News of Note
Income Tax Severed Letters 12 October 2022
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA is reviewing whether it will permit critical mineral status to be certified after the related flow-through share agreement is made
Regarding the draft rules for an enhanced mineral exploration credit for individuals’ investing in flow-through shares, CRA noted in relation to the stipulation in draft para. (e) of the “flow-through critical mineral mining expenditure” definition that the required certification by a “qualified engineer or geoscientist” be “completed … no more than 12 months before the time that the agreement is made”:
This wording suggests that the Certification is to be completed before the time the flow-through share agreement is made (but not more than 12 months before that time), although it doesn’t expressly mandate that the Certification be completed before the flow-through share agreement is made (rather than after). We have raised this issue with the Department of Finance.
While the prescribed form for the certification had not yet been released, CRA will accept a letter signed by the qualified engineer or geoscientist that includes inter alia “a brief explanation of why it is expected that the mineral deposit(s) being explored will contain primarily (i.e., more than 50%) critical minerals” and the certifier’s professional qualifications.
Neal Armstrong. Summaries of 29 September 2022 External T.I. 2022-0949081E5 under s. 127(9) - flow-through critical mineral mining expenditure and General Concepts - Transitional Provisions.
Peach – Federal Court of Appeal distinguishes between not challenging a taxpayer’s business acumen and measuring by what a reasonable business person would have done
In his 2011 taxation year, the taxpayer earned $27 in revenue and deducted over $19,600 in business expenses from a business of selling life insurance and mutual funds to a client base largely consisting of friends and family. In confirming the findings of the Tax Court that the taxpayer’s business expenses, beyond those allowed by CRA, were unreasonable, Rennie JA stated:
The appellant relied on Keeping to argue that the Tax Court erred in holding that his business expenses were not deductible based on his poor business judgment. This case does not assist the appellant. Keeping establishes that the Tax Court’s role is not to evaluate a taxpayer’s business acumen, a principle the Tax Court respected … . The Tax Court evaluated what a reasonable business person would have done in the appellant’s position, without relying on hindsight or second-guessing the appellant’s choices.
Perhaps this could be paraphrased as saying that a taxpayer’s business acumen can be challenged, but only indirectly by measuring against a reasonable business-person standard.
Neal Armstrong. Summaries of Peach v. Canada, 2022 FCA 163 under s. 67, s. 3(a) – business and s. 152(4)(a)(i).
Colmvest – Tax Court of Canada finds that a minority shareholder could not use the ETA s. 186(1) rule to access ITCs
Colmvest, which was the 25% shareholder of a corporation (“443307”), incurred legal fees in an arbitration between it and the 75% shareholder (“QF,” which was owned by an individual unrelated to Colmvest’s shareholder) regarding dividend distributions by 443307. Colmvest claimed ITCs relating to the legal fees in reliance on ETA s. 186(1), which required inter alia that Colmvest be “related” to 443307 by virtue of ITA ss. 251(2) to (6).
In finding that Colmvest was not so related to 443307, so that its ITC claims were properly denied, Graham J indicated that:
- QF, not Colmvest, prima facie had de jure control of 443307.
- Although there was a unanimous shareholders’ agreement, “[i]t appear[ed] that none of the governance provisions requiring unanimous consent was ever followed,” so that it was unnecessary to consider what effect those provisions would have on the control of 443307. (It is not at all apparent what difference this would have made even if he had considered those clauses.)
- The referenced phrase in s. 256(5.1) was not used in ss. 251(2) to (6), so that it was unnecessary to consider whether Colmvest had de facto control of 443307.
Neal Armstrong. Summary of Colmvest Holdings Corporation v. The Queen, 2022 TCC 70 under ETA s. 186(1).
We have translated 8 more CRA interpretations
We have published 8 translations of CRA interpretations released in February of 2004. Their descriptors and links appear below.
These are additions to our set of 2,240 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 18 2/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Choptiany – Tax Court of Canada allows the taxpayers’ appeal from (likely - correct) assessments on the basis that they had been repeatedly stonewalled on discovery
The three taxpayers had appealed the imposition of gross negligence penalties based on what Boyle J characterized as “nonsensical misstatements” regarding them “claiming to be agent for themselves.” Although Boyle J expressed himself more circumspectly than this, essentially it appears that CRA, with the assistance of Crown counsel, sought to hide from the taxpayers that they had been the subject of criminal investigation by CRA, then downplay that fact, in clear breach of the Rules regarding the requirement for the CRA representative on discovery to be knowledgeable and informed, and for incorrect answers given to be corrected and relevant documents provided.
