News of Note

The broad Canadian concept of series should not inform the implicit concept of series in the MLI’s PPT

A key component of the principal purpose test in the MLI references obtaining a benefit as “one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.” In this regard, the authors conclude:

[W]hile the expression “arrangement or transaction” as used in the PPT is broad enough to include a series of transactions, for this purpose a “series” must be given its ordinary and natural meaning (i.e., pre-ordained or pre-ordered transactions that can be construed as a single composite transaction)… [and] the extended meaning of series under the ITA, as set out by the SCC … should not be relevant … .

Neal Armstrong. Summary of Michael N. Kandev and John J. Lennard, “Interpreting the Expression “Arrangement or Transaction” in the Principal Purpose Test of the MLI,” International Tax (Wolters Kluwer CCH), June 2019, No. 106, p. 1 under Treaties – MLI – Art. 7(1).

Gagnon – Quebec Court of Appeal allows class action to proceed against Amazon for “deceptively” collecting GST/QST on exempt product sales

The class-action plaintiffs sought damages equal to the GST and QST that had been erroneously charged to them on their purchases from the defendant (Amazon). The two year period for applying to the ARQ for a refund under ETA s. 261 (and under the Quebec equivalent) had expired. The plaintiffs alleged that the Amazon invoices were “deceptive,” and relied on s. 227.1 of the Consumer Protection Act (Quebec) (“CPA”), which provided:

No person may, by any means whatever, make false or misleading representations concerning the existence, charge, amount or rate of duties payable under a federal or provincial statute.

Marcotte JCA accepted that the Quebec Superior Court would have had no jurisdiction to consider this claim if it was merely “a disguised attempt to receive a tax refund to which the [class action] members no longer have a right.” However, before allowing the claim to proceed, she stated:

[T]o the extent that the alleged failure relates to a deceptive invoicing practice contrary to the CPA, and not simply to the collection of taxes on exempt products, I consider that the Superior Court remained competent to be seized of such action.

It is unclear what it was about Amazon’s tax-related disclosure on its invoices for exempt products that was alleged to be “deceptive” [“trompeuse”].

Neal Armstrong. Summary of Gagnon v. Amazon.com Inc., 2019 QCCA 1166 under ETA s. 261.

We have over 900 full-text translations of CRA Interpretations

We have published a further 6 translations of CRA interpretations released in December and November, 2011. Their descriptors and links appear below.

These are additions to our set of 903 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 2/3 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2011-12-02 24 November 2011 External T.I. 2011-0416791E5 F - Shareholder Benefit Income Tax Act - Section 15 - Subsection 15(1) payment by Opco of whole life insurance premiums on policy of which it is beneficiary, but sole shareholder is holder, generates s. 15 benefit – but not policy loan advance
21 November 2011 External T.I. 2011-0416881E5 F - Late-filed designation - paragraph 88(1)(d) Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) provided year of property disposition not-statute-barred, CRA generally will accept a late designation allocating s.88(1)(d) excess pro rata amongst the eligible properties
22 November 2011 External T.I. 2011-0420451E5 F - Canadian resource property Income Tax Act - Section 66.2 - Subsection 66.2(5) - Canadian development expense - Paragraph (e) farm-in policy inapplicable where an option that might not be exercised: CDE addition as cash and exploration expenditures made
31 October 2011 External T.I. 2011-0422981E5 F - Whether property is eligible for a bump Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(v) properties not bumpable as the subsidiary control was deemed by s. 88(1)(d.2) to be acquired at the same time as it acquired the properties
Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(vi) bump unavailable given previous non-arm's length acquisition
Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d.2) properties not bumpable as not owned at subsidiary's formation by related person
2011-11-25 7 October 2011 Roundtable, 2011-0411911C6 F - Exploitation entreprise par SP Income Tax Act - Section 96 Quebec partnership need not carry on business
Income Tax Regulations - Regulation 2601 - Subsection 2601(1) property income of partnership is taxable only to partner (as to its share) in its province of residence
7 October 2011 Roundtable, 2011-0411831C6 F - Définition du mot mois Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share - Paragraph (b) individual required to have held shares for 24 months plus one day to and including day of the determination time
Statutory Interpretation - Interpretation Act - Section 35 24-month period preceding time on Date X interpreted as extending back 24 months from the day before Date X

Gordon – Federal Court notes that in theory a genuine belief that records falsification was a legitimate accounting practice might be a defence to charges under s. 239(1)(c)

A company (“JAD”) that promoted itself as an SR&ED specialist firm, created backdated records in support of R&D claims that it and its principals (Deacur and Gordon) made on behalf of numerous clients. Deacur and Gordon were committed to stand trial, but the prosecution ended when Crown counsel entered a stay of proceedings. Deacur and Gordon, and JAD, brought an action for damages for inter alia malicious prosecution. CRA had failed to understand that backdating records was an acceptable accounting practice, and that the prosecution had no chance of success.

