News of Note
BMO Nesbitt Burns – Federal Court rejects a claim that providing a full spreadsheet would breach privilege or a requirement not to disclose uncertain tax positions
Email this ContentCRA brought an application pursuant to s. 231.7 seeking an order requiring BMO Nesbit Burns (“BMONB”) to provide an unredacted version of a spreadsheet in connection with CRA’s audit of suspected dividend rental arrangement transactions of BMONB. BMONB in response to the initial request made pursuant to s. 231.1 had redacted a column in the spreadsheet on the basis that it reflected written legal advice it had received from McCarthy’s and Torys.
In rejecting BMONB’s claim of privilege, Kane J stated that the spreadsheet was not more than the mere “operational outcome or end product of legal advice” and did not satisfy the requirement that it “communicate … the very legal advice given by counsel.”
Kane J also rejected some further submissions of the taxpayer.
First, in rejecting the BMONB submission that the Minister was precluded from relying on s. 231.1 or 231.7 because there was no open audit or inquiry (a notice of objection and appeal to the Tax Court having subsequently been launched), she indicated that she did “not agree that BMONB’s notice of objection puts an end to the Minister’s authority pursuant to sections 231.1 or 231.7,” noted that “[i]n the present case, the Minister made the request for information pursuant to section 231.1 in 2019, long before the reassessment or notice of objection, and stated:
[R]estricting a request for information to the pre‑assessment or pre-reassessment period would not be in the spirit of the Act, which gives broad powers to ensure the administration and enforcement of the Act, and could promote non‑compliance.
Second, although the spreadsheet had some aspects of a tax accrual working paper (“TAWP”) as considered in BP, there the “FCA’s caution was against imposing an obligation to self-audit”, whereas here “[u]nlike BP, the concerns arising from the tax year under audit have not been addressed … [and] the Minister has not sought access to the [spreadsheet] (whether or not it is a TAWP) without advancing a particular justification.”
Third, she rejected a submission that granting the requested production would undermine the discovery process in the Tax Court of Canada proceedings, which had procedural protections not set out in s. 231.1, stating that this interpretation had not been accepted in Cameco.
Neal Armstrong. Summaries of Canada (National Revenue) v. BMO Nesbitt Burns Inc., 2022 FC 157 under s. 232(1) – solicitor-client privilege and s. 231.7.
NCL Investments – UK Supreme Court recognizes that employee stock option expenses were as a general matter sustained on income account
The taxpayers, which were required by the UK Corporation Tax Act 2009 to calculate the “profits of [their] trade … in accordance with generally accepted accounting practice”, were found by the Court to be thereby authorized to deduct the expenses (“Debits”) recognized under IFRS when they granted stock options to employees through an employee benefit trust. In finding that this deduction was not precluded by s. 53 of the same Act, which provided that “[i]n calculating the profits of a trade, no deduction is allowed for items of a capital nature,” Lord Hamblen and Lady Rose accepted the findings below that the taxpayers’ “employees operate in a professional services business whose success depends on the availability of skilled and motivated professionals and the grant of share options to those employees is part of their remuneration package” and that the “Debits were … recurring costs that had a connection with the Appellants’ earning of income … .”
Neal Armstrong. Summary of Revenue and Customs v NCL Investments Ltd & Anor [2022] UKSC 9 under s. 18(1)(b) – Capital expenditure v. expense - contract modification or grant.
Supreme Court grants leave in Des Groseillers
The Supreme Court has granted leave to appeal in Des Groseillers, in which the Quebec Court of Appeal had found (to refer to the ITA equivalents) that s. 69(1)(b) deemed there to be FMV proceeds for s. 7 purposes respecting an employee’s gift of stock options to arm’s-length registered charities, rather than the s. 7 rules constituting (having regard to s. 7(3)(a)) “a code so complete and airtight that the application of section [69] is excluded.”
Neal Armstrong. Summary of Agence du revenu du Québec v. Des Groseillers, 2021 QCCA 906, leave granted 24 March 2022, under s. 7(3)(a).
