News of Note
CRA indicates that unused HCSA credits can be carried forward for up to an additional 6 months during COVID-19
Email this ContentDue to the curtailment of services during the COVID-19 pandemic, plan members of a health care spending account (“HCSA”) may not be able to use the credits allocated to the HCSA before they expire, so that they will be forfeited. The terms of the HCSA would in most cases comply with IT-529, which provides that an HCSA can permit the carry-forward of either unused credits or eligible medical expenses (but not both) for a period not exceeding 12 months without generally disqualifying the HCSA from being a private health services plan, for purposes of the exemption in s. 6(1)(a)(i).
CRA has announced:
In these extraordinary circumstances, a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15 and December 31, 2020, could temporarily permit the carry forward of those unused credits for a reasonable period to allow members to access services that were otherwise restricted during the COVID-19 outbreak. A carry-forward period of up to six months would generally be considered reasonable and would not, in and of itself, disqualify the HCSA from being a PHSP.
Summary of 25 May 2020 External T.I. 2020-0846751E5 under s. 248(1) - private health services plan.
Joint Committee articulates its understanding of reasonable limitations on CRA’s discretion to extend reassessment periods during COVID-19
S. 7 of the Time Limits and Other Periods Act (COVID-19) (the “Proposals”) would grant the Minister the exceptional power inter alia to order the suspension or extension of a time limit, or any other period, that is established under any ITA or ETA listed in the Schedule. The Joint Committee suggests that there are provisions missing from the Schedule, and suggests that it contain more generic language to cover what is being aimed at.
One set of provisions that are already listed are ITA ss. 152(3.1) and (4) and ETA ss. 298(1) and (2), setting out permitted (re)assessment periods. Based on informal discussions with CRA officials, it is understood that the “Minister would likely exercise the authorities provided under s. 7 of the Proposals in a manner that would not displace acquired rights by reopening administrative proceedings which had achieved finality before the announcement of the Proposals, nor in a manner that could be duplicative or inordinately disruptive of certainty in proceedings and the rule of law, or not justified by the need to avoid unfair or undesirable effects of the COVID-19 crisis.” The following observations of the Joint Committee give shape to that understanding:
- Where such reassessment periods had already expired before the announcement of the Proposals, any such order would not permit an assessment without the taxpayer’s consent.
- For audits that had not been materially disrupted by COVID-19, no order would extend such a reassessment period.
- Any order(s) would not result in a total prolongation exceeding six months.
- Any such order would not suspend or extend any such reassessment period which would otherwise expire within a reasonable amount of time after September 13, 2020.
Neal Armstrong. Summary of "COVID-19 Measures", 1 June 2020 Joint Committee Submission under s. 180(1), s. 152(3.1) and ETA s. 298(1)(a).
Watson – Full Federal Court of Australia finds that expenses incurred in administering a litigation settlement fund were not deductible from the related interest income
A trust for distributing $300M in class action damages to the class claimants earned $8.4M in interest income on the funds and incurred $4.3M in various expenses in assessing the claims of the various claimants before distributing the damages. The costs related to the derivation of the interest income were minimal. The Australian taxing act provided:
You can deduct from your assessable income any loss or outgoing to the extent that:
- it is incurred in gaining or producing your assessable income; or
- it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
In finding that such expenses were not deductible because there was no business and that such expenses were capital expenditures, the Full Federal Court of Australia stated:
[T]he taxpayer, in administering the Fund, was not turning his talent to account for money but was administering a court-approved scheme for the distribution of a settlement sum agreed upon by parties to a class action. ...
Properly analysed, the costs of administering the scheme were costs incurred in the course of effecting the distribution of the settlement sum to claimants entitled to share in the settlement sum, and thus costs incurred on capital account. The requirement that the settlement sum be held in interest-bearing accounts pending distribution as part of the Distribution Scheme does not give the costs of administering the scheme the character of revenue outgoings.
Neal Armstrong. Summary of Watson as trustee for the Murrindindi Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 under s. 18(1)(b) – capital expenditure v. expense – oversight or investment management.
CRA confirms that a DSLP leave period can be interrupted for COVID reasons
Two of the conditions for a qualifying deferred salary leave plan are (i) that the deferral period cannot exceed six years with the leave period beginning immediately afterwards and (ii) that the leave period must be one continuous period of at least six consecutive months (or three months for certain educational leaves). CRA recently issued two technical interpretations confirming that, pending a Finance review of the impact of the COVID-19 pandemic on such plans, CRA will permit the leave period to be deferred.
CRA has now issued a further two technical interpretations confirming that it is also permissible, pending the completion of the Finance review, for the leave period to be interrupted for COVID reasons (e.g., because of being called back to work as an essential health care worker or because of the need to get back to Canada before all flights were cancelled, but with a view to the leave period subsequently being resumed when advisable).
Neal Armstrong. Summaries of 29 May 2020 External T.I. 2020-0849841E5 F and 28 May 2020 External T.I. 2020-0849681E5 under Reg. 6801(a)(i).
