News of Note
CRA finds that an information exchange agreement between one of Canada’s treaty partner’s and its overseas territory did not render the latter a “designated treaty country”
Email this ContentThe territorial scope of the income tax Treaty between Country A and Canada specified that the term “Country A” did not encompass its overseas territory (“Sub-jurisdiction A”). However, Country A then entered into a bilateral agreement with Sub-jurisdiction A for the exchange of information between their competent authorities for the carrying out of Country A’s obligations under its tax treaties or comprehensive tax information exchange agreements (“TIEAs”).
In finding that Sub-jurisdiction A would not be considered a “designated treaty country” under Reg. 5907(11), CRA first noted that such provision clearly provides that a designated treaty country does not include any territory to which the relevant tax treaty or TIEA does not apply, and then stated:
[S]uch [subsequent] agreement will not, by itself, extend the territorial scope of the Canada - Country A tax treaty to Sub-jurisdiction A. The territorial scope of a tax treaty must be determined in accordance with the terms of the treaty and international law.
Neal Armstrong. Summary of 1 March 2023 External T.I. 2023-0990821E5 under Reg. 5907(11).
TD Bank – Federal Court finds that s. 227(4.1) attaches to proceeds of the deemed trust property when paid to an unsecured creditor, which lacks a purchaser for value defence
TD Bank received all of the net proceeds of the sale of the business of its customer (the “Debtor”) in repayment of the Debtor’s unsecured overdraft with the Bank. Regarding CRA’s subsequent claim for the amount of unremitted source deductions of the Debtor at the time of the overdraft repayments, the Bank took the position that the s. 227 deemed trust ceased to apply once the money was conveyed by the Debtor to it, and noted that the s. 227(4) and (4.1) language referred explicitly only to secured, not unsecured, creditors.
Southcott J found that where a tax debtor conveys money that has been subject to a s. 227 deemed trust to an unsecured creditor, such money represents proceeds of trust property so as to engage the application of s. 227(4.1), by whose terms “the proceeds of such property shall be paid to the Receiver General…”.
The Bank also took the position that it could rely on the bona fide purchaser for value defence to defend against the deemed trust claim. Southcott J accepted that it was sufficient to come within the referenced equitable doctrine that the Bank, although not literally a “purchaser,” had provided value to the Debtor through the overdraft reduction. However, he stated that “it would be inconsistent with Parliament’s intent in enacting the deemed trust provisions to afford unsecured creditors recourse to the bona fide purchaser defence” so that this defence was excluded as a matter of statutory interpretation.
Neal Armstrong. Summary of Canada v. The Toronto-Dominion Bank (TD Canada Trust), 2024 FC 441 under s. 227(4.1).
Income Tax Severed Letters 3 April 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
4258843 Canada – Quebec Superior Court finds a tax advisor negligent for failing to advise of a GAAR risk and of a subsequently-published adverse CRA position
The principal (“Pilon”) of an incorporated family business (“Gennium”) sought to secure asset protection for the significant dividends paid by Gennium. To this end, both a family trust (“FFLP”) to hold the Gennium shares and a holding company (“9134”) were formed. Pilon’s objectives would have been achieved if the dividends received by FFLP had been paid by it to 9134 as a corporate beneficiary of FFLP (the “base case”). However, the tax plan presented by Pilon’s tax advisors (KPMG) involved the formation of a second family trust (Satoma Trust) to which s. 75(2) applied, so that Gennium dividends which, in fact were paid to Satoma Trust, were attributed to 9134 and qualified for the intercorporate dividend deduction. This KPMG plan, if it worked, had the tax advantage over the base case of permitting the tax-free distribution of the Gennium surplus to the family members by Satoma Trust – but instead, the Gennium dividends were retained in Satoma Trust for reinvestment.
A more robust variant of the above tax plan (in which an asset-protection trust had not already been formed) was reviewed by the KPMG GAAR Committee, who concluded that GAAR should not apply if it could be demonstrated that the s. 75(2) trust was put in place for asset-protection (or other non-tax) purposes – but otherwise it was more likely than not that GAAR would apply. This view and the GAAR risk were not communicated to Pilon.