CRA indicates that it was for the trustee to determine whether an amount was payable at year end to a beneficiary
After the trustee had (it believed) finished the administration of an estate, it was notified by the Government of Canada Pension Centre that a pension payment was still owing to the deceased, which amount was then paid and received by the estate on the last day of the estate’s taxation year, and distributed by the trustee in the following taxation year. Given that the 36-month period for the estate to continue qualifying as a graduated rate estate had expired (which Headquarters stated it had no discretion to extend), the estate was subject to tax at the top marginal rate on the pension receipt unless it was eligible for an offsetting deduction under ss. 104(6) and (24) in the year of receipt.
Headquarters indicated that whether this was so was “a question of law and fact which only the Trustee can determine” and that if “the Trustee determines that the beneficiary was, on [that date] entitled to enforce payment of the lump-sum amount received by the Estate” the beneficiary would be required to include the amount in income under s. 104(13). This answer effectively was an invitation to the Individual Returns Directorate to show some leniency.
Neal Armstrong. Summaries of 15 June 2021 Internal T.I. 2020-0867081I7 under s. 104(24), s. 248(1) – GRE, and s. 104(27). See also 2021-0883041C6.
Income Tax Severed Letters 23 March 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The PUC scheme established in Copthorne does not require that all surplus be realized as dividends
While Copthorne stated that the PUC scheme in the Act was intended to prevent “a return of tax-paid investment without inclusion in income,” the Court did not state whether such inclusion should be as a dividend rather than as a taxable capital gain, i.e., the Court apparently considered that the characterization of the income inclusion does not matter so long as the transactions at issue do not result in the creation or preservation of PUC contrary to the intention of the Act. In contrast, CRA appears to seek the characterization of the extraction of all corporate surplus as dividend income, regardless of the legal substance of the transactions giving rise to such extraction.
Where tax is paid at capital gains rates on transactions involving surplus stripping and the transactions fall outside the specific bright-line tests in ss. 84.1, s 212.1, and 84(2), the transactions (or series) should not be found to violate the PUC scheme and, therefore, GAAR. Three examples:
Example 1
Mr. A, exchanges some of his common shares of his operating company (A Co, which at all times continues to carry on its business) for preferred shares and pays capital gains tax pursuant to a s. 85(1) election. He subsequently transfers the preferred shares to a holding company (B Co) for a B Co promissory note. A Co redeems the preferred shares and B Co repays the principal of the note.
Example 2
Mr. X (in transactions similar to MacDonald) transfers some of the common shares of his operating company (X Co, which at all times continues with its business), to his uncle, in exchange for a promissory note equal to the FMV of the transferred shares, thereby triggering capital gains tax. The uncle subsequently transfers the X Co common shares to his holding company (Uncleco), in exchange for a promissory note. Funds of X Co then are used to redeem the common shares held by Uncleco, with Uncleco using those funds to repay the note owing to the uncle, so that he can repay the note owing to Mr. X.
Example 3
Ms. R owns all the common shares of R Co, which transfers capital assets with unrealized gains to a newly-formed subsidiary (S Co) in exchange for S Co common shares, thereby realizing a capital gain, with those assets being leased back to R Co. R Co pays a dividend to Ms. R equaling the resulting capital dividend account balance.
In Example 1, hard ACB is legitimately created on the preferred shares for the purposes of s. 84.1. Considering that this transaction engaged GAAR would disregard the Copthorne dictum that there is no anti-surplus-stripping scheme in the Act.
In Example 2, Mr. X pays capital gains tax on each share contributing to the subsequent PUC bump on the transfer by the uncle to his holding company. Because the same result could be achieved by other means (namely, as per Example 1), there is a strong argument that GAAR should not apply in the circumstances.
In Example 3, there is no s. 84.1 concern since the transferor is a corporation rather than individual, and the objective is to create additional CDA balance (which increases from a taxable disposition), not PUC.
(Leaving aside the further implications of the comments in Robillard subsequent to this article), s. 84(2) may not apply to Examples 1 and 2 provided that (per Perrault) the company continues to carry on its business for at least one year, or if the distributions are funded with third-party money. In Example 3, per “Geransky and Kennedy, the sale of the capital assets in and of itself should not constitute a reorganization for the purposes of subsection 84(2) provided that R Co continues to carry on the same business.”
