News of Note
Soulliere – Federal Court of Appeal finds that an incorporating director’s resignation was invalidated because he was not replaced
Email this ContentThe taxpayer was named as the sole incorporating director of an Ontario corporation, and a few weeks later he submitted a written resignation as director without any replacement director having been appointed, as required by s. 119(2) of the OBCA, so that such resignation was invalid. However, the taxpayer submitted that there had been a deemed appointment of a replacement pursuant to s. 115(4) of the OBCA (so that s. 119(2) did not nullify his resignation). S. 115(4) provided:
Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this Act.
In rejecting this submission, Gleason JA stated, inter alia:
On its plain meaning, a deeming provision does not constitute an “election” or “appointment” … .
[T]hose who are deemed to be directors by virtue of subsection 115(4) of the OBCA may often be unaware that they have been deemed to hold that office. If incorporating directors were allowed to resign before the first meeting of the corporation’s shareholders where permanent directors are elected, the person deemed to be a director could well be unaware of their fiduciary obligations to the corporation and the steps mentioned in subsection 117(1) of the OBCA [respecting the appointment of the continuing directors] may not be completed.
Accordingly, the taxpayer’s appeals from assessments under ITA s. 227.1 and ETA s. 323 was dismissed.
Neal Armstrong. Summary of Soulliere v. Canada, 2022 FCA 126 under s. 227.1(4) and Statutory Interpretation - Consistency.
St. Benedict Catholic Secondary School Trust – Federal Court of Appeal finds that a taxpayer is precluded from changing previous CCA claims
The taxpayer, over the course of its 1997 to 2003 taxation years, claimed capital cost allowance and generated non-capital losses. When CRA denied the carryforward of these losses to the taxpayer’s 2014 to 2016 taxation years (they had expired), the taxpayer claimed that it incurred a terminal loss in 2017 that could be carried back to those years. This terminal loss was computed by reversing a portion of CCA claims it had made in its 1997 through 2003 taxation years (so as to reduce the losses in those years to nil), and adding these amounts to the undepreciated capital cost of the property it had disposed of in 2017.
In finding that such CCA claims could not be treated as having been revised, Webb JA indicated that the “administrative practice [in IC 84-1] is not binding on this Court, nor can it amend the Act, noted that “Nassau Walnut … drew a distinction between an election and a designation” and found that “the comments in Nassau Walnut with respect to an election, and the inability of a taxpayer to change an election absent a specific provision in the Act permitting such a change, are applicable in this case.” He further stated:
If the Trust is permitted to revise its earlier claims for CCA, this would defeat the purpose chosen by Parliament of having non-capital losses only available for a particular period of time. Having chosen to claim the amounts of CCA as it did in each of the years, the Trust must accept the consequences that flow from having made those choices. The Trust is attempting to revive non-capital losses that it cannot otherwise claim by converting these non-capital losses into a terminal loss in 2017.
Neal Armstrong. Summary of St. Benedict Catholic Secondary School Trust v. Canada, 2022 FCA 125 under s. 13(21) - UCC – E.
We have translated 9 more CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 8 translations of CRA interpretations released in October and September of 2004. Their descriptors and links appear below.
These are additions to our set of 2,134 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).
CRA indicates that a GRE’s taxation year terminates early when it is wound up
CRA noted that s. 249(1)(b) defines the taxation year of a graduated rate estate (GRE) to be the period for which the accounts of the estate are made up for purposes of assessment under the Act and that this paragraph, when combined with s. 249(5), causes the taxation year to cease when the period of accounts ends – which CRA considers to occur when the GRE is wound up or terminated. For non-GREs, s. 249(1)(c) provides that the taxation year is the calendar year. Thus, in CRA's view, winding up any other type of trust will not accelerate its year end.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.10 under s. 249(1)(b).
Procon Mining – Tax Court of Canada finds that shares which were acquired as part of a mining contract business were capital property
A mining contractor subscribed for shares of junior mining companies as an inducement to be awarded mine development work and as an investment. It argued that because it acquired the shares in order to generate business income, therefore, they were acquired on income account.
Boyle J thought this was almost backwards from the correct test, which he articulated as:
Inventory is a property acquired or produced for resale. All property held to produce income from the business other than inventory is capital property.
Losses realized on the shares after the companies failed to proceed with the mines were capital losses - which were denied, because they were "superficial" (i.e., suspended) losses.
Neal Armstrong. Summary of Procon Mining & Tunnelling Ltd. v. The Queen, 2022 TCC 71 under s. 18(1)(b) – capital loss v. loss.
Carvest Properties – Federal Court of Appeal confirms that the relevant valuation unit in an apartment building for ETA s. 191(1) self-assessment purposes was each rental unit
The company (“Carvest”) constructed a 137-unit building in London, Ontario, for purposes of renting the units. Nonetheless, it registered each of the units under the Condominium Act in order to avoid paying property taxes at a commercial-building rate. The Tax Court had found that Carvest was required under s. 191(1) to self-assess HST on the FMV of each “condo” unit as each unit was occupied by its tenant, rather than self-assessing under s. 191(3) on the FMV of the whole building when the first tenant moved in (or on substantial completion, if later). Furthermore, it accepted that the best method for valuing condo units was comparable sales of condo units, and rejected the cost plus 6% method proposed by Carvest (in light inter alia of difficulties in allocating common-area costs to the individual units.) However, the resulting per-unit value was to be reduced by a 6% “absorption discount” to reflect the effect on the market of absorbing the sale of 137 condo units over a 16-month period.
