News of Note
Tooth - U.K. Supreme Court finds that a computer’s inability to understand an explanation in a return did not render the return inaccurate
Email this ContentThe tax return software used by Mr Tooth (which had been approved by HMRC) had a glitch, so that it did not permit him to claim a loss from a tax scheme in the box on the online return for employment losses (which was the correct box, had the scheme worked, which it did not). Instead, he entered it in the partnership loss box, coupled with an explanation in the adjacent “white space” that, rather than a partnership loss, it was an employment-related loss.
Whether HMRC was statute-barred from denying the loss (or, to use the U.K. terminology, whether it could issue a “discovery assessment”) turned on whether (as per s. 118(7) of the Taxes Management Act 1970) the insufficiency of the initial assessment of the year arose as “a result of a deliberate inaccuracy” in the return.
Lord Briggs and Lord Sales gave a joint judgment for the Court, finding that this reference to "deliberate inaccuracy" meant a statement which, when made, was deliberately inaccurate (i.e. the taxpayer intended to mislead HMRC), rather than a deliberate statement which was inaccurate. They stated:
Deliberate is an adjective which attaches a requirement of intentionality to the whole of that which it describes, namely “inaccuracy”. An inaccuracy in a document is a statement which is inaccurate. Thus the required intentionality is attached both to the making of the statement and to its being inaccurate.
Furthermore, as to whether there was an inaccuracy, there was no reason to depart from the usual approach to interpreting a document (here, the return) as a whole. They stated that although the online tax return form clearly stated that it would be read upon receipt by an HMRC computer:
A document written in the English language …does not have a different meaning depending upon whether it is read by a human being or by a computer. A choice by the recipient of such a document to have it machine-read cannot alter its meaning. Furthermore, the Revenue-approved online tax return form used by Mr Tooth and his advisors contained numerous “white spaces” … within which the taxpayer is invited to add information using his own words and phrases, so as to ensure that the declaration [was accurate].
Therefore, there was no inaccuracy in the return and, even if there were, it was not deliberate, as Mr Tooth did his best with an intractable online form. HMRC’s appeal failed.
Perhaps the same result would have obtained regarding a similar return filing in Canada, where s. 152(4)(a)(i) refers to “any misrepresentation that is attributable to neglect, carelessness or wilful default.” Has CRA improved its position by deliberately not providing much in the way of “white spaces” for explanations on its online returns?
Neal Armstrong. Summary of Revenue and Customs v Tooth [2021] UKSC 17 under s. 152(4)(a)(i).
Mussalli – Full Federal Court of Australia finds that “rent prepayments” made by new franchisees to reduce percentage rent payments on leases were capital expenditures
Two Australian trusts that were to be the franchisees for seven McDonald’s restaurants agreed, at the same time as they agreed to enter into leases of the premises for base rents plus sales-based percentage rents, to make a lump sum “prepayment of rent” so as to reduce the percentage rent payable. With one exception, the leases did not provide for any refund of the prepaid rent in the event of early lease termination.
The trusts deducted the rent prepayments over a 10-year period. In finding that the rent prepayments were capital expenditures, so that such deduction was not permitted, Mckerracher and Stewart JJ stated:
There is no principle that a payment that substitutes for future revenue outgoings or which compensates for them, or which more accurately in this case obviates or removes the need for them, must itself be revenue. …
[I]f the term … of the lease was irrelevant to the method of calculation of the payment [as was the case here], then any argument that the payment was in truth … a computation of prepayment of rent is extremely difficult to mount. …
The taxpayer has, in effect, purchased the right to have the better lease with the lower rent. …
Neal Armstrong. Summary of Mussalli v Commissioner of Taxation [2021] FCAFC 71 under s. 18(1)(b) – Capital expenditure v. expense – Contract purchases or prepayments.
Friedman – Federal Court of Appeal suggests that Jarvis also applies to allegations that CRA information requirements violate the Charter right not to self-incriminate
The Friedmans, a married couple, who had each received Requests for Information under s. 231.1(1) (“RFIs”) that were addressed to them personally, appealed the Federal Court decision granting a compliance order against them under s. 231.7(1). They submitted:
- ss. 231.1(1) and 231.7(1) infringed their rights under s. 13 of the Charter in that those provisions did not prohibit use of the information gathered in any subsequent criminal proceedings and
- the Federal Court failed to follow Lin which, in dealing with RFIs with essentially identical wording, found that compliance with the RFIs was not required because it was unclear whether the RFIs were directed to the taxpayers individually or to their related foreign entities.
In rejecting the second submission, Pelletier JA stated that any failure to follow “judicial comity,” i.e., the expectation “that judges will consider the decisions of their colleagues carefully and, if they choose to differ, will explain why … is not a basis for appellate intervention.”
In rejecting the first submission, he stated that “courts should not decide constitutional cases in a factual vacuum” such as here, where there were “merely hypothetical possibilities which may or may not arise” (e.g., a subsequent criminal investigation commencing) – speaking of which, he went on to find that, in any event, even though Jarvis (which “established a predominant purpose test to determine if inquiries by the Minister were intended to determine a taxpayer’s tax liability or a taxpayer’s criminal liability” (para. 41)) dealt explicitly only with ss. 7 and 8 of the Charter, and not s. 13 thereof, that test nonetheless appeared to be applicable here, where there was no criminal investigation.
