News of Note
Income Tax Severed Letters 26 January 2022
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a federal assessment of a return with no mention of an agreeing province starts the normal reassessment period running for that province
CRA indicated that the normal reassessment period for taxes payable in an agreeing province begins with the sending of the federal assessment, even if there was no reporting in the assessed return regarding that agreeing province (e.g., by not including the form for that province with the return). Thus, where a trust that CRA considered to have been resident in Ontario had reported all along on the basis that it was resident in Alberta, CRA’s initial assessment of the trust federally and in Alberta for a particular year would start the normal reassessment period running for that year regarding any subsequent reassessment of Ontario tax. CRA noted that this view was consistent with Aubrey Dan.
Neal Armstrong. Summary of 24 September 2020 Internal T.I. 2020-0841041I7 under s. 152(4).
Robillard Estate – Tax Court of Canada finds that MacDonald established that s. 84(2) applied to a speedo pipeline – but doubts MacDonald’s correctness
An estate engaged in accelerated pipeline transactions in which it transferred shares (stepped up under s. 70(5)) of a portfolio company (“Holdco”) to a Newco in consideration for a note, with Holdco being wound up into Newco a day later – and with the note being repaid by Newco to the estate about three weeks later. Hogan J concluded that he was bound to follow MacDonald, so as to confirm the assessment of the estate for a deemed dividend under s. 84(2).
However, he went on to indicate that he disagreed with MacDonald. First, that decision had the unfortunate effect of giving CRA a non-statutory discretion to determine when pipeline transactions occurred too rapidly to be acceptable to it. The findings in MacDonald also appeared to ignore the more precise wording of s. 84(2), as contrasted to the earlier versions considered in Merritt and Smythe. In light of the references in s. 84(2) to the “time of the distribution”:
The time at which the dividend is deemed paid is the time at which the distribution is completed. In addition, the dividend is deemed to have been received by the persons who were shareholders at that time.
Since at the time of the distribution, the estate was not a shareholder of Newco, s. 84(2) could not be applied to it.
The estate had distributed an amount equal to approximately half of the s. 84(2) deemed dividend to its three family beneficiaries. Hogan J found that this amount was deductible by the estate under s. 104(6), notwithstanding that the executors had thought of this payment as being a capital distribution rather than of income. This of course confirms the view that capital distributions effectively cushion the trust itself from subsequent assessments which increase its income for the year.
Neal Armstrong. Summaries of Robillard (Estate) v. The Queen, 2022 CCI 13 under s. 84(2) and s. 104(6).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretation released in October, September and August, 2005. Their descriptors and links appear below.
These are additions to our set of 1,898 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.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2005-10-07 | 26 August 2005 Internal T.I. 2005-0131171I7 F - Alinéa 18(1) e) de la LIR | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) | no specific contractual obligation regarding maintenance obligation |
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense | no expense incurred for maintenance obligation until contractual obligation to someone | ||
| 30 September 2005 External T.I. 2004-0093661E5 F - Revenu d'une fiducie et droit acquis par un mineur | Income Tax Act - 101-110 - Section 104 - Subsection 104(6) | a specific clause allocating taxable portion of capital gains to income beneficiary and non-taxable portion to capital beneficiary can be recognized | |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(24) | written trustee resolution may be necessary to establish that an amount of income has become payable | ||
| 2005-09-16 | 12 September 2005 External T.I. 2005-0134631E5 F - Superficial Loss - Realization of Latent Loss | Income Tax Act - Section 54 - Superficial Loss | loss could be realized by 4 unrelated individuals transferring their equal shareholdings of Opco to Newco |
| Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | 4 unrelated individuals transferring their equal shareholdings of Opco to Newco could be a NAL transaction | ||
| 2005-09-09 | 31 August 2005 Internal T.I. 2005-0134831I7 F - Capital Gains Exemption Strip | Income Tax Act - Section 245 - Subsection 245(4) | the use of s. 40(3.6)(b) for surplus-stripping purposes would be referred to the GAAR Committee |
| Income Tax Act - Section 40 - Subsection 40(3.6) | individuals holding high-ACB/low-PUC prefs and low ACB/PUC common shares preserved that ACB under s. 40(3.6)(b) for surplus-stripping purposes on their prefs’ redemption | ||
| Income Tax Act - Section 84.1 - Subsection 84.1(1) - Paragraph 84.1(1)(a) | s. 84.1 did not apply to transferring crystallized preferred shares’ ACB to common shares under s. 40(3.6)(b), with those shares exchanged for high-PUC prefs of new Holdcos for cash redemption | ||
