News of Note

A Revenue Quebec audit team gathered incriminating evidence respecting the alleged diversion of company funds to pay for the construction of a chalet for its CEO (by allegedly paying false invoices directed to it by the builder). RQ did not accord any of the Jarvis protections to the company and its CEO, because it had no intention of criminally prosecuting – it was content to impose the equivalent of s. 163(2) penalties (in addition to the tax) – as did CRA, a year later, following the RQ lead.

However, in a bizarre twist, several years later, the CRA Investigations Division, in order to find sufficient work for its investigators, began selecting closed files for which s. 163(2) penalties had been imposed, for criminal investigation – which in this case, consisted mostly of asking the RQ for a copy of much of its file (a transmission of information which Galiatsatos JCQ found to be contrary to the intergovernmental agreement), and then executing searches on the company premises as well as those of the builder. The company and CEO then were charged with tax evasion under the ITA.

Galiatsatos JCQ acknowledged that, in a dry technical sense, perhaps CRA had not violated the Jarvis protections as conventionally expressed as it itself had not used any of its audit powers. However, he stated that he could not “condone … a practice” of using a “treasure trove of ready-made files for ‘investigation’ and prosecution containing uncautioned conscripted evidence,” as “otherwise, the Jarvis protections simply melt away.”

Here, the usual remedy of simply excluding evidence under s. 24(2) of the Charter was not a satisfactory solution as RQ likely would have audited the builder regarding the chalet even if it had observed Jarvis. Galiatsatos JCQ took the further step of ordering a stay of the prosecution, stating:

[S]hould the State choose not to engage the criminal process despite obvious signs of criminality, thereby choosing not to offer constitutional protections, it is expected that is will in turn choose to forego criminal prosecution. In order to ensure that the taxpayer’s constitutional rights are respected, such a broad discretionary decision must have a built-in mechanism by which it ensures that the taxpayer will not later be prosecuted on the basis of the fruits of such an expansive audit. …

Considered as a whole, the history of this investigation directly harms the integrity of the justice system and irreparably compromised the community’s sense of fair play and decency. Alternative remedies are insufficient to redress this prejudice. Even if much of the evidence is excluded under s. 24(2), the case would still be viable, since a significant portion of the evidence was deemed admissible by this Court.

Neal Armstrong. Summary of R. v. Bouclair Inc. (2020), 500-73-004592-180 (Court of Quebec) under s. 231.1(1).

CRA has expanded some of its positions in its Webpage Q&A on the CEWS (wage subsidy). These include:

• CRA will recognize employee cost sharing arrangements where, for example, medical professionals share support staff and only one entity has a payroll account with CRA to handle the source deductions – so that, provided the other employers open up payroll accounts with CRA, they can apply for the CEWS based on their agreed share of the payroll.
• Regarding the requirement in the definition of “eligible employee” that the individual be “employed in Canada,” CRA stated that “generally, a person exercises the functions of their employment at the place where they are physically present,” so that “when that place is situated outside Canada, that person will not generally be considered as being ‘employed in Canada’.”
• Amounts paid by an eligible employer to an eligible employee as a maternity or parental top-up amount are generally considered as eligible remuneration for the relevant claim period.

Neal Armstrong. Additional summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 6 October 2020 under s. 125.7(1) – eligible employee, eligible remuneration.

CRA has expanded or altered various positions in IT–257R, Canada Council Grants, IT-504R2, Visual Artists and Writers, and IT‑525R, Performing Artists, in its new Folio on Artists and Writers.

CRA states that in distinguishing between an employment contract and a contract for services in the common law provinces, it applies the following two-step approach:

Step 1 - Look at the intention of the parties when they entered into the working arrangement.

Step 2 - Determine whether the intent of the parties is reflected in the facts by looking at the following elements:

• the level of control the payer has over the worker's activities

• whether the worker or payer provides the tools and equipment

• whether the worker can subcontract the work or hire assistants

• the degree of financial risk the worker takes

• the degree of responsibility for investment and management the worker holds

• the worker's opportunity for profit

• any other relevant factors, such as written contracts.

Then determine whether the actual working conditions are more consistent with a contract of service or with a contract for services.

This approach (and a somewhat similar three-step approach applied in Quebec) appears to give somewhat less weight to the parties’ subjective intention than suggested in Insurance Institute.

In light of Stewart and Walls, the reliance in IT-504R2 on the reasonable expectation of profit test in identifying whether there is a business or a merely personal endeavour has been dropped. However (presumably in part because artistic activities also typically satisfy a personal interest), CRA insists on the application of a list of objective tests in verifying that there is a business. It concludes this discussion by stating:

In the case of an artist or writer, it is possible they may not realize a profit during their lifetime. In order for the taxpayer to be considered to have undertaken the activity in pursuit of profit, i.e. to be considered to be carrying on business, the artistic or literary endeavours must be carried on in a sufficiently commercial or business-like manner.

CRA provides an intricate example showing that an employed musician may be better off deducting his expenses of travelling to performances under s. 8(1)(h) rather than (q).

A gift of art by a visual artist will be considered to be on income account if the artist created the work with the intention of selling it, but instead donated it - whereas gifts of items such as original manuscripts, letters, memoranda, or similar papers would generally be considered to be of capital property.

The proceeds of disposition deemed to result from the gift can be reduced by a designation under s. 118.1(7.1) – or, where there is a gift of certified cultural property, are automatically reduced (assuming no “advantage”) while at the same time generating full charitable credits – all as discussed in detail.

Neal Armstrong. Summaries of Folio S4-F14-C1 Artists and Writers 9 October 2020 under General Concepts – Substance, s. 5(1), s. 3(a) – business source, s. 9 – nature of income, s. 10(6), s. 18(1)(a) – income-producing purpose, s. 8(1)(p), s. 56(3)(b), Reg. 200(2), s. 9 – capital gain v. profit – commodities, s. 118.1(1) – total cultural gifts and s. 118.1(7.1).

We have published a further 6 translations of CRA interpretations released in January, 2010. Their descriptors and links appear below.

These are additions to our set of 1,291 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.