News of Note

CRA will not provide relief where there are COVID-related delays in meeting the deadline of realizing a loss for s. 164(6) carryback within an estate’s first taxation year

In order for the s. 164(6) carryback of a capital loss by an estate to the terminal year to be available, the executors must dispose of the capital property in question within the first taxation year of the estate. Could CRA allow more time for the disposition given that there may be COVID-related or other delays in the probate process? CRA responded that the extensions accorded under the COVID-19 Time Limits Act did not apply here, and stated:

[W]hile we understand that delays in the probate process may delay the timing of the disposition of the properties of an estate, the CRA is unable to extend the time limit for the dispositions in subsection 164(6) … beyond the first taxation year of the graduated rate estate.

Neal Armstrong. Summary of 16 October 2020 External T.I. 2020-0865071E5 under s. 164(6).

CRA indicates that taxpayers can delay flow-through share reporting under the look-back rule in reliance on the COVID-related proposed amendments

COVID-related proposed amendments (principally ss. 66(12.6001), 66(12.731) and 211.91(2.1)) released on December 16, 2020 generally related to a one-year extension of the timelines to spend flow-through share proceeds and make related filings. Should taxpayers file their returns based on such “Proposed Amendments”? For example, where flow-through shares were issued in 2019 under the look-back rule , can the Form T101C (reporting any Part XII.6 taxes payable) be filed before March 2022 rather than March 2021?

CRA first noted its previously-stated position:

It is the CRA’s longstanding practice to ask taxpayers to file on the basis of proposed legislation. … However, where proposed legislation results in an increase in benefits … the CRA’s past practice has generally been to wait until the measure has been enacted. …

Generally speaking, the CRA will not reassess if the initial assessment was correct in law. As a result, a taxpayer’s request to amend their tax records to reflect proposed legislation will be denied.

It then stated:

Based on the foregoing, taxpayers may file their tax returns, including any Form T101C, based on the Proposed Amendments.

Neal Armstrong. Summary of 23 December 2020 External T.I. 2020-0874621E5 under s. 211.91(2.1).

Pomeroy – Federal Court of Appeal allows the Crown to adduce fresh evidence after a TCC motion even with something of a failure to have introduced this before the TCC

The Tax Court dismissed the Crown’s motion to amend its reply to the taxpayer’s notice of appeal to add an allegation that a loan in issue was a sham, on the grounds that such addition would be unfair as the taxpayer’s principal (Mr Pomeroy) had now died. The Crown now moved under Rule 351 for leave to present fresh evidence, namely, the entirety of the transcript of Mr. Pomeroy’s 2018 discovery, on the basis that it would demonstrate that Mr. Pomeroy had little knowledge of the transactions in question, and therefore he could not have given evidence of importance.

The principal sticking point to allowing this new evidence was the first of the four tests enunciated in Coady (2019 FCA 102), namely, that “the party seeking to adduce fresh evidence [must] establish that the evidence: (1) could not have been adduced at trial with the exercise of due diligence.”

Regarding the failure to satisfy this test, Locke JA noted that the Crown did not become aware of the relevance of the additional evidence until six days before the hearing of the Tax Court motion, at which point there was no established procedure for introducing such evidence – but nonetheless found that he was “not convinced that the appellant could not have sought, and possibly obtained, leave to put the evidence before the Tax Court.”

In nonetheless allowing the new evidence, he stated:

… I am conscious that the motion before the Tax Court was an interlocutory matter, and the respondent’s opportunity to adduce this evidence was limited because of the absence of a clear procedural mechanism for doing so. Leave might have been sought at, or shortly before, the hearing before the Tax Court to adduce the New Evidence, but such a request would have been irregular and might well have been unsuccessful.

On balance, and having regard for the limited opportunity the respondent had for putting forward the New Evidence before the Tax Court, I find that the interests of justice require that the Court exercise its discretion to admit the New Evidence.

Neal Armstrong. Summary of Canada v. Pomeroy Acquireco Ltd., 2020 FCA 221 under Rule 351.

CRA indicates that amending a foreign-law debt to transition to RFRs is a disposition only if there is discharge and substitution under that law

A number of jurisdictions are working on replacing existing interbank offering rates (IBORs) by “risk-free-rates” (RFRs), for example, replacing CDOR by the Enhanced Canadian Overnight Repo Rate Average (CORRA), and USD LIBOR by the Secured Overnight Funding Rate (SOFR) – so that existing debts with floating interest rates may have consequential amendments to the benchmark rates.

