News of Note
Toronto-Dominion Bank – Federal Court of Appeal finds that the deemed trust for unremitted GST defeated the Bank’s security interest on a voluntary sale of the mortgaged home
Email this ContentTD Bank made a mortgage loan to an individual who, unbeknownst to it, had unremitted GST collections. A year later, the individual sold his home and repaid the Bank in full. The Bank found out about the unremitted GST two years later when it received a payment demand from CRA.
Dawson JA agreed with Grammond J below that the Bank was required to pay the demanded amount by virtue of the deemed trust for the unremitted GST following the proceeds of the sale into the Bank’s hands by virtue of ETA s. 222(3). She recognized that First Vancouver had found that this deemed trust did not apply to “bona fide purchasers for value” of the tax debtor’s property (so that the trust attached to the sales proceeds rather than following the sold property) – but found that this exception did not apply to the payment of the sales proceeds to the Bank as a secured creditor. The Bank’s mortgage was not excluded as a “prescribed security interest” from the deemed trust rule because it was registered after the deemed trust arose in the tax debtor’s hands.
Respecting the implications of this decision, she stated:
[S]ecured lenders … may identify higher risk borrowers (which might include persons operating sole proprietorships), require borrowers to give evidence of tax compliance, or require borrowers to provide authorization to allow the lender to verify with the Canada Revenue Agency whether there are outstanding GST liabilities then known to the Agency.
She noted that ITA s. 227(4.1) was similar, except that the ITA deemed trust did not disappear in CCAA or bankruptcy proceedings.
Neal Armstrong. Summary of Canada v. Toronto-Dominion Bank, 2020 FCA 80 under ETA s. 222(3).
Income Tax Severed Letters 6 May 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
BMO – Federal Court of Appeal finds that former s. 39(2) extended to FX gains on s. 39(1) dispositions
On unwinding a tower structure, a Nevada subsidiary LP of BMO realized FX gains on repaying U.S.-dollar borrowings, but completely offset that loss through realizing a capital loss on winding up an NSULC subsidiary. As a technical matter, s. 112(3.1) did not apply to deny any portion of this capital loss because the NSULC paid all its dividends on a separate class of preferred shares that it had issued as a stock dividend – rather than on the common shares on which the LP had realized the loss.
CRA considered this structuring to be abusive and applied GAAR. Webb JA found that s. 112(3.1) would not have applied to grind the loss even if the NSULC had instead paid all the dividends on its common shares. Thus, the structuring was unnecessary, and there was no “tax benefit” which could engage GAAR.
In particular, he found that the pre-2013 version of s. 39(2) applied to FX gains or losses on the dispositions of property generally, rather than being restricted, as contended by the Crown, to dispositions of foreign currency and FX gains or losses arising on settlement of obligations. As s. 39(2) applied to the FX loss sustained on the disposition of the NSULC shares, s. 39(2) thus deemed that loss to be a loss from the disposition of foreign currency rather than of shares, so that s. 112(3.1) could not apply.
In this regard, he stated:
By providing that subsection 39(2) of the Act will be applicable “[n]otwithstanding subsection (1)”, Parliament acknowledged that both subsections 39(1) and (2) of the Act could apply to dispositions of property. If foreign currency was the only property to which subsection 39(2) of the Act was to have applied, the text of the provision could have so provided.
After referring to the Finance Technical Notes on ss. 39(2), 95(2)(f.15) and 95(2)(g.02), he further stated:
All of the Technical Notes released by the Department of Finance appear to be drafted on the premise that subsection 39(2) of the Act (as it read in 2010 and in earlier years) had a broader application than what is proposed by the Crown. The Technical Notes indicate that this version of subsection 39(2) of the Act applied to any disposition of capital property, and not just a disposition of foreign currency.
Neal Armstrong. Summaries of Canada v. Bank of Montreal 2020 FCA 82 under s. 39(2) and s. 112(3.1).
CRA rules that a simultaneous consolidation of 7 identical series of common shares into 1 series, and a stock split, did not effect a disposition
With a view to going public, a closely-held US corporation, whose issued and outstanding shares (which were taxable Canadian property and held by Canadian and US-resident corporate shareholders) consisted of seven series of common shares with identical attributes, proposed to amend its articles of incorporation so as to reclassify all the common shares into one series and to simultaneously effect a stock split. CRA ruled that this did not entail a disposition of the shares, so that no s. 116 certificate was required
Neal Armstrong. Summary of 2020 Ruling 2019-0799981R3 under s. 248(1) – disposition.
Athletes 4 Athletes Foundation – CRA is ordered to produce any irrelevant material (e.g., re other Foundations) that was before it when rejecting a registration request
The appellant Foundation appealed from the refusal of the Minister to register it as a Canadian amateur athletic association on the grounds inter alia that the Minister had considered “irrelevant information in comparing the [Foundation] to other applicants and existing registered CAAAs.” It sought an order under Rule 318(4) for further disclosure.
Laskin JA found that the Rules merely required the Minister to produce the documents which were in the hands of the decision-maker when the decision was made – and not to provide various other requested documents (e.g., the constating documents of all registered CAAAs at the time of the decision).
However, the affidavit of the CRA decision maker stated that “all relevant materials upon which the CRA relied … have been produced.” Laskin JA stated:
The affidavit evidence does not foreclose the possibility that the Minister used irrelevant material relating to the other entities.
He ordered the Minister “to produce any material apart from that already disclosed that was before her when the decision was made, with the exception of properly redacted information.”
Neal Armstrong. Summary of Athletes 4 Athletes Foundation v. Canada (National Revenue), 2020 FCA 41 under Rule 318(4).
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in October and September, 2010. Their descriptors and links appear below.