Before dismissing their actions, Barnes J stated:

Messrs. Deacur and Gordon are perhaps fortunate that the Crown elected to stay their prosecution. The actus reus of a fraud was clearly present. Based on JAD’s widespread use of misleading backdated records and an untenable taxation theory, an inference of a guilty intent could also have been reasonably drawn. … [T]he only argument potentially available to them was one that was successfully employed in R v Patry, 2018 BCSC 1524 [which stated]:

... [D]espite my conclusion that Mr. Patry's tax strategy was flawed, I conclude that it is at least possible that Mr. Patry believed he had formulated a viable tax strategy. He cannot be convicted for being wrong, only for knowingly being wrong. ...

The fact that mens rea might have been negated in the prosecution of Messrs. Deacur and Gordon based on a wholly untenable but mistaken belief that their methods were sound does not, however, lead to a conclusion that the prosecution was legally unsound. … [T]he investigation was thorough, fair, objective and competently carried out.

Neal Armstrong. Summaries of Gordon v. Canada, 2019 FC 853 under s. 239(1)(c) and General Concepts – Malicious Prosecution.

CRA announces that it successfully applied transfer pricing penalties to an inbound hybrid loan

CRA provided a cryptic diagram portraying a borrowing by Canco of, say, $100M from U.S. parent (a C Corp) at, say, 10% interest, with Canco funding the cash interest payments of $10M p.a. through the receipt of those sums as prepayments under agreements for the forward sale of treasury shares by it to a U.S. LLC subsidiary of U.S. parent (which, in turn, funds the payments by LLC under the prepaid forwards by annually contributing $10M to LLC). This arrangement presumably was targeted to not generate interest income in the U.S., and an interest deduction to Canco.

After noting that it had “resolved a file regarding a hybrid mismatch arrangement involving the deduction of non-arm’s length interest in a series of transactions that included a forward subscription agreement (outlined in the diagram …) on the basis that paragraphs 247(2)(b) and (d) … and transfer pricing penalties applied,” CRA stated:

It is the CRA’s general view that such transactions are undertaken primarily to obtain a tax benefit and that they would not be undertaken by parties dealing at arm’s length. When the CRA finds transactions similar to the example …, the Transfer Pricing Review Committee will be consulted regarding the application of paragraphs 247(2)(b) and (d). Where these paragraphs apply, related transfer pricing penalties will generally apply on the basis that taxpayers engaging in this type of tax planning did not use reasonable efforts to use arm’s length prices, terms and conditions in their transfer pricing.

This is odd. Once CRA acknowledges that interest on the loan is deductible and that the only issue is whether the interest rate exceeds the arm’s length standard, the fact that Canco used commercially unusual arrangements to fund its interest payments becomes irrelevant. The question as to whether s. 247(2)(d) can or should be applied here to rejigger the loan terms so as to support CRA arguments for a lower arm’s length rate is no different here than where there is a plain vanilla inbound unsecured "covenant lite" loan. As to whether the interest rate should reflect implicit parent credit support, see General Electric, ENMAX and Chevron, see also McKesson.

Neal Armstrong. Summary of CRA Notice to Tax Professionals, 7 July 2019 under s. 247(2)(d).

CRA has revised its policy on employee merchandise discounts at the Minister’s request

At the Minister’s request, Folio S2-F3-C2 (on employee benefits) was removed in October 2017 from the CRA website, and CRA “drafted new wording” respecting employee discounts on merchandise.

The revised folio continues to undergo additional review as per our internal procedures. During the review period, the CRA continues to administer employee discounts on merchandise in accordance with the administrative policy outlined in Guide T4130, Employers Guide – Taxable Benefits and Allowances … .

Neal Armstrong. Summary of 4 December 2018 TEI Roundtable Q. E2, 2018-0782361C6 under s. 6(1)(a).

CRA confirms that a Reg. 1103(1) election (consolidating in Class 1) does not affect subsequent years’ acquisitions

CRA effectively confirmed that Folio S3-F4-C1, para. 1.132 should be interpreted as having the bolded sentence below added to it:

[U[nder [Reg.] 1103(1) …, a taxpayer may elect to transfer all properties otherwise included in Classes 2 through 12 (excluding Class 10.1) to Class 1 provided that all such properties were acquired for the purpose of gaining or producing income from the same business. The election affects all properties on hand at the commencement of the tax year for which the election is made, as well as any such property acquired during that year. The election does not affect properties acquired after the end of that year but, of course, they could be subject to a later election.

Neal Armstrong. Summary of 4 December 2018 TEI Roundtable Q. 1, 2018-0782341C6 under Reg. 1103(1).

