News of Note
Kallis – Tax Court of Canada adopts a restrictive interpretation of what constitutes a money-lending business
Email this ContentThe taxpayer used funds that he had generated from a successful career in the oil and gas industry to make interest bearing loans to third parties. Loans of $10 million at 16% interest that he had made to indirectly finance a pay-day loan company, and of $3.5 million that he had made at 22.5% interest to a junior venture capital company, went bad.
Wong J found that the taxpayer did not go “about his loan activities in an orderly, businesslike way, as a business person would normally be expected to do” and thus was not “in the business of lending money during the years under appeal because the positive indicia of a business were either absent or minimally present.” In this regard, she noted that:
- He lent surplus funds (presumably, as contrasted to using borrowed funds).
- The loans were unsecured.
- The number of borrowers and of loans was limited.
- The loan terms were not complex and had not been negotiated by him.
- He used word of mouth and social contacts to generate leads.
- His deficient record-keeping was more consistent with investing than running a business.
His losses were on capital account.
Neal Armstrong. Summary of Kallis v. The Queen 2021 TCC 58 under s. 18(1)(b) – capital loss v. loss - debt.
Ressources Eastmain - Court of Quebec finds that as a junior exploration company’s CEO devoted "substantially all" (75%) of his time to exploration, his salary was not CEDOE
A junior exploration company with two projects in northern Quebec claimed significant portions of the remuneration of its president and CEO as Canadian exploration expense that was eligible for Quebec exploration credits. The correctness of this claim turned principally on whether, under the Quebec equivalent of the “Canadian exploration and development overhead expense” definition, his remuneration was not “in respect of a person employed by the taxpayer whose duties were not all or substantially all related to exploration or development activities.”
Fournier JCQ accepted that the CEO devoted approximately 75% of his time to exploration activities, and only the balance of his time to such matters as investor relations and attending board meetings. He noted in this regard that the federal jurisprudence accorded an “elastic” meaning to the phrase “substantially all.” Accordingly, the claimed salary amounts qualified for the credits.
Fournier JCQ also found that: the costs of constructing dirt berms at the exploration sites to contain the escape of harmful effluent were currently deductible, given that the berms deteriorated and had to be replaced each year; and that the costs for a recent hire to attend a university geology course qualified as CEE.
Neal Armstrong. Summaries of Ressources Eastmain Inc. v. Agence du revenu du Québec, 2021 QCCQ 4379 under Reg. 1206(1) – CEDOE – para. (b), s. 18(1)(b) – capital expenditure v. expense – current expense v. capital acquisition, s. 66.1(6) – CEE – para. (k.1), para. (f).
We have translated over 1700 CRA Interpretations
We have published a translation of a CRA interpretation released last week and a further 10 translations of CRA interpretation released in February and January, 2007. Their descriptors and links appear below.
These are additions to our set of 1,703 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 14 2/3 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 September.
CRA finds that employer coverage of collision damage to a leased car is ignored for standby charge purposes and that electric vehicle charging costs can be inferred from kilometres
CRA, reversing 2011-0399691I7, found that an amount paid by an employer to compensate a lessor for the total loss of an employer-leased automobile (which was self-insured for collision damages by the employer) was not to be included in the standby charge calculation in s. 6(2), i.e., it no longer considered such amounts to be payable by the employer to the lessor “for the purpose of leasing the automobile.”
CRA also was asked about employees who are provided with electric vehicles for use in performing their employment duties and who are required to recharge the vehicle battery at home - and may not be able to identify the portion of their monthly electricity bill pertaining to such charging. CRA noted that this allocation was relevant because:
- the electricity costs paid by the employee that are established to be attributable to the personal use of the vehicle reduce the operating expense benefit under s. 6(1)(k)
- employer reimbursements for reasonable employment-related electricity costs paid by the employee, generally are not a taxable benefit
- where there is no such reimbursement, employment-related electricity costs that are established may be deductible by the employee under s. 8(1)(h.1), where its documentary requirements are met
CRA then stated:
Where it is not possible to produce supporting documentation showing the exact amount of electricity expenses incurred for an electric vehicle, other means for establishing the amount of employment-related electricity costs may be acceptable. For example, the establishment of an average per-kilometre electricity cost could be a reasonable method.
Neal Armstrong. Summaries of 10 June 2021 External T.I. 2017-0696041E5 under s. 6(2) – E and s. 6(1)(k).
CRA indicates that pre-production revenues cannot be netted against costs of bringing a new mine into production
Can revenues earned while a mine is in the development phase and before the mine comes into production in reasonable commercial quantities (“Pre-Production Revenues”) be netted against expenses included in a taxpayer’s Canadian development expenses under para. (c.2) of the definition thereof, rather than being included in income under s. 9?