Monaghan JA found that the Tax Court had made no reversible error. Among other submissions, she rejected the Carvest suggestion “that the proper approach is to first determine the value of the property and then decide which part of section 191 applies—subsection 191(1) or 191(3)” and stated:
I disagree. [C]onsistent with Nash … the first step is to identify the property to be valued [i.e., each “condo” unit].
Neal Armstrong. Summary of Carvest Properties Limited v. Canada, 2022 FCA 124 under ETA s. 191(1).
CRA indicates that s. 15(2) applies separately to accrued and unpaid interest on a shareholder loan, but s. 80.4(2) does not apply to such interest
CRA indicated that where a corporation with calendar taxation years makes an interest-bearing loan to its individual shareholder, and the accrued interest is still unpaid at the end of the following year, s. 15(2) will apply separately to such accrued interest amount (to include it in the individual’s income) regardless of whether the loan principal amount was also included in the individual’s income under s. 15(2).
Although on a literal reading, there also might be imputed s. 80.4(2) interest on such unpaid interest amount, CRA stated that "accrued interest such as …Interest in th[is] Particular Situation does not meet the meaning of ‘debt’ in the context of a textual, contextual and purposive interpretation of subsection 80.4(2),” so that no such imputation would occur whether or not the loan was repaid before the end of the corporation’s second taxation year.
Neal Armstrong Summaries of 25 February 2022 External T.I. 2020-0873761E5 F under s. 15(2) and s. 80.4(3)(b).
CRA discusses the application of s. 43.1 where a remainder realty interest is transferred to a personal trust and there is a subsequent life interest surrender
CRA ran through a simple example illustrating what happens if the life-estate-in-realty rules in 43.1 are partially or fully applicable.
Parent transfers a remainder interest, having an FMV of $200,000, in a residence having an FMV of $250,000, to a personal, inter vivos trust of which an adult child is the sole beneficiary and retains a life estate in the residence with an FMV of $50,000. Parent later moves out of the residence and disposes of the life estate to the Trust to enable the sale of the residence to a third party for $400,000.
CRA noted that by virtue of having disposed of the remainder interest in the residence to the trust and retained the life estate, Parent was deemed by s. 43.1(1) to have disposed of the life estate for proceeds of disposition equal to $50,000, and to have re-acquired it at a deemed cost of $50,000. S. 69(1)(b)(i) or (ii) deemed the proceeds of disposition of the remainder interest to be $200,000, and if the trust received the remainder interest by way of gift, it was deemed under s. 69(1)(c) to have acquired it at a cost of $200,000. Provided the usual conditions were satisfied, the capital gains realized from the deemed disposition of the life estate, and the disposition of the remainder interest to the trust, could be sheltered by the principal residence exemption.
Since the life interest of Parent was terminated by moving out rather than “as a result of an individual’s death,” so that the s. 43.1(2)(a) rollover did not apply, s. 69(1)(b) deemed Parent to receive FMV proceeds for the life interest, so that Parent realize a further gain if the life interest had appreciated in its FMV.
If (to vary the facts) Parent stayed in the residence until death, s. 43.1(2)(a) would deem Parent to have disposed of the life estate immediately before death for proceeds equaling the ACB of the life estate (being the deemed cost that had previously arisen under s. 43.1(1)(b)) and (since Parent and the trust were deemed not to deal with each other at arm’s length) s. 43.1(2)(b), on the termination of the life estate, would add an amount to the $50,000 ACB of the residence equal to the ACB of the life estate in the property immediately before the death (or a lesser amount if the fair market value of the residence as a whole has decreased since the initial transfer of the remainder interest).
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.9 under s. 43.1.
CRA declines to state a s. 237.3 safe harbour for a financial planner who is unaware of the tax planning
A financial advisor (Ms. A), at the request of Mr. B’s tax advisor, sells a generally-available financial product to Mr. B and receives compensation directly from the issuer of the product based on the amount invested by Mr. B.
Subsequently, the tax advisor, without Ms. A’s knowledge, combines the financial product with certain other tax strategies where the existence and amount invested by Mr. B is used to obtain a tax benefit. Mr. B is reassessed on the basis that the purchase of the financial product was part of a series of transactions that included an avoidance transaction, so that such purchase (being part of the series) was a reportable transaction. Did Ms. A nonetheless have no reporting obligation under the current version of s. 237.3(2)?
CRA indicated that “[b]ased on the limited facts provided” it could not confirm that Ms. A had no such reporting obligation and that, in determining whether Ms. A has an obligation to file an information return under s. 237.3(2)(c) or (d), it would consider factors such as:
- whether Ms. A is an advisor or a promoter in respect of the sale of the financial product (notably whether she acted in a manner described in the definition of “advisor” or “promoter” in s. 237.3(1) in respect of the sale of the financial product);
- the terms of the sale of the financial product and the series of transactions, of the financial product, and of the consideration received by Ms. A from the financial services corporation;
- whether Ms. A is dealing at arm’s length with an advisor or promoter in respect of any transactions in the series; and
- who was entitled to a fee referred to in para, (c) of “reportable transaction” in s. 237.3(1).
Neal Armstrong. Summaries of 3 May 2022 CALU Roundtable Q. 3, 2022-0928721C6 under s. 237.3(2)(c) and s. 237.3(1) – Reportable Transaction – para. (a).
Income Tax Severed Letters 6 July 2022
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.