News of Note
Osborne – Federal Court sets aside a CRA decision to not extend a s. 216 return filing deadline, because CRA did not address the taxpayers’ arguments
Email this ContentTwo residents of Bermuda owning a Canadian rental property filed their s. 216 returns nine days after the filing deadline (which was six months after the taxation year end as a result of their having given undertakings under s. 216(4).) In requesting an extension to this deadline under s. 220(3) they alleged that CRA had misapplied their withholding tax payments to their general account rather than their non-resident account, and that much of their delay in filing their returns was attributable to their holding off on filing their returns (with some encouragement from their accountants) until this error was remedied (and they also proffered an excuse of sorts for the remaining portion of the delay).
Before returning the CRA rejection of their extension request (the “Decision”) for redetermination by another decision maker on the basis that (to quote Vavilov) the Decision did not “exhibit the requisite degree of justification, intelligibility and transparency”, Go J stated:
No mention was made [in the Decision] of the Applicants’ argument about the error made by the CRA in allocating withholding tax remittances to the wrong account or the delay by CRA in remediating the problem with the remittances. It may well be the case … that the error in the tax remittances was not made by the CRA or alternatively …that the Applicants could have filed the NR Returns before the filing deadline. However, that was not stated in the Decision.
Neal Armstrong. Summary of Osborne v. Canada (Attorney General), 2022 FC 122 under s. 220(3).
CRA releases its initial list of notifiable transactions
Draft s. 237.4 provides a requirement for taxpayers, advisors and others to report transactions to CRA that are designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance as transactions of a notifiable type. Although s. 237.4(3) is stated to be effective January 1, 2022, the substantial penalties applicable under draft s. 237.4(8) (subject to the due diligence defence under draft s. 237.4(12)) do not apply to transactions entered into before Royal Asset. The transaction types set out so far are:
- A corporation holding assets that are or will become investment assets continues from Canada to the corporate laws of a foreign jurisdiction, thereby ceasing to be a “Canadian corporation” and a CCPC (so that it is not subject to additional tax under ss. 123.3 and 123.4).
- Alternatively, it issues special voting shares, redeemable for a nominal amount, or options to acquire a majority of its voting shares, to a non-resident person or a public corporation so as to avoid CCPC status.
- A taxpayer seeks to avoid the s. 18(19) straddle-transaction rules by acquiring a partnership interest in a partnership that had an accrued loss and gain on the two legs of an FX straddle, with the closing of such acquisition being immediately preceded by the closing out by the partnership of the gain leg so that such gain is allocated to the vending partner pursuant to s. 96(1.01) – and with the loss leg realized after the acquisition and allocated to the taxpayer.
- With a view to effectively extending the 21-year period under s. 104(4):
- A Canadian resident trust (“Old Trust”) transfers capital property or land inventory to Holdco (which is held by a new Canadian resident trust (“New Trust”) and is also a beneficiary of Old Trust) on a tax deferred basis under s. 107(2); or
- A trust having non-resident beneficiaries transfers property (other than as described in s. 128.1(4)(b)(i), (ii) or (iii)) to a corporation (Holdco) of which such beneficiaries are shareholders and which also is a trust beneficiary, so that there is an indirect transfer out to the non-residents; or
- Opco, is held by Old Trust, one of whose beneficiaries is Holdco (also Canadian-resident), which is a beneficiary of Old Trust and whose shares are held by New Trust. Opco redeems its shares held by Old Trust for a promissory note or cash, and Old Trust distributes and designates the resulting s. 84(3) dividend under s. 104(19) so that Holdco receives the s. 112(1) deduction and receives high-basis assets.
- There is a temporary assignment of a debtor into bankruptcy to avoid a forgiven amount under the exception in (i) of the forgiven amount definition, with the bankruptcy then being annulled, for example, upon a court approval of a proposal.
- There are various listed transactions which are aimed at identifying situations where taxpayers rely on “one of the main reasons” or a “one of the reasons” tests in ss. 256.1(2), 256.1(4), and 256.1(6) not being satisfied so as to conclude that the “attribute trading” rules in s. 256.1(3) or 256.1(6) do not apply to transactions or events that would otherwise have satisfied all of the other conditions enumerated within those provisions.