Many Mansions – Federal Court of Appeal confirms revocation of charity’s registration on the grounds that it let its pastor occasionally use office space in his personal business

Laskin JA confirmed CRA’s decision to revoke the charitable registration of a charity (Many Mansions, whose object was advancing Christian tenets and observances) on various grounds, including that it “furnished its pastor with an office and permitted him on three occasions during the audit period to use meeting rooms on Many Mansions’ premises in operating a private business.” He rejected Many Mansions’ submission that such use “was merely ancillary or incidental to the fulfilment of Many Mansions’ charitable purposes,” and found:

While paragraph 149.1(6)(a) permits a charitable organization itself to carry on a related business without contravening the requirement to devote all its resources to charitable activities, the pastor’s private business does not come within this exception.

Neal Armstrong. Summaries of Many Mansions Spiritual Center, Inc. v. Canada (National Revenue), 2019 FCA 189 under s. 168(1)(b) and s. 168(1)(e).

The s. 247 transfer-pricing rules should not apply to transactions between non-residents none of whom is within the ITA charging provisions

A textual, contextual, and purposive analysis of s. 247 and other Canadian transfer-pricing provisions, e.g., ss. 69(1) and 17(1), suggests that, contrary to 2017-0691191C6, s. 247 applies to a transaction between two parties that are non-residents of Canada only to the extent that at least one of the parties carries on business in Canada or disposes of taxable Canadian property, and only where the transfer-pricing analysis is relevant to one of those activities or transactions.

Factors suggestive of this conclusion include:

  • Jurisprudence supports the general proposition that a person is not a "taxpayer" unless the person comes within the charging provisions of the Act - that is, the person is resident in Canada, carries on business in Canada, or disposes of taxable Canadian property.
  • Analysis of contemporaneous external sources suggests that there was no intent to expand the scope of the parties to which the transfer-pricing rules apply when, on the replacement of ss. 69(2) and (3) by s. 247 in 1998, the reference to a "taxpayer carrying on business in Canada" in subsections 69(2) and (3) was replaced by a reference to only a "taxpayer."
  • It appears unlikely that the change in 2009 from the computation of income “as though the affiliate were resident in Canada” in the predecessor to s. 95(2)(f), to the deemed Canadian residence of an affiliate in the current version, was intended to require the current s. 95(2)(f) to be taken into account in applying s. 247. For example, in the context of a transaction between a foreign affiliate and a Canadian taxpayer that gives rise to FAPI, if s. 95(2)(f) is taken into account for the purposes of s. 247 to deem the foreign affiliate to be resident in Canada, paradoxically s. 247 cannot apply because there will then be no "non-resident person" for the purposes of s. 247.
  • A more expansive interpretation generates difficulties. To give one example:

[W]here a foreign affiliate has earnings from an active business and the affiliate is required under the tax law of its country of residence, or the tax law of the country in which the business is carried on, to compute income, the affiliate's earnings are computed in accordance with that foreign law. Such earnings computed under foreign law are then adjusted in accordance with the items listed in regulation 5907(2), none of which relate to transfer-pricing adjustments under Canadian law. If subsection 247(2) could apply to interaffiliate transactions, it appears that earnings and surplus adjustments could be made only in respect of earnings of the foreign affiliate computed under Canadian tax rules, and not, for example, in respect of active business earnings computed under foreign law. It is not apparent why a transfer-pricing adjustment under subsection 247(2) should affect the computation of surplus in the former circumstance but not the latter.

Neal Armstrong. Summary of Byron Beswick, “Transfer Pricing and Transactions Between Foreign Entities,” Canadian Tax Journal, (2019) 67:1, 187-208 under s. 247(2).

Moore – Tax Court of Canada vacates the penalty assessed on a careful Canadian for late-filing a T1135

The taxpayer (Mr. Moore) realized approximately a year late that he should have filed a T1135 form to report some U.S. shares that now exceeded the $100,000 threshold, and promptly filed the T1135 with CRA.

In allowing Mr. Moore’s appeal of the $2,500 penalty imposed for the late-filing of the 2015 form, Boyle J indicated that even a careful and otherwise-compliant Canadian like Mr. Moore would find the disclosure in the CRA Guide as to T1135 reporting requirements to be opaque, noted the implicit presence of a due diligence defence, and stated:

I would ask the rhetorical question, “Is Mr. Moore’s disclosure to CRA on a voluntary basis of his failure to file a 2015 information return not the type of compliance effort CRA wants to encourage Canadians to follow?” …

I cannot imagine why in a case such as this the CRA would prefer to have Mr. Moore appeal to this Court, lose, and then go back to CRA’s Fairness Review program armed with my comments.

Neal Armstrong. Summary of Moore v. The Queen, 2019 TCC 141 under s. 162(7).

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