After stating the general principle that “the determination of whether an obligation has been disposed of for Canadian income tax purposes depends on whether these events are considered to result in the discharge of the obligation and the substitution of a new obligation under the law governing the former obligation,” CRA indicated that where the governing law is Canadian, such an amendment “in and of itself, would generally not constitute a disposition of the IBOR Instrument,” and then stated:

Where foreign law governs an obligation … the legal effect of these events on such an obligation under the relevant foreign law must be considered in order to determine if the obligation has been disposed of … .

Neal Armstrong. Summary of 16 December 2019 Roundtable, 2019-0828571C6 under s. 248(1) – disposition.

Income Tax Severed Letters 6 January 2021

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

Belchetz - Federal Court of Appeal confirms that CRA’s decision to waive “only” 15 out of over 30 years of interest was reasonable

Taxpayers who were the “innocent dupes” of a tax fraud, i.e., purported partnerships giving rise to large reported losses in the mid-1980s where, in fact, the partnerships were non-existent, ultimately had their Tax Court actions decided against them in 2014. A large part of the delay (including CRA not assessing the taxpayers’ returns for quite some time) was attributable to CRA and Justice wanting to bring a criminal prosecution against the promoters before dealing with the taxpayers. In the meantime (in 2004, i.e., before the 10-year limitation on interest relief in s. 220(3.1) was introduced) the taxpayers sought interest relief.

After three levels of review, CRA cancelled approximately 15 years of accrued interest. The Federal Court dismissed the taxpayers’ application for judicial review. In dismissing their appeal of that decision, Mactavish JA noted that the “Minister’s discretion must … be genuinely exercised, and must not be fettered or dictated by policy statements such as … IC 07-1R1” – but found that no such fettering had occurred here – the Minister’s delegate had “clearly turned his mind to the question of whether additional interest relief was warranted” and had “conducted a holistic review of the processing delays that had occurred,” and his “decision was transparent, intelligible and justified.”

Neal Armstrong. Summary of Belchetz v. Canada (National Revenue), 2020 FCA 225 under s. 220(3.1).

BCS Group – Federal Court of Appeal finds that a corporation must be represented by counsel in General Procedure appeals

In Masa Sushi, Graham J found that a corporation could not appear “in person” in a General Procedure matter and had to appear through counsel, so that a Rule purporting to permit a corporation to appear in person with the Court’s consent would be ultra vires. Gauthier JA essentially agreed, stating (at paras. 6, 33):

[T]he legislator did not intend to oust the common law and civil law principle that a corporation, because of its very nature, cannot appear “in person” before a court. It can only be represented by an agent who is a distinct person than the corporation. … By adopting detailed provisions dealing with representation in the Act, the legislator limited the TCC’s implied power to control who may represent the corporation in their courtroom, especially in proceedings subject to the General Procedure. …

[T]he common law/civil law concept that a corporation cannot appear in person because of its very nature strongly suggest[s] that under section 17.1 [of the TCCA], a party who is a corporation must be represented by counsel as defined by subsection 17.1(2).

Neal Armstrong. Summaries of Canada v. BCS Group Business Services Inc., 2020 FCA 205 under Tax Court of Canada Act, s. 17.1(1) and Rule 30(2).

Non-resident realty investors may be subject to Quebec rules imposing double taxation

There are particular potential pitfalls that can arise for a non-resident investing in Quebec rental properties or other investments:

  • The Quebec Taxation Act departs from the federal rules by deeming Quebec rental properties to be a Quebec establishment, with the result that the rental income therefrom is subject to Quebec income tax, whereas there is no federal abatement for provincial tax if the income is considered to be income from property – hence, there is double taxation.
  • A similar double-taxation problem arises when the property is disposed of.
  • Non-resident inter vivos trusts that own immovable property in Quebec and earn rental income therefrom are considered to have a “specified immovable property.” On a disposition of such property by the trust, the taxable portion of the capital gain (and recapture) will be subject to federal income tax and Quebec surtax at a combined rate of 48.84% (i.e., of 24.42% on the capital gain). However, by virtue of the specified immovable property constituting taxable Quebec property, there is further tax at an effective rate of 12.875% on the capital gain, resulting in a combined effective rate of 37.30%.
  • On a literal reading of the taxable Quebec property definition, that term can include a closely-held company share that derives its value principally from a Canadian resource property, even where there is no connection to Quebec, e.g., shares of a Canadian corporation holding only Alberta exploration rights. The ARQ has declined to acknowledge that it lacks the constitutional authority to impose tax in these circumstances.

