News of Note

An Austrian private foundation was found in obiter dicta not to be a trust for Canadian income tax purposes given that it had juridical personality and owned its property rather than holding it for the taxpayer and other alleged beneficiaries.  (The reasons suggest that it was a corporation instead.)  Furthermore, s. 75(2) does not apply to sales of property for fair market value proceeds to a trust (or an alleged trust, in this case) - otherwise the same gain could be attributed under s. 75(2) to the vendor, and to the settlor who had contributed the property used to make that purchase.

Respecting the first question, Sharlow J.A. implicitly applied the general entity classification methodology of Memec and Backman, and of CRA (see ITTN No. 38).

Neal Armstrong.  Summary of Sommerer v. The Queen, 2012 FCA 207 under s. 104(1) and 75(2).

The copyright holders of musical works represented by the Society of Composers, Authors and Music Publishers of Canada ("SOCAN"), who generally would have already licensed the copyright in their musical works to games publishers, were found to not have any right to further royalties when the games were downloaded by online purchasers.  At issue was whether these downloads represented a "communicat[ion of] a work to the public by telecommunication," which was protected under s. 3(1)(f) of the Copyright Act.  The Supreme Court of Canada found that the core of Canadian copyright is the pair of rights set out in the introductory paragraph of s. 3(1), which are the exclusive right to produce or reproduce, and the exclusive right to perform, a work.  Historically, s. 3(1)(f) is a specific example of the latter right only.  As the downloading of the games by their online purchasers was protected by the production or reproduction branch of copyright protection, rather than the performance branch (including the s. 3(1)(f) telecommunication right), the SOCAN members were not entitled to collect a second set of royalties.

This distinction drawn between reproduction and performance rights suggests that copyright royalties paid to a non-resident for the right to mount a theatrical or musical production may not be exempted from Part XIII tax by s. 212(1)(d)(vi) (which applies only to royalties for "production or reproduction" of a work; see 13 June 2003 T.I. 2003-0018975 and 29 May 1998 Memorandum 973007).  Additional issues arise under similarly-worded exemptions in various Income Tax Conventions to which Canada is a party (but which should also give effect to the intent of the other Treaty partner), given that (as noted in the dissenting reasons of Rothstein J.) the copyright law of foreign jurisdictions such as the U.S. may be structured quite differently than the Canadian Copyright Act.

Scott Armstrong.  Summary of Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada, 2012 SCC 34 under s. 212(1)(d)(vi) and Statutory Interpretation - Legislative History.

The son of the taxpayers, who was the beneficiary of his own life insurance policy, was abducted by Angolan rebels in 1998 and later presumed dead.  The taxpayers received the insurance proceeds plus interest in 2002, which was three years before his estate went into administration.  The Upper Tribunal found that the interest was not income to the taxpayers because at the time of receipt all beneficial interests in the unadministered estate were held in suspense - and, in fact, until the administration was completed, they did not have any proprietary interest in any particular asset of the unadministered estate.

The UK provision in issue specified that tax "shall be charged on and paid by the persons receiving or entitled to the income."  The Upper Tribunal found that the taxpayers were not "entitled to" the interest, but did not explicitly state that they did not "receive" the interest.  An implicit finding appears to be that, because the interest was potential income of the unadministered estate, the taxpayers should not also be regarded as the "persons receiving or entitled to" that income.

Similar reasoning might apply in Canada.  Ss. 104(13) and (24) provide that an amount of estate (or other trust) income is not included in a beneficiary's income until the beneficiary is entitled to enforce its payment, or it is paid, by the estate.

Scott Armstrong.  Summaries of Pope & Ors v. R & C Commrs., [2012] UKUT 206 (Tax and Chancery Chamber) under s. 104(13) and s. 12(1)(c).

If you purchase a company for $2.6 million, and then immediately incur $200,000 in professional fees to reorganize the company, followed by a transfer of the securities of the company in an internal reorganization, is it appropriate to consider that the securities have a fair market value of $2.8 million on the internal transfer?  The Fiducie Gauthier case - which dealt with the reverse situation where approximately $200,000 of reorganization expenses are incurred before transferring securities in a non-arm's length transfer, and then selling them in an arm's length sale for $2.8 million - arguably provides some support for the proposition that the fair market value of shares may reflect recently-incurred reorganization expenses.

Neal Armstrong.  Summaries of Fiducie Famille Gauthier v. The Queen, 2012 FCA 76, aff'g  2011 TCC 318 under s. 84.1(1) and General Concepts - Fair Market Value - Shares.