News of Note
Khanna – Federal Court of Appeal finds that a gross negligence penalty could not be sustained where the trial was all about the taxpayer’s husband and she was ignored
Email this ContentThe taxpayer conceded that she had unreported income from rental properties owned equally by her and her husband, but appealed the imposition of a gross negligence penalty.
Monaghan JA noted that the taxpayer was not called to testify (which the Crown could have done) and that essentially the only testimony was of the taxpayer’s husband, which “was almost entirely about his actions and inactions,” so that essentially “nothing on the record address[ed] her involvement in or knowledge about the details of the rental business … and nothing on the record establish[ed] whether … the appellant knew she had unreported income prior to receipt of the reassessments.” Before allowing the taxpayer’s appeal, Monaghan JA stated:
Where is the evidence or finding about the appellant’s deliberate choice not to make inquiries or the finding of deliberate ignorance? I see nothing in the record.
Neal Armstrong. Summaries of Khanna v. Canada, 2022 FCA 84 under s. 163(2) and Tax Court Rule 146(2).
CRA applies the proposition (regarding a s. 90(3) PUC distribution election) that a partnership cannot be a related person
A limited partnership (LP) - whose 90% general partner is FA1 (held by Canco1) and whose 10% limited partner is FA2 (held by Canco2, which is related to Canco1) – receives a paid-up capital distribution from its wholly-owned subsidiary (FA3). CRA confirmed that an s. 90(3) election respecting the distribution could be made by LP alone (or, to be more precise, by FA1 in its capacity of the general partner of LP) given that there is no “connected person or partnership” in respect of LP within the meaning of s. 90(4).
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.14 under s. 90(4).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in December of 2004. Their descriptors and links appear below.
These are additions to our set of 2,053 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 1/3 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 |
|---|---|---|---|
| 2004-12-03 | 25 November 2004 External T.I. 2004-0079751E5 F - Dépenses d'une auberge limitées par 18(12) | Income Tax Act - Section 96 | pro rata rent received by the 2 equal partners of a partnership operating an inn jointly owned by them would not be respected as rent |
| Income Tax Act - Section 18 - Subsection 18(12) | s. 18(12) would apply to the joint owners of an inn whose wives operate it, with them staying with them on weekends/ no avoidance if partnership interposed | ||
| 29 November 2004 External T.I. 2004-0105131E5 F - Avantages sur options - Diminution de valeur | Income Tax Act - Section 7 - Subsection 7(8) | s. 7(1)(a) benefit is realized under s. 7(8) based on shares’ FMV at exercise, and capital loss is realized if the shares decline before their disposition | |
| 30 November 2004 External T.I. 2004-0090181E5 F - Assurance maladie grave | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | premiums paid by corporation for critical illness policy of which it is beneficiary are non-deductible per s. 18(1)(a) or (h) | |
| Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(a) - Subparagraph 39(1)(a)(iii) | no capital gain on receipt by corporation of benefit under a critical illness insurance policy or of refund of premiums | ||
| Income Tax Act - Section 15 - Subsection 15(1) | misallocation shareholder benefit could arise if corporation pays premiums for its critical illness policy and sole shareholder pays for rider entitling him to premium refunds | ||
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) | premiums paid by corporation for critical illness policy of which it is beneficiary are non-deductible pursuant to s. 18(1)(h) | ||
| 30 November 2004 External T.I. 2004-0092941E5 F - Déductibilité des intérêt | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | interest deduction not generally denied where negative spread | |
| 12 November 2004 External T.I. 2004-0080051E5 F - Allocation et remboursement de dépenses-employé | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(x) | per-kilometre allowance tainted because a per-diem allowance also paid | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) | per-hour reimbursement of employees’ use of equipment is taxable allowance/ reimbursed employment-related internet use is not taxable | ||
| 23 November 2004 External T.I. 2004-0094101E5 F - IT-474R Administrative Relief | Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a) | IT-474R, para. 10 provides no administrative relief from short taxation year from amalgamation | |
| Income Tax Act - Section 20 - Subsection 20(24) | amalgamated corporation can make s. 20(24) election | ||
| 29 November 2004 External T.I. 2004-0080891E5 F - Régime d'assurance invalidité | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | employer cannot render a disability plan a full employee-funded plan by arbitrarily allocating composite employee contributions to that plan | |
| 17 November 2004 External T.I. 2004-0097131E5 F - Travail temporaire; négociation de contrats | Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(a) - Subparagraph 6(6)(a)(i) | union executives standing for election every 4 years would not have duties of a temporary nature | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(v) | expenses of union employee in negotiating contracts with the union members’ employers would not be included |
CRA notes that around half of its recent MAP cases resulted in full relief
CRA provided the following statistics on MAPs for the 2020 calendar year:
- … The average time to complete a negotiable MAP case was 17.83 months;
- Of the 74 MAP cases closed in 2020, 36 cases (i.e., 48.6%) resulted in full relief from double taxation upon negotiation, 9 cases (i.e., 12.2%) had objections not justified, and 8 cases (i.e., 10.8%) were resolved through unilateral relief. The remaining 21 cases (i.e., 28.4%) were either withdrawn by the taxpayers, resolved via domestic remedy, resulted in no agreement or were denied MAP access;
- Of the 74 MAP cases closed in 2020, 60 (i.e., 81%) were initiated by Canada and 14 (i.e., 19%) were initiated by countries other than Canada;
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.13 under Treaties – Income Tax Conventions – Art. 26.
