News of Note
We have 1400 translations of CRA interpretations going back 12 years
Email this ContentWe have published translations of two CRA interpretation released last week, and a further 6 translations of CRA interpretation released in March and February, 2009. Their descriptors and links appear below.
These are additions to our set of 1400 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for March.
Perron-Ali – Tax Court of Canada finds that training expenses were eligible capital expenditures
A couple wanted to start investing in rental real estate but, in the year prior to that in which they started looking seriously at potential acquisitions, they were charged approximately $34,000 by a corporation, which provided some intensive three-day weekend training sessions that were focused on different strategies for investing and dealing in real estate, as well as “mentoring” services and over-the-phone coaching. Jorré DJ characterized these expenses as an “educational expense” which (as they involved more than “simply maintaining or somewhat extending existing knowledge and skills”) were capital expenditures, so that they were not currently deductible and could be recognized only under the eligible capital expenditure (now Class 14.1 property) rules.
Neal Armstrong. Summary of Perron-Ali v. The Queen, 2021 TCC 6 under s. 18(1)(b) – Capital expenditure v. expense - Know-how and training.
CRA indicates that an entity may be an eligible entity for CEWS purposes if it is not a public institution
In response to a question as to whether an “organization” that was an inter-municipal authority held by four regional Quebec county municipalities was eligible for the Canada emergency wage subsidy, CRA indicated that an “entity may be an ‘eligible entity’ for CEWS purposes, provided that it is not a ‘public institution,’.” Although the definition of “eligible entity” only explicitly excludes corporations, trusts, registered charities and organizations listed in ss. 149(1)(e), (j), (k) or (l) that are public institutions, this answer seems to indicate that CRA was indifferent as to whether this organization might instead be some other type of association or body.
CRA went on to indicate that regional Quebec county municipalities are municipalities (and, thus, public institutions), but did not address the nature of the authority that they jointly held.
Neal Armstrong. Summary of 23 June 2020 External T.I. 2020-0848441E5 F under s. 149(1)(c) and s. 125.7(1) – eligible entity.
Paletta – Tax Court of Canada decision supports the offsetting of almost $200M in taxable income through straddle trades
The taxpayer in Friedberg entered into spread positions in gold futures contracts, and in the same taxation year closed out the losing legs on his straddle positions (while entering into further contracts to maintain his hedged position) but deferred closing out the remaining contracts until the subsequent taxation year. The taxpayer in Paletta carried out a similar straddle program, except that it involved FX OTC forward contracts rather than gold futures. In order that he could shelter virtually all of the income of around $40 million earned by him over a number of years ending in 2007, he had to keep increasing the scale of his straddle position, given that the entire gain from closing out, in each year, the gain leg from the previous year’s trading needed to be offset in addition to his other taxable income for that year. Associated companies claimed $150 million in losses from the same straddle program.
In finding that the taxpayer’s claimed losses (except for an $8 million overstatement of the 2002 loss due to an “egregious error” – for which a gross negligence penalty was sustained) were fully deductible, Spiro J noted:
- “Friedberg stands for the proposition that straddle traders may report the results of their trades for tax purposes on a [realization] basis that does not reflect the true economic results of such trades.”
- The Parliamentary response to Friedberg (in ss. 18(17) to (23)) was not introduced until 2017.
- Regarding Crown arguments based on the trading consistently generating small economic losses, so that there was no source of income, Stewart established that “provided that one’s activity is clearly commercial, and that no personal element is involved, there is a source of income” and made “it clear that there is no ‘sufficiency’ test.”
- The straddle trades were not shams: the “parties to the trades did not represent their legal rights and obligations to the Minister any differently than the way they themselves understood them”; and although there could “be no doubt but that the straddle trading had no business purpose”, “[l]ack of business purpose is not a sham”.
- Furthermore, the Crown failed to “cite any binding authority that establishes ‘window dressing’ as a stand-alone judicial anti-avoidance doctrine”.
Neal Armstrong. Summaries of Paletta v. The Queen, 2021 TCC 11 under s. 9 – timing, General Concepts – Sham and s. 163(2).
Fitter International – Alberta Court of Appeal finds that B.C. must be sued in B.C. for unconstitutionally imposing extra-provincial sales tax obligations on non-B.C. vendors
The Alberta Court of Appeal found that the Alberta Court of Queen’s Bench lacked the jurisdiction to hear an application by an Alberta company (“Fitter”) for a declaration that provisions of the Provincial Sales Tax Act (B.C.), that purported to impose liability on non-B.C. vendors for failure to charge and collect B.C. sales tax on sales to B.C. residents, were unconstitutional. The Court stated:
Fitter can bring an action against the Crown in right of BC pursuant to the BC CPA [Crown Proceeding Act], but it must do so in the courts of BC in accordance with the requirements of that statute. BC has not waived its Crown immunity so as to permit it to be sued in the courts of Alberta.
