News of Note

In order for the investors in UK limited liability partnerships that had funded films to be allowed their share of the LLP losses that had purportedly been generated, the LLPs were required to be fiscally transparent. This required that the LLPs carry “on a trade, profession or business with a view to profit" - and, in addition, for the LLPs to have been validly formed as a matter of the statutory commercial law, they also were required to represent "two or more persons associated for carrying on a lawful business with a view to profit."

Before finding that the “with a view to profit” test had been satisfied, the Court of Appeal noted the following principles:

• “[T]he words ‘with a view to profit’ import a wholly subjective test” rather than an objective test.
• "[P]rofit" has an objective meaning” so that if “putative partners only have a view to making what they wrongly believe to be profits, for example gross revenue, they will not have a view to profit.”
• “[T]here is no maximum period during which the partners must intend to make a profit, although no doubt the longer the period the more searching the inquiry into the real subjective purpose of the partners."
• “[I]n broad terms, ‘profit’ has the basic meaning of an excess of income over costs over a possibly indefinite period. It follows that the complex mosaic of generally accepted accounting practice … will generally have little part to play.”
• “[T]he view to profit need not be the predominant subjective purpose, but it must be part of the partners' subjective purpose.”

The Court noted that many of the above propositions were supported by Backman – quoting, for example, the statement in Backman that it “will be sufficient for a taxpayer to show that there was an ancillary profit-making purpose."

Although the taxpayers succeeded on this issue, the bulk of the £1.6 billion in losses that had been claimed by the investors in these and similar LLPs nonetheless were disallowed because of an unreversed finding below that most of the LLP expenditures were capital expenditures rather than being on income account.

Neal Armstrong. Summary of Ingenious Games LLP & Ors v Revenue and Customs [2021] EWCA Civ 1180 under s. 96.

In 2012, a company (“9267”) sold domain names to another corporation (“9210”) that was owned equally by its individual shareholder and an unrelated individual for cash consideration to be paid in instalments. However, it did not file its GST return for that year until 2016, at which time 9210 was insolvent, and most of the purchase price was still owing. The tax so reported was assessed accordingly. Also in 2016, it filed its GST return for its taxation year beginning in 2014 in which it claimed a bad debt deduction for the unpaid GST.

D’Auray J affirmed the denial of the s. 231(1) credit on the basis that 9267 had not satisfied s. 231(1.1), i.e., when it filed its return reporting the 2012 sale, it did not remit GST on that taxable supply. Thus because it only paid the tax on the subsequent assessment rather than on filing the return, it lost the credit.

Furthermore, she found that 9267 had not taken reasonable measures to pursue collection of its debt, including claiming under its security interest, and having its debt included in the debtor claims made against 9210 in connection with the receivership and bankruptcy proceedings, so that she would have denied the credit on this ground as well.

She also found that no credit was available under s. 232(3). She rejected arguments that the purchase contract had been rescinded and further indicated:

What is clear from North Shore is that for the purposes of section 232, a credit or debit note is not sufficient, there must be an amount made available to the buyer under the note.

Here no such note had been issued, let alone one that satisfied the North Shore requirement or that set out the particulars required by Regulation.

Neal Armstrong. Summaries of 9267-9075 Québec Inc. v. The Queen, 2020 CCI 53 under ETA s. 231(1.1) and s. 232(3).

We provided summaries of most of the 2021 Roundtable responses on a piecemeal basis in June. For your convenience, here is a table linking to the items as now published by CRA and our summaries, and showing our descriptors.

Mr. Miller did consulting work for a European client (“Casala”). He also received payment of his professional fees from other clients through deposits in trust with two Canadian law firms.

Walker J granted a compliance order pursuant to s. 231.7(1) regarding an extensive list of items that CRA had demanded including information regarding the terms and conditions of his oral contract with Casala and copies of the trust ledgers from one of the law firms.

Regarding her order to disclose the terms of his oral contract with Casala, she stated that this was information “that Mr. Miller ought to have documented in his records,” that the “requests do not stray into the problematic type of questions identified in Cameco and BP Canada” e.g., an attempt “to compel Mr. Miller to reveal his ‘soft spots’,” and that a “request for the information that would have been included in any written contract and issued invoices is the Minister’s mechanism to ensure her access to basic information necessary for the Audit.”

Regarding the required disclosure of the trust ledger accounts with the law firms, she stated:

I do not agree that the Cameco decision establishes that a taxpayer discharges their obligation to satisfy a request that is otherwise within the scope of subsection 231.1(1) with a response that they simply do not have those documents in their possession. … [A] taxpayer is required to exercise reasonable efforts to obtain and provide to the Minister information and documentation that should be in its books and records.

Walker J declined to make a compliance order for a description of the development of Mr. Miller’s business relationship with Casala.

Neal Armstrong. Summary of Canada (National Revenue) v. Miller 2021 FC 851 under s. 231.1(1).