News of Note
Arrbab - Court of Appeal of England and Wales restrictively interprets a power accorded in subordinate legislation to amend the primary legislation
Email this ContentSection 124 of the Finance Act 2008 (UK) provided inter alia that Treasury could by statutory instrument make an order in connection with appeals against HMRC decisions which amended the provisions of any Act, provided that a draft of the order had been laid before and approved by resolution of the House of Commons. Treasury made such an order, amending the Tax Credits Act 2002 (UK), which effectively took away the jurisdiction of the First-tier Tribunal to extend the deadline for a taxpayer to challenge a denial by HMRC of working tax credits. Before concluding that such amendment was ultra vires, Falk LJ stated:
Section 124 … is an example of what has come to be referred to as a "Henry VIII power", meaning a provision of primary legislation which permits subordinate legislation to be used to amend primary legislation.
It is now well established that any genuine doubt about the scope of the power conferred by such a provision should be resolved in favour of a restrictive approach. …
(This case broadly accords with the reluctance in Société des alcools and B.C. Ferry to permit Regulations to be applied so as to depart from the intent of the governing legislation.)
A few days before the taxpayer’s appeal was heard before the Court of Appeal, HMRC realized that its denial of the taxpayer’s credits was mistaken, and reversed such denial, so that the appeal was rendered “academic.” Falk LJ stated that the “conditions that will generally need to be met before this court may exercise its discretion to entertain an academic appeal” are that (quoting an earlier decision):
"(i) the court is satisfied that the appeal would raise a point of some general importance; (ii) the respondent to the appeal agrees to it proceeding, or is at least completely indemnified on costs and is not otherwise inappropriately prejudiced; (iii) the court is satisfied that both sides of the argument will be fully and properly ventilated." …
She found that these conditions were satisfied here.
Neal Armstrong. Summaries of Commissioners for His Majesty's Revenue and Customs v Arrbab [2024] EWCA Civ 16 under Statutory Interpretation – Regulations/ Statutory Delegation, and Federal Courts Act, s. 27(1.1).
Parent – Court of Quebec finds that building repair work that matched the cost of the whole building was currently deductible
The taxpayer acquired a rental property in run-down condition for $275,000 and then incurred $290,074 in expenditures in order to restore the building. Subject to a concession at trial that $34,900 of this amount (spent on constructing a new exterior stairwell) was a capital expenditure, Vaillant JCQ found these to be currently deductible expenses, stating:
[T]he work carried out on the building consisted of correcting defects or deficiencies in the building created over time by a lack of maintenance. The problems were serious because the lack of maintenance dated back a number of years.
…What needed to be replaced was done, and without extravagance, only the minimum.
… [T]he work done … was in the nature of repairs.
Neal Armstrong. Summary of Parent v. Agence du revenu du Québec, 2023 QCCQ 10440 under s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs.
Sussex Group – Tax Court of Canada reverses a s. 227(9) penalty in full because its amount was established by the taxpayer to be partially incorrect
The appellant determined that the remuneration paid to its two employees (the Suttons) would be allocated as to $165,000 and $192,000 to Mrs. and Mr. Sutton, respectively. CRA noted that all but $12,675 of such remuneration had been deposited into the bank account of Mr. Sutton, considered that all of such deposits to his account were remuneration received by him, and imposed a late source-deductions remittance penalty under s. 227(9) on the appellant regarding its computed under-remittance.
In finding that Mrs. Sutton had constructively received remuneration in excess of the $12,675 deposited into her account, Gagnon J stated:
Case law has noted that the word “receive” means to get or to derive benefit from something, therefore to “enjoy its advantages without necessarily having it in one’s hands”. Moreover, an amount of money is deemed received by an employee when it is available to the employee. …
[A]lthough this Court cannot confirm the exact remuneration received by Mrs. Sutton, and indirectly by Mr. Sutton, it remains clear that the remuneration used by the CRA to assess the penalty is incorrect.
After having noted that “the Crown bears the onus for the penalty,” and in reversing the penalty, Gagnon J stated:
The role of the Court is to determine whether the penalty was either validly imposed or not. …. And adjusting the quantum of a given penalty would be beyond the jurisdiction of this Court. On that basis, it is determined that the evidence in the present case does not support that the conditions to levy the penalty as determined by the Minister have been established.
Neal Armstrong. Summary of Sussex Group - Allan Sutton Realty Corp. v. The King, 2024 TCC 1 (Informal Procedure) under s. 227(9) and General Concepts – Payment and Receipt.
CRA confirms that a home is not acquired for FHSA purposes until it become habitable
CRA has published Q.2 from the November 3, 2023 APFF Financial Strategies and Instruments Roundtable. As discussed in greater detail last November, CRA indicated in the context of the application of the new FHSA rules to a constructed home, that:
- regarding the requirement in para. (a) of the “qualifying withdrawal” definition - that an individual commenced use of the home as a principal place of residence not later than one year after the qualifying home’s “acquisition” - a “home is generally acquired by the individual when it becomes habitable.”