Neal Armstrong. Summary of Fitter International Inc. v British Columbia, 2021 ABCA 54 under Crown Liability and Proceedings Act, 2019, s. 16(1).
Income Tax Severed Letters 17 February 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Luxury Home Landscape – CRA fails to establish the mailing date of an assessment due to not having a copy of a Canada Post Certificate of Registration
The Crown brought a motion to quash the corporate taxpayer’s notice of appeal from a GST/HST notice of confirmation on the grounds that the notice had not been filed within 90 days of the CRA sending, by registered mail, the notice of confirmation. It sought to prove this date of mailing by filing an affidavit of the CRA Appeals officer.
Russel J found that this affidavit did not satisfy the requirement in ETA s. 335(1) (similar to ITA s. 244(5)) that the affidavit attach “the post office certificate of registration of the letter or a true copy of the relevant portion thereof.” All it did was attach a copy of the form she got back from the CRA mailroom on which someone had affixed the Canada Post tracking number. The Crown’s motion was quashed.
This decision suggests that the wording of ETA s. 335(1)/ ITA s. 244(5) requires CRA's systems to retain and match thousands of copies of Canada Post Certificates to particular taxpayer files.
Neal Armstrong. Summary of Luxury Home Landscape Construction Inc. v. The Queen, 2021 TCC 4 under ETA s. 335(1).
DiCaita – Tax Court of Canada allows reconditioning of rental unit as deductible expense
A condo unit, which the taxpayer had been renting-out for many years, was vacated by the current tenant and ceased to be rentable at a reasonable rent as a result of extensive remediation to the exterior of the building that was commissioned by the condo board. The taxpayer used this as an opportunity to attend (at the beginning of 2012) to long overdue repairs to recondition the unit’s interior, which cost about 5% of the FMV of the unit. After this work, the taxpayer increased the rent by almost 50%, and was ultimately able to rent it out (at the end of 2012) at the increased rent.
In rejecting the Crown’s submission that the repair expenditures were not deductible because the unit was not rented out during that year, Masse DJ noted (at para. 23) that “a property does not need to be generating income at every stage of operation in order to be considered a source of income.” Turning to the Crown’s less frivolous argument that the repairs were capital expenditures, he stated (at para. 50):
… The repairs effected by the Appellant did not result in the creation of a different capital asset than what was there before. … They were meant to bring the property to the state that it previously was. There was no material changes to the physical structure, the layout or functionality of the unit. The expenditures were modest compared to the value of the property.
The taxpayer also had a rental property in Phoenix. He and his spouse flew down to Las Vegas on a vacation, but he then rented a car so that he could drive down to Phoenix (accompanied by his spouse) so that he could attend to issues regarding the rental unit – then they flew directly from Phoenix back home (in Vancouver). CRA allowed only the car rental expense. Masse DJ also allowed the cost of air fare of the taxpayer (but not his spouse) back to Vancouver as a deduction.
Neal Armstrong. Summaries of DiCaita v. The Queen, 2021 TCC 5 under s. 18(1)(a) – income –producing purpose, s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs, s. 3(a) - business source and s. 18(12).
Pelletier – Court of Quebec finds that the shareholder benefit from personal use of a corporate aircraft should reflect GAAP depreciation rather than CCA (25% d.b.) rates
A corporate helicopter was used partly for the personal use of the individual shareholder (Pelletier). The ARQ (contrary to the CRA approach) assessed to increase the amount of the shareholder benefit includible in the income of Pelletier on the basis that the value of the depreciation of the helicopter should be increased from the 4% straight-line rate used in preparing the corporation’s financial statements to the 25% declining-balance rate applicable to Class 9 property (such as helicopters).
Dortélus JCQ noted that the appropriate test was that of “what would the shareholder have paid to receive the benefit had he not been a shareholder” He accepted that the 4% rate accorded with generally-accepted accounting principles, and found that Pelletier had established that the 4% rate was “more in line” with this test.
Neal Armstrong. Summary of Pelletier v. Agence du revenu du Québec, 500-80-035631-176, 500-80-035644-179, 11 February 2021 (Court of Quebec) under s. 15(1).
CRA indicates that the capitalization of interest constituted its payment if there was a concurrent novation
CRA indicated that the capitalization of unpaid interest on a student loan would constitute the payment of such interest (so as to likely generate a credit under s. 118.62) if there was a concurrent novation of the loan by way of change of debt under the governing Quebec law – but that any such novated loan would be a new loan rather than qualifying as a loan made under the applicable Quebec post-secondary student assistance program. This latter comment likely signified that interest that accrued on any novated loan could not qualify for the credit when paid.
Neal Armstrong. Summaries of 29 September 2020 External T.I. 2018-0757501E5 F under s. 118.62 and General Concepts – Payment and Receipt.