News of Note
2276230 Ontario – Federal Court states that a CRA requirement for information need not be demonstrated by it to be proportional to the matter at issue
Email this ContentCRA had requested that three taxpayers provide information (characterized by it as routine business information) pursuant to ETA s. 288(1) (similar to ITA s. 231.2(1)) and when many of the requests were either not answered at all or only partially by the last of the extended deadlines, it sought a compliance order.
Before granting the compliance order, Pentney J cited (at para. 19) Cameco for the proposition that “the fact that the requests may involve substantial documentation which the taxpayer may view as not proportional to the matter is not a relevant consideration,” and further stated (at para. 29):
[T]here is no evidence to suggest that the CRA audit has been launched for any purpose other than to ensure compliance with the ETA, or that the request for information was so wide, extraordinary, or unusual as to give rise to questions about its legitimacy in the context of the audit (assuming that such a claim could be brought, in the face of the wide authority granted to the Minister to set the timing, scope, and nature of the audit …).
Neal Armstrong. Summary of Canada (National Revenue) v. 2276230 Ontario Inc., 2021 FC 242 under ETA s. 289.1(1).
Des Groseillers – Quebec Court of Appeal decision indicates that s. 69(1)(b) deems FMV proceeds for an employee stock option gift for s. 7 purposes
An individual who donated some of his employee stock options on the shares of a public company to arm's length registered charities, claimed the $3M fair market value of the donated options for charitable tax credit purposes, but did not include any portion of the donated options in his income under the equivalent of ITA s. 7(1)(b). This reporting was confirmed in the Court of Quebec on the basis inter alia that the equivalent of ITA s. 7(3)(a) established that the stock option rules constituted a “complete code” so that the equivalent to ITA s. 69(1)(b) did not apply to deem the “value of the consideration for the disposition” received by him to be equal to the options’ fair market value of $3M, rather than the nil proceeds in fact received.
In disagreeing with this interpretation and before allowing the ARQ’s appeal, Cournoyer JCA stated:
[The s. 7(3)(a) equivalent] only has the effect of giving precedence to the application of [the s. 7 equivalent rules] over any other section providing for a taxability rule. It does not prevent the ARQ from using the presumptions provided for in the T.A. to calculate the taxable income of the taxpayer.
Neal Armstrong. Summary of Agence du revenu du Québec v. Des Groseillers, 2021 QCCA 906 under s. 7(3)(a).
We have translated 11 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in February, 2008, and also an interpretation released last week. Their descriptors and links appear below.
These are additions to our set of 1,568 full-text translations of French-language severed letters (mostly, Roundtable items and Technical Interpretations) of the Income Tax Rulings Directorate, which covers all of the last 13 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for June.
CRA illustrates how draft s. 211.91(2.1) would reduce Part XII.6 tax from delayed CEE under the look-back rule
CRA discussed a simple example showing how draft s. 211.91(2.1), which relevantly provides that Part XII.6 tax is to be applied (in the context of a 2019 flow-through share agreement, or “FTS agreement”) as if the renounced CEE was incurred in January 2020, if the expenses were incurred in 2020 and, otherwise, 12 months earlier than when they were actually incurred. (An analogous rule applies to FTS agreements entered into in 2020.)
In January 2020, a principal-business corporation (“PBC”) renounces (with an effective date of December 31, 2019, under the look-back rule) $5M of Canadian exploration expense (CEE) on shares issued in December 2019 pursuant to the FTS agreement. The PBC incurs $3M of CEE in August 2020, and the remaining $2M in 2021.
In computing Part XII.6 tax of the PBC for February to June 2020, it is deemed to have incurred $3M of CEE before the end of those months, so that the tax would be computing (applying the prescribed rate of 2%) in accordance with the formula:
($5M - $3M) X (0.02/12 + 0/10) = $3, 333
so that the tax for each month during that period is $3,333.
The remaining $2M of CEE is deemed to have been incurred by the end of July 2020, so that the PBC would not have any Part XII.6 tax payable respecting its $5M renunciation after June 2020.
Given that draft s. 211.91(2.1) also extends the deadline for filing Part XII.6 tax returns by one year, the Part XII.6 tax return for 2020 would only be required to be filed before March of 2022.
Neal Armstrong. Summary of 24 February 2021 Internal T.I. 2020-0870401I7 under s. 211.91(2.1).
Brent Carlson Family Trust – Federal Court finds that CRA had been confused by the rectification jurisprudence in rejecting an amended s. 85(1) election
In implementing a plan to maximize the utilization by family members of the capital gains exemption (“CGE”) on the sale to an arm’s length purchaser of an operating company that was indirectly held by family trusts, the trusts engaged in a dirty s. 85(1) exchange of existing low-basis common shares of a subsidiary for new shares of that subsidiary that included Class F preferred shares, with a joint s. 85 election being filed at an agreed amount that resulted in recognition of a capital gain equaling the aggregate CGE available to the trust’s beneficiaries. The Class F preferred shares were then sold at the closing for an amount equaling their stepped-up ACB to the arm’s length purchaser.
CRA subsequently reassessed on the basis that, since the capital gain had been realized by the trusts in a non-arm’s length transaction and some of the family beneficiaries had not yet attained 17 years, s. 120.4(5) of the “kiddie tax” rules applied to deem the capital gains distributed to those minor beneficiaries to be taxable dividends. To avoid this result, the trusts requested that CRA accept an amended election (beyond the three-year period set out in s. 85(7)) pursuant to s. 85(7.1) for the preliminary exchange for the Class F preferred shares to have occurred on a rollover basis, so that the capital gain was instead realized on the subsequent arm’s length sale of the Class F preferred shares such that s. 120.4(5) ceased to apply.