Income Tax Severed Letters 3 June 2020
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Ferme Lunick – Court of Quebec finds that a farm with a substantial potato-bagging operation carried on a single farming business
The taxpayer operated a four-employee 1500-acre farm that produced potatoes, grains, market garden and dairy products, as well as a 10+-employee processing operation housed in four buildings on the farm, that purchased, sorted, washed and bagged potatoes before their sale. Whether various equipment purchased for use in the processing operation qualified for a tax credit for purchases of Class 29 property used in manufacturing or processing turned on whether an exclusion, from what otherwise would qualify as manufacturing or processing, for the carrying on of a farming or fishing business, applied.
Forlini JCQ confirmed the ARQ position that this exclusion applied given that this was a “vertically integrated” business in which the farming operation “sold” all of its potato production to the processing operation, carried on at the same location, and the processing operation acquired 90% of its purchases from the farming operation. The facts that there was separate accounting for the two divisions, and that each division had a substantial scale of operations, rather than being merely ancillary to the other, did not carry the day. Forlini JCQ concluded “that Lunick Farm carries on a single farming business.”
Neal Armstrong. Summary of Ferme Lunick Inc. v. Agence du revenu du Québec, 2020 QCCQ 1703 under s. 125.1(3) – manufacturing or processing – (a).
Demers – Quebec Court of Appeal finds that failure to treat hockey players as employees based on flawed and non-independent legal advice was carelessness that opened up a statute-barred year
The individual taxpayer (Demers) was a director of the owner of the RadioX team, which was a minor professional hockey team. The corporation had been treating its players (and other staff) as employees rather than independent contractors for Quebec health tax purposes in accordance with the known views of the ARQ, but then commenced to treat them as independent contractors. The players did not register for GST/QST purposes or invoice for their services, and declined to sign a written contract (which did not reflect the realities of how the team continued to be operated), and the only substantive change made was that the team manager was incorporated.
After finding that the players continued to be employees, the Court of Quebec had next dealt with the due diligence defence of Demers under the equivalent of ITA s. 227.1(3) (the corporation having since been wound up without paying any of the source deductions), which was based on the proposition that he had been advised by his tax advisor, Ms. Rochette (who was also his wife and a co-director of the corporation) that the players were now independent contractors. In rejecting this defence, the Court of Quebec noted that the views of Ms Rochette were based on factually incorrect matters that could have been readily checked by her, including that the players could play for other teams, that they had their own tools and that the team did not reimburse them for their expenses, and also noted that Ms. Rochette had not consulted the jurisprudence. Bouchard JCA found no reversible error here.
However, the Court of Quebec had found that the assessment of the Corporation for its 2006 year had been statute-barred as having been made beyond the four-year prescription period, as the ARQ had not established carelessness of Demers or the Corporation. In reversing this finding, Bouchard JCA noted the principle in Regina Shoppers Mall that a “taxpayer does not make a misrepresentation where he or she thoughtfully, deliberately and carefully assesses the situation and files on what he or she believes bona fide to be the proper method” and found that, given that Demers was the guiding spirit of the Corporation, the findings of fact that “the change in the status of the players did not in any way materialize at the operational level and was strictly motivated by the Corporation’s desire to no longer pay deductions at source” also established carelessness or willful default of the Corporation, so that the year was not statute-barred.
Neal Armstrong. Summaries of Demers v. Agence du revenu du Québec, 2020 QCCA 681 under s. 227.1(3) and s. 152(4)(a)(i).
7 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week, as well as the previous week, and a further 5 translations of CRA interpretations released in August and July 2010. Their descriptors and links appear below.
