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Bernardin – Court of Quebec finds that interest that accrued prior to a class action judgment having become res judicata was non-taxable
An individual, by virtue of being part of a group of class action claimants, was awarded damages in 2004 of $1,200 for each of the eight winter seasons in which she had endured snowmobile noise. In 2010 she received a supplementary “indemnity” pursuant to Article 1619 of the Quebec Civil Code of $8,400 (capital) and $6,148 (interest). Whether the interest was taxable under the Taxation Act turned on when her damages were considered to have become “liquidated.”
Coutlée, J.C.Q. found that this liquidation date did not occur until July 3, 2009, being the date on which the Attorney General of Quebec abandoned the appeal which had been launched in December 2004 (reasoning that it was only on that date that “the November 30, 2004 judgment attained the status of res judicata”) – so that only the awarded interest that was referable to the period after July 3, 2009 was taxable to the individual.
Neal Armstrong. Summary of Bernardin v. Agence du revenu du Québec, 2019 QCCQ 846 under s. 12(1)(c).
CRA further clarifies that a qualifying s. 94(2)(t) sale of Canadian shares effects an immediate change in trust residency
If a non-resident trust is "tainted" as a resident trust under s. 94(2)(g) by being issued shares by a resident corporation, it potentially can re-acquire non-residency status under s. 94(2)(t) if it makes a qualifying sale of the shares. When this occurs, it changes its status immediately, so that it is non-resident for the stub period beginning with the sale, is resident for the stub period before the sale, and has a potential deemed disposition of its property under the emigration rule (s. 128.1(4)) as a result of the status change.
2013-0509111E5 confirmed the above results. However, a 2019 Interpretation has essentially amended 2013-0509111E5 by getting rid of a confusing passage that suggested that for certain purposes the trust remained a deemed resident until year end. The 2019 interpretation confirms that the sale triggers the change back to non-resident status for all relevant purposes.
Neal Armstrong. Summary of 17 January 2019 Internal T.I. 2018-0781041I7 under s. 94(2)(t).
Roy – Tax Court of Canada finds that CRA could not deny the carry-forward of excess RRSP contributions as an imposed quid pro quo for forgiving Part X.1 penalty tax
The taxpayer made a substantial overcontribution to his RRSP to fund investments that quickly became worthless. Accordingly, he was not in a position to withdraw the amount of the overcontributions to mitigate the corresponding Part X.1 penalty tax. CRA granted his application to waive that tax under s. 204.1(4). However, it thought that it was fair to also deny him any further deductions of the over-contributed amount in future years as he gradually earned income in those years to utilize the excess. Accordingly, it denied RRSP deductions taken by him in those subsequent years.
Smith J, in allowing the claimed RRSP deductions, stated:
…[T]he Respondent has failed to point to any legislative provision that would allow the Minister to eliminate unused RRSP contributions on the basis that they represent excess contributions.
Moreover … the Court does not make decisions on the basis of fairness ... .
Neal Armstrong. Summary of Roy v. The Queen, 2019 TCC 50 under s. 204.2(1.2).
CRA provides numerical speed limits on a pipeline for a company with a marketable securities “business”
CRA has provided the usual rulings for a pipeline transaction in which the estate sells a company with a “business” of investing and trading in marketable securities to a Newco for consideration comprising mostly a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time.
The ruling letter stipulates that the amalgamation will occur no sooner than 12 months after the sale to Newco, and that thereafter the note will be paid off no faster than 15% per quarter for the first year. This contrasts with, for example, 2014-0540861R3 F and 2014-0548621R3, where these two parameters were 12 months and 25% per quarter, and 2016-0670871R3, where they were 30 months and 15% per quarter.
Neal Armstrong. Summary of 2018 Ruling 2018-0767431R3 under s. 84(2).
After an audit team has made the mandatory referral of any proposed GAAR assessment to the Abusive Tax Avoidance Division at Headquarters, Headquarters then determines whether such assessment is clearly warranted or unwarranted under the jurisprudence or is respecting a structure already considerd by the Committee. In any such case, the proposal does not continue to the GAAR Committee. The GAAR Committee therefore looks at fewer matters than it used to, meets less frequently - and there is a greater tendency to send technical people rather than the named Committee representative to meetings.
Neal Armstrong. Summary of 7 March 2019 CTF Seminar on GAAR: Alexandra MacLean on GAAR under s. 245(4).