In Satoma Trust, Noël CJ confirmed CRA’s application of GAAR to include the Gennium dividends in the income of Satoma Trust.
Before finding that KPMG was liable in negligence for damages equal to the Part I tax plus interest for which Satoma Trust had been assessed, Davis JCS stated:
[O]ne can only wonder why KPMG did not evaluate the risk of the CRA concluding that the primary purpose of the new structure was to provide a tax benefit. At the very least, KPMG should have had a full and detailed discussion with Pilon about the risk of the CRA seeing a tax benefit and applying the GAAR. The consequences of possible application should also have been discussed.
Davis JCS also noted that a year following the structure’s implementation, CRA indicated at the 2006 APFF Roundtable that essentially this structure “would trigger the application of subsection 245(2),” and stated:
… KPMG's obligation to keep Mr. Pilon informed of the risk of applying the GAAR did not end in 2005. …
Timely advice on CRA's new approach could have led to rectification of the structure and minimized both the risk and the extent of an assessment.
Neal Armstrong. Summary of 4258843 Canada Inc. v. KPMG, 2024 QCCS 760 under General Concepts – Negligence.
CRA indicates that an individual can carry forward unclaimed charitable donations
CRA confirmed that an individual can choose not to claim a charitable donation in a particular year and carry forward the claim for up to five years, subject to the s. 118.1 limitations. For example, under s. 118.1(2.1), gifts will be considered to have been claimed in determining an individual's charitable donations tax credits in the order in which they were made (i.e., on a “first-in, first-out” basis).
Neal Armstrong. Summary of 23 January 2024 External T.I. 2023-1000021E5 under s. 118.1(1) - "total charitable gifts" – (c)(i)(A).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released in Februaary of 2002. Their descriptors and links appear below.
These are additions to our set of 2,792 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 22 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 |
|---|---|---|---|
| 2002-02-15 | 25 February 2002 External T.I. 2000-0046485 F - Majoration et Immobilisation | Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | co-operative use of s. 88(1)(d) bump by targets and purchasers could entail acting in concert |
| Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares | arguable that preferred shares received on s. 85(1) rollover basis for eligible capital property transfer, and immediately sold, were not capital property | ||
| Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(v) | reciprocal transactions entailed acting in concert, so that the bump was denied under s. 88(1)(c)(v) | ||
| Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(vi) - Clause 88(1)(c)(vi)(B) - Subclause 88(1)(c)(vi)(B)(I) | reciprocal transactions entailed acting in concert, so that the bump was denied under s. 88(1)(c)(vi)(B)(I) given resulting specified shareholder status | ||
| Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d.2) | reciprocal transactions entailed acting in concert, so that the bump was denied under s. 88(1)(c) and (d.2) by virtue of backdating acquisition of acquisition of control by parent | ||
| 1 March 2002 External T.I. 2001-0095115 F - ACTIF UTILISE PRINCIPALLEMENT-SEPE | Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation | relative floor area a significant factor in determining principal use of building/ interposition of franchisor as tenant/ sublessor did not change potential business-use finding | |
| Income Tax Act - Section 129 - Subsection 129(6) | interposition of 3rd-party franchisor between lessor and active-business wholly-owned tenant precluded application of s. 129(6) | ||
| 28 February 2002 External T.I. 2002-0120315 F - Butterfly Transactions | Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(c) - Subparagraph 55(3.1)(c)(ii) - Clause 55(3.1)(c)(ii)(B) | application of s. 55(3.1)(c)(ii)(B) to post-butterfly issuance to unrelated persons of shares by the distributed corporation/ tainting effect on one TC of post-butterfly sale by the other TC | |
| 28 February 2002 Internal T.I. 2001-0097117 F - TPS/TVH SUR UN AVANTAGE IMPOSABLE | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | GST on employee benefit, but not shareholder benefit, generally is deductible | |
| Income Tax Act - Section 9 - Timing | accrual-basis taxpayer may deduct GST on employee benefits on a cash basis | ||