These are additions to our set of 1,187 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ¾ 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 June.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2020-05-27 | 9 April 2020 External T.I. 2014-0527261E5 F - Beneficial ownership discretionary power of trustees | Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) - Subparagraph 73(1.01)(c)(ii) | "right to receive" all the income not satisfied where trustees' discretion to accumulate income |
| Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(1) - Paragraph 107.4(1)(a) | discretion of trustees to retain capital or income rather than distribute to the sole current beneficiary does not preclude the latter being the beneficial owner | ||
| Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(1) - Paragraph 107.4(1)(i) | discretion of trustees to retain capital or income rather than distribute to the sole current beneficiary precluded s. 73(1.01)(c)(ii) application and satisfied s. 107/4(1)(i) | ||
| General Concepts - Ownership | discretion of trustee to accumulate rather than distribute income to sole beneficiary did not detract from beneficial ownership | ||
| 2020-05-20 | 15 May 2020 External T.I. 2020-0848511E5 F - Deferred salary leave plans (DSLPs) | Income Tax Regulations - Regulation 6801 - Paragraph 6801(a) - Subparagraph 6801(a)(i) | employer can defer the 6-year deferral period, e.g., for those with COVID-disrupted travel, pending Finance review |
| 2010-08-13 | 19 May 2010 Internal T.I. 2008-0279441I7 F - Canadian-controlled private corporation | Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation - Paragraph (a) | future acquisition right under a USA of 50% Canadian shareholder gave its non-resident shareholder de jure control of underlying corporation |
| Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(i) | future acquisition right under a USA gave indirect 50% non-resident shareholder de jure control | ||
| 2010-08-06 | 7 July 2010 External T.I. 2010-0370611E5 F - Purchase of Shares by Subsidiary - Sec. 245 | Income Tax Act - Section 84.1 - Subsection 84.1(1) | realization by an individual of capital gain by selling shares to the corporation’s Newco sub requires inter alia that any basis created in Newco not be abused |
| Income Tax Act - Section 245 - Subsection 245(4) | position that an individual potentially can realize a capital gain by selling shares to a Newco sub of the corporation for cash does not depend on there being a s. 87 or 88 merger of Newco and the corporation | ||
| 28 June 2010 External T.I. 2010-0362391E5 F - Revenus de récompenses | Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) | awards for winning music competitions might or might not be prescribed prizes | |
| 26 July 2010 External T.I. 2009-0349481E5 F - 212(1)d)(i)-Marque de commerce utilisée au Canada | Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) | royalty for use outside Canada of trademark is subject to withholding | |
| 26 July 2010 External T.I. 2010-0368991E5 F - CIAPH - Société de personnes | Income Tax Act - Section 118.05 - Subsection 118.05(1) - Qualifying Home | partner is not precluded from claiming HBTC for residence acquired by partnership | |
| 2010-07-16 | 24 June 2010 External T.I. 2010-0358981E5 F - Déductibilité de dépistage de la XXXXXXXXXX | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | expense of bacteria testing can be deductible even though expenditures do not themselves generate revenue |
Laliberté – Federal Court of Appeal confirms that the Cirque du Soleil’s bearing most of the $41.8M cost of a space trip for its controlling shareholder gave rise to a shareholder benefit
The founder and controlling shareholder of Cirque du Soleil, had been found by the Tax Court to have received a taxable benefit under s. 15(1) (or alternatively, under s. 246(1)) equalling approximately 90% of the $41.8 million cost of sending him on a trip to the international space station in September and October 2009, given that the cost was borne by his family holding company and then largely passed through to the top operating company (“Créations Méandres “) in the Cirque du Soleil group, but with there being a matching contribution of capital by the holding company to Créations Méandres so that independent shareholders would not bear any of the cost of the trip.
In dismissing the appeal, Geason JA rejected a submission that the Tax Court had focused insufficiently on whether there had been a corporate intent to impoverish the corporations, stating that “even if intent to impoverish the corporation were required, such intent cannot be equated with a controlling shareholder’s subjective intent and most especially not with an intent that was formulated [as in the case here] after the corporate expenditure was engaged”.
She also effectively indicated that, consistently with Youngman, it was appropriate for the Tax Court to have “calculated the value of the shareholder benefit at the end of the case based upon all the evidence tendered” rather than there having been a shifting of the burden to the Minister to establish this value once the evidence demonstrated that the Minister’s assumption of a 100% taxable benefit was incorrect.
Neal Armstrong. Summaries of Laliberté v. Canada, 2020 FCA 97 under s. 15(1) and General Concepts – Onus.
CRA announces that it “is resuming a full range of audit work”
At the end of March 2020, CRA announced on a webpage:
For the vast majority of taxpayers, the CRA will temporarily suspend audit interaction with taxpayers and representatives. Interaction with taxpayers will be limited to those cases where the legal deadline to reassess a tax return is approaching, and in cases of high risk GST/HST refund claims that require some contact before they can be paid out.
That and related statements have been replaced on that webpage by the following indication that it is ramping back up again (presumably on the basis that its systems are getting better able to handle remote working):
The CRA is resuming a full range of audit work and adapting our practices to reflect the health and economic impacts of COVID-19. We are prioritizing actions that are beneficial to the taxpayer or where taxpayers have indicated there is an urgency to advancing their audit. In prioritizing our resumption, we are also focusing on higher dollar audits first, audits close to completion, and those with a strategic importance to the Government of Canada, provinces and territories, or our tax treaty partners. In addition, efforts to combat suspected fraud and other criminal activity are advancing.
New methods of taxpayer and registrant interaction will be required, and the CRA is working to develop procedures and protocols to adapt these to the current reality. For example, we are providing taxpayers with the option to send us information via e-mail. Some key changes will relate to offering additional time and upfront consultation on requests to provide the CRA with information and access. Public Health directives will be respected, and additional reasonable measures will be extended both in terms of timing or another other aspect of a CRA request.
In addition, Requirements for Information (RFIs) issued prior to March 16 and due after that date will be reviewed and taxpayers and third parties, including financial institutions, will be contacted where the CRA continues to require the information in the RFI.
CRA has not changed its indication that most Objections already received are still being held in abeyance.
Neal Armstrong. Summaries of Collections, audit, objections and appeals (CRA webpage updated on 28 May 2020) under s. 165(3), s. 152(1) and s. 222(2).