News of Note
We have translated 9 more CRA interpretations
Email this ContentWe have published a translation of a CRA interpretation released last week and a further 8 translations of CRA interpretation released in August and July, 2005. Their descriptors and links appear below.
These are additions to our set of 1,907 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. Next week is the “open” week for February.
Desjardins – Quebec Court of Appeal finds that the due diligence defence is not available for errors of law
When the taxpayers, which were property-casualty insurers, received premiums from a customer before the policy took effect, they remitted the insurance premium tax received by them on such collection on the basis of the month in which the policy came into effect rather than the earlier month of receipt. The relevant QSTA provisions, which were broadly similar in this regard to ETA ss. 225(1) – A(a), 228(2) and 222(1), required that a person receiving payment of a policy premium collect the tax thereon as agent for the Minister and remit such tax to the Minister. The Court found that these provisions clearly triggered an obligation to remit the tax collected when it was received rather than the later time when the policies took effect.
In going on to confirm the imposition of penalties on the taxpayers pursuant to the Tax Administration Act (generally calculated as 15% of the amounts they had remitted one month late), the Court stated:
The defence of due diligence allows for the avoidance of administrative penalties imposed by a statute where an error of fact is made in good faith, but not where there is an error of law. …
… To allow the taxpayer to escape the consequences of failing to meet its obligations by proposing a different interpretation of the legislative provisions would open a loophole that is difficult to reconcile with [the self-assessment] principle.
Neal Armstrong. Summaries of Agence du revenu du Québec v. Assurances générales Desjardins Inc., 2022 QCCA 57 under ETA s. 225(1) – A(a) and ITA s. 227(8)(a).
CRA adds Quebec psychotherapists to its list of authorized medical practitioners
CRA will be adding “psychotherapist legally authorized" to its list of Authorized medical practitioners for the purposes of the medical expense tax credit so that “expenses incurred for psychotherapy services rendered by psychotherapists who hold a psychotherapy permit issued by the Ordre des psychologues du Québec will now be considered medical expenses" … for purposes of the medical expense tax credit.” It noted in this regard that those holding “a psychotherapy permit issued by the Ordre des psychologues du Québec, are legally supervised by the latter.”
Neal Armstrong. Summary of 26 October 2021 External T.I. 2019-0800111E5 F under s. 118.4(2).
Hubmar – Court of Quebec finds that the applicable salaries of employees engaged in SR&ED but who did not record their time could not be recognized
Although the ARQ accepted that the taxpayer was carrying on SR&ED, the taxpayer had failed to establish with any convincing evidence what proportion of the remuneration of its employees qualified under the Quebec equivalent of federal Reg. 2900(2)(b) as being amounts that could reasonably be considered to be in respect of the prosecution of such SR&ED.
After stating that “[i]t is true that neither the Act nor the Regulations require that employee time sheets be prepared and filed,” Dufour J noted that time sheets were the only evidence presented, and these had been fabricated well after the fact and were incoherent and unreliable.
Neal Armstrong. Summary of Hubmar International Inc. v. Agence du revenu du Québec, 2021 QCCQ 12822 under Reg. 2900(2)(b).
CIBC – Tax Court of Canada states that the continued correctness of PC Bank “now hangs by a thread” because of the narrowing of the financial services definition
After President's Choice Bank (the “2009 Decision”) determined that services supplied by a subsidiary of Loblaw (“PC Bank”) to CIBC were exempt arranging-for “financial services,” the ETA definition was then retroactively amended (through the addition of paras. (r.4) and (r.5)) to narrow its scope. CIBC nonetheless applied for a refund of GST that PC Bank had commenced charging to it (for subsequent periods) on the basis that the supplies made continued to be exempt. In connection with its appeal of the CRA denial of these rebate claims, CIBC brought a motion for its appeal to be allowed on the basis that the substance of the supply was already determined in the 2009 Decision.
In dismissing the motion on the basis that res judicata (and, in particular, issue estoppel) did not apply, Hogan J first found that the CIBC appeal did not raise the same issue as in the 2009 Decision since the scope of the financial services exemption had “been narrowed by virtue of these new exclusions” in paras. (r.4) and (r.5), and further stated:
The judgment … rendered [in the 2009 Decision] now hangs by a thread because of the new financial services definition. This is hardly a case where the principle of finality requires me to give effect to the issue estoppel and/or abuse of process doctrines.
Neal Armstrong. Summary of Canadian Imperial Bank of Commerce v. The Queen, 2022 TCC 26 under General Concepts – Res Judicata.
Income Tax Severed Letters 26 January 2022
This 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.