News of Note
Income Tax Severed Letters 9 February 2022
Email this ContentThis 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).
National Benefit Authority Corp. – Federal Court of Appeal finds that it lacked jurisdiction to hear an appeal of a Tax Court determination denying access to a non-lawyer
A corporation in the business of assisting individuals with claims for disability tax credits (DTCs) appealed a Tax Court decision finding that it (through one of its non-lawyer employees) could not be recognized as the representative of individuals in their Tax Court appeal of the CRA denial of their DTCs. It and the Crown agreed that the Federal Court of Appeal had jurisdiction pursuant to s. 27(1.2) of the Federal Courts Act to hear this appeal from a “final judgment” of the Tax Court. Woods JA disagreed, and instead found that this appeal was regarding an “interlocutory matter,” so that the Court of Appeal lacked jurisdiction. She stated (at para. 11):
The subject matter of the DTC appeals is the DTC appellants’ entitlement to DTCs. The motion did not determine this substantive right. It determined a collateral, procedural right.
Neal Armstrong. Summary of The National Benefit Authority Corporation v. Canada, 2022 FCA 17 under Federal Courts Act, s. 2(1) – “final judgment”.
Income Tax Severed Letters 2 February 2022
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.