- A relevant non-resident in respect of a taxpayer (NR1) enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
- Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.
Neal Armstrong. Summaries of Income Tax Mandatory Disclosure Rules Consultation: Sample Notifiable Transactions (Finance Release Webpage), 4 February 2022 under s. 123.3, s. 18(19), s. 104(4)(b), s. 80(1) – forgiven amount – (i), s. 256.1(6), s. 18(4) and s. 212(3.1).
Income Tax Severed Letters 9 February 2022
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Chad – Tax Court of Canada finds that the Crown could not resile from an oral representation that it would not argue “tax shelter” at trial
The taxpayer, which had appealed reasssessments of foreign-currency straddle trades (the “Chad I” appeal), had brought a motion in January 2021 to strike out various of the Crown pleadings, some of which were relevant to the CRA assumption in reassessing that the transactions constituted a tax shelter. Crown counsel at that hearing had indicated to Sommerfeldt J that at trial (then scheduled for about a month later) the Crown would not pursue tax shelter arguments. Sommerfeldt J stated that he considered that this statement had been made to him in order to persuade him at the time to not to strike out the other Crown pleadings at issue. In a subsequent motion brought by the Crown in June 2021 and heard in September 2021 (after the postponement of the trial for COVID reasons), the Crown now sought to amend its Reply to add allegations and related assertions that the deductions claimed should also be denied on the basis that they were part of a “tax shelter.”
In denying this amendment, Sommerfeldt J stated:
[W]here a party desires to resile from a previously stated position, the party should provide an explanation as to the intervening and previously unexpected circumstances that occurred after the representation had been made and that require the party to change its position. That was not done here. …
I view the statements made by counsel for the Respondent at the hearing on January 28, 2021, to the effect that the Respondent would not rely on the tax-shelter argument at trial, as being a representation or a commitment made to the Court. In the absence of a reasonable explanation as to why counsel for the Respondent now desires to resile from that representation or commitment, I am reluctant to grant leave … .
In the context of a somewhat similar procedural history, Sommerfeldt J also denied leave to the Crown to include, in its amended Reply, an argument of “window-dressing” (which he defined as “deceptively making facts appear better or more favourable than they actually are”.
Neal Armstrong. Summary of Chad v. The Queen, 2022 TCC 18 under Tax Court of Canada Rules (General Procedure), Rule 54 and General Concepts – Window Dressing.
CRA notes that a sublease may in fact constitute a lease assignment
Although the definition of “qualifying rent expense” for CERS (rent subsidy) purposes generally includes a requirement that the rent be paid “under a written agreement entered into before October 9, 2020,” the definition also clarifies that an assignment of a pre- October 9, 2020 after that date is not problematic. CRA dealt with the situation where a sublease was signed prior to October 9, 2020, but the consent of the landlord was not obtained until later. CRA (citing Sussex Square) noted that the sublease would instead be an assignment of the leasehold interest of the sublessor if the purported sublease was for all of the sublessor’s remaining term as head tenant– so that it would not matter if the assignment was regarded as occurring after October 9, 2020.
On the other hand, if it indeed was a sublease then, given that “the only parties to the sublease are the sublessor and the subtenant” it would be plausible that the sublease took effect before the deadline, unless further considerations were engaged, for example, the sublease contained a condition stipulating that the agreement would not take effect until the signature of the landlord was procured.
Neal Armstrong. Summary of 14 January 2022 Internal T.I. 2021-0913891I7 under s. 125.7(1) – qualifying rent expense.
CRA accepts that a lease could constitute a continuation of an agreement to lease
The definition of “qualifying rent expense” for Canada emergency rent subsidy (“CERS”) purposes includes a requirement that the rent be paid “under a written agreement entered into before October 9, 2020” (subject to some accommodation of subsequent renewals or lease assignments). CRA indicated that the requirement for a pre- October 9, 2020 written agreement was met where a letter agreement to lease was entered into before that date, even though the “formal” lease was not executed until subsequently, provided that the letter agreement satisfied requirements that it “show a clear intention to create a binding and enforceable contractual relation, outline all the essential terms and conditions of the agreement, and demonstrate an acceptance in writing by both parties of the terms and conditions.”
