News of Note
PCI Géomatics – Quebec Court of Appeal finds that a loan that was not repayable if the borrower’s revenues consistently declined was a forgivable loan
Email this ContentA company (PCI) engaged in R&D activities for the development of software for satellites, received a non-interest-bearing loan from Industry Canada that was repayable by it (on a formula basis) over the following 15 years: in equal annual instalments if its revenues were stable; in amounts up to 1.65 times the advances received if its revenues increased consistently and significantly over the 15-year repayment period – but not at all if its revenues decreased steadily throughout the 15-year repayment period.
Hogue, J.C.A. found that, in light of this last feature, the loan was a “forgivable loan” and, thus, “government assistance” (under a Quebec definition similar to that in ITA s. 127(9)) so that its amount reduced R&D tax credits of PCI for Quebec purposes. In distinguishing McLarty, she stated that here, by way of contrast:
[T]he Agreement does not have the effect of [merely] limiting the remedies available to the government in the event of a PCI default. Rather, it provides that PCI’s obligation to repay will only arise if its revenue is maintained or increases, which is a future and uncertain event. This condition goes to the very nature of the debt.
Neal Armstrong. Summary of Agence du revenu du Québec v. PCI Géomatics Entreprises Inc., 2020 QCCA 1342 under s. 127(9) – government assistance.
CRA indicates that amounts received out of a UK FURBS are taxable except to the extent there can be a lump sum rolled into an RRSP or RPP
A UK resident is a member of a “funded unapproved retirement benefit scheme” (“FURBS”), which is a UK trust to which the taxpayer’s employer had contributed and the benefits from which are attributable to services rendered by the taxpayer while resident in the UK and before the time of retirement. CRA indicated that, if the individual became a Canadian resident, amounts paid out of the plan would be taxable under s. 56(1)(a)(i) if the plan was a foreign pension plan, and if it was any other form of EBP, such amounts would be taxable under s. 6(1)(g).
If an amount received out of the UK retirement plan was a lump sum amount taxable under s. 56(1)(a)(i), a deduction could be accorded under s. 60(j) regarding a transfer to an RRSP or a registered pension plan. No Treaty exemption (nor the s. 56(1)(a)(i)(C.1) exemption for IRAs and kin) would be available.
Neal Armstrong. Summary of 11 September 2020 External T.I. 2019-0824281E5 under s. 56(1)(a)(i).
Richard A. Bureau Barrister & Solicitor Inc. – Tax Court of Canada leans in favour of giving a registrant its day in court
In granting an extension for an incorporated lawyer to appeal HST assessments to the Tax Court, Russell J accepted the testimony of the lawyer that his strategy was to see if anticipated income tax reassessments (both of his professional corporation and him personally) might assist the corporation’s HST position in its HST appeal. Russell J further stated:
I consider it just and equitable to permit an entity its day in court absent a clear rationale for declining to do so. As well … procedural gaffes are not so egregious as to require or demand denial of this application.
The tests in ETA s. 305(5)(b) for granting an extension are similar to ITA s. 166.2(5)(b) except that there is a further test in ETA s. 305(5)(b)(iv) that “there are reasonable grounds for appealing from the assessment.” Russell J stated in this regard that “there is a semblance of logic to … [the corporation’s] position, sufficient to constitute reasonable grounds.”
Neal Armstrong. Summary of Richard A. Bureau Barrister & Solicitor Incorporated v. The Queen, 2020 TCC 119 under ETA s. 305(5)(b).
We have translated 6 more CRA Interpretations
We have published 6 further translations of CRA interpretation released in November, 2009. Their descriptors and links appear below.
