News of Note
Tiessen Interior Design – Federal Court of Appeal confirms s. 256(2.1)’s application to stop a professional firm multiplying the small business deduction
Email this ContentAn incorporated firm of architects and interior designers restructured, so that their practice was now carried on by a partnership between “Partnercos” owned by each of them. The principals were now exclusively employed by respective Servicecos controlled by them, which provided their services to the respective “paired” Partnerco for fees, which were deemed to be business income under s. 129(6).
The Tax Court found that one of the main reasons for the reorganization and for the separate existence of the 30 corporations was the reduction of taxes through multiplication of the small business deduction (“SBD”), so that s. 256(2.1) applied to deem the corporations to be associated, thereby denying the SBD multiplication.
The taxpayers now submitted that the Tax Court had erred by not focusing on whether one of the main reasons each particular Partnerco had chosen to pair itself with a new Serviceco was tax reduction rather than on what was the purpose of undertaking the reorganization for the 30 corporations as a whole. Woods JA found that “the evidence and factual findings in the Tax Court may well have been different had the parties been focussed before the Tax Court on the issue [now] raised by the Appellants” so that this argument could not now be raised, and dismissed the taxpayers’ appeal.
Neal Armstrong. Summary of Nicole L. Tiessen Interior Design Ltd. v. Canada, 2022 FCA 53 under Federal Courts Act, s. 27(1.3).
CRA provides a detailed listing of what is para. (f) CEE
CRA has provided a detailed chart listing various categories of expenditure which generally qualify as Canadian exploration expense (CEE) under para. (f) of the definition as well as noting various exclusions.
In addition to the more obvious early-stage activities, CRA also includes, as qualifying activities, various items that are made with the hope of getting to the bankable feasibility study stage, but without being there yet- such as resource estimation and deposit delineation, deposit modelling and updating resource estimates, testing of rock stability, of mineral resource dilution (re waste rock) and of metallurgy (re difficulty of separating pay material) including grinding tests , metallurgical separation testing on core or bulk samples (to determine recoverable percentage of minerals), but not if for determining an optimal method of separation , and bulk sampling (in reasonable sizes) for determining the effective grade (after dilution), and performing grinding tests and tests as to whether any separation process (e.g. flotation or solvent extraction) allows minimum quality specifications (provided it is not for determining the optimal processing method).
CRA indicates that pre-feasibility and feasibility studies generally do not so qualify, but give rise to deductions under s. 9, and that the costs of various of other types of studies such as those of mine design, evaluation of transportation from the mine to the processing plant and of different technically feasible options for processing, process engineering studies and estimates of capital and operating costs are also deductible under s. 9 if incurred before making a decision to bring the mine into production. This latter point is consistent with Rio Tinto and Bowater.
Neal Armstrong. Summaries of 9 February 2022 Internal T.I. 2020-0873931I7 under s. 66.1(6) – CEE - (f), s. 66.2(5) – CDE - (e) and s. 18(1)(b) – capital expenditure v. expense –current expense v. capital acquisition.
Income Tax Severed Letters 30 March 2022
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
PwC – Federal Court of Australia finds that privilege applied to communications made or received by a multi-disciplinary partnership for the “dominant purpose” of legal advice
PwC Australia was a multi-disciplinary partnership. The engagement partner for the JBS Australia group was a lawyer, and the client-servicing team also included non-lawyers.
The Commissioner of Taxation issued notices to produce documents to that engagement partner and some of the group companies, as to which legal professional privilege was claimed over approximately 44,000 documents, with the Commissioner disputing such claims over approximately 15,500 documents.
Moshinsky J indicated that he was satisfied that a lawyer-client relationship existed between the engagement partner (along with some of the other PwC lawyers) and the client group, so that is was necessary to consider, on a document-by-document basis, whether the sample documents provided to him were subject to legal professional privilege, which turned in each case on whether they were “communications made for the dominant purpose of giving or receiving legal advice.”
Paragraphs 37 to 932 of his 934-paragraph decision are currently redacted, and he will release a less redacted decision after reviewing submissions on what should continue to be redacted.
Neal Armstrong. Summary of Commissioner of Taxation v PricewaterhouseCoopers, [2022] FCA 278 under s. 232(1) – solicitor-client privilege.