- in the scenario where the home is constructed by the individual with the assistance of trades, the requirement in para. (c) of the “qualifying withdrawal” definition - that the individual have entered into an agreement prior to the withdrawal time for the acquisition or construction of the qualifying home before October 1 of the following calendar year - could be satisfied by agreements with such trades, provided that those agreements showed “that sufficiently significant work was undertaken to complete the construction of the qualifying home before October 1 of the calendar year following [the withdrawal].”
Neal Armstrong. Summaries of 3 November 2023 Roundtable, Q.2, 2023-0978631C6 F under s. 146.6(1) - “qualifying withdrawal” - (a), (c).
CRA treats a trust distribution of a life insurance policy to a beneficiary as made for FMV consideration equal to the part of the beneficiary’s capital or income interest that is satisfied
CRA has essentially published Q.4 of the 3 November APFF Financial Strategies 2023 Roundtable, along with two other technical interpretations that are quite similar.
Q.4 dealt with a private corporation (Aco) which distributes a life insurance policy of which it is the holder and beneficiary and with an adjusted cost basis (ACB), cash surrender value (CSV) and FMV of $50, $150 and $250, respectively as a dividend in kind to a discretionary family trust shareholder, and such trust then distributes the policy as an income distribution under ss. 104(6), (13) and (19) to a corporate beneficiary (Xco).
The dividend-in-kind of the life insurance policy by a corporation (Aco) to its shareholder is made for no consideration for purposes of s. 148(7)(a)(ii)(B), so that on the dividend-in-kind, the policy is deemed to be disposed of for the greatest of its ACB, CSV and the (nil) consideration received - or $150. However, where a trust transfers the policy to its beneficiary, the beneficiary (Xco) is regarded as giving consideration for the transfer that is all or any part of the beneficiary's income or capital interest in the trust, as applicable. Here, it would be reasonable to consider that such consideration had an FMV of $250.
If s. 106(3) rather than s. 148(7) was regarded as applying to the distribution, s. 106(3) also would generate deemed FMV proceeds. Thus, it made no difference which of s. 106(3) and s. 148(7) prevailed over the other.
Neal Armstrong. Summary of 21 December 2023 External T.I. 2020-0866651E5 F under s. 148(7).
Income Tax Severed Letters 24 January 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Csak – Tax Court of Canada finds that a taxpayer could reverse a s. 160 assessment because inter alia her transferor husband had given a waiver for the primary assessment on a Sunday
Two months after their marriage, the taxpayer received (on January 8, 1993) from her 80-year old ailing husband (“CC”) the transfer of a property valued in excess of his subsequently assessed tax liabilities for various taxation years including his 1988 and 1989 years (as a result of losses from a partnership investment being denied). CRA alleged that it received a timely waiver by CC for his 1988 year. CRA also received a waiver for his 1989 year on the Monday immediately following the expiry of the normal reassessment period on the previous day.
Owen J rejected the taxpayer’s submission that she was not liable under s. 160(1) because she had provided full consideration for the transfer through her agreement to marry CC and care for him. However, he found (based on Gaucher) that she was not precluded from disputing the validity of the assessments of her under s. 160(2) on the grounds that the waivers proffered by CRA were invalid, even though this issue had not been raised in the unsuccessful group appeal by CC and others of the denial of the partnership losses.
Regarding the waiver for 1988, Owen J found that the burden on the Minister to establish that the waiver had been timely-received had not been met with evidence of a CRA employee that an unstamped signed waiver was included in the taxpayer’s physical file along with a time-stamped letter on behalf of the taxpayer that was not established to have been attached in front of the waiver.
Regarding the waiver for 1989 and in finding that s. 26 of the Interpretation Act (which provided that “Where the time limited for the doing of a thing expires or falls on a holiday, the thing may be done on the day next following that is not a holiday”), did not have the effect of deeming the waiver to have been received during the normal reassessment period expiring on the Sunday, Owen J stated:
A taxpayer filing a waiver is not facing a deadline that would preclude the taxpayer from doing anything. … The deadline relates solely to the validity of the waiver itself, not to the doing of something by the person filing the waiver.
Neal Armstrong. Summaries of Csak v. The King, 2024 TCC 9 under s. 160(1), s. 160(2), and s. 152(4)(a)(ii).
Gestion Roy – Federal Court of Appeal confirms that a company’s payment of premiums on whole life policies where it was the beneficiary but not owner engaged ss. 15(1) and 246(1)
Various whole life policies on the life of a resident individual (Mr. Roy) were owned by (i) a holding company (“Gestion Roy”), controlled by Mr. Roy and which was the majority shareholder of a consulting firm (“R3D”), or by (ii) another holding company (“445 Canada”) which was wholly-owned by Mr. Roy but which was not a shareholder of R3D. However, R3D was the revocable beneficiary of any death benefits under the policies and paid all the premiums.