It is suggested that where a non-resident wishes to invest in a Canadian property that generates active business income, such as an assisted–living facility, the unavailability of a s. 216 structure for business income can be addressed by using a headlease structure under which the non-resident headleases the property under a passive net lease to an operating subsidiary that instead carries on the active business of dealing with the residents, space tenants, hotel patrons, etc.

Neal Armstrong. Summaries of Michel Ranger and Rhonda Rudick, “Federal and Provincial Tax Considerations Relating to Non-Resident Investment in Canadian Real Estate”, 2019 Conference Report (Canadian Tax Foundation), 32:1 – 39 under Reg. 805, s. 216(1), s. 248(1) – taxable Canadian property – (c), (a).

We have translated 4 more CRA Interpretations

We have published a further 4 translations of CRA interpretation released in June 2009. Their descriptors and links appear below.

These are additions to our set of 1,358 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for January.

Bundle Date Translated severed letter Summaries under Summary descriptor
2009-06-26 27 May 2009 External T.I. 2008-0296731E5 F - Rachat d'actions: 20(1)c) Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) corporation must allocate contributed capital of redeemed shares proportionately to borrowed money and redemption notes, but can disproportionately allocate its accumulated profits
12 June 2009 External T.I. 2009-0316511E5 F - Charges sociales et autres retenues France Treaties - Income Tax Conventions - Article 18 list of pension plans recognized for French tax purposes re Art. XXIX(5) of French Treaty
Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax social security contributions do not qualify as income taxes – but French "contribution sociale généralisée" and "contribution pour le remboursement de la dette sociale" so qualify
2009-06-19 10 June 2009 External T.I. 2008-0300041E5 F - Paiements ou remboursement de frais de formation Income Tax Act - Section 5 - Subsection 5(1) bonus taxable even where employee requests that it be spent on skills training
10 June 2009 External T.I. 2009-0308031E5 F - Admissibilité partagée de la PFCE Income Tax Act - Section 122.6 - Eligible Individual - Paragraph (f) factors in Reg. 6302 applied to determine which parent has primary care responsibility – if indeterminate, CRA applies its shared eligibility policy

Development Securities plc - Court of Appeal of England and Wales locates the residence of Jersey subsidiary in the UK given that its directors took instructions from the UK parent on a transaction not in its commercial interests

A U.K. tax avoidance scheme entailed special-purpose Jersey subsidiaries acquiring assets from their UK parent (DS Plc) or its U.K. subsidiaries at prices corresponding to the assets’ historical cost plus an inflation-indexation adjustment and then, after the Jersey-resident directors had resigned, selling those assets back to the DS group at their much lower fair market value, thereby triggering a tax loss that could be used in the DS group. The scheme depended on considering that these subsidiaries had their central management and control (“CMC”) and, thus, residence, in Jersey at the moment of the acquisitions. Their directors consisted of the UK-resident secretary of DS Plc and three Jersey residents who also served as directors of numerous other client companies. The board held a three-hour meeting in Jersey to review and approve the transactions, and three briefer meetings to approve the granting and then exercise of the call options, and the replacement of the Jersey directors by UK-management directors (when the time came in the PwC plan for the subsidiaries’ CMC to shift to the UK).

In reversing the Upper Tribunal and reinstating the decision of the First-Tier Tribunal that, at the acquisition times, the CMC of the subsidiaries was exercised in the UK by the parent’s management and not in Jersey, David Richards LJ stated:

The clear conclusion to which the FTT came … was put by the FTT at [422], "the Jersey directors were acting under what they considered was an 'instruction' or 'order' from the parent".

The inevitable conclusion from that finding was … that the decision to enter into the relevant transactions was taken by the parent in the UK, not by the directors in Jersey. They were, of course, concerned to ensure that what they were being instructed to do was lawful. … Likewise, the directors were concerned to ensure that there were no unexpected liabilities for the Jersey companies, such as stamp duty, and to ensure that the documents were in proper order. None of that detracts from the FTT's finding as to who made the decision to enter into the transactions and where that decision was made.

The applicable principle was stated in the concurring reasons of Newey LJ:

A company may be resident in a jurisdiction other than that of its incorporation not only where a constitutional organ exercises management and control elsewhere, but if the functions of the company's constitutional organs are usurped, in the sense that management and control is exercised independently of, or without regard to, its constitutional organs, or if an outsider dictates decisions (as opposed to merely proposing, advising and influencing decisions). [emphasis added]

Neal Armstrong. Summary of R & C Commrs v Development Securities plc & Ors, [2020] EWCA Civ 1705 under s. 2(1).

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