News of Note

The taxpayer relied on a statement in Hickman that the “initial onus of ‘demolishing’ the Minister’s exact assumptions is met where the appellant makes out at least a prima facie case.” He argued that since he had established that around ¼ of the payments received by him as cheques from a corporation, with which he did not deal at arm’s length, properly reimbursed him for business expenses, he had demolished the Minister’s “exact” assumption made in assessing him under s. 160 that the taxpayer had “provided no consideration for the cheques.”

In rejecting this position, Monaghan JA stated that the taxpayer “places far too much emphasis on the word ‘exact’ and gives insufficient weight to the word ‘demolish’ in … Hickman.” and further stated that “establishing some consideration for the cheques is not sufficient to demolish the Minister’s assumption,” noting in this regard that the “purpose of pleading the assumption is to provide the appellant with notice of the case the appellant has to meet” and here, the taxpayer knew that, in the context of a s. 160 assessment, he needed to establish that he had provided fair market consideration for the cheques, “not merely some consideration.”

Neal Armstrong. Summary of Jefferson v. Canada, 2022 FCA 81 under General Concepts – Onus.

CRA labelled it a “post-mortem hybrid pipeline,” so that must have been what it was despite an unusual form.

An individual died holding shares of a portfolio investment company (“Investments”) directly and through a holding company (“Newco”), so that the estate acquired those shares with their basis stepped up under s. 70(5). Investments redeemed various shares held by the estate for a note (giving rise to deemed dividends and capital losses which were carried back under s. 164(6)), and the estate then disposed of all its shares of Investments to Newco in consideration for a further note. Investments then sold its stock market investments to the estate beneficiaries (four testamentary trusts) for four trust notes.

It was now proposed that Investments be wound-up into Newco under s. 88(1), and that the estate distribute, to its beneficiaries, most of the Newco notes owing to it by Newco, with the beneficiaries (the four trusts) then presumably using these notes as the currency to settle the trust notes owing by them to Newco. Newco would then by wound-up into the estate pursuant to s. 88(2).

Neal Armstrong. Summary of 2021 Ruling 2020-0865901R3 F under s. 84(2).

At the time a non-resident individual immigrated to Canada, the individual owned shares of a non-resident corporation which was the policyholder of a foreign life insurance policy on the life of the individual. On the immigration, there was a deemed disposition and acquisition of the shares for their FMV under s. 128.1(1)(b) and (c).

CRA indicated that, by virtue of s. 70(5.3), the shares were to be valued for such purposes by treating the policy as having a value equal to its cash surrender value.

In contrast, a foreign life insurance policy (which would not be an “excluded right or interest” under s. 128.1(10) – (f)) held by a non-resident corporation when it became resident in Canada would not be subject to s. 70(5.3), and for purposes of determining its deemed cost under s. 128.1(1)(c), “would be valued in accordance with normal valuation practices taking into consideration all facts relevant to the particular case.”

Neal Armstrong. Summary of 17 February 2022 External T.I. 2021-0882401E5 under s. 70(5.3).

A software development company (CS Canada) entered into an agreement with Pratt & Whitney for the sale to of aeronautical control system software. The ARQ accepted that various salary expenses of CS Canada (of about $0.9M per annum) were incurred on the prosecution of SR&ED, but denied investment tax credits on the basis that the contractual consideration paid by P&W constituted “contract payments” under the Quebec equivalent of the definition of that term in ITA s. 127(9), i.e., on that basis that the SR&ED was performed on behalf of P&W.

In finding that such payments were not contract payments, so that CS Canada was entitled to its claimed ITCs, Riverin JCQ noted that subject matter of the contract was a sale of system control software (required to meet the detailed specifications of P&W) and not the performance of SR&ED, and that CS Canada bore all the risk (it paid all the development costs in consideration for a largely fixed contract price), and retained ownership of the intellectual property developed by it in performing the development work (although it licensed that IP to P&W).

Neal Armstrong. Summary of CS Communication v. Agence du revenu du Québec, 2022 QCCQ 1175 under s. 127(9) – contract payment - (a).