News of Note
CRA confirms that the Lavrinenko interpretation regarding a shared-custody parent has been legislatively overruled retroactively
Email this ContentWhile normally the Canada child benefit (CCTB) can at most be claimed by only one parent, individuals who are a child’s “shared‑custody parent” are each entitled to ½ of the benefit. Formerly, one of the requirements in order to be a “shared‑custody parent” was that the parent reside with the child “on an equal or near equal basis.”
In Lavrinenko, Webb JA has concluded that the “near equal” concept was to be handled by rounding relative residing-with-the-child percentages to the nearest multiple of 10% - so that if the percentage was below 45%, (e.g., 44%) it was to be rounded down to 40% (test failed), whereas if it was 45% or more, it was to be rounded up to 50% (test passed).
CRA was asked at the 2019 APFF Roundtable how it would respond to this decision. It waited until now to give its answer, which was to note that the “shared-custody parent" definition had since been retroactively amended (back to July 1, 2011) to provide that the individual must reside with the dependant "at least 40% of the time in the month in which the particular time occurs, or on an approximately equal basis." This had the effect of retroactively confirming a CRA policy that effectively accommodated in some circumstances a relative percentage somewhat lower than the Lavrinenko 45%.
Neal Armstrong. Summary of 5 November 2021 External T.I. 2019-0812631E5 F under s. 122.6(1) – shared-custody parent – para. (b).
J.D. Irving – Quebec Court of Appeal finds that servicing fees paid by a property user to the owner for services that it performed on behalf of the owner were not leasing revenues
A loss consolidation transaction involved a company (“IPPL”) in the Irving group of companies transferring, in December, its pollution control equipment on a rollover basis to an affiliated lossco, which then sold the equipment for $120M to the group profitco (“JDI”), which then claimed $120M of CCA and, in January of the next year, transferred the equipment back to IPPL on a rollover basis. The ARQ denied most of JDI’s $120M CCA claim on the basis that servicing fees of $1.2M that JDI earned from IPPL during its one month of ownership of the equipment were in substance leasing revenues. In particular, the ARQ appeared to be struck by the artificiality of the agreement between JDI and IPPL that JDI would accomplish its servicing of the equipment under its “services agreement” with IPPL by means of delegating to IPPL the performance of such services as its agent, in consideration for fees going in the opposite direction.
In rejecting the ARQ submission that IPPL did not validly operate the equipment on behalf of JDI, Mainville JCA stated (at paras. 43-44, 46):
[I]t is undisputed that a taxpayer may carry on a business through an agent. …
The fact that the agent and the principal are related companies does not change this principle. This was the case in Stubart … .
As the trial judge concluded, we are dealing with clear contracts and uncontradicted evidence that confirm that the designation of the transactions as services agreements does reflect their true legal effects. It is a principle of tax law that, in the absence of sham, recharacterization is only possible where the label attached to a transaction does not properly reflect its actual legal effects.
Neal Armstrong. Summary of Agence du revenu du Québec v. J.D. Irving Limited, 2022 QCCA 241 under Reg. 1100(17).
Canadian residents generally are better off investing in a portfolio that may include Canadian companies through a partnership rather than an LLC
Where an LLC with both Canadian- and US-resident members receives a dividend from a Canadian corporation, the US members may benefit from Art. IV(6) of the Treaty so as to reduce the dividend withholding tax rate to 15% or 5% - but there is no Treaty reduction to the Canadian withholding tax rate regarding the indirect interest in that dividend of the Canadian members.
Contrast this with the receipt of the same dividend by a partnership with US and Canadian partners - form NR302 generally provides for look-through treatment of the partnership so that, with proper documentary support, withholding tax may not apply to the portion of the dividend allocated to the Canadian-resident partners.
Neal Armstrong. Summary of Nakul Kohli and Jiani Qian, “Canadian Residents Earning Income Through Non-Resident US LLCs,” Canadian Tax Focus, Vol. 12, No. 1, February 2022, p. 10 under Treaties – Income Tax Conventions – Art. 4.
Paywall Changes
Starting March 1st, Tax Interpretations' paywalled content (e.g. case and administrative policy summaries, translations of severed letters and systematic scraped copies of current and historical CRA websites) will be open-access to the public on the 1st-5th of each month, and paywalled for the remainder. The decisions and severed letters themselves, and News of Note posts, will continue to be open-access at all times.
We will also continue to expand the free content on the site. For example, we have recently added a substantial volume of income tax severed letters from 1979-1993, and court decisions from 1980-1999.
