News of Note
Athletes 4 Athletes – Federal Court of Appeal finds that the required nationwide objective for a Canadian amateur athletic association could be met out of a local office funding athletes directly
Email this ContentThe Minister rejected the application of the appellant (“A4A”) for registration as a registered Canadian amateur athletic association (CAAA) on the basis that (1) A4A was not intending to promote amateur athletics in Canada directly, but instead was intending to financially support athletes who could not otherwise afford to train and pay for their daily living expenses, and (2) A4A was intending to have, at least initially, a presence only in Vancouver and lacked the budget to operate programs on a national level, so that it would not satisfy the test (in para. (d) of CAAA definition) of promoting amateur athletics in Canada on a “nationwide basis”.
In rejecting the first ground and before remitting the matter back to the Minister for redetermination in accordance with his reasons, Webb JA stated:
So long as the only purpose and the only function of an organization is the promotion of amateur athletics in Canada on a nationwide basis, it should not matter whether a particular function directly or indirectly does so.
In rejecting the second ground, he stated:
So long as the organization is promoting amateur athletics in Canada on a nationwide basis, even if it only has an office in one province, it would satisfy the requirement.
He also cited Stemijon in noting that the “guidance as previously drafted by the CRA cannot bind the Minister nor can it alter the provisions of the statutory definition of a CAAA”.
Neal Armstrong. Summaries of Athletes 4 Athletes Foundation v. Canada (National Revenue) 2021 FCA 145 under s. 149.1(1) – CAAA - (d) and s. 149.1(22).
GST/HST Severed Letters March 2021
This afternoon's release of three severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their March 2021 release) is now available for your viewing.
Including in-laws or aunts or nephews as beneficiaries of a family trust might jeopardize access to the capital gains deduction
S. 110.6(14)(c) may assist in satisfying the test, in the qualified small business corporation (QSBC) definition in s. 110.6(1), that the mooted QSBC shares have been held by the disposing taxpayer or a related person or partnership for at least 24 months.
Suppose, for example, that on January 31, 2021, Mr. X settled a family trust for himself and related family members, and thereupon transferred his shares of Opco (which he had incorporated in 2015 and which otherwise met the QSBC definition) to the trust, with the trust selling the shares to a third party on June 30, 2021.
In this situation, resort may be had to s. 110.6(14)(c)(ii), which indicates that a trust is deemed to be related to a person from whom it acquired the shares, provided that all beneficiaries are related to the person at the time that the shares are sold to the third party. Here, because the trust acquired the shares from Mr. X and there are no non-related beneficiaries, (c)(ii) deems the trust to be related to Mr. X, so that the 24-month test is met, i.e., the shares were owned by the vendor (the trust) or by Mr. X (deemed by (c)(ii) to be related to the trust) for the 24-month period.
The beneficiaries of a trust may include a second trust – which will be deemed by s. 110.6(14)(c)(i) to be related to the first trust during the period that the second trust is a beneficiary thereof. For s. 110.6(14)(c)(ii) to apply, in addition to being related to all beneficiaries, the person from whom the first trust acquired the shares must also be a beneficiary of the second trust, and thus deemed by s. 110.6(14)(c)(i) to be related to the second trust at the time that the first trust disposes of the shares.
Where there is a corporate beneficiary, s. 110.6(14)(c)(i) deems that corporation to be related to the trust while it was a beneficiary thereof. For s. 110.6(14)(c)(ii) to apply, the person from whom the trust acquired the shares must also be related to the corporate beneficiary at the time that the trust disposes of the shares.
Note that to access s. 110.6(14)(c)(i), all beneficiaries of the trust must be related to the person selling the shares. Thus, no aunts, uncles, or cousins can be beneficiaries. Furthermore, if in-laws are included as beneficiaries, a divorce may result in an in-law no longer being related to the original owner of the shares at the time of the third-party sale.
Neal Armstrong. Summary of David Carolin, Manu Kakkar and Stan Shadrin, “Capital Gains Exemption Planning, Trusts, and the 24-Month Holding Period Rule,” Tax for the Owner-Manager, Vol. 21, No. 3, July 2021, pp. 2-3 under s. 110.6(14)(c).
Income Tax Severed Letters 21 July 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
It may be bad tax planning to try to reduce the passive-income grind
Under s. 125(5.1)(b), when a CCPC, together with any corporations associated with it, earns more than $50,000 of adjusted aggregate investment income (AAII), access to the small business deduction (SBD) is eliminated as the AAII for the group increases from $50,000 to $150,000.
Although the effect of loss of the SBD is to reduce the tax deferral benefit of corporate earning of the active business income (ABI), Ontario and New Brunswick did not adopt a matching AAII rule – so that in Ontario, for example, a CCPC earning ABI of $500,000 and AAII of $150,000 can still obtain a tax-deferral benefit at the Ontario level of up to $41,500 annually.
Furthermore, in those two provinces, the integrated taxes for ABI, subject to the passive income business limit reduction rules and fully distributed to the top-rate individual shareholder, generates a saving compared to the situation where the AAII grind does not apply - since the CCPC can pay dividends as eligible dividends. For example, on ABI of $500,000, the corporate income tax in Ontario is higher ($91,000 v. $61,000), but the personal tax (at an effective rate of 39.34% v. 47.74%) on a dividend of the after-tax income is lower ($160,901 v. $209,579), for a net saving of $18,678. In the other provinces, the difference between the integrated taxes paid in the two scenarios is minimal.
