News of Note
Dow ULC – Federal Court of Appeal finds that the Tax Court cannot reverse a CRA opinion that a requested s. 247(10) downward adjustment is inappropriate
Email this ContentIn reassessing the taxpayer under s. 247(2), the Minister did not allow a requested “downward” adjustment under s. 247(10) (to increase the interest expense on a loan from a Swiss affiliate by $3.26 million) because of a limitation period in the Canada-Switzerland Tax Treaty. A Rule 58 question was put to the Tax Court, which was essentially whether it was the Tax Court that had jurisdiction regarding the taxpayer’s challenge to this denial, or whether the only recourse was to the Federal Court for judicial review of the Minister’s decision to disallow.
In reversing the decision below, and indicating that the s. 247(10) adverse opinion was a Federal Court matter, Webb JA noted:
- S. 247(10) explicitly requires that a downward adjustment can only occur with a favourable opinion of the Minister that such an adjustment was appropriate (and here there was none).
- The jurisdiction accorded to the Tax Court under ITA s. 171(1) is only to vacate or vary an assessment or refer it back to the Minister, whereas a s. 247(10) opinion is not an assessment (although it will affect an assessment.)
He then stated:
Even if the Tax Court could review the opinion without quashing it, since the existing opinion would remain in place (and therefore there would not be an opinion of the Minister that it would be appropriate to make the downward adjustment), on what basis could the assessment be referred back to the Minister? Without the opinion of the Minister that it is appropriate to make the downward adjustment, the assessment (which does not reflect this downward adjustment) is correct.
Neal Armstrong. Summaries of Canada v. Dow Chemical Canada ULC, 2022 FCA 70 under s. 247(10), s. 247(11), s. 169(1) and Federal Courts Act, s. 18.5.
CRA rules on a pipeline transaction implemented after a discretionary inter vivos trust voluntarily realizes capital gains on its 21st anniversary
Two discretionary inter vivos trusts, with an individual (“Father”) and his child (“Child”) as the beneficiaries (both resident in Canada) and which had been settled by Father’s parent, held shares of a portfolio investment company and its holding company. In order to respect the wishes of the settlor, the trustees determined that most of the capital and accumulated income of the two trusts would be retained rather than distributed on the 21st anniversaries of the trusts’ formation. Accordingly, the two trusts realized capital gains pursuant to s. 104(4)(b)(ii) on that anniversary.
The trusts were then to engage in pipeline transactions in which the two companies’ shares were to be transferred to a ULC Newco in consideration mostly for notes, and then convert those notes to high-PUC shares of the ULC – and only after a number of years, might ULC be amalgamated with the two companies (which would have been continued to the same jurisdiction as the ULC). The ULC will not make substantial distributions for quite some time otherwise than to fund the taxes payable by the two trusts under s. 104(4).
Neal Armstrong. Summary of 2020 Ruling 2020-0848081R3 F under s. 84(2).
We have translated 10 more CRA severed letters
We have published 2 translations of CRA severed letters released last week and a further 8 translations of CRA interpretation released in February and January of 2005. Their descriptors and links appear below.
These are additions to our set of 2,014 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 ¼ 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 |
|---|---|---|---|
| 2022-04-20 | 16 July 2020 Internal T.I. 2019-0817271I7 F - Indemnités reçues à la suite de la négociation | Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) | compensation paid to land owners for their restoration of the portion of their lands not sold to the government would be a s. 12(1)(x) receipt |
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(f) | compensation for damages to depreciable property would be included under s. 12(1)(f) rather than under proceeds of disposition, but the related repaid expenses would be deductible | ||
| Income Tax Act - Section 54 - Proceeds of Disposition - Paragraph (e) | compensation for loss of value to lands left after the government agreed to purchase a portion thereof, would constitute proceeds of disposition of such remainder | ||
| 2020 Ruling 2020-0848081R3 F - Subsection 104(4) and pipeline transaction | Income Tax Act - Section 84 - Subsection 84(2) | pipeline transaction implemented after a discretionary inter vivos trust voluntarily realizes capital gains on its 21st anniversary | |
| 2005-02-04 | 26 January 2005 Internal T.I. 2004-0101351I7 F - Déduction pour frais juridiques - Alinéa 60o) | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | legal costs of disputing GST or sales tax assessments of a business are deductible |
| Income Tax Act - Section 60 - Paragraph 60(b) | legal fees incurred in disputing sales tax assessments are not included | ||
| 27 January 2005 Internal T.I. 2004-0103531I7 F - Dommages Intérêts art.1618- 1619 CCQ | Income Tax Act - Section 9 - Compensation Payments | Irving Oil applied to find that interest on damages received to compensate for additional costs incurred in a construction business, was business income | |
| Income Tax Act - Section 129 - Subsection 129(4) - Income or Loss - Paragraph (b) - Subparagraph (b)(ii) | interest on damages received to compensate for a business loss, was business income | ||