| 31 August 2005 External T.I. 2005-0114421E5 F - Frais de garde d'enfants | Income Tax Act - Section 63 - Subsection 63(3) - Child Care Expense | fees for breach of contract can qualify but not educational fees | |
| 26 August 2005 Internal T.I. 2005-0121871I7 F - Assurance-vie commissions reçues par une société | Income Tax Act - Section 9 - Nature of Income | exemption for life insurance commissions on broker’s own life inapplicable where commission is assigned to his corporation carrying on the business | |
| 2005-09-02 | 26 July 2005 External T.I. 2004-0097031E5 F - Règles sur les entités de placement étrangères | Income Tax Act - Section 95 - Subsection 95(8) | description of Barbados cell company in context of previous tracking interest rules |
| 2005-08-19 | 2 August 2005 External T.I. 2005-0112871E5 F - Cotisation professionnelle | Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(i) - Subparagraph 8(1)(i)(i) | fees paid by municipal mangers to a professionals corporation formed under private member’s bill were non-deductible |
Denial of CDA access for non-CCPCs is recommended
In an expanded version of an op-ed piece in the Financial Post, Allan Lanthier notes the following pending Tax Court appeals involving allegedly abusive avoidance of status as a Canadian-controlled private corporation so as to be subject to a lower corporate tax rate on taxable capital gains:
- two involving a transfer of appreciated property on a s. 85(1) rollover basis to a CCPC followed by its continuance to the BVI, and realization of the capital gain after such loss of CCPC status;
- a third involving such continuance and realization without a prior s. 85(1) rollover; and
- a fourth where, shortly before realizing a substantial capital gain, the CCPC had issued voting, redeemable preferred shares to three non-resident family members giving them 50.89% of the votes.
It is quite unclear whether the Minister’s position in these appeals - that a deliberate flipping out from the CCPC rules to avoid tax frustrates the rationale underpinning ss. 123.3 and 123.4 - will prevail. Accordingly, he recommends that the Minister of Finance act immediately to:
- amend GAAR “so that any transaction or series of transactions whose dominant purpose is the avoidance of tax is struck down, without giving taxpayers an exit ramp based on the fuzzy notion of ‘abuse’.”
- “deny the capital dividend account to private corporations that are not CCPCs.”
Neal Armstrong. Summary of Allan Lanthier, “The latest Canadian tax scam has a Caribbean flavour,” Canadian Accountant, January 21, 2022 under s. 123.3.
Singapore Telecom – Federal Court of Australia finds that arm’s length parties would not have agreed to a loan having a significant participation feature
A Singapore-resident company (“SAI”) transferred the shares of a recently-acquired Australian telecom company (“SOPL”) to an Australian subsidiary (“STAI”) in consideration for common shares and $5.2B in unsecured notes which had a term of approximately 10 years and bore interest at a floating rate equal to the 1 year bank bill swap rate (“BBSR”) plus 1%, but multiplied by a gross-up factor of 10/9 to reflect that the interest was subject to withholding tax. After a minor amendment, the terms of the notes were amended less than a year later (under the “Second Amendment”) so as to increase the interest rate by a premium of 4.52% to reflect that the interest would not be paid if STAI did not exceed specified cash flow and profitability thresholds (which were not expected to be met for a number of years). The “Third Amendment” made six years later changed the interest rate by replacing the 1 year BBSR with a fixed rate of 6.835%, so that the applicable rate thereafter became the aggregate of 6.835% and 1% multiplied by 10/9, plus the 4.552% premium, for a total rate of 13.2575% per annum.
Whether the Commissioner had appropriately reduced the interest-deduction claims of STAI turned principally on whether (under aspects of the Australian transfer pricing rules that were essentially aligned in this regard with the related-person Article of the Singapore-Australia Treaty) conditions operated between the two enterprises (STAI and SAI) in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another, such that the actual cost of borrowing under the notes was greater than the costs that a party in STAI’s position might be expected to have paid under such conditions.
Before dismissing STAI’s appeal, Moshinsky J found that independent parties in the positions of SAI and STAI might have been expected to have agreed at the time of the notes’ issuance that the interest rate applicable to the notes would be the rate actually agreed (noting in this regard that the interest gross-up was “common in international borrowings”. This interest rate took into account that, in such circumstances, there would be a guarantee by the ultimate public-company parent (“SingTel”), given that it would not be commercially rational to bear the “much greater amount in interest” that would have been required without such a guarantee. Furthermore, no guarantee fee should be imputed as there was no evidence that under the hypothetical conditions the parent would have charged such a fee (and, in fact, SingTel had not charged a guarantee fee for a $2B loan made to a subsidiary of SOPL).