CRA is monitoring PPT compliance on a priority basis and it, Finance and Justice are still considering Alta Energy
Regarding a query as to any applications by CRA of the principal purpose test (“PPT”) under Art. 7(1) of the MLI, CRA stated:
[T]he CRA has started monitoring compliance with the MLI on a priority basis in advance of the normal audit cycles. To date, the CRA has not issued any assessments on the basis of the PPT, although compliance review processes are underway.
CRA further indicated that, other than a pre-ruling consultation received some time ago that was put on hold pending the Supreme Court decision in Alta Energy, to date, no PPT-related ruling or consultation requests have been received.
As for Alta Energy:
The SCC considered a matter central to the CRA’s ongoing efforts to protect Canada’s tax base and the integrity of its tax treaties. The meaning and effect of the decision continues to be analyzed by the CRA, the Department of Finance and the Department of Justice as the processing of the files that were held in abeyance at different audit or litigation stages pending the decision of the Supreme Court in Alta Energy resumes.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.12 under Treaties – MLI - Art. 7(1).
CRA indicates that the non-qualified securities rules are being reviewed by Finance respecting options such as RSUs that can never generate a s. 110(1)(d) deduction
The new non-qualified securities rules regarding specified persons (generally, large non-CCPCs) make the employee deduction under s. 110(1)(d) subject to a $200,000 annual vesting limit and may permit the issuer to take a s. 110(1)(e) deduction for the portion of the benefit realized by the employee. S. 110(1.9) requires the employer to notify CRA where it has agreed to issue a non-qualified security. S. 110(1)(e)(vi) provides that non-compliance by the employer in this regard results in no employer deduction being claimable - and there also is the risk of a penalty under s. 162(7).
When asked as to why there is a notice requirement where a specified person (as it happened, a non-resident corporation) issues restricted stock units to an employee that can only be settled for shares (so that they are effectively treated as s. 7 stock options with no exercise price and, thus, as options that could never generate a s. 110(1)(e) deduction on exercise), CRA stated:
The objective of the employee stock options rule is to impose limits on the amount of employee stock options that may vest in an employee in a calendar year and qualify for a subsequent 110(1)(d) deduction against taxable stock option benefits. Therefore, this particular question raises the larger issue of whether restricted share units and other rights to securities that are subject to section 7, which would never entitle the recipient employee to a deduction under paragraph 110(1)(d), should count towards the employee’s $200,000 annual vesting limit.
The Department of Finance is aware of this larger issue and is contemplating potential remedial measures. This particular question will be addressed at a later date in the context of this larger exercise.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.11 under s. 110(1.4).
CRA indicates that a corporation’s factual residence can abide elsewhere than the situs of its board meetings
Responding to a query as to whether CRA will continue to have “too much focus on the location of board meetings” in determining corporate residency, CRA adverted to the general principle enunciated in De Beers ([1906] AC 455, at 458) that “a company resides for purposes of income tax where its real business is carried on … and the real business is carried on where the central management and control actually abides,” stated that De Beers indicated that a corporation’s central management and control “must … be determined after a scrutiny of the whole ‘course of business and trading’ of the corporation” - and then reiterated its position that:
[T]he presence of board meetings in the country in which the corporation is asserting residence would not, in and of itself, be sufficient to conclude that the corporation is resident in that country. … The courts have repeatedly considered evidence beyond the location of board meetings in order to look at the whole “course of business and trading” of a corporation.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.10 under s. 2(1).
CRA will not provide special COVID extensions of the 6-month deadline under s. 247(4) to complete contemporaneous documentation
CRA indicated that it will not provide any COVID-related relief regarding the requirement under s. 247(4) to complete contemporaneous documentation meeting statutory requirements within six months of the end of the relevant taxation year – although it noted that it has the authority under s. 220(3.1) to waive penalties or interest, as described further in IC07-1R1.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.9 under s. 247(4).
CRA will not provide a list of the foreign entities that it considers to be of particular entity types
CRA is unwilling to provide the equivalent of the HMRC table listing entities in a wide range of jurisdictions that it considers to be opaque or transparent for UK tax purposes: CRA considers that its two-step approach to entity classification needs to be applied on a “case-by-case basis” in light inter alia of the application of the foreign law to the documentation governing the particular entity or arrangement.
However, CRA will entertain ruling requests based on complete taxpayer submission as to their analysis of the application of the two-step approach to the relevant documentation submitted by them.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.8 under s. 248(1) – corporation.
CRA is still reviewing whether and when cryptocurrencies may not be foreign property
At the 2021 APFF Financial Strategies and Instruments Roundtable, CRA stated:
The question of where a cryptocurrency is located, deposited or held within the meaning of section 233.3 is currently under review ... .
After now indicating that this question “is still under review by the CRA,” it stated:
In parallel, work is underway at the …OECD … to develop the Crypto-Asset Reporting Framework …, a standardized package that will include reporting requirements to tax administrations and exchange of information procedures related to taxpayers’ transactions with crypto-asset service providers. … A public consultation meeting will be held at the end of May 2022.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.7, under s. 233.3(1) – specified foreign property – (a).