Fortier – Federal Court finds a violation of procedural fairness where the taxpayer was not given a chance to respond
A CRA agent reviewed an individual’s application for CERB benefits, then contracted the individual’s former employer directly, and was told that he had left employment because his contract had reached its termination date, rather than for COVID reasons. That agent’s denial of claimed benefits without contacting the individual “violated the principles of procedural fairness,” i.e., the individual was not provided with “a full and fair chance to respond.” St-Louis J directed that the matter be reconsidered by another agent.
Neal Armstrong. Summary of Fortier v. Canada (Procureur général), 2022 CF 374 under s. 220(3.1).
Shaker – Federal Court finds that a trustee of a real estate trust does not hold any “interest in real property” that can be charged by CRA
CRA obtained an interim order to charge the interest of Mr. Shaker, as one of the trustees of a trust (the “VSI Trust”) for a Toronto property (Blue Jays Way), for a personal tax debt. In finding that such charge was not authorized under Rule 458(1)(a)(i), which referenced a judgment debtor’s “interest in real property,” i.e., in finding that the quoted words did not extend to Mr. Shaker’s legal interest in the Blue Jays Way property as trustee, and before ordering the interim charge to be discharged, Walker J stated:
Trust property is not available to the creditors of a trustee where the debt in question is the trustee’s personal debt … . [T[he Tax Debt is not a debt of the VSI Trust and the trust property, the Blue Jays Way Property, is not available to the CRA to satisfy Mr. Shaker’s debt. To conclude otherwise would improperly and adversely impact the interests of the third-party beneficiaries of the VSI Trust. …
… Canada North Group stat[ed] “[p]roperty held in trust cannot be said to belong to the trustee because ‘in equity, it belongs to another person’ (Henfrey [[1989] 2 S.C.R. 24]], at p. 31)”. It follows that a trustee cannot use trust property to satisfy a personal debt.
Neal Armstrong. Summaries of Canada (National Revenue) v. Shaker, 2022 FC 407, 2022 FC 408 under Federal Court Rule 458(1)(a)(i) and General Concepts - Ownership.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in April, 2005. Their descriptors and links appear below.
These are additions to our set of 1,977 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 16 ¾ 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 |
|---|---|---|---|
| 2005-04-15 | 21 March 2005 Internal T.I. 2005-0119961I7 F - CCPC STATUS | Income Tax Act - Section 251.2 - Subsection 251.2(2) - Paragraph 251.2(2)(a) | moving from one shareholder to 2 equal shareholders generally entails an acquisition of control unless there is deadlock |
| General Concepts - Effective Date | effective date of transfer of shares (entailing acquisition of control) cannot precede determination of essential contract elements | ||
| 29 March 2005 Internal T.I. 2005-0111401I7 F - Article 7306 du Règlement | Income Tax Regulations - Regulation 7306 | referenced taxation year is the individual's calendar year | |
| 2005-04-08 | 4 April 2005 External T.I. 2005-0110941E5 F - Transfert d'une police d'assurance-vie | Income Tax Act - Section 15 - Subsection 15(1) | factors relevant to determining FMV of life insurance policy |
| Income Tax Act - Section 148 - Subsection 148(9) | ACB of life insurance policy transferred to shareholder increased by s. 15(1) benefit | ||
| 2005-04-01 | 17 March 2005 External T.I. 2005-0118601E5 F - Sale of Shares-Transfer of Family Business | Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(a.1) - Subparagraph 84.1(2)(a.1)(ii) | preliminary s. 85(1)(g) exchange transaction for crystallized preferred shares avoided application of s. 84.1(2)(a.1)(ii) |
| Income Tax Act - Section 245 - Subsection 245(4) | GAAR could apply where previous capital gains crystallization transaction indirectly generated a capital loss on a pref redemption transaction | ||
| 30 March 2005 External T.I. 2004-0102421E5 F - Placement à rendement progressif | Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(c) | the computation should use the maximum known rate for each period, and assign nil to a period for which no rate is specified | |
| 18 March 2005 External T.I. 2004-0070911E5 F - Allocation ou salaire - traitement fiscal | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(iii) | meaning of representation allowance | |
| 18 March 2005 External T.I. 2004-0089661E5 F - Fiducie personnelle-Résidence principale | Income Tax Act - Section 54 - Principal Residence - Paragraph (c.1) - Subparagraph (c.1)(ii) | the residence being leased to the specified beneficiary does not change that it may be a principal residence to the trust | |
| Income Tax Act - 101-110 - Section 107 - Subsection 107(4) | application of s. 107(4) to spouse trust respecting residence turned on whether such trust was terminated by such income interest being distributed to the capital beneficiary during the spouse’s lifetime or on her death | ||
| Income Tax Act - 101-110 - Section 106 - Subsection 106(2) | s. 106(2) engaged where income interest renounced in favour of capital beneficiary, but not where extinguishment on death | ||
| 18 March 2005 External T.I. 2005-0117691E5 F - Significant increase in interest in any corp | Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) | preliminary transfer of Opco shares to Holdco preliminary to a spin-off engaged the s. 55(3)(a)(ii) exclusion |
BMO Nesbitt Burns – Federal Court rejects a claim that providing a full spreadsheet would breach privilege or a requirement not to disclose uncertain tax positions
CRA brought an application pursuant to s. 231.7 seeking an order requiring BMO Nesbit Burns (“BMONB”) to provide an unredacted version of a spreadsheet in connection with CRA’s audit of suspected dividend rental arrangement transactions of BMONB. BMONB in response to the initial request made pursuant to s. 231.1 had redacted a column in the spreadsheet on the basis that it reflected written legal advice it had received from McCarthy’s and Torys.