The taxpayers brought two motions before Boyle J, and he issued orders directing the Crown to comply with its discovery-disclosure obligations. This third motion was now brought based on the Crown’s essential non-compliance with the two previous orders. Boyle J noted the extraordinary position of Crown counsel during the hearing of this third motion “that no remedy was warranted because all questions asked had been answered.”
In allowing the taxpayer’s appeals from their penalty assessments, with costs on a solicitor-and-client scale, he stated:
The Respondent has adopted and demonstrated a consistent pattern of non-compliance with this Court’s Orders and Rules with respect to CRA’s audits and investigations involving the Appellants. I find this to have been intentional and deliberate, and that it was undertaken to frustrate these Appellants’ rights to pre-trial discovery on the subject of CRA’s investigation involving them relevant to their appeals. …
The Respondent’s egregious history of defaults and non-compliance in these appeals, that there is no alternative available that could reasonably be expected to cause the Respondent to now comply, and that this has caused prejudice to the Appellants, are reason enough to allow these appeals. This disposition is also necessary to protect the integrity of the judicial process and the rules of law that apply to all parties.
Neal Armstrong. Summary of Choptiany v. The King, 2022 TCC 112 under Rule 95.
If commercially feasible, deferred share consideration can be used instead of a share sale occurring on a cash earnout basis
Some points made on share sale earnouts, or achieving their equivalent without having to address s. 12(1)(g), include:
- The contingent payment terms can be embedded in the terms of special shares issued by the Canadian purchaser, thereby permitting s. 85(1) rollover treatment, and with a Callco needed in the buyer structure to avoid Pt. VI.1 and IV.1, or IV, taxes arising on retraction of such shares.
- It would be important to embed the terms of the earn-out in the special shares themselves so as to not engage the derivative forward arrangement rules.
- Where the vendor has the contingent right to receive additional shares of the purchaser, the receipt of at least some purchaser shares at closing will satisfy that precondition for s. 85(1) to apply, whereas the contingent right to receive shares will not constitute boot under the s. 85(1)(b) wording, thereby permitting the s. 85(1) deferral.
- However, the election form (T2057) creates difficulties in that it refers only to the “share consideration” rather than also including rights to receive shares in that quoted phrase.
- It is suggested that s. 87(7) (which also applies to s. 88(1) wind-ups by virtue of s. 88(1)(e.2)) has the effect of deeming Amalco, as successor to the purchaser, as having incurred an earnout obligation of the latter.
The paper also discusses inter alia ss. 110.6(14)(b) and 111(4)(e) planning in a pre-substantive CCPC context, and various issues (mostly US other than under the foreign-affiliate dumping rules) regarding exchangeable share structuring.
Neal Armstrong. Summaries of Kim Maguire and Jeffrey Shafer, “Trends in Buy/Sell Transactions,” draft 2021 Conference Report under s. 12(1)(g), s. 85(1)(b), s. 87(7) and s. 110.6(14)(b).
Income Tax Severed Letters 5 October 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Use of high-PUC shares rather than a note in a pipeline transaction may be preferred
It is suggested that taking back shares with high paid-up capital (rather than a note) from the transferee Buyco in a pipeline transaction reduces whatever risk there is of s. 84(2) applying.
Neal Armstrong. Summary of Balaji (Bal) Katlai and Hugh Neilson, “Challenges and Caution: Using a Pipeline for Shareholder Remuneration” Tax for the Owner-Manager, Vol. 22, No. 4, October 2022, p. 1 under s. 84(2).
Halwachs – Court of Quebec finds that estimates of a taxpayer’s unreported income based on annual changes to his Swiss bank accounts should be translated using year end spot rates
The ARQ estimated unreported income of the taxpayer for his 2008 to 2010 taxation years from offshore investments based in part on its application of the “indirect variation method” to the bank statements which it had obtained for his Swiss bank accounts. This method was based on the change in the total value of funds held by him from the end of one year to the end of the next.
Breault JCQ found that the results of the application of this method should be converted into Canadian dollars by translating the year end fund balances using the spot exchange rates on December 31 and then taking the differences, rather than by determining the differences in foreign currency and then translating those differences using the average exchange rate for the year (as had been done by the ARQ). He stated:
In this case, since the calculation is based on the last day of each of Mr. Halwachs' taxation years in dispute, the Court is of the view that the same logic should be followed in translating the tax results obtained in this manner into Canadian dollars.
After quoting from ITA s. 261(2) and the Quebec equivalent, he further stated:
[T]he day on which the amount of the variation was determined or "arose" was December 31 of each of the 2008, 2009 and 2010 taxation years.
Neal Armstrong. Summary of Halwachs v. Agence du revenu du Québec, 2022 QCCQ 5817 under s. 261(2).