News of Note
Iris Technologies – Federal Court of Appeal finds that seeking review of an improper exercise of CRA discretion in assessing represented a futile collateral attack on those assessments
Email this ContentRennie JA struck out a Federal Court application of Iris Technologies Inc., which sought a declaration that Iris was denied procedural fairness in the audit and assessment process, that the resulting assessments were made without an evidentiary foundation and that they were issued for the improper purpose of depriving the Federal Court of jurisdiction to hear its administrative law grievances. He stated inter alia that the application was “in essence, a collateral challenge to the validity of the assessments issued under the ETA, a matter within the exclusive jurisdiction of the Tax Court.”
In also applying the proposition that the Court should not exercise its discretion by making a declaration that will not “have any real or practical effect,” he stated:
The assessment remains valid and binding until vacated by the Tax Court. Issuing a declaration that does not quash or vacate the assessments would serve little or no purpose …
Neal Armstrong. Summaries of Canada (Attorney General) v. Iris Technologies Inc., 2022 FCA 101 under Federal Courts Act, s. 18.5.
Thinaddictives – Court of Quebec finds that a contribution of capital by a US shareholder was incorrectly recorded as debt, and reversed thin cap assessments
The Canadian taxpayer (“Thinaddictives”), which was initially formed by its US parent (“Nonni”) with nominal issued share capital, received approximately $19 million from Nonni to fund the cash portion of the purchase price for an asset acquisition. $10 million of this was clearly interest-bearing debt, but the balance of around $9 million did not have any resolution or other legal documentation establishing its character. Dortélus JCQ accepted testimony that it had been erroneously reported in the financial statements and tax return of Thinaddictives as being non-interest-bearing debt rather than a contribution of capital.
He quoted with approval the statement of Bowman J in Weisdorf that:
Accounting entries do not create reality. Their function is to reflect it.
Accordingly, assessments of the ARQ applying the Quebec thin cap rules were reversed.
Neal Armstrong. Summary of Thinaddictives Inc. v. Agence du revenu du Québec, 2022 QCCQ 3029 under s. 18(5) – equity amount – (a)(ii).
CRA interprets a reference to an ITA paragraph as referring to a subparagraph thereof
S. 144.1(2)(e)(i) requires that an employee life and health trust (ELHT) established by an employer must have one class of beneficiaries whose members represent at least 25% of all the beneficiaries of the participating employer under the trust, with at least 75% of the members of the class not being key employees.
S. 144.1(2)(e) was amended (through the addition of s. 144.1(2)(e)(ii)) to provide, as an alternative to satisfying the “Beneficiary Condition” in s. 144.1(2)(e)(i), that a trusteed plan can qualify as an ELHT where key employees are included as beneficiaries under the plan if the total cost of private health services plan benefits (PHSP benefits) provided to each key employee (and specified related persons) in respect of the year does not exceed $2,500
CRA indicated that the requirement of s. 144.1(2)(f) (dating from before the introduction of the s. 144.1(2)(e)(i) condition) – that the rights under the trust of each key employee are not more advantageous than the rights of a class of beneficiaries described in s. 144.1(2)(e) - applies only where the s. 144.1(2)(e)(i) condition is relied upon (so that where s. 144.1(2)(e)(ii) is met, the plan is not required to satisfy s. 144.1(2)(f).
Neal Armstrong. Summary of 3 May 2022 CALU Roundtable, Q.4, 2022-0928801C6 under s. 144.1(2)(f).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations mostly released in August of 2004. Their descriptors and links appear below.
These are additions to our set of 2,151 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 17 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
PC Bank – Tax Court finds that loyalty points were redeemed by a credit card issuer in the course of its financial services business so that no ITCs were available
The PC Bank case, which was released with the CIBC case, addressed two additional issues.
The first issue dealt with loyalty points that PC Bank essentially was paid by Loblaw to issue to PC Bank credit cardholders (based on their purchases at Loblaws’ stores), with PC Bank then being obligated to redeem those points in the hands of Loblaws when the points were used by the cardholders at Loblaws’ stores. Hogan J found that PC Bank could not claim input tax credits based on the amount of points redemption payments made by it to Loblaws, because it did not satisfy the requirement in ETA s. 181(5) that such amounts be paid “in the course of a commercial activity” of PC Bank. Hogan J (who was dismissive of the relevance of some taxable amounts charged by PC Bank to Loblaws in connection with the redemptions) stated:
PC Bank issued the PCB Points to generate revenue from its PC MasterCard portfolio. PC Bank earned significant revenue from interchange fees that pales in comparison to the minimal revenue it received from Loblaws. …
There is a direct link between the PCB Points that are issued in conjunction with an exempt financial service supplied by PC Bank to Cardholders and an expense that is paid when the PCB Points are redeemed by Cardholders.
