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Income Tax Severed Letters 23 January 2019

This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Développements Béarence – Federal Court finds that CRA cannot require a taxpayer to reformat its information for CRA’s reading convenience

Grammond J had previously made an order pursuant to s. 231.2 that the taxpayer (“Béarence,” a land developer with numerous land sales and who had been undergoing a CRA audit) provide, within five days, an Excel file containing all the daily transactions for its 2012 to 2015 years and a report of transactions by each general ledger account for those years. In finding that Béarence could not now be found to be in contempt of court for not having provided these documents, Bell J accepted Béarence’s submission that CRA already had all the information it needed to perform its audit and stated):

[N]either the CRA nor this Court can impose the format in which this information must be provided to the CRA, as all the necessary information has already been provided.

Neal Armstrong. Summary of Canada (Revenu national) v. Les Développements Béarence Inc., 2019 CF 22 under s. 231.7(4).

Prima Properties – Tax Court of Canada finds that a taxpayer was not negligent in failing to ask its accountant about a change in use of its rental property

CRA assessed the taxpayer on the basis that there was a change in use of its rental property from commercial activity to exempt rental activity, when it started to rent the property to an NPO for homeless people, thereby triggering GST equal to the previously claimed input tax credits for the property. Paris J found that the Crown had failed to establish the basis for making this assessment beyond the four-year statute-barring period.

First, no “misrepresentation” had been established, as the Crown had failed to establish that in fact the users of the facility had exempt leases or licences, i.e., for continuous occupancy of over one month.

Second, there was no “carelessness” or “neglect.” The taxpayer’s principal, as a lay person, could not be expected to recognize the issue of triggering a change of use – and to expect him “to initiate a discussion with [the company’s accountant] concerning the possible application of a highly technical provision of the Act would be to hold him to an unrealistically high standard of care.”


Aridi … found that it was not sufficient to show negligence on the part of the taxpayer’s professional advisor in making the misrepresentation, and that the taxpayer must also be shown to have acted in a negligent or careless manner.

Neal Armstrong. Summary of Prima Properties (92) Ltd. v. The Queen 2019 TCC 4 under ETA s. 298(4)(a).

BH Parkway – Tax Court of Canada finds that a statutory penalty received by a landlord from a defaulted tenant was exempt from HST – and that a Mercedes SUV was not capped at $30K

A tenant (Trillium College) of a commercial landlord (BH Parkway) vacated the premises in breach of the terms of the lease. BH Parkway sued and there was a settlement agreement pursuant to which it received damages. Obviously, such damages were subject to ETA s. 182, so that the full amount of the damages was deemed to be inclusive of HST. However, that which is obvious may not be correct.

The heads of claimed damages of BH Parkway included $500,000 for the value of the goods removed by Trillium College of at least $250,000 together with a penalty pursuant to s. 50 of the Commercial Tenancies Act equal to 100% of such value. This penalty was intended to penalize in the situation of “a tenant in removing its goods from a premise to defeat a landlord’s ability to distrain them.”

D'Auray J found that such a penalty would be paid “as a consequence of the operation of a provincial statute rather than as a consequence of the breach of the lease.” Since the $250,000 penalty claimed represented 33% of the total amount claimed, on a pro rata basis, s. 182 applied only to 67% of the actual amount of damages received in the reporting periods in question, so that 33% of the damages were received free of HST.

D'Auray J also accepted evidence that BH Parkway had purchased a $73,000 Mercedez Benz SUV in order to permit its principal to move goods to and from business premises. On this basis, it was not an “automobile,” whose ITA definition (applicable also for ETA purposes), excluded a “van or pick-up truck, or a similar vehicle” (interpreted by CRA to include an SUV) “the use of which … is all or substantially all for the transportation of goods, equipment or passengers in the course of gaining or producing income.” Accordingly, its cost was not limited for input tax credit (or, presumably, CCA) purposes to $30,000.

Neal Armstrong. Summaries of BH Parkway Place Ltd. v. The Queen 2019 TCC 7 under ETA s. 182(1) and s. 201.

6 further translations of CRA interpretations are available

We have published the final 3 translations of 2012 APFF Roundtable questions as well as translations of 3 interpretations released in October 2012. Their descriptors and links appear below.

These are additions to our set of 759 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¼ 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
2012-11-14 5 October 2012 Roundtable, 2012-0454151C6 F - Registre des déplacements Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(k) onus on employer to support benefit computation if kilometer log
Income Tax Act - Section 230 - Subsection 230(1) no stipulated documentary requirement for kilometer log
24 October 2012 Internal T.I. 2012-0454661I7 F - Conseils de planification financière Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(iv) - Clause 6(1)(a)(iv)(B) exclusion can extend to reimbursement or payment of fees for financial planning
5 October 2012 APFF Roundtable Q. 8, 2012-0454161C6 F - Computation of CDA and Acquisition of Control Income Tax Act - Section 245 - Subsection 245(4) purchase of shares of cash-rich company could be part of abusive surplus strip
Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) CDA deduction for net capital losses not affected by their denial under s. 111(4)(a)
2012-10-31 12 October 2012 External T.I. 2011-0428521E5 F - Société d'État Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(d.4) (d.4) corp cannot be partly owned directly by Crown/capital (as contrasted to share) ownership is relevant only for non-share corps
11 October 2012 External T.I. 2012-0433681E5 F - Résidence principale terrain adjacent Income Tax Act - Section 54 - Principal Residence - Paragraph (e) adjacent land not included in principal residence if owned by spouse, not by taxpayer
18 October 2012 External T.I. 2012-0452131E5 F - CIE, établissement domestique autonome Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(b.1) s. 118(1)(b.1) credit can be claimed for different children by different parents

GE Energy Parts – High Court of Delhi finds that GE U.S. companies had a PE in India based on the intensive involvement of their employees in India in contact negotiations

Various non-resident General Electric companies employed non-resident employees (the “expatriates”) in an office in India to secure customers and negotiate contracts with them. Bhat J found that as this was an intensive process, their services were not merely of “a preparatory or auxiliary character,” and the office constituted a fixed place of business and, thus, a permanent establishment for purposes of the India-U.S. Convention.