Income Tax Severed Letters 23 February 2022
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Fiducie Immobilière J.P. – Tax Court of Canada accepts that maintaining rental income could be a good s. 40(2)(g)(ii) purpose
A family trust, which made non-interest-bearing loans to two companies owned directly or indirectly by its sole trustee and another family trust, was prohibited by s. 40(2)(g)(ii) from recognizing capital losses when the loans went bad because, unlike Byram, it did not have any direct or indirect shareholding in the companies. As for an alternative argument that the loans were made for the (income-producing purpose) of preserving rental income (rather than dividend income) from the two companies, St-Hilaire J stated (at para. 29):
[T]here is no reason to exclude rental income from the test of subparagraph 40(2)(g)(ii), which provides that the deduction is nil unless the debt obligation was acquired for the purpose of earning income from a business or property. [emphasis in original]
However, the evidence failed to establish that the trust in fact was leasing property to the two companies.
Neal Armstrong. Summary of Fiducie Immobilière J.P. v. The Queen, 2022 CCI 7 under s. 40(2)(g)(ii).
Fyfe – Tax Court of Canada rejects a CRA position that a taxpayer who regularly reported business income was not carrying on a business
The taxpayer spent approximately six months per year doing work for one client (mostly construction and repair work), and the balance of the year sailing in the Bahamas. He reported annual income (of around $11,000) that was just below the level at which the Working Income Tax Benefit (“WITB”) (now the Canada Workers Benefit) began to be reduced. He kept no business records.
CRA denied his WITB claims on the surprising basis that he had no source of income and, therefore, no income – rather than on the basis that he was under-reporting his income. Masse DJ allowed his appeal, stating:
Although he was only carrying on a small business and only for 6 months of the year and had essentially only one client, this does not mean that he was not carrying on a business. The appellant's testimony is corroborated by his client, Mr. Huet, and I accept their testimony.
Neal Armstrong. Summary of Fyfe v. The Queen, 2022 CCI 20 under s. 122.7(1) – working income – para. (c).
Dominelli – Federal Court accepts that an agreement to compromise a s. 231.7 compliance procedure would have been binding if complied with by the taxpayer
Before judgment had been rendered in an application by the Minister for a s. 231.7 compliance order regarding failure of Mr. Dominelli (who had claimed $139 million in deductions from two leveraged insurance annuity arrangements) to provide related documents, Dominelli and the Minister made a written agreement that Dominelli would provide an affidavit with appended documents that was to certify with particulars that he and his advisors had canvassed their records for the requested documents – and that if the Minster was not satisfied with the affidavit, she would ask that judgment be delivered on the compliance application (until then, held in abeyance).
The Minister indicated dissatisfaction with the affidavit, whereupon Dominelli brought this motion before Pentney J to enforce the settlement agreement.
Pentney J stated (at para. 59) that he agreed “with Dominelli that the scope of the Minister’s discretion to determine that she is not satisfied that he has discharged his obligations under the agreement must be limited by the terms of their agreement … .” However, he went on to find that Dominelli’s affidavit did not demonstrate that he had met his obligations under the agreement, stating (at para. 79):
[T]he gap between what Dominelli promised to do and what his affidavit states is striking. … [H]is evidence does not establish that he has met the specific and detailed terms of the agreement and the Undertaking that he negotiated, and thus his motion cannot succeed.
Neal Armstrong. Summary of Canada (National Revenue) v. Dominelli, 2022 FC 187 under s. 231.7(1).
We have translated 8 more CRA severed letters
We have published a further 8 translations of CRA interpretation released in June, 2005. Their descriptors and links appear below.
These are additions to our set of 1,932 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 2/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Hong Kong Style – Tax Court of Canada indicates that a CRA program to detect “zapped” sales did not alter the taxpayers’ burden to displace the Minister’s assumptions
Two incorporated restaurants were alleged by the Minister to have used “zapping” software to delete a portion of their sales, with the proceeds for the deleted sales being appropriated by their individual shareholder. The taxpayers argued that the CRA program (the “Algorithm”) used to identify missing line items in the raw point-of-sale data was exclusively within the knowledge of the Minister, and argued that the difficulty they would face in “disproving” the Algorithm somehow meant that Bocock J should now grant their pre-trial motion to delete the Minister’s pleaded assumptions of fact that appeared to rely on the Algorithm.
Bocock J dismissed the motion essentially on the basis that it was within the trial judge’s bailiwick, not his, to deal with the evidence at trial and related questions of burden.
Before so concluding, he volunteered his views on the likely irrelevance of the Algorithm to the matter of the burden on the taxpayers to displace the Minister’s assumptions as to unreported income, stating:
The Appellants are under no obligation to prove that the … Algorithm is deficient or unreliable. Rather, their burden of proof will be discharged by disproving the Minister’s core assumed facts through the presentation of evidence at trial to substantiate, on balance, what were the correct sales, revenue and reportable income.
Neal Armstrong. Summary of Hong Kong Style Café Ltd. v. The Queen, 2022 TCC 9 under General Concepts – Onus.