News of Note

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).

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).

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).

ETA s. 135 deem a supply by a public sector body (PSB) of a service, or a licence of copyright, a trade-mark, trade-name or other similar property to a “sponsor” for exclusive use by the sponsor in publicizing the sponsor’s business, to not be a supply – except that this rule is stated not to apply where the consideration for this supply by the PSB to the sponsor is “primarily” for radio, TV, newspaper, or magazine advertising.

CRA dealt with a situation where, in order to ensure the success of an event mounted on a stage, a PSB enlisted the participation of sponsors. The agreements typically provided for consideration payable by that sponsor and for sponsorship rights, which included: acknowledgement as official sponsor of the event, logo visibility on event signage on a website, in newspapers, and in social media; the sponsor’s name being on a stage; a licence to use real property to promote its brand by offering samples; and VIP invitations to attend the event.

CRA found that notwithstanding the newspaper element, “the dominant element is the promotional services that the sponsor acquired” of the permitted character, so that the s. 135 no-supply rule applied.

Neal Armstrong. Summary of 10 August 2020 GST/HST Ruling 210848 under ETA s. 135.