News of Note
Spiegel Sohmer – Court of Quebec finds that reimbursing expenses for the wedding of a law firm partner’s daughter generated a non-deductible taxable benefit
Email this ContentIn 1994, Grunbaum found that expenses incurred by the corporate taxpayer as a result of inviting business guests to a wedding reception held in honour of the daughter of a shareholder were incurred by it for the purpose of gaining or producing income from its business.
More recently, a senior tax partner of a Montreal law firm (“Raich”) sought and received reimbursement from the firm’s management company (Spiegel Sohmer Inc, of which Raich was the largest shareholder) for 97/218 of the $169,000 cost of the Montreal wedding of Raich’s daughter: 97 of the 218 guests at the reception were clients, business contacts or partners of Raich. Spiegel Sohmer Inc. submitted that it bore such expense “in order to solidify the professional and commercial relations of Mr. Raich with his clients.”
In finding that the reimbursed expenses were non-deductible, and that their reimbursement gave rise to a taxable benefit to Raich, Bourgeois JCQ noted that no former partner of Raich had testified as to what discussions had occurred regarding the expense reimbursements and the business opportunity arising from the marriage of Raich’s daughter, and stated that it accordingly was impossible for the Court “to determine if such event presented an important promotional aspect to the firm.”
Neal Armstrong. Summary of Spiegel Sohmer Inc. v. Agence du revenu du Québec, 2021 QCCQ 69 under s. 18(1)(a) – income-producing purpose.
Income Tax Severed Letters 20 January 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Motter – Quebec Court of Appeal finds that a purported “tenant inducement payment” was a capital expenditure
An individual in the business of constructing and renting commercial real estate, entered into a lease agreement with Téléglobe respecting a building which he was to construct, that provided Téléglobe with “an initial Improvement Allowance” of $25.00 per square foot (or $2M). After construction, this was paid by way of partial set-off against the $2.7M cost of tenant improvements made by him in the course of constructing the building that he invoiced to Téléglobe. The $2.7M apparently was included in his income, but also presumably was offset with substantial expenses of paying for the work. He sought to deduct what he styled as a $2M “tenant inducement payment” on income account, so that the effect of the arrangement might have been similar to the taxpayer (the building owner) deducting the cost of building-finishing work on income account.
In affirming that the leasehold improvement payment of the taxpayer was a capital expenditure rather than deductible in computing his income, Gagné JCA stated:
The payment was made for work which, at first glance, was of a capital nature ("Stairs and metal works", "Modification of sprinklers", "Engineering of bathrooms", "Structural support for stairs including engineering", etc.). As in … Développement Iberville … the appellant did not establish that the work was related to the specific needs of Teleglobe and, therefore, was of no use to other tenants, and that it did not add any value to the building. …
[T]he form of the expenditure (…one-off), its effect (an enduring benefit) and the purpose or rationale underlying it, all incline to the capital nature of the payment … .
Neal Armstrong. Summary of Motter v. Agence du revenu du Québec, No. 500-09-027452-184 (500-80-029040-145) (Quebec Court of Appeal, 19 January 2021) under s. 18(1)(b) – improvements v. repairs/running expense.
CRA discusses the overlap between the EBP and pension plan concepts
It was unclear whether benefits received by the taxpayer (now a Canadian resident) from a “provident fund” (the “PF”), that had been established for the taxpayer by a non-resident employer should be included in income under s. 6(1)(g) as benefits from an employee benefit plan (“EBP”) or under s. 56(1)(a)(i) as benefits from a (foreign) pension plan. CRA noted:
- “A foreign pension plan would generally fall within the EBP definition, but a foreign EBP does not necessarily fall within the meaning of a pension plan.”
- If the PF is an EBP, the amounts received therefrom would be taxable under s. 6(1)(g), subject to exceptions including that in s. 6(1)(g)(iii) regarding pension benefits received out of the plan that are attributable to services rendered by a person while a non-resident in Canada – as to which there would be full taxability under s. 56(1)(a)(i) regardless of non-deductibility of contributions to the plan or a foreign tax exemption for the pension benefits.
