News of Note
Income Tax Severed Letters 22 September 2021
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Paletta International – Federal Court of Appeal finds that there is no requirement for the Crown to explicitly plead “sham”
Hogan J had found that a tax shelter partnership, which had funded the prints and advertising expenses for films that it had purchased from Twentieth Century Fox, had not incurred such expenses for an income-producing purpose because there was no real prospect that Fox would not exercise its “options” to repurchase the films – and thus no real prospect that the films would generate revenue to the partnership. He stated that “the options were shams designed to mask the parties’ agreement that Fox would reacquire the films prior to their commercial release.”
In concluding that it was not procedurally unfair for Hogan J to make his quoted finding given that the Crown pleadings had “put the appellants on notice that the Minister took the view that it was a certainty that the partnerships would not have any income from the exploitation of the films,” Woods JA stated:
There was no reason for the assumptions to explicitly use the term “sham” or to explicitly state that there was deception. But it is obvious from the relevant assumptions that the Minister did assume that there was deception with respect to the options.
Neal Armstrong. Summaries of Paletta International Corporation v. Canada, 2021 FCA 182 under General Concepts – Sham and s. 9 – capital gain v. profit – real estate.
Le – Court of Quebec finds that domination and abuse of the taxpayer by her aunt precluded a finding of a shareholder benefit
The ARQ assessed the taxpayer (who was a recent immigrant from Vietnam with no knowledge of French or English) under the Quebec equivalent of s. 15 on the basis that a corporation of which she was a 40% shareholder had made unreported sales and a portion of the proceeds had been appropriated to her.
Bourgeois JCQ accepted her testimony that she was dominated by her aunt (who had had her beaten, and precluded her from having opportunities to leave the aunt’s residence), that she had no involvement in the affairs of the corporation and that her aunt had forced her to sign various documents. Before finding that there was no receipt of any taxable benefit, he noted that under the Quebec Civil Code, fear vitiated consent to a contract.
Neal Armstrong. Summary of Le v. Agence du revenu du Québec, 2021 QCCQ 5290 under s. 15(1).
We have published 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in December 2006. Their descriptors and links appear below.
These are additions to our set of 1,724 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 14 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CAE – Tax Court of Canada finds that an unconditionally repayable loan with a 2.5% yield was government assistance
CAE, which was engaged in manufacturing flight simulator systems, incurred over $700 million in R&D expenditures on further developing such systems, as to which it received “contributions” over a five-year period of $250 million from Industry Canada. Under the agreement with Industry Canada, CAE was required to repay 135% of the amounts advanced (or $337.5 million) beginning after the last advance was made and in escalating specified amounts over a 15-year period.
Were the amounts government assistance? Ouimet J agreed with CAE that the arrangement was a loan. However, he then interpreted Immunovaccine as establishing that the relevant test was whether the agreement with Industry Canada was an “ordinary commercial agreement.” He found that this test was not satisfied given that the yield on the loan to Industry Canada of 2.5% was a third of the interest that CAE would have borne on an unsecured commercial loan and that the loan lacked normal commercial covenants. As the amounts were government assistance, the amounts received or receivable in each year were excluded from qualifying expenditures for investment tax credit purposes by s. 127(18), the amounts so received were not deductible in computing income by virtue of s. 37(1)(d) and (without duplication) the amounts so receivable were includible in income under s. 12(1)(x).
Neal Armstrong. Summary of CAE Inc. v. The Queen, 2021 CCI 57 under s. 127(9) – government assistance and s. 37(1)(d).
CRA was not unreasonable in not recommending remission where taxpayers realized stock option benefits on stock that became worthless
The taxpayers realized stock option benefits, and then the stock became worthless somewhat later without their having exercised. In finding that it was not unreasonable of the CRA to conclude that no remission of the tax, interest and penalties should be recommended, Southcott J noted the CRA findings that the taxpayers had sufficient home equity to pay the liabilities, and “that the potential for a sudden decline in value after acquiring shares is a known risk” - and then further indicated that “it was within [CRA’s] discretion to be influenced significantly by the public interest in collection of taxes.”
Neal Armstrong. Summary of Anderton v. Canada (Attorney General), 2021 FC 788 under Financial Administration Act, s. 23(2).
CRA indicates that the safe income of common shares acquired on a s. 88(1) wind-up is averaged with that of directly-purchased common shares
A Canadian corporate taxpayer (“Parent”) had held a majority of the common shares of an indirect Canadian subsidiary (“Subsidiary”) for some time through a wholly-owned direct subsidiary (“Holdco”), and recently acquired the balance of the common shares of Subsidiary directly.
CRA ruled that upon a s. 88(1) winding-up of Holdco (so that the two shareholdings were combined in Parent’s hands), the safe income on hand attributable to the historical shareholding would be averaged across all of the common shares held by Parent immediately following the winding-up.
Parent then effects a “dirty s. 85” exchange of its common shares of Subsidiary for new common shares and preferred shares with a cost equaling their redemption amount, and then has a cash dividend paid on the common shares and has the preferred shares redeemed for cash. CRA ruled that the pref redemption would not reduce the safe income on hand attributable to the common shares – noting in its summary that this was because there was no inherent gain on such pref.
Neal Armstrong. Summary of 2020 Ruling 2020-0854091R3 under s. 55(2.1)(c).
Income Tax Severed Letters 15 September 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Sprott Physical Uranium Trust will hold uranium directly and in corporate form as a closed-end (non-MFT) trust
The Sprott Physical Uranium Trust was formed in April 2021 to acquire all the common shares of Uranium Participation Corporation (“UPC”), an OBCA corporation, under a Plan of Arrangement. UPC held over US$600 million in uranium through a Bermuda subsidiary, which will be wound-up under s. 88(3). The Trust has now issued a Short Form Base Shelf Prospectus for the further issuance of units by it, which will continue to be listed on the TSX.
As it is a closed-end trust (presumably with an eye to not triggering corporate tax), the Trust does not qualify as a s. 108(2)(a) unit trust or as a mutual fund trust. However, in order to avoid a deemed disposition on its 21st anniversary, it is directed in its trust agreement to become a unit trust before then.
It does not expect to be subject to SIFT tax, on the basis that the Uranium held by it and UPC will not be non-portfolio property. It and UPC do not expect to dispose of uranium except to fund administrative expenses, so that the uranium is expected to be capital property.
Neal Armstrong. Summary of 10 August 2021 Short Form Base Shelf Prospectus of Sprott Physical Uranium Trust under Commodity Funds – Metals Funds.
We have published 11 more CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 10 translations of CRA interpretation released in January, 2007 and December 2006. Their descriptors and links appear below.
These are additions to our set of 1,714 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 14 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.