These are additions to our set of 1,321 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Custeau – Quebec Court of Appeal finds that Copthorne does not require the s. 248(10) “in contemplation of” test to be applied on a backwards-looking basis
When a family small business corporation (the “Corporation”) was in financial difficulty, two Quebec regional development funds agreed in 1997 and 1998 (with an objective of saving jobs) to inject equity capital in the Corporation on terms largely dictated by them. As a result of paid-up capital averaging that occurred in the 1998 transactions, the PUC of the common shares of the taxpayers (two brothers) was boosted by a significant amount. In 2003 and 2004, they engaged in capital gains crystallization transactions, which resulted in them holding their shares through respective Holdcos whose shares had a stepped-up ACB and a PUC that reflected the PUC that had effectively been transferred to them. The funds’ common shares of the Corporation were repurchased in 2005 (the Corporation had done quite well), and the taxpayers had their Holdcos distribute most of their PUC in cash during 2006.
The ARQ considered this to be abusive surplus-stripping, and applied the Quebec general anti-avoidance rule to treat most of the paid-up capital distributions as taxable dividends. Dortélus JCQ had found that the utilization by the taxpayers of their stepped-up PUC in 2006 was not part of the same series of transactions as the 1998 PUC-averaging transactions, stating that in order to analyze the nexus between the 1998 and 2006 transactions “it is necessary to place oneself in 1998, at the time of the first transaction and not to apply a backwards-looking analysis.” The ARQ submitted that this approach had erred by not recognizing that Copthorne had found that the assimilation to a series of transactions - of related transactions completed “in contemplation” of the series - included backwards-looking contemplation (i.e., the 2006 transactions were effected “in contemplation” of the previous PUC step-up in 1998.)
In rejecting this submission, Schrager JCA found that, consistently with Copthorne, the question of whether the “in contemplation of” test as to a series should be applied prospectively or retrospectively, depended “on the circumstances of the case.” In the circumstances of this case, including that “none of the players in 1998 could have foreseen that the business would generate sufficient cash six or eight years later to allow the shares to be redeemed,” Dortélus JCQ had not erred by applying the “in contemplation of” test looking forward from 1998 rather than backwards from 2006. It followed that the 1998 PUC-averaging transactions and the use of that PUC in 2006 were not avoidance transactions for GAAR purposes.
Neal Armstrong. Summary of Agence du revenu du Québec v. Custeau, 2020 QCCA 1496 under s. 248(10).
3295036 Canada – Quebec Court of Appeal finds that the use, in sales years later, of ACB that was stepped up in a “Quebec shuffle,” occurred as part of the same series
In October 1996, a Quebec-taxpayer company (“329”) acquired public company shares from its parent, on two separate days, in “Quebec shuffle” transactions. The parent realized no gain because federal and Ontario s. 85(1) elections were made. However, 329 acquired the shares at full cost for Quebec purposes because no Quebec rollover election was filed. Most of the shares were sold by 329 in 2000 at a capital loss for Quebec purposes, and it claimed some of those capital losses in its 2007 and 2008 Quebec returns.
A specific Taxation Act provision (s. 529.1) effectively denied 329’s use of its stepped-up cost if its two 1996 acquisitions occurred as part of a series of transaction that ended after 18 December 1996. The Court affirmed the finding of Fournier JCQ below, who found that the two 1996 share drop-downs were a “series of transactions” and applied Copthorne to find that the subsequent sales of the shares by 329 were transactions occurring “in contemplation” of that series and, thus, were assimilated to the series by the Quebec equivalent of s. 248(10). In this regard, the Court of Appeal stated:
[T]he transactions at issue … were not known at the time the tax planning was implemented, but were undoubtedly the type of transactions contemplated in order to benefit from the tax advantage resulting from the "Quebec shuffle".
The Court also confirmed Fournier JCQ’s finding that the ARQ was not precluded from reassessing 329’s 2007 and 2008 taxation years to deny the capital losses carried forward from 2000, notwithstanding that the 2000 year was statute-barred.
Neal Armstrong. Summaries of 3295036 Canada Inc. v. Agence du revenu du Québec, 2020 QCCA 1435 under s. 248(10) and s. 152(4).
