in the same day in running errands for the employer was deemed to be unreasonable by s. 6(1)(b)(x)) reverse 2007-0228521I7 (which accepted the employer’s compensation policy of providing for a daily minimum payment where the number of kilometres traveled per employee was less than a specified number). In indicating no change, CRA stated:
[A] minimum daily allowance based on the number of kilometres traveled should not have adverse tax consequences if it is representative of the actual use of a vehicle and is established to compensate an employee for expenses actually incurred for the use of the employee’s vehicle in the performance of duties of employment. This position is still in effect.
Neal Armstrong. Summary of 24 June 2016 Internal T.I. 2014-0555611I7 Tr under s. 6(1)(b)(x).
S. 100 rules extend to negative ACB amounts
Where a general partner interest is sold to a non-resident or tax exempt, any negative ACB amount is included in the amount which is 100% rather than 50% taxable (except to the extent that the it is attributable to non-depreciable property capital property). It is unclear whether this is an intended result.
Neal Armstrong. Summary of Paul Cormack and Janette Pantry, "Negative Partnership Interest ACB," Canadian Tax Highlights, Vol. 24, No. 8, August 2016, p. 2 under s. 100.
CRA’s audit practice is to interpret the central-paymaster provision (Reg. 402.1) restrictively
The central-paymaster provision in Reg. 402.1 likely is intended to ensure that the general inter-provincial income allocation formula in Reg. 402(3) (which gives ½ weight to the relative payroll borne by the respective provincial permanent establishments) is uanaffectd where the business has one corporation (Payco) bearing payroll for the whole group. Be that as it may:
CRA's provincial income audit practices take the restrictive view that the provision only applies if Payco's employees spend at least 90 percent of their time on the related corporation's economic activity. Thus, two sister corporations that share vital operational functions equally do not include their share of relevant salaries and wages from those functions when determining income attributable to a province if a third corporation in the group acts as central paymaster.
Neal Armstrong. Summary of Brian Robson, "Provincial Income Allocation," Canadian Tax Highlights, Vol. 24, No. 8, August 2016, p. 3 under Regulation 402.1.
Chappell – Court of Appeal of England and Wales finds that a provision intended to provide relief for “real world…commercial transactions” was not available in a purely tax-driven structure
Patten LJ applied the Ramsay doctrine and, in particular, how it was expressed in UBS, to find that a tax scheme, which depended on accessing relief for manufactured overseas dividends, failed given that such relief was only “intended to benefit the parties to real-world, commercial transactions involving the lending of marketable securities and not to transactions which lack those characteristics and whose only purpose is to obtain tax relief.” From a Canadian perspective, this might be articulated as giving greater weight to the “purposive” part of “textual, contextual and purposive” than would normally animate a Canadian decison (in the absence of GAAR).
Neal Armstrong. Summary of Chappell v Revenue and Customs Commissioners [2016] BTC 36, [2016] EWCA Civ 809 under General Concepts – Tax Avoidance.
CRA finds that qualification of partnership units as interests in a family farm or fishing partnership can be based on a previous period of farming use of its assets
In the situation where a farming couple held a partnership holding the farm property, which leased the farm to a farm corporation, also owned by them, which used the land in its farming business for the first 11 of the 20 years that the land was held by the partnership – but, then, apparently ceased operations, CRA accepted that their interests in the partnership qualified under the s. 110.6 definition of "interests in a family farm or fishing partnership," because the land was used in the farming business for over half of the 20-year holding period by the partnership. Thus the units qualified at the end of the 20 year period even though the active use test by the family corporation was no longer satisfied at that time.
Neal Armstrong. Summary of 2013-0478961E5 Tr under s. 110.6(1) - interest in a family farm or fishing partnership.