Neal Armstrong. Summaries of Friedman v. Canada (National Revenue) 2021 FCA 101 under General Concepts – Judicial Comity and Charter – s. 13.
CRA rules that s. 84.1 did not apply to a leveraged buyout financed by the target
The shares of Holdco - which holds real estate that it leases to Opco (carrying on a Canadian active business) – are held by three individuals: Ms. Y (an executive of Opco); Mr. Z (her son); and Mr. X (an unrelated investor);.
CRA ruled that s. 84.1 would not apply to transactions in which Ms. Y forms a Buyco (Newco), and uses money borrowed from Holdco (which, in turn, takes out a secured loan from its bank) to acquire Mr. X’s shares, with Newco then repaying the loan over time. CRA’s summary simply states, “Mr. X and [Newco] are dealing with each other at arm’s length” – and the body of the ruling letter noted that representations were submitted to this effect.
Neal Armstrong. Summary of 2021 Ruling 2020-0868661R3 under s. 84.1(1).
CRA finds that eligible remuneration that is returned to the eligible employer as a capital contribution or shareholder loan adjustment is excluded for CEWS purposes
The CEWS (wage subsidy) is generated based on the amounts of “eligible remuneration paid to the eligible employee.” CRA stated, in the context of an employee who also was the controlling shareholder of the eligible entity, that “where salary and wages are only reflected by journal entry as an expense by the employer with a corresponding credit to a due to shareholder loan account, such salary and wages are not considered eligible remuneration paid to an eligible employee.”
Para. (c) of the eligible remuneration definition excludes “any amount received [by the eligible employee] that can reasonably be expected to be paid or returned, directly or indirectly, in any manner whatever to … the eligible entity.” CRA indicated that this exclusion would apply where “salary and wages are paid to an eligible employee and returned to the eligible employer with a corresponding increase or credit to a due to shareholder loan account or other shareholder loan account,” or where “salary and wages [are] paid but returned to the corporation by the shareholder/employee as a capital contribution or as an amount re-loaned to the corporation.”
Neal Armstrong. Summaries of 29 March 2021 Internal T.I. 2020-0865791I7 under s. 125.7(2) and s. 125.7(1) – eligible remuneration – (c).
Income Tax Severed Letters 26 May 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that business interruption insurance proceeds generally are not excluded as extraordinary revenue for CEWS purposes
Regarding the treatment of business interruption insurance proceeds for Canada emergency wage subsidy (“CEWS”) purposes, CRA stated:
[A]n entity would typically acquire business interruption insurance to replace lost revenue when the entity is unable to carry on its ordinary activities. Accordingly … business interruption insurance proceeds would generally be included in qualifying revenue and would generally not be considered an extraordinary item.
This sounds rather like an application of the surrogatum principle: the business interruption itself is extraordinary, but the revenues for which the insurance proceeds are a substitute are ordinary.
Neal Armstrong. Summary of 3 May 2021 Internal T.I. 2020-0852571I7 under s. 125.7(1) – qualifying revenue – (c).
Logix Data – Tax Court of Canada finds that alleged SR&ED work was routine engineering
A taxpayer’s SR&ED claims for work on solar shingles installations were denied by Monaghan J on various bases including that the taxpayer did not have enough knowledge of the field to identify whether its work was advancing the state of knowledge, its work addressed routine engineering challenges and its documentation of the supposed SR&ED work was paltry and not prepared contemporaneously with the work.
Neal Armstrong. Summaries of Logix Data Products Inc. v. The Queen 2021 TCC 36 under s. 248(1) - SR&ED.
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in March and February, 2008. Their descriptors and links appear below.
These are additions to our set of 1,546 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 13 ¼ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Lauzon – Federal Court rejects an unjust enrichment claim by a taxpayer claiming he had not received refund cheques
The taxpayer alleged that he had not received cheques for refunds claimed in his returns for his 2005 and 2006 taxation years, which CRA’s records showed as having been paid, and brought an action against CRA in 2018 for unjust enrichment on the basis that it had not in fact received the refunds. In addition to finding that this action had been brought beyond the two-year limitation period in s. 4 of the Limitations Act (Ontario), Walker J also found that the CRA’s records of the payments having been made were sufficient evidence of this having occurred. She then stated:
I agree with Mr. Lauzon that the CRA’s evidence does not establish whether the Refund Cheques were negotiated by Mr. Lauzon or were stolen and negotiated by a third party. However, the CRA has demonstrated on a balance of probabilities that the Refund Cheques were issued, mailed and cashed with the result that Mr. Lauzon has not established any enrichment of the Crown. Without proof of enrichment, Mr. Lauzon’s claim for unjust enrichment can go no further and his action must fail.
Neal Armstrong. Summaries of Lauzon v. Canada (Revenue Agency) 2021 FC 431 under General Concepts – Unjust enrichment and s. 248(7).