News of Note

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.

The Crown agreed that BMO was entitled to substantial indemnity costs of $450,069 for the legal costs incurred by BMO after it had made a settlement offer (over seven months before the Tax Court hearing), but argued that BMO was entitled to receive costs only at the meagre Tariff rate for its legals incurred before then. This was based on Rule 147(3.1), which provided that a party receiving substantial indemnity costs following a settlement offer is entitled to party and party costs to the date of service of the settlement offer.

Graham J instead awarded pre-offer costs of 35% of BMO’s actual such costs of $684,471. He considered that being more generous in this regard accorded with the policy of encouraging settlement offers to be made at least 90 days before the hearing even in circumstances where substantial legal costs had already been incurred. Otherwise:

A party who made an offer within the [90 day] time limits would be rewarded for making the offer but, at the same time, punished for not having made it sooner.

Neal Armstrong. Summary of Bank of Montreal v. The Queen, 2021 TCC 3 under Tax Court of Canada Rules (General Procedure), s. 147(3.1).

A couple wanted to start investing in rental real estate but, in the year prior to that in which they started looking seriously at potential acquisitions, they were charged approximately $34,000 by a corporation, which provided some intensive three-day weekend training sessions that were focused on different strategies for investing and dealing in real estate, as well as “mentoring” services and over-the-phone coaching. Jorré DJ characterized these expenses as an “educational expense” which (as they involved more than “simply maintaining or somewhat extending existing knowledge and skills”) were capital expenditures, so that they were not currently deductible and could be recognized only under the eligible capital expenditure (now Class 14.1 property) rules.

Neal Armstrong. Summary of Perron-Ali v. The Queen, 2021 TCC 6 under s. 18(1)(b) – Capital expenditure v. expense - Know-how and training.

The taxpayer in Friedberg entered into spread positions in gold futures contracts, and in the same taxation year closed out the losing legs on his straddle positions (while entering into further contracts to maintain his hedged position) but deferred closing out the remaining contracts until the subsequent taxation year. The taxpayer in Paletta carried out a similar straddle program, except that it involved FX OTC forward contracts rather than gold futures. In order that he could shelter virtually all of the income of around $40 million earned by him over a number of years ending in 2007, he had to keep increasing the scale of his straddle position, given that the entire gain from closing out, in each year, the gain leg from the previous year’s trading needed to be offset in addition to his other taxable income for that year. Associated companies claimed $150 million in losses from the same straddle program.

In finding that the taxpayer’s claimed losses (except for an $8 million overstatement of the 2002 loss due to an “egregious error” – for which a gross negligence penalty was sustained) were fully deductible, Spiro J noted:

• “Friedberg stands for the proposition that straddle traders may report the results of their trades for tax purposes on a [realization] basis that does not reflect the true economic results of such trades.”
• The Parliamentary response to Friedberg (in ss. 18(17) to (23)) was not introduced until 2017.
• Regarding Crown arguments based on the trading consistently generating small economic losses, so that there was no source of income, Stewart established that “provided that one’s activity is clearly commercial, and that no personal element is involved, there is a source of income” and made “it clear that there is no ‘sufficiency’ test.”
• The straddle trades were not shams: the “parties to the trades did not represent their legal rights and obligations to the Minister any differently than the way they themselves understood them”; and although there could “be no doubt but that the straddle trading had no business purpose”, “[l]ack of business purpose is not a sham”.
• Furthermore, the Crown failed to “cite any binding authority that establishes ‘window dressing’ as a stand-alone judicial anti-avoidance doctrine”.

Neal Armstrong. Summaries of Paletta v. The Queen, 2021 TCC 11 under s. 9 – timing, General Concepts – Sham and s. 163(2).