As with some other Indian PE cases, the facts are quite unclear, including the respective work performed by the expatriates and by an Indian subsidiary which had local Indian employees. Bhat J appeared to find (somewhat at odds with his finding above) that the Indian subsidiary was also an agency PE of the non-resident GE companies given that it was considered through its Indian employees or (somehow) the expatriates to have an extensive involvement in the negotiation of the contracts.

Bhat J accepted a finding below that, in the absence of any evidence of the profits generated from the sales in India, they should be estimated at 10% of such sales, and that 26% of this profit was attributable to the operations carried out by the PE in India.

Neal Armstrong. Summary of GE Energy Parts Inc. v. Commissioner of Income Tax (International Taxation), ITA 621/2017, 21 December 2018 (High Court of Delhi) under Treaties – Income Tax Conventions – Article 4.

Delia – Court of Quebec finds that a director showed due diligence in relying on accounts for his corporation that did not show a remittance obligation

The ARQ commenced a QST audit of a corporation (Motostar) after its voluntary dissolution by its sole individual shareholder (Delia) and assessed Motostar for some unremitted QST – and then assessed Delia for the same amount under the Quebec equivalent of ETA s. 323(1) (and ITA s. 227.1(1).) Cameron JCQ found that the assessment of Motostar was void given that the equivalent provision in the Quebec BCA to CBCA s. 226(2) did not (unlike s. 226(2)) provide that a proceeding may be brought against the dissolved corporation within X years after its dissolution, and instead merely provided that “judicial or administrative proceedings to which the corporation was a party” are continued against its shareholder on the dissolution. (As noted, the “administrative proceedings,” i.e., audit, were commenced after the dissolution.)

Nonetheless, the assessment against Delia was valid but for the due diligence defence given that the Quebec equivalent of ETA s. 323(2)(b) (and of ITA s. 227.1(2)(b)) merely required that the corporation have been dissolved (or was in the process of dissolution proceedings) and did not require that a claim for the corporation’s liability have been proved. (The ARQ dropped an argument that Delia also was liable under the BCA for the QST in his capacity of shareholder of the dissolved corporation.)

In finding that the due diligence defence was made out, Cameron JCQ indicated that it was reasonable in the circumstance for Delia to rely on his accounting staff and to treat the accounts of Motostar, which at the time of its winding-up did not disclose any QST liability, as if they were accurate.

This case, for example, supports the view that the director of a corporation - which has been attentive to its tax reporting obligations but mistakenly missed a withholding tax obligation, e.g., under Part XIII - has a due diligence defence in relying on the corporation’s accounting staff (cf. 2015-0622751I7).

Neal Armstrong. Summaries of Delia v. Agence du revenu du Québec, 2018 QCCQ 9487 under CBCA, s. 226(2), ETA s. 323(1) and s. 323(3).

4053893 Canada – Federal Court finds that CRA could not deny VDP relief to a corporation without explaining how its shareholder audit would have exposed the corporation

After Mr. Harris received a letter from CRA requesting that he file his personal returns (which he had not done for many years), he spoke briefly to CRA, disclosed that he owned an active corporation (“405” or the “applicant”) and was advised that he should file both business and personal returns. 405 was subsequently denied access to the voluntary disclosure program on the basis that, since this conversation had taken place before 405’s disclosure, such disclosure was not voluntary.

Gleeson J found that this decision was unreasonable because it lacked transparency, so that the matter was to be returned to another CRA official for redetermination. He noted that the CRA decision did not engage “in any analysis as to how the enforcement action against Mr. Harris would likely have uncovered the information disclosed by applicant.” He rejected the Crown’s submission that “the [CRA] Delegate could reasonably conclude, based on Mr. Harris’s role as the sole owner, director, and employee of the applicant alone, that the applicant’s information would have been uncovered in the course of the enforcement action against Mr. Harris,” stating:

This Court has consistently held that it is insufficient to simply conclude on the basis of an existing relationship that enforcement action against one taxpayer would uncover information contained in a second taxpayer’s voluntary disclosure.

Neal Armstrong. Summary of 4053893 Canada Inc. v. Canada (National Revenue), 2019 FC 51 under s. 220(3.1).

Reyes – Federal Court of Appeal finds that Columbia-source government pension was not exempt from Canadian tax

Gauthier JA found that Canada had the clear right under Art. 17 of the Canada-Columbia Convention to tax a former Columbia government employee (now resident in Canada) on a pension from Columbia that was exempt under the Columbia tax laws. The taxpayer lacked good arguments, so he made weak ones.

Neal Armstrong. Summary of Reyes v. Canada, 2019 FCA 7 under Treaties – Income Tax Conventions - Art. 18.

CRA indicates that completing an exploratory geothermal well ultimately used in production generates Class 43.1 costs, not CRCE

CRA indicated that the costs of both drilling and (except as noted below) completing exploratory wells for a geothermal project generally qualify as Canadian renewable and conservation expense (“CRCE”). However, in the case of a production well - or a (smaller diameter) exploratory well that nonetheless ends up being used for production (including small-scale heat or electricity production), - the costs only of drilling qualify as CRCE whereas the costs of completing such a well instead generally would be an addition to the Class 43.1 costs of the project.

Neal Armstrong. Summary of 17 July 2018 External T.I. 2018-0747311E5 under Reg. 1219(1)(h) and Schedule II - Class 14.