That left the requirement that the rents be paid “under” the letter agreement rather than only under the subsequent lease. CRA stated that this was “possible … assuming that the Lease includes the same enforceable and binding rights and obligations, and terms and conditions, as the [letter agreement].”
Neal Armstrong. Summary of 20 January 2022 Internal T.I. 2021-0877511I7 under s. 125.7(1) – qualifying rent expense.
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in July, 2005. Their descriptors and links appear below.
These are additions to our set of 1,915 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 ½ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for February.
CRA expands its positions on spouse trusts in a new Folio
CRA has published a Folio that expands on various of the positions that it took in IT-305R4. Additional points made include:
- A mooted spouse trust is disqualified by the existence of a power to encroach on the capital or income for the benefit of persons other than the spouse or common-law partner, prior to their death – or by a discretion of the trustee to allocate the trust’s income or capital among members of the deceased taxpayer’s family during the life of such spouse/partner.
- Only the spouse/partner can have discretion respecting trust income distribution. In order for the spouse/partner to have a legal right to enforce payment of the income of the trust (as required under s. 70(6)(b)(i)), any discretion respecting distribution of trust income must be solely in that individual’s hands. However, retention of trust income at that individual’s direction does not disqualify the trust (although such income would still be included in the individual’s income under s. 104(24), absent a valid s. 104(13.1) election).
- The terms of the trust cannot permit the trustee to restrict the payment to the spouse or common-law partner of any portion of the trust’s income, nor may the individual’s income entitlement be limited to a certain percentage of the value of the trust property.
- The doctrine of constructive receipt is applied, for example, a payment of trust income in accordance with the will to a person other than the spouse or common-law partner, on condition of its use solely for the individual’s benefit, would not disqualify the spouse trust.
- The competent authority procedure under Art. XXIX B of the Canada-U.S. Treaty can potentially be accessed for US residents, who devised or bequeathed taxable Canadian property to a spousal trust, in order to access the s. 70(6) rollover.
Neal Armstrong. Summaries of Folio S6-F4-C1, “Testamentary Spouse or Common-law Partner Trusts,” 3 February 2022 under s. 70(6)(b), s. 70(6.2), s. 248(1) - Common-Law Partner, s. 248(9.1), s. 108(3), s. 70(8)(c), s.70(7), s. 70(6.1), Treaties – Income Tax Conventions - Art. 29 B and s. 104(13.4)(b.1).
Cliff – Federal Court of Appeal states that a director can resign by email or text
ITA s. 227.1(4) and ETA s. 323(5) indicate that a director cannot be assessed for unremitted corporate source deductions or GST more than two years after she ceased to be a director. Rennie JA stated:
Chriss does not require that all resignations must have a personal, physical signature to be effective. A director may resign via email or text, for example.
However, the only evidence of a purported written resignation in any form was a completed Form in the minute books for informing the Ontario Ministry of Consumer and Commercial Relations that the resignation had occurred (which may not have been sent to the Ministry). Rennie JA stated:
For a resignation to be effective, there must be evidence that the corporation received a written resignation confirming that the appellant has resigned. While Form 1 may reflect something that may have happened, it is not a substitute for a written resignation.
Accordingly, the taxpayer’s appeal was dismissed.
Neal Armstrong. Summary of Cliff v. Canada, 2022 FCA 16 under s. 227.1(4).
Partnerships cannot choose a 53-week fiscal period
Unlike a corporation, which under s. 249.1(1)(a) is allowed to choose a 53-week fiscal period, under s. 249.1(1)(d) a partnership cannot have a fiscal period lasting more than 12 months. Thus, for example, if a partnership (with corporate partners which are not professional corporations) is formed on December 29, 2021, it must close off its first fiscal year on December 31, 2021 (in which case it could incur penalties under s. 162(7.1) if it forgets to file a return for that three-day year) – or, alternatively, its first fiscal period end could be at some later date partway through 2022, and it could apply to CRA for advance permission to change the second fiscal period end to December 31, 2022.
Neal Armstrong. Summary of Lorenzo Bonanno, “Problems with Fiscal Period of Partnerships and Subsection 249.1(1),” Canadian Tax Focus (Canadian Tax Foundation), Vol. 12, No. 1, February 2022, p. 4 under s. 249.1(1)(d).