This request was rejected by CRA on the grounds that it represented “retroactive tax planning,” which was not permissible having regard to the jurisprudence (Canada Life) on rectification.
Before setting aside and remitted to the Minister for redetermination, Walker J stated:
… The Minister’s delegate … imports equitable requirements specific to rectification and rescission without acknowledging any difference in the remedies sought. … They requested only the amendment of the Original Elections, as contemplated in subsection 85(7.1). The Minister’s delegate erred when he stated, “[y]our request is similar to the request Canada Life put forward, in which [the] ONCA said, ‘The court cannot substitute one series of transactions for another to avoid an unintended tax result’”.
The first-level CRA review had been conducted by the immediate CRA supervisor of the auditor who had proposed the reassessments, and the second level review was conducted by the Assistant Director further up the same audit chain. Walker directed that the redetermination be made by CRA personnel who had had no audit involvement.
Neal Armstrong. Summary of Brent Carlson Family Trust v. Canada (National Revenue), 2021 FC 506 under s. 85(7.1).
CRA states that a statutory amalgamation satisfied s. 87(1)(a) notwithstanding a distribution of cash on the amalgamation
2017-0696821E5 F described two individuals who wholly-owned two corporations of equal value and who, on the corporations’ amalgamation, received equal numbers of shares of Amalco, but also received an equal amount of cash from Amalco. CRA indicated that the payout of the cash (pursuant to the Amalgamation Agreement) would comply with s. 87(1)(c) (i.e., the predecessor shareholders received shares of Amalco), but went on to indicate that the cash payout prevented there from being a rollover at the shareholder level that otherwise would have been available under s. 87(4).
CRA has now indicated that, in light of Envision, such an amalgamation would satisfy the condition in s. 87(1)(a) (that all the property of the predecessors, other than intercompany holdings, have become property of the Amalco by virtue of the amalgamation) notwithstanding the cash leakage on the amalgamation. This interpretation effectively confirms that the immediate payout of cash on an amalgamation squeeze-out transaction does not jeopardize the application of s. 87(1).
Neal Armstrong. Summary of 14 April 2021 External T.I. 2018-0785921E5 F under s. 87(1)(a).
CIBC – Federal Court of Appeal finds that fees paid by CIBC to Aeroplan were for promotional services, but was not averse to viewing Aeroplan Miles as gift certificates
The appellant (CIBC) was charged by Aeroplan for the number of Aeroplan Miles that were credited to the cards of CIBC cardholders. CIBC argued that these fees were (1) consideration for intangible personal property (the Miles) that were supplied by Aeroplan, and (2) that such property was exempted from GST as being a supply of “gift certificates.”
Webb JA rejected the first argument in light of the terms of the agreement between CIBC and Aeroplan, which he found essentially labelled the fees as being for promotional and marketing services. He stated:
The issuance of Aeroplan Miles to CIBC’s customers cannot be elevated to be the predominant supply when such issuance of Aeroplan Miles is not even mentioned in the referral activities for which the consideration was payable. …
The legal relationship between CIBC and Aeroplan is defined by the agreement between these two parties. There is nothing to suggest that this agreement is not a bona fide agreement. …
Given this finding, it was unnecessary for him to address the gift certificate argument, but he nonetheless stated that he should not in any way be considered to be endorsing the Tax Court’s views that the Miles were not gift certificates.
In his dissenting reasons, Stratas JA referred approvingly to the argument in Osler’s memorandum that "'[t]he parties cannot, by a contractual provision, bind each other or the Minister to a particular determination of the predominant element of a single composite supply for GST purposes’," and then stated:
My colleague focuses on literal contractual language and exclusively so. … Now that my colleague’s approach is law, I fear that in the future parties will add words not to change their contractual obligations or the practical, commercial substance of the supply but merely to trigger favourable GST treatment. This may be a boon for cunning drafters and their bag of tricks. …
[T]he element that gives the supply commercial efficacy—the predominant element of the supply—is the right to allocate Miles. But for the right to allocate Miles, there would have been no point in the parties performing their other obligations.
Stratas JA went on to indicate that the Miles acquired by CIBC were deemed under the gift certificate rule (ETA s. 181.2) not to be a supply, so that the fees were not subject to GST, stating:
In the commercial world, Miles function as gift certificates. … They are an exchange device because they may be used as consideration for property or services in the same way as money or a gift certificate.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 96 under ETA s. 123(1) – supply, s. 181.2, s. 309(1) and Federal Courts Act, s. 27(1.3).
Income Tax Severed Letters 2 June 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now avaiable for your viewing.
CRA indicates that loans under a COVID program are income when received as to the forgivable portion
CRA indicated that a business receiving a contribution (as a result of COVID-related liquidity issues) from a Regional Relief and Recovery Fund (“RRRF”) that is forgiven as to the remaining balance of the contribution if a required portion of the contribution is repaid by a certain date, will be required to include that forgivable portion in its income under s. 12(1)(x) in the year of receipt of the contribution, to the extent the amount was not already included under s. 9.
Neal Armstrong. Summary of 15 February 2021 Internal T.I. 2021-0879231I7 under s. 12(1)(x).
CRA indicates that an eligible employer can make a CEWS claim for less than all its employees
CRA indicated that an eligible employer has the discretion to make less than the maximum (CEWS) claim under s. 125.7(2) by claiming for fewer than all of its eligible employees.
Neal Armstrong. Summary of 3 May 2021 External T.I. 2020-0850231E5 under s. 125.7(2).