Neal Armstrong. Summary of Eytan Dishy and Chris Anderson, “The Permissibility of Surplus Stripping: A Brief History and Recent Developments,” Canadian Tax Journal (2021) 69:1, 1 -33 under s. 245(4).
Mediclean – Tax Court of Canada denies ITCs to a registrant who paid HST to unregistered suppliers - but grants an equivalent s. 261(1) rebate under s. 296(2.1)
After the Tax Court had ruled that the cleaning staff utilized by the taxpayer in its cleaning business were independent contractors rather than employees, the taxpayer commenced paying GST/HST to them and did not obtain GST/HST registration numbers from them in the mistaken belief that it was sufficient to obtain their business numbers - but, in fact, most of them were small suppliers who were not registrants.
After applying Systematix to find that this failure to obtain prescribed information (the registration numbers) meant that the taxpayer was not entitled to claim input tax credits (ITCs) for the GST/HST paid by it to the workers, Owen J went on to find that the taxpayer was entitled to rebates for such tax.
In rejecting the Crown’s position “that subsection 261(1) does not apply to a mistake resulting from the Appellant’s negligence, or inattention and carelessness,” Owen J stated:
The applicable conditions [in s. 261] include the requirement that the amount be paid by mistake or otherwise. The reason for the mistake is simply not a consideration in the application of the section.
Furthermore, although s. 261(3) denied payment of a rebate under s. 261(1) if the application for the rebate was not filed within two years after the day the amount was paid or remitted, s. 296(2.1) (as found in UPS) required the Minister to assess a person to deduct a rebate under s. 261(1) in computing the net tax of that person if the specified conditions were met (as was the case here).
Neal Armstrong. Summaries of Mediclean Incorporated v. The Queen, 2022 TCC 37 under s. 261(1), s. 298(4)(a), s. 285(1) and s. 169(5).
We have translated 11 more CRA interpretations
We have published 3 translations of CRA interpretations released last week and a further 8 translations of CRA interpretation released in April, 2005. Their descriptors and links appear below.
These are additions to our set of 1,969 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 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA indicates that trailer fees are GST-exempt except in exceptional circumstances
CRA indicated that, other than in “exceptional circumstances,” trailer fees (a.k.a., trailing commissions) paid by the manager of a mutual fund trust or corporation to a dealer generally would be regarded as part of the exempted consideration for the dealer’s services in arranging for the sale of shares or units, and not as consideration for a separate taxable supply from the dealer to the manager.
The referenced exceptional circumstances included where the dealer was not the same person who arranged for the initial sale of the mutual fund unit, and where the trailing commission was specifically linked in the agreement between the dealer and the manager to the provision of specific services and it could be determined that these services constituted a separate supply from that of arranging for the sale of shares or units.
CRA went on to note that the general exemption of trailer fees did not benefit the fund investors since such fees were paid by the manager out of taxable management fees charged by it to the fund.
Neal Armstrong. Summaries of 28 October 2021 GST/HST Interpretation 217144 under ETA s. 123(1) – financial service – para. (l), para. (q).
CRA finds that dental services provided to the patients of a dentist's professional corporation were GST exempt
ETA Sched. V, Pt. II, s. 5 exempts health care services “rendered” by a medical practitioner, such as a licensed dentist, to an individual. CRA ruled that this exempted the dental services provided by a dentist to patients notwithstanding that it was the corporation of which he was sole shareholder (and not an employee) which billed the patients for his services. It stated:
[R]egardless of whether the dental services are supplied through the Dentist’s clinic or directly by the Dentist, the exemption under section 5 would still apply.
CRA went on to find that the dividends received by him “as the only form of consideration for the work he performs for the Company” were exempted, i.e., CRA did not recharacterize the dividends as compensation for his services.
Neal Armstrong. Summaries of 4 November 2021 GST/HST Ruling 196473a under ETA Sched. V, Pt. II, s. 5 and s. 123(1) – financial service – (f).