This suggests:
A shift in investment strategies or the extraction of funds from the corporation to avoid the application of the passive income business limit reduction rules may not be advisable.
Neal Armstrong. Summary of Jeanne Cheng, “The Small Business Deduction and the AAII Grind: Is It a Real Problem?”, Tax for the Owner-Manager, Vol. 21, No. 3, July 2021, pp. 1-2 under s. 125(5.1)(b).
Boguski – Federal Court of Appeal confirms rejection of attempt by CRA to use the expanded s. 174 application procedure
In 2013, s. 174 was expanded so that it could be used to request a determination by the Tax Court on questions involving a large group of unrelated taxpayers who entered into similar transactions with a third party. CRA sought to have the Tax Court make a determination as to the validity of Canadian development expense claims by a significant number of different taxpayers respecting their purchase of rights from a resource company. The Tax Court previously had directed that certain of the appeals proceed under the Court’s lead case rules. The Tax Court dismissed the s. 174 application on the basis, inter alia, that directing a hearing of the s. 174 question would be “significantly more expensive and time-consuming than proceedings that would otherwise occur under the Court’s Lead Case Rules.”
In dismissing the Minister’s appeal, Stratas JA stated that the “Tax Court has broad discretion to act or refuse to act under section 174,” that the “Tax Court was entitled to take into account issues of efficiency and procedural fairness,” and that “this Court must defer to such a factually suffused, discretionary finding.”
Neal Armstrong. Summary of Canada (National Revenue) v. Boguski, 2021 FCA 118 under s. 174(3).
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in August, 2007. Their descriptors and links appear below.
These are additions to our set of 1,632 full-text translations of French-language severed letters (mostly, Roundtable items and Technical Interpretations) of the Income Tax Rulings Directorate, which covers all of the last 13 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Whether there is a “liquidation and dissolution” for QLAD or DLAD purposes likely turns on whether in substance there is a net asset distribution followed by corporate termination
The ITA definitions of qualifying liquidation and dissolution and a designated liquidation and dissolution both reference the undefined concept of “liquidation and dissolution.”
It is suggested that Canadian legal practitioners regard "liquidation" as generally referring to the “factual process of satisfying a corporation's creditors and distributing its remaining assets to its shareholders,” and "dissolution" as generally referring “to the acceptance by the relevant corporate registrar of the corporation's articles of dissolution, which terminates the corporation's legal existence.” Similarly:
What appears to be important in determining whether a corporation has been "liquidated" or "wound-up" is the broad substance of what occurred: Was there a realization of the corporation's assets (if any), a discharge of its liabilities (if any), and a distribution of its surplus (if any) to its shareholders?
CRA seemed to agree in 2003-0034311E5, i.e., it seemed to consider that it is the substance of what occurred (as opposed to the form) that is important in determining whether there is a “liquidation and dissolution”.
Neal Armstrong. Summary of Michael Kandev and Olivia Khazam, “Was there a ‘Liquidation and Dissolution’? A (Corporate) Existential Question,” International Tax (Wolters Kluwer CCH), No. 118, June 2021, pp. 8-9 under s. 88(3.1).
The concepts of NAL dealings/lien de dépendance may have evolved since Swiss Bank
After discussing the concept of parties dealing at arm’s length and its judicial treatment , including the concepts of acting in concert, and then of captive interest, that surfaced in the two levels of decision in the Swiss Bank case, and how subsequent courts dealt with these concepts, the authors conclude:
[T]he interpretation of Swiss Bank by later jurisprudence has given different meaning to the determination of whether parties are dealing at arm's length than what was intended by the Exchequer Court, or even the Supreme Court. Justice Thurlow looked to see whether A and B acted in concert without separate interests to test whether they were NAL with C, not with each other, but the CRA and most courts seem only interested in applying the acting in concert test bilaterally. The SCC decision in Swiss Bank is predominantly cited for the test it rejected, and almost never for the test it put forward (i.e., captive interest). This has been coupled with a deemphasis of the word "dealing" in the arm's length determination, with a resolute focus on what the relationship is between the parties. However, once a refrain is repeated often enough it tends to take on a life of its own, meaning that even with tenuous origins, the "acting in concert" test as it currently stands is likely here to stay.
Neal Armstrong. Summary of Matias Milet and Emily Gilmour, “A Discordant Jurisprudence: What does it Mean to be ‘Acting In Concert’?,” International Tax (Wolters Kluwer CCH), No. 118, June 2021, pp. 1-7 under s. 251(1)(c).
Mariani – Supreme Court of Ontario orders a new trial regarding claiming wedding expenses as business expenses
The trial judge convicted the individual accused and the corporation he owned (“MMFL”), of making a false statement and tax evasion in relation to both personal and corporate income tax returns. In particular, MMFL paid and claimed as a business expense a significant portion ($60,000) of the costs of the wedding of the son of the individual accused as a business expense. Before ordering a new trial, Nakatsuru J found that the trial judge had misapprehended the evidence in finding that there was no evidence of business associates of the accused having been invited to or attending the wedding.
Neal Armstrong. Summary of Mariani. v The Queen, 2021 ONSC 4731 under s. 239(1)(a).