In rejecting BMONB’s claim of privilege, Kane J stated that the spreadsheet was not more than the mere “operational outcome or end product of legal advice” and did not satisfy the requirement that it “communicate … the very legal advice given by counsel.”
Kane J also rejected some further submissions of the taxpayer.
First, in rejecting the BMONB submission that the Minister was precluded from relying on s. 231.1 or 231.7 because there was no open audit or inquiry (a notice of objection and appeal to the Tax Court having subsequently been launched), she indicated that she did “not agree that BMONB’s notice of objection puts an end to the Minister’s authority pursuant to sections 231.1 or 231.7,” noted that “[i]n the present case, the Minister made the request for information pursuant to section 231.1 in 2019, long before the reassessment or notice of objection, and stated:
[R]estricting a request for information to the pre‑assessment or pre-reassessment period would not be in the spirit of the Act, which gives broad powers to ensure the administration and enforcement of the Act, and could promote non‑compliance.
Second, although the spreadsheet had some aspects of a tax accrual working paper (“TAWP”) as considered in BP, there the “FCA’s caution was against imposing an obligation to self-audit”, whereas here “[u]nlike BP, the concerns arising from the tax year under audit have not been addressed … [and] the Minister has not sought access to the [spreadsheet] (whether or not it is a TAWP) without advancing a particular justification.”
Third, she rejected a submission that granting the requested production would undermine the discovery process in the Tax Court of Canada proceedings, which had procedural protections not set out in s. 231.1, stating that this interpretation had not been accepted in Cameco.
Neal Armstrong. Summaries of Canada (National Revenue) v. BMO Nesbitt Burns Inc., 2022 FC 157 under s. 232(1) – solicitor-client privilege and s. 231.7.
NCL Investments – UK Supreme Court recognizes that employee stock option expenses were as a general matter sustained on income account
The taxpayers, which were required by the UK Corporation Tax Act 2009 to calculate the “profits of [their] trade … in accordance with generally accepted accounting practice”, were found by the Court to be thereby authorized to deduct the expenses (“Debits”) recognized under IFRS when they granted stock options to employees through an employee benefit trust. In finding that this deduction was not precluded by s. 53 of the same Act, which provided that “[i]n calculating the profits of a trade, no deduction is allowed for items of a capital nature,” Lord Hamblen and Lady Rose accepted the findings below that the taxpayers’ “employees operate in a professional services business whose success depends on the availability of skilled and motivated professionals and the grant of share options to those employees is part of their remuneration package” and that the “Debits were … recurring costs that had a connection with the Appellants’ earning of income … .”
Neal Armstrong. Summary of Revenue and Customs v NCL Investments Ltd & Anor [2022] UKSC 9 under s. 18(1)(b) – Capital expenditure v. expense - contract modification or grant.
Supreme Court grants leave in Des Groseillers
The Supreme Court has granted leave to appeal in Des Groseillers, in which the Quebec Court of Appeal had found (to refer to the ITA equivalents) that s. 69(1)(b) deemed there to be FMV proceeds for s. 7 purposes respecting an employee’s gift of stock options to arm’s-length registered charities, rather than the s. 7 rules constituting (having regard to s. 7(3)(a)) “a code so complete and airtight that the application of section [69] is excluded.”
Neal Armstrong. Summary of Agence du revenu du Québec v. Des Groseillers, 2021 QCCA 906, leave granted 24 March 2022, under s. 7(3)(a).