Second, Hogan J characterized supplies made to PC Bank by a supplier and its successor as follows:
The main service offered by FDR/TSYS was the automated management and authorization of credit in real time, on behalf of PC Bank, based on the parameters and protocols established by PC Bank. These protocols included measures designed to detect credit fraud and to ensure that the terms and conditions under which PC Bank wishes to grant a credit card loan to a Cardholder are satisfied. All of this is done to avoid loan losses for PC Bank.
In finding that such supplies were excluded from being financial services by para. (r.3) of the financial services definition, Hogan J stated (at paras. 141):
The language of paragraph (r.3) indicates that “managing credit” is broader in scope than what may be commonly understood by that expression. …
Neal Armstrong. Summaries of President's Choice Bank v. The Queen, 2022 TCC 84 under ETA, s. 181(5), and s. 123(1) financial service – para. (r.3) and para. (t).
CIBC – Tax Court of Canada finds that the predominant element supplied by PC Bank to CIBC was a right to access Loblaw customers, engaging the (r.5) HST financial service exclusion
A subsidiary ("PC Bank") of Loblaw (“LCL”) had agreed with CIBC for CIBC to provide retail banking services under LCL's President's Choice trademark. Hogan J found that the predominant element of the supply made by PC Bank to CIBC was the provision of a “bundle of rights” consisting mainly of the right to solicit LCL’s clients in LCL’s stores, the right to use trademarks, and the right to issue points under the LCL Loyalty Program, and that “the Bundle of Rights … enabled CIBC to sell financial products and services” by “allow[ing] CIBC to tap into LCL’s loyal and extensive customer base.”
Given that para. (r.5) of the financial service definition provided an exclusion from financial service for “property … that is delivered or made available to” CIBC “in conjunction with” CIBC selling financial products of PC Bank, the supply made by PC Bank to CIBC was taxable.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. The Queen, 2022 TCC 83 under ETA s. 123(1) – financial service, para. (r.5), para. (r.4).
CRA elaborates that a limited partnership selling shares on an earnout basis cannot utilize the cost-recovery method
CRA provided a more elaborate version of its position (also stated at the 2021 APFF Roundtable) regarding whether use of the cost-recovery method for a share earnout satisfies the conditions of IT-426R, para. 2:
[T]he conditions for the application of the cost recovery method described in paragraph 2 … were not designed to apply to limited partnerships. Therefore, neither a partnership nor the partners of a partnership … may use the cost recovery method [as described in IT-426R, para. 2, regarding earn-outs].
The particular context was a limited partnership with both resident and non-resident partners selling a somewhat small (under 5%) shareholding of a US target company on terms that included an earnout. Although CRA considered that other requirements of IT-426R, para. 2 would not be satisfied in this situation, it made a helpful comment to the effect that the requirement of subpara. 2(c) – that “[i]t is reasonable to assume that the earnout feature relates to underlying goodwill the value of which cannot reasonably be expected to be agreed upon by the vendor and purchaser at the date of the sale” — can be satisfied where (as here) “a particular vendor is not directly involved in the negotiations for the sale of shares.”
Neal Armstrong. Summaries of 17 May 2022 External T.I. 2021-0884651E5 under s. 12(1)(g), s. 96(1)(a) and Reg. 229(1).
Income Tax Severed Letters 20 July 2022
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Duhamel – Tax Court of Canada finds that earnings from winning poker tournaments were not the result of a serious and systematic approach, and were tax-free
In 2010, 2011 and 2012, the net winnings of the taxpayer from participating in in-person poker tournaments were $4.87 million, $0.38 million and $0.11 million, respectively. In particular, he was the winner at the no-limit Texas Hold ‘Em tournament at the World Series of Poker held in Las Vegas in November 2010, winning a multi-million dollar purse at the age of 23. In finding that such earnings were not from a business or other source and, therefore, were not taxable, Lafleur J stated:
[T]he Court finds … that Mr. Duhamel did not employ any system or strategy to manage or mitigate the risks associated with his poker business. … Mr. Duhamel was not acting as a serious businessman in his poker activities.
[T]here was no evidence that Mr. Duhamel had any systematic and serious means of winning tournaments. Mr. Duhamel does not employ any method of gathering information about his gambling opponents. …
… Mr. Duhamel partied very often and sometimes arrived at the various tournaments in a "morning after" state. …
Neal Armstrong. Summary of Duhamel v. The Queen, 2022 CCI 66 under s. 3(a) – business source.
CRA indicates that the s. 110(1)(d) deduction can now apply to stock option benefits realized on death
On death, an individual holding stock option rights is deemed pursuant to s. 7(1)(e) to have disposed of them immediately before death for their value. Although 2009-0327221I7 and 2011-0423441E5 indicated that the 50% deduction under s. 110(1)(d) is not permitted to a deceased taxpayer, s. 110(1)(d) was since amended to make specific reference to s. 7(1)(e).
CRA indicated that, as a result of this amendment, the deduction is now available to a deceased taxpayer in circumstances where s. 7(1)(e) applies, provided that all of the conditions of s. 110(1)(d) are met.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.17 under s. 110(1)(d).