| 21 February 2002 External T.I. 2001-0109765 F - Debts to be Bad Debts of Bankrupt Corp. | Income Tax Act - Section 50 - Subsection 50(1) - Paragraph 50(1)(b) - Subparagraph 50(1)(b)(iii) - Clause 50(1)(b)(iii)(A) | “insolvent” means unable to pay one’s debts/ can’t be insolvent if nil liabilities and assets | |
| 25 February 2002 Internal T.I. 2001-0114167 F - DOMMAGES - DISCRIMINATION | Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | compensation under the CHRA for lost wages and expenses would be a retiring allowance – reasonable (e.g., under $5,000) compensation for pain and suffering would be non-taxable | |
| Income Tax Act - Section 3 - Paragraph 3(a) | awards by human rights tribunals for pain and suffering re wrongful termination often are under $5,000 |
Chad – Federal Court declines to issue a compliance order to the Canadian protector of non-resident trusts who had refused his request for information demanded under s. 231.2
Mr. Chad was the protector of three non-resident trusts and the president or former director of two non-resident companies. CRA sent a requirement pursuant to s. 231.1 to Chad to provide documents and answer questions respecting such entities, and then sent him a requirement pursuant to s. 231.2 to produce the information. In both cases, the trustee of the trusts refused to provide the information to Chad, and the director or lawyer for the two companies so refused on the grounds that doing so was not in the best interests of their shareholder (which were two of the respective trusts).
In rejecting Chad’s submission that the requested documents were “foreign-based documents” which could only be requested under s. 231.6(2), Favel J noted that the “[c]ourts have yet to definitively rule on whether sections 231.1 and 231.2 apply to foreign-based information or documents,” but found that, as in the 2022 Ghermezian decision, the evidentiary record was lacking as to whether the mooted information was accessible from Canada. However, in dismissing the Minister’s application for a compliance order pursuant to s. 231.7, Favel J stated that he was satisfied, on a balance of probabilities, that Chad had made reasonable efforts to satisfy the requirements and that he did not possess and could not access the documents and information.
Neal Armstrong. Summary of MNR v. Chad, 2024 FC 460 under s. 231.7(1).
CRA indicates that a fee paid by a non-resident for a service rendered by the Canadian branch of another non-resident is subject to Reg. 105 withholding
CRA indicated that a commission paid by an LLC to the Canadian branch of a related non-resident corporation was subject to Reg. 105 withholding, given that “a ‘branch’ of a non-resident corporation is not a separate legal entity from the non-resident corporation.”
Neal Armstrong. Summary of 22 December 2023 External T.I. 2023-0986461E5 under Reg. 105(1).
CRA indicates that it will not accommodate COVID-related travel restrictions in applying the principal residence exemption
An individual and her husband, both Canadian residents, did not travel in 2020 and 2021 to the country where the individual’s townhouse was located due to COVID-19 travel restrictions. The townhouse was not inhabited during those two years. Could the principal residence exemption be claimed for those years following its sale in 2023?
CRA stated:
Notwithstanding that travel guidance and travel restrictions of varying degrees were in effect during the COVID-19 pandemic, for a property to qualify as a taxpayer’s principal residence as defined in section 54 of the Act for the year, the condition that the property be ordinarily inhabited by the individual, the individual’s spouse, common-law partner, former spouse, former common-law partner or child in the year is still required to be met.
Neal Armstrong. Summary of 1 February 2024 External T.I. 2023-0993691E5 under s. 54 – principal residence – (a).
CRA is reconsidering whether a partnership selling shares on an earnout basis can utilize the cost-recovery method
After referring to its adverse conclusion in 2021-0884651E5, CRA stated:
[T]he CRA is prepared to re-examine whether the cost recovery method should apply to Canadian resident taxpayers that are members of partnerships that sell shares subject to an earnout agreement. …
[It]s review … may take some time. Therefore, any change of position would likely be disclosed at a future CRA Round Table, rather than in the context of a technical interpretation.
Neal Armstrong. Summary of 1 February 2024 External T.I. 2023-0994141E5 under s. 12(1)(g).