| 2 February 2005 Internal T.I. 2005-0111961I7 F - Reassessment of a Partner | Income Tax Act - Section 152 - Subsection 152(1.4) | CRA can assess a partner directly to change the partnership income allocable to it rather than being required to make a partnership-level determination under s. 152(1.4) | |
| 2005-01-28 | 19 January 2005 External T.I. 2004-0075601E5 F - Fiducie de fonds commun de placement | Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) | no ACB reduction from distribution of ordinary income or capital gain (cf. ROC distribution) irrespective whether effected as cash or unit distribution |
| Income Tax Act - Section 248 - Subsection 248(25.3) | cost under s. 248(25.3) for distribution of ordinary income or capital gain made as units distribution | ||
| 19 January 2005 External T.I. 2004-0081001E5 F - Réserve de valorisation d'une coopérative | Income Tax Act - Section 135 - Subsection 135(4) - Allocation in Proportion to Patronage | question of fact whether distributions of enhancement reserves are allocations in accordance with patronage | |
| Income Tax Act - Section 181.2 - Subsection 181.2(3) - Paragraph 181.2(3)(b) | enhancement reserve of Quebec cooperative added to capital | ||
| 6 January 2005 External T.I. 2004-0087221E5 F - Modification de la déclaration d'une société | Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) | return amendment should be requested where a capital gain has been unreported due to a missed ROC distribution | |
| 24 January 2005 External T.I. 2004-0099471E5 F - Convention de retraite pour un actionnaire-employé | Income Tax Act - Section 67 | 81 Roundtable position on shareholder-manager compensation also applies to RCA contributions | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(r) | no deduction regarding pre-incorporation services, and longstanding CRA position re shareholder-manager compensation | ||
| Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(x) | Part XI.3 tax and s. 56(1)(x) income inclusion apply even where RCA contribution is partially or fully non-deductible | ||
| Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangement | a significant reduction in bonus or salary matched by an RCA contribution likely suggests it instead is an SDA | ||
| 20 January 2005 External T.I. 2004-0104921E5 F - RPDB et déficit cumulé | Income Tax Act - Section 147 - Subsection 147(1) - Profit Sharing Plan | corporation with an accumulated deficit is not precluded from registering a DPSP |
CRA discusses the treatment of additional government compensation paid to owners who had consensually sold a portion of their lands to the government
A governmental authority was to acquire a number of residential, commercial, forestry, agricultural and undeveloped properties for a construction project for negotiated purchase prices, and also would agree to pay the owners additional compensation for losses sustained by them from the sale. CRA comments included:
- Compensation received for loss of value to (capital property) lands retained by the owners could be compensation in respect of injuriously affected property and, therefore, could be “proceeds of disposition” pursuant to para. (e) of the definition, in which case a reasonable portion of the ACB of the remainder would be required to be allocated to the disposed of portion pursuant to s. 43(1).
- Compensation received for expenses incurred for the purpose of earning income from the taxpayer's business or property (e.g., compensation for the time taken to restore the remainder or for clearing or levelling the land or installing a drainage system) would be included in computing income pursuant to s. 12(1)(x), except to the extent an election was made pursuant to s. 12(2.2) respecting a related expenditure.
- Although compensation for damage to property that, within a reasonable time after the damage occurred, has been expended to repair the damage is excluded from “proceeds of disposition” pursuant to para. (f) of the definitions in ss. 54 and 13(21), such compensation could be included in income pursuant to s. 12(1)(f) - and expenses made or incurred to repair damage to depreciable property (e.g., to fences) would be deducted in computing income.
Neal Armstrong. Summaries of 16 July 2020 Internal T.I. 2019-0817271I7 F under s. 54 – proceeds of disposition – (e), s. 12(1)(x) and s. 12(1)(f).
Pipeline ruling for an alter ego trust includes a preliminary deletion of a non-resident beneficiary
Around when he was placed in a long-term care facility, the “Deceased” transferred his shares of two companies with investing businesses (Aco and Bco) on a s. 73(1) rollover basis to a newly-formed alter ego trust (“AE Trust”) of which a child (“Child 1”) was the trustee, and Child 1, Child 1’s spouse and their three adult children were beneficiaries with entitlements to income and capital as determined in the discretion of the trustee (except that he could not distribute capital to himself). On the death of the Deceased, there was a deemed disposition of the Aco and Bco shares for their FMV pursuant to s. 104(4)(a).
As a preliminary transaction, it was proposed that the trustee pursuant to a provision of the Trust Deed execute an irrevocable deed to amend the Trust Deed to thereupon remove one of the grandchildren (who was a non-resident) as a beneficiary of AE Trust. The stated purpose was "to preclude the potential application of the provisions of section 212.1 that may otherwise result, to the extent that Grandchild 1 would be a non-resident beneficiary of AE Trust at any relevant time.” (Note that in 2019-0824561C6, CRA adverted to the 2 December 2019 Finance comfort letter, but noted that it did not extend to non-GRE trusts, e.g., a life interest trust, such as AE Trust.)