Yellow Point – Federal Court of Appeal confirms that an ecological gift was made in the year before it was certified as such
A taxpayer, who donated an interest in ecologically sensitive land to two qualified donees in 2008, unsuccessfully argued that the gift was not made until 2009 for purposes of computing the five-year (now 10-year) carryforward period described in s. 110.1(1)(d)(iii), because it was not until 2009 that he received the certification from the Minister of the Environment as to the land's ecologically sensitive nature and value that was required under that provision. In confirming that the ecological gift instead was made in 2008 when the gifted property was transferred, Noël CJ stated:
[W]hen property is gifted … the disposition takes place when ownership of the gifted property is transferred from the donor to the donee …
… There is no doubt that the appellant’s entitlement to the capital gain exemption and the related deduction did not arise until 2009 when all the conditions set out in paragraph 110.1(1)(d) and subsection 110.1(2) were met, but this does not alter the time when the “gift was made”.
Noël CJ also effectively found that the word “peut” (may) in the French version of s. 118.1(11) meant the same thing as the word “shall” in the English version, stating in this regard:
[T]he use of the word “peut” in the French version illustrates how “an official who is permitted to do a thing may, in addition, be obliged to do it” (Ruth Sullivan, Sullivan on the Construction of Statutes …).
Neal Armstrong. Summary of Yellow Point Lodge Ltd. v. Canada, 2020 FCA 195 under s. 110.1(1)(d) and s. 118.1(11).
Income Tax Severed Letters 11 November 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
MDA Systems – Court of Quebec finds payments made by the federal government under a contract where it mostly had the risks and benefits were SR&ED “contract payments”
MDA contracted with the Government of Canada to provide computer systems engineering work on a satellite system to perform radar imaging from space. The ARQ denied tax credits for the wages cost of work performed on the contracts by MDA on the basis that the consideration received by MDA from the Government was “contract payments” – whose definition (similarly to the federal definition in ITA s. 127(9)) relevantly referred to “an amount in respect of an expenditure of a current nature … of a taxpayer … payable by the Government of Canada … or other public authority … for scientific research and experimental development to be performed for the authority.”
Before agreeing with the ARQ position, Bourgeois JCQ found that:
- “the SR&ED work was carried out because of the requirements in the contracts between the Government of Canada and MDA”
- “the Government of Canada bore the major risks of the … Program”
- “the intellectual property developed by MDA in the space component of this project was transferred from MDA to the Government of Canada”
- it was a contract for services rather than for the sale of goods (although Bourgeois JCQ agreed with a CRA Policy Statement that “a contract for the sale of a good does not necessarily mean that the SR&ED work was not being performed on behalf of the payer”)
More generally, “[a]lthough the contracts were not drafted specifically for doing SR&ED work, analysis of the contract terms tends to show that ultimately the SR&ED work was undertaken on behalf of the Government of Canada.”
Neal Armstrong. Summary of MDA Systems Ltd. v. Agence du revenu du Québec, 2020 QCCQ 4190 under s. 127(9) - contract payment - para. (b).
CRA reaffirms that there potentially can be a safe income pick-up from a corporation over which there is no significant influence
CRA reaffirmed its position dating back to the 1984 Hiltz paper that:
One can consolidate safe income of a corporation over which there is no significant influence if it can be clearly demonstrated that the safe income of such corporation contributes to the gain on the shares … .
CRA went on to note that this position:
- extended to the consolidation of income from foreign corporations that were not foreign affiliates (citing Lamont)
- generally would not extend to portfolio investments in public corporations (given that “what would be considered to contribute to the value of the shares held by the shareholder is not the income of the public corporations but rather the trading value of its shares on the stock exchange”)
CRA also stated:
… [T]he negative safe income of corporations would reduce the safe income of a holding corporation only to the extent that it can be considered to result in a reduction of the value of the shares of the holding corporation, for example, either because of a guarantee made by the holding corporation, or because of an actual payment for the losses by the holding corporation [citing Brelco].
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.2 under s. 55(2.1)(c).