Furthermore, independent parties in the positions of SAI and STAI would not have agreed to make the changes contained in the Second or Third Amendments. In particular, agreeing to an interest rate that would provide a very high return to the lender if the cash flow and profitability conditions were met promptly and a quite low return if they were not achieved, would “expose… each party to significant commercial risk”, and there did “not appear to be any commercial rationale for these terms.”
Neal Armstrong. Summary of Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation, [2021] FCA 1597 under s. 247(2)(a).
9056-2059 Québec – Tax Court of Canada finds that ETA s. 153(2) requires a reasonable allocation of consideration between component supplies
In order to promote the sale of its farm products (mostly honey), the appellant developed a “labyrinth” of trails on its forest lands and, when it sold tickets for access by visitors to the trails, stipulated that the ticket, generally sold for $12, also constituted a coupon of $1.50 to be applied to the purchase of honey or other products. However, if the visitor purchased further coupons, the value proposition improved, for example, six coupons (with the additional five purchased at $1.50 each), would purchase 20 times as much honey as one coupon.
In 9056-2059 Québec, the Federal Court of Appeal had rejected the CRA position that s. 138 applied to deem all the supplies by the appellant to be taxable supplies of access to a place of amusement (rather than zero-rated supplies of food), in light inter alia of beekeeping accounting for 50% of the appellant’s maintenance costs, and remitted the matter for redetermination by the Minister on that basis.
Before confirming the resulting reassessments that treated $1.50 of the ticket prices as being zero-rated consideration for the honey or other food products, and the balance as consideration that was subject to tax, Boyle J indicated that s. 153(2) required that the “cost of admission to … the … forest must be reasonably divided between access to the labyrinth and other activities, and the mandatory purchase of a coupon to be exchanged for a honey or maple food product,” and then stated:
Appellant was unable to present any valid reason why the value of the initial coupon should be other than $1.50, which is what it charged for the same coupons when purchased individually.
Neal Armstrong. Summary of 9056-2059 Québec Inc. v. The Queen, 2022 CCI 6 under ETA s. 153(2).
Income Tax Severed Letters 19 January 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Charron – Court of Quebec finds that all the expenses incurred in relation to a rental home under construction from the building permit to being livable were to be capitalized
The taxpayers purchased a lot, constructed a house, leased it out for a year and then sold it at a gain. Regarding the computation of the ACB of the house for capital gains computation purposes, Laurin JCQ referred to the Quebec equivalents of ss. 18(1)(b) and 18(3.1) to (3.3), and found (contrary to the ARQ view of these items as being of a personal nature) that the taxpayers were entitled to add the costs of the following items incurred during the construction period: municipal taxes, school taxes, insurance, electricity, interest on a line of credit and mortgage interest.
He considered the construction period to commence with the receipt of the building permit and to end with the point of substantial completion, being the point at which “there was some minor work to be done that did not prevent the house from being used for the purpose for which it was built.” He further found that “[e]xpenditures after that date were current expenses that should have been deducted from income.
Neal Armstrong. Summary of Charron v. Agence du revenu du Québec, 2021 QCCQ 12137 under s. 18(3.1).
Young - Supreme Court of Nova Scotia finds that Jarvis principle did not exclude evidence gathered before referral to criminal investigation
An auditor (Power) performed an audit of a company, that then extended to seven related companies, that had very poor record-keeping and that had been making large input tax credit and rebate claims. A month after having visited the business premises and interviewed the registrants, she concluded that the matter should be referred to the Criminal Investigation Division. In concluding that the evidence gathered by Power should not be excluded on Jarvis grounds (so that it was admissible in the subsequent criminal proceeding), Gogan J stated:
[I]t is a nuanced distinction … between a registrant being unable to support claims made (the audit conclusion and one potentially explained by poor record keeping) and a registrant making false or fraudulent statements to CRA (a criminal conclusion potentially explained by having no legitimate records). In this case, I am satisfied that any evidence obtained came as a result of Power’s audit inquiries.
… I find that the predominant purpose of the investigation did not turn to criminal or penal liability until after the completion of Power’s interviews with each of the accused. …
Neal Armstrong. Summary of R v Young, 2021 NSSC 361 under ETA s. 288(1).