It was then proposed that a conventional pipeline be implemented under which AE Trust transferred its common shares of Aco and Bco on a s. 85(1) rollover basis to a “Newco” in consideration for two notes of Newco and nominal-value preferred shares with a price adjustment clause and, after the passage of (presumably) one year, Newco would be amalgamated with Aco and Bco, and the notes would then be gradually repaid.
The rulings included the application of s. 88(1)(d.3) to the amalgamation, so that securities of Aco and Bco held before the death could be bumped.
Neal Armstrong. Summary of 2021 Ruling 2019-0800431R3 under s. 84(2).
Kufsky – Federal Court of Appeal finds that a taxpayer received dividends for s. 160 purposes because she was estopped from arguing otherwise or because the corporate insolvency did not matter
A shareholder loan balance that was owing by the taxpayer was eliminated through dividend declarations backdated to the three preceding years and paid by way of set-off. CRA accepted amendments to the taxpayers’ returns to those years to add the dividend amounts, so that she thereby avoided income inclusions (and higher interest assessments) pursuant to s. 15(2).
Webb JA found that the taxpayer was estopped from now arguing that the amounts that she had treated as dividends in fact were not dividends (so that s. 160 did not apply to their payment) - because the appropriate procedures for the declaration and payment of the amounts as dividends were not followed and because s. 38(3) of the OBCA prohibited the payment of a dividend by an insolvent corporation – on the basis of the principle that:
[A] taxpayer who has benefited from having an amount included in his or her income as a dividend in a particular taxation year (and who has not objected to the assessment of tax based on having received this dividend) is estopped from claiming in any subsequent appeal related to the application of section 160 of the Act, that the previous filing position was wrong.
In her minority concurring reasons, Monaghan JA was “not certain” that estoppel applied to preclude the taxpayer from arguing that she had not received dividends, and instead found that s. 160 applied on the basis that the taxpayer had not made out a prima facie case that the dividends had not been paid - and noted that “[w]hile a breach of the solvency test may be unwise, and have consequences for the directors, shareholders or corporation, that does not mean a dividend was not declared and paid.”
Neal Armstrong. Summaries of Kufsky v. Canada, 2022 FCA 66 under s. 160(1), General Concepts – FMV – Other, Onus, and Payment and Receipt.
Income Tax Severed Letters 20 April 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that use of the GST/HST Quick Method generally results in a s. 12(1)(x) inclusions, but also increases expense deductions
When qualifying small registrants elect to use the “Quick Method” of accounting for GST/HST obligations, they thereby cease to be entitled to claim ITCs or rebates, but are entitled to remit only specified percentages, rather than all, of the GST/HST collectible by them. CRA confirmed that the resulting “net gain experienced by them” (i.e., the percentage amounts they are permitted to keep rather than remit) constitute government assistance pursuant to s. 12(1)(x) and are thus included in their income (assuming no s. 12(2.2), 13(7.1) or 53(2)(k) election). However, since ITCs (which result in income inclusions under s. 248(16)) cannot be claimed by them, the GST/HST payable on their deductible expenses is included in the amount of those expenses for income computation purposes.
Neal Armstrong. Summary of 2 November 2021 External T.I. 2021-0898151E5 under s. 248(16).
Salama – Court of Quebec finds that the principal residence exemption was available for the whole of a duplex
The ARQ took the position that a duplex sold by the taxpayer consisted of two distinct units – the second storey, occupied by her and her son, and the ground floor (with a separate municipal address) occupied (with its own kitchen, bathroom etc.) by her mother – so that she was only entitled to the principal residence exemption on half the gain.
Davignon JCQ acknowledged that there was some support for the ARQ position in the jurisprudence, under which "housing unit" [logement] has generally been interpreted “as being a self-contained living space, including all the amenities normally associated with it, namely a sleeping area, a kitchen and a bathroom” so that the courts “have generally held that only one separate self-contained dwelling unit in the same building can come within this definition.”
However, before granting full exemption to the taxpayer, he found on the evidence that in fact the taxpayer had occupied the entire duplex as the residence of her and her son, stating:
Mrs. Salama's daily life was not separated from that of her mother and in fact, she lived in the entire building. For all practical purposes, she ate all her meals with her mother and son on the first floor. The three of them lived together and even when she or her son had friends over, it was no different.
Neal Armstrong. Summary of Salama v. Agence du revenu du Québec, 2022 QCCQ 718 under s. 54 – principal residence.
We have translated over 2,000 CRA interpretations
We have published a further 8 translations of CRA interpretation released in February, 2005. Their descriptors and links appear below.
These are additions to our set of 2,004 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).