In responding negatively, CRA noted that there was a telling contrast with the permitted netting of Pre-Production Revenues in parts of the definition of Canadian exploration expense. CRA also stated that the purpose of moving what now was para. (c.2) from the CEE to the CDE definition was “to better align the tax treatment of pre-production mining expenditures with the tax treatment of pre-production oil and gas expenditures,” and inferred that no such netting was permitted for the latter type of expenditure.
Neal Armstrong. Summary of 3 May 2021 External T.I. 2019-0831981E5 under s. 66.2(5) - "Canadian development expense" - (c.2).
CRA considers that a promissory note issued in satisfaction of a capital dividend has full cost
S. 52(1) does not deem a promissory note issued to a shareholder in payment of a capital dividend to have a cost equaling the dividend amount (as the dividend was not included in the recipient’s income). Does that matter?
CRA responded:
Our Directorate is generally of the view that the cost of a promissory note, received as full and absolute payment of a dividend for which the election under subsection 83(2) has been made, equals the principal amount of the promissory note, thereby achieving a result more consistent with the role of subsection 83(2) under the integration scheme embodied in the Act.
Neal Armstrong. Summary of 21 June 2021 External T.I. 2019-0815871E5 F under s. 54 – ACB.
Income Tax Severed Letters 1 September 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Paletta Estate – Tax Court of Canada states that there is no “buy Canadian" requirement regarding use of expert witnesses
The taxpayer was substantially successful in its appeals for eight taxation years of denials of around $49 million in net losses from “straddle trading.”
Spiro J otherwise would have allowed 55% of the taxpayer’s legal fees of $3,365,500 in light inter alia of the amounts at stake, the taxpayer’s complete success for all but one year, challenges in displacing the Crown’s allegations of sham and legally ineffective transactions, the complexity of the straddle trading transactions, and the novelty and complexity of the issues. However, he reduced that percentage by 5% to reflect some wasting of trial time attributable to failure to concede at trial that the taxpayer had failed to report $8 million of income for one of the years, and seeking to qualify an irrelevant expert. The percentage was reduced by a further 5%, to 45%, to reflect the partial success of the Crown (regarding that same $8 million) for one of the taxation years.
Spiro J found the taxpayer’s total disbursements of $996,550 were reasonable given that the Crown’s disbursements were only somewhat lower ($710,000) notwithstanding “the significant burden that rested on the Appellant to demolish the Minister’s assumptions of fact in respect of sham, ineffective transactions, etc” - although this figure was adjusted downward somewhat to reflect that only 25% of the opinion evidence of one of the experts was useful.
Regarding the experts being foreign experts, he noted:
[T]he global centres of forward foreign exchange trading are all located outside Canada. There is no "“buy Canadian”" requirement when it comes to expert witnesses.
Neal Armstrong. Summary of Paletta Estate v. The Queen 2021 TCC 41 under Tax Court Rules, s. 147(3).
Hansen - Tax Court of Canada awards enhanced substantial indemnity costs against the Crown for its delay in making a concession
The judgment in Hansen (dealing with whether serial dealings in “homes” were statute-barred from reassessment or eligible for the principal residence exemption) was numerically somewhat more favourable to the taxpayer than an offer he had made to the Crown about nine months before the trial. D’Auray J. applied s. 147(3.1) of the Rules to award the taxpayer party and party costs to the date of service of the offer, but awarded him 85% of solicitor and client costs thereafter, rather than the normal "substantial indemnity" rate of 80% set out in the Rules.
In explaining the increase to 85%, she noted that the Crown had not admitted that the homes were owned in equal co-ownership by the taxpayer and his wife, rather than by the taxpayer alone, until one week before trial, even though this fact had been admitted in the discoveries by a CRA representative more than a year earlier. Furthermore, the Crown had never responded to the taxpayer’s offer.
Neal Armstrong. Summary of Hansen v. The Queen, 2021 TCC 39 under Tax Court Rules, s. 147(3.1).
Dupuis – Quebec Court of Appeal notes that there is no time limit for a notice of objection to be responded to
The taxpayer argued that the ARQ, in taking over three years to reassess in response to its objections, had failed to act with “all due dispatch” as required by the Quebec equivalent of ITA s. 165(3). The Court noted that the taxpayer had the option of appealing directly to the Court of Quebec after 180 days, or seeking a waiver of interest that accumulated due to undue delay (here, in fact, the ARQ had waived 16 months’ interest), and then stated:
The fact that no time limit is set for the assessment in response to a Notice of Objection is a deliberate choice by the legislature and is understandable. …
The Court of Quebec, like the Tax Court of Canada, has made it clear on numerous occasions that its powers do not include the power to set aside a notice of assessment on the basis that the Minister has not acted with dispatch.
Neal Armstrong. Summary of Dupuis v. Agence du revenu du Québec, 2021 QCCA 1061 under s. 165(3).