Boivin JA confirmed the inclusions in Gestion Roy’s income under s. 15(1) of the annual premium amounts paid on Gestion Roy’s policies for the reasons given in the Tax Court. Gestion Roy was the owner of such policies (entitling it to the cash surrender value of the policies at any time), so that it was “enriched” when the premiums were paid by R3D– and it was irrelevant to this point that, in fact, Gestion Roy never received any distribution on its policies. (What in fact occurred a number of years later was that, on the sale of R3D and R3D assets to a third-party purchaser, R3D received the cash surrender value of most of the policies on their termination.)
In also confirming the Tax Court’s finding that it followed from this that the payment by R3D of the premiums on the policies of 445 Canada resulted in corresponding inclusions under s. 246(1) to 445 Canada, Boivin JA stated:
[W]e agree with the TCC's conclusion that the analysis to be performed under subsection 246(1) is substantially the same as that required under subsection 15(1) (see Laliberté).
Neal Armstrong. Summaries of Gestion M.-A. Roy Inc. v. Canada, 2024 CAF 16 under s. 15(1) and s. 246(1).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released during May of 2002. Their descriptors and links appear below.
These are additions to our set of 2700 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 3/4 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2002-05-10 | 24 May 2002 External T.I. 2002-0123225 F - REER DONNE EN GARANTIE | Income Tax Act - Section 146 - Subsection 146(8) | generally no double taxation under s. 146(8) on payout on guarantee if property’s value previously included under s. 146(10)/ gross-up for source deduction purposes |
| Income Tax Act - Section 146 - Subsection 146(10) | inclusion under s. 146(10) for secured guarantee not limited to loan value, and ousts application of s. 146(8) if payment made by RRSP pursuant to guarantee | ||
| Income Tax Act - Section 248 - Subsection 248(28) | s. 248(28) prevents double inclusion under s. 146(10) when secured guarantee given and under s. 146(8) when guarantee called | ||
| 24 May 2002 Internal T.I. 2001-0113597 F - ASSURANCE CONTRE LES MALADIES GRAVES | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i) | if a clause providing for the return of premiums on death was ancillary, the policy could still qualify as a group sickness or accident insurance plan | |
| 20 May 2002 External T.I. 2002-0117885 F - Lien de dépendance et application de 120.4 | Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(a) | trustee is related to individual if its trustee is so related | |
| Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (c) | split income definition applied on the basis that the business of a partnership is carried on by its partners and that a trust if related based on the relatedness of its trustee | ||
| Income Tax Act - 101-110 - Section 104 - Subsection 104(1) | s. 104(1) indicates that related party status of trust is tested through its trustee | ||
| 2 May 2002 External T.I. 2002-0134335 F - Sous-aliéna 104(4)a)(i) et 110.6(15)a)(i) | Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(15) - Paragraph 110.6(15)(a) - Subparagraph 110.6(15)(a)(i) | s. 110.6(15)(a)(i) deeming rule does not apply for s. 104(4)(a)(i) purposes | |
| 15 May 2002 External T.I. 2001-0103605 F - Prêt par un Associé à une Société | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | interest on loan by partner to partnership is treated as interest rather than income allocation if there is a loan rather than partnership contribution under provincial law | |
| Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(g) | if a loan made by a partner is at law a loan rather than a partnership contribution, the interest thereon will be treated as interest rather than profit allocation | ||
| 31 May 2002 External T.I. 2001-0110095 F - ALLOCATIONS NON IMPOSABLES | Income Tax Act - Section 6 - Subsection 6(16) - Paragraph 6(16)(a) | mobility impairment means significant difficulty moving around that lasts 12 months |
CRA treats a Swiss collective investment vehicle as a flow-through for purposes of the pension/ retirement fund dividend exemption in the Canada-Swiss treaty
A collective investment scheme (the “Fund”) established under Swiss law is an arrangement by which investors pool their assets to be managed by and in the name of a Swiss regulated fund management company (the “Management Company’) for the account of the investors, whose proportionate entitlements to income and to cash or in-kind redemption proceeds are represented by non-voting units. The Fund was established by a contract of the investors with the Manager and the non-resident custodian of the Fund assets (the “Custodian”), and lacks legal personality. The Custodian delegated the custody of Canadian securities (being mostly listed shares of Canadian companies) to the “Canadian Sub-Custodian.” The Fund unitholders are all Swiss entities providing pension or retirement plans.
CRA effectively ruled that this arrangement would be treated like a co-ownership arrangement rather than like an entity such as a trust, so that dividends paid on the Canadian shares would benefit from the Canadian withholding tax exemption in Art. 10 of the Canada-Swiss Treaty for Canadian dividends received by Swiss pension/ retirement entities.
Neal Armstrong. Summary of 2024 Ruling 2019-0817961R3 under Treaties – Income Tax Conventions – Art. 10.