Revera Long Term Care – Federal Court requires CRA to reconsider whether a taxpayer’s negligence in over-reporting income in a statute–barred year permits CRA to reassess that year
The taxpayer discovered that it had overreported its income for ITA purposes by $9 million per year for years that were before the normal reassessment period. It requested that CRA reassess it for those years to exclude those amounts from its income - on the basis that the error was due to negligence so that such reassessments were permitted under s.152(4)(a)(i). CRA declined this request, based on a determination that the Minister did not have discretion under s.152(4)(a)(i) in situations where the taxpayer’s negligence leads to over-reported rather than under-reported income.
Ahmed J found CRA’s reasoning to be conclusory and agreed with the taxpayer that as CRA did “not conduct any textual, contextual, and purposive analysis as the Supreme Court of Canada requires” such decision was unreasonable and the request should be returned to CRA for a further decision.
Neal Armstrong. Summary of Revera Long Term Care Inc. v. Canada (National Revenue), 2019 FC 239 under s.152(4)(a)(i).
We have published a further 6 translations of interpretations released in June and May, 2012. Their descriptors and links appear below.
These are additions to our set of 801 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Comments of Brian Ernewein on the GAAR Committee and the future of GAAR included:
- Finance participates on the Committee for a window on what is happening and to offer insights on the policy underlying the Act.
- However, Finance does not bring “inside information” to this policy question as GAAR should be applied to the scheme of the law, as evidenced in the public record.
- Although perhaps five years ago (i.e., before a spate of more favourable decisions), this same conclusion might not have been reached, it now appears on balance that the introduction of GAAR has been an improvement: it has put a brake on some overly aggressive planning, without unduly impeding legitimate activity; and it has effectively engaged the Courts and CRA to give more than lip-service to something resembling a textual, contextual, and purposive analysis of legislation.
- Finance has considered:
- Whether a GAAR penalty should be introduced (the potential downside is that this might have a deleterious effect on the jurisprudence, i.e., fewer Crown wins)
- Explicitly incorporating economic substance into GAAR.
- Overruling Wild (which found that surplus-stripping transactions were not subject to GAAR before the surplus was actually stripped – and “seems inconsistent with the expressed intention of Parliament.”)
- Perhaps also requiring more reporting of aggressive transactions.
- That being said, any GAAR changes should be made with extreme caution.
- If, at the time of introducing new rules to shut down transactions, CRA is pursuing those transactions under GAAR, Finance will add a statement to the Explanatory Notes that GAAR can apply to those transactions.
Neal Armstrong. Summaries of 7 March 2019 CTF Seminar on GAAR: Brian Ernewein on GAAR – Past and Future under s. 245(4).
Klopak – Federal Court confirms an apparent denial of penalty relief for voluntarily disclosing a tax return error
Although the facts are quite unclear, what may have happened is that the Canadian-resident individual, who worked in the U.S. as a subcontractor to a rock band, originally filed late Canadian tax returns on the basis that his Canadian tax liability was offset by foreign tax credits for the U.S. taxes payable on his income. However, on getting advice, he later determined that he was Treaty-exempt on that income, sought a refund of the U.S. taxes, and filed amendments to his Canadian returns, showing Canadian taxes payable. CRA (in addition to assessing the Canadian income taxes payable and interest) also assessed him penalties since it now appeared that at the time of the original filing of his “nil” returns, Canadian taxes in fact had been owing.
The taxpayer argued inter alia that as he “came forward with a voluntary disclosure in a timely fashion … it was unreasonable for the [CRA] Delegate to not exercise discretion in waiving the penalties.” McVeigh J denied penalty relief essentially on the basis that the taxpayer did not fall within the conventional narrow criteria of CRA in IC-07 for penalty relief, e.g., no extraordinary circumstances justifying the late filing of the returns, such as natural disaster, had been established, and that this situation also did not fall within the four corners of CRA’s published voluntary disclosure program.
It is unclear why it was reasonable for the Delegate not to consider that the Applicant presumably could have received relief if he had formally applied under the voluntary disclosure program rather than simply sending in a T1 adjustment.
This case illustrates that the common practice of sending in nil returns quite late is fraught.
Neal Armstrong. Summary of Klopak v. Canada (Attorney General), 2019 FC 235 under s. 220(3.1).