These are additions to our set of 1,164 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 May.
It may be preferable for an FA held by a partnership with a Canadian corporate partner to make QROC distributions (where possible under local law) rather than pay s. 113(1)(d) dividends
Where a foreign affiliate paid a dividend to a partnership out of its pre-acquisition surplus in respect of which a Canadian corporate partner (the CRIC) claimed a s. 113(1)(d) deduction, a subsequent disposition by the CRIC of its partnership interest will result in s. 92(4) adding a matching amount to the proceeds of disposition, even where that disposition was a rollover transaction. However, a qualifying return of capital (QROC) election may be used to avoid this anomaly if the FA operates in a jurisdiction in which the relevant corporate law allows for a return of capital.
The QROC distribution effects an immediate reduction in the partnership’s ACB in the shares of FA, and there is a reduction in CRIC's ACB in the partnership interest when there is a further distribution to it. S. 92(4) does not apply to a subsequent disposition of the partnership interest because there was no s. 113(1)(d) deduction.
Similar issues apply to a disposition by a partnership of its shares in the FA regarding the operation of ss. 92(5) and (6). Again, tax-deferred internal reorganizations may not be possible without having made a QROC election.
Neal Armstrong. Summary of Ben Cen, “Planning for FA Distributions Paid Through a Partnership,” Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 6 under s. 92(4).
1074022 B.C. Ltd. v Li - BCSC finds that CRA could be directed to pay an excess s. 116 remittance to the taxpayer’s secured creditors
No s. 116 certificate was obtained on a court-approved sale of a Vancouver property (arising in connection with foreclosure proceedings) by the Hong Kong owner (Mr. Li), so that the purchaser paid 25% of the purchase price (being $200,000) to CRA. Mr. Li’s tax liability was only $46,000 and he had provided CRA with an irrevocable direction to pay the excess funds (i.e., $154,000) to his lawyer (so that such funds would then be paid, in accordance with the court order, to the secured creditors of Mr. Li, including the second mortgagee (the petitioner in this case). However, CRA refused to do so on the basis that s. 164 of the ITA and s. 67 of the Financial Administration Act required a tax refund to be paid only to the taxpayer (i.e., to Mr. Li in Hong Kong, with the effect of defeating his secured creditors) and not a third party (i.e., a mortgagee).
Before determining “that Canada is obligated to pay the excess funds to Mr. Li’s lawyer in trust in accordance with the direction to pay,” Harper M stated:
In my view, Canada’s interpretation of s. 67 of the FAA and s. 164 of the ITA is overly narrow. If CRA pays the excess funds to Mr. Li’s lawyer in trust, the payment is neither an “assignment” of the excess funds to a third party, nor a payment for the benefit of anyone other than Mr. Li. The funds remain Mr. Li’s to be dealt with in accordance with the trust conditions agreed upon between him, his lawyer and the secured creditors.
Harper M went on to indicate that “Alternatively, it is acceptable that CRA pay the excess funds into court to the credit of the proceeding, or to the petitioner’s lawyer in trust, if agreed.” In this regard, she rejected the Attorney General’s argument that “it has no discretion to pay the excess funds into court, or, in fact, to do anything other than pay them to Mr. Li.”
It is suggested that this case:
may be considered to make a more general point: taxpayers should be allowed to direct where their refunds are to be paid, just as they choose the bank account into which the funds are to be deposited.
Neal Armstrong. Summaries of 1074022 B.C. Ltd. v Li, 2020 BCSC 65 under s. 116(5) and of H. Michael Dolson, "Can a Tax Refund Be Paid to a Third Party? Section 116 and Foreclosures,” Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 8 under Financial Administration Act, s. 67.
Piché – Court of Quebec finds that a family realized capital gains from the sale of 3 newly-constructed residences in 3 years
A closely-knit family, who collectively constructed and sold three single family residences over the course of three years without reporting anything on their returns, and were assessed by the ARQ for having realized gains from adventures in the nature of trade, were able to come up with convincing stories as to how, due to various “vicissitudes” and unexpected twists and turns in their personal lives, all that had occurred. They were not “building entrepreneurs” and their appeals were allowed.
The principal residence exemption was not discussed.
Neal Armstrong. Summary of Piché v. Agence du revenu du Québec, 2020 QCCQ 1283 under s. 9 – capital gain v. profit – real estate.
CRA states that a PSB can deduct the “cost” of car loan interest under s. 18(1)(p)(ii) to the extent of the benefit conferred on the individual qua employee rather than shareholder – but not CCA
Under s. 18(1)(p)(ii), a corporation carrying on a personal services business is entitled to deduct “the cost to the corporation of any benefit … provided to an incorporated employee … that would, if the income of the corporation were from a business other than a [PSB] be deductible in computing its income.” CRA was asked whether this permitted the corporation to deduct the costs of leasing an automobile provided to the individual, or interest on a loan financing an automobile provided to the individual.
The word “cost” was less than apt to describe loan interest. Nonetheless, CRA was of the view that, in either situation, the leasing or interest “cost” was deductible to the extent of any related benefit provided to the individual qua employee (provided that the general deductibility tests were satisfied), whereas there could be no such deduction if the auto was provided to the individual qua shareholder.
CRA went on to indicate that no CCA could be claimed by the corporation (stating that “a capital cost allowance amount is not the cost of a benefit”) – except that if the corporation had a sales business, CCA could generally be deducted under s. 18(1)(p)(iii) to the same extent as CCA claims could have been made under s. 8(1)(j)(ii) if the marketing activity had been carried on by the individual as a sales employee.
Neal Armstrong. Summary of 9 March 2020 External T.I. 2013-0490301E5 F under s. 18(1)(p)(ii).