- Where the amount received out of the PF is a lump sum amount that is taxable under s. 56(1)(a)(i), a deduction may be permitted under s. 60(j) for a transfer to an RRSP or registered pension plan.
Neal Armstrong. Summary of 5 October 2020 External T.I. 2020-0852671E5 under s. 56(1)(a)(i).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretation released in June 2009. Their descriptors and links appear below.
These are additions to our set of 1,368 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.
CRA’s position that s. 104(19)-designated dividends are not received until the trust’s year end suggests planning possibilities
CRA’s position (e.g., in 2016-0647621E5 and 2013-0495801C6) is that a dividend designated under s. 104(19) by a trust to a beneficiary is not received by the beneficiary for most ITA purposes until the year end of the trust. This position, if correct, raises some planning possibilities:
- Suppose that Opco, whose shares are held by a family trust, pays a $1 million dividend to the trust on January 15, 2020 and claims a dividend refund of $383,300 for its taxation year ended January 31, 2020. The dividend is not allocated by the trust to Bankco (a connected resident corporate beneficiary with a November 30 year-end) until the trust’s year-end of December 31, 2020, and is not reported by Bankco until its year ending November 30, 2021. If Opco’s dividend refund is received on June 30, 2020, 19 months pass before Bankco is required to pay its matching Pt. IV tax under s. 186(1)(b) – a tax deferral.
- Suppose, instead, that on March 31, being a day that Opco and Bankco are not connected, a dividend is paid both by Opco to the trust, and by the trust to Bankco – but on September 30, a share ownership change results in Opco and Bankco now being connected, so that CRA’s position suggests that Pt. IV tax has been avoided.
- Now suppose that Opco pays a dividend in excess of safe income on hand on January 15, 2020. Bankco need not report the resulting s. 55(2) deemed capital gain until its year ending November 30, 2021. In addition to deferral of the capital gains tax, a permanent tax saving might result through acquiring losses or other deductions in the meantime.
Neal Armstrong. Summary of David Carolin and Manu Kakkar, Estate Plans, Trusts, and Dividends: Is There a Gap Here? Tax for the Owner-Manager, Vol. 21, No. 1, January 2021, p. 1 under s. 104(19).
CRA indicates that a military pension from India was Treaty-exempt
CRA indicated that a military service pension and disability pension received by a Canadian resident from the Ministry of Defence of India would be exempted under Art. 18 of the Canada-India Treaty.
Neal Armstrong. Summary of 13 October 2020 External T.I. 2020-0860081E5 under Treaties – Income Tax Conventions - Art. 18.
Ifi – Federal Court finds that CRA unreasonably refused to cancel tax under s. 207.06(1) on the basis of a “repeated” mistake that in fact was new
In 2009, the taxpayer (Ms. Ifi) made a small over-contribution to her TFSA regarding which CRA assessed her a small amount of over-contribution tax. For quite a number of years thereafter, she made further contributions (including a substantial one for 2014) which would not have been over-contributions but for her having become a non-resident. She discovered the error herself in 2018, whereupon she promptly closed out the TFSA.
Pallotta J found that essentially the sole stated basis of CRA for denying waiver of the over-contribution tax “was that Ms. Ifi repeated a previous mistake after being warned by the CRA.” In granting Ms. Ifi’s application for judicial review on the basis that this decision “was unreasonable, as it lacked the requisite transparency, intelligibility and justification,” she stated:
The Delegate failed to recognize that Ms. Ifi’s excess contribution in 2009 and her subsequent excess contributions resulted from different errors. Ms. Ifi did not repeat a previous mistake—the one the CRA warned her about—when she made an excess contribution in 2014. The excess contribution in 2014 … was tied to Ms. Ifi’s status as a non-resident.
Neal Armstrong. Summary of Ifi v. Attorney General of Canada, 2020 FC 1150 under s. 207.06(1).
CRA indicates that CEWS amounts must generally be included in income under s. 9 or 12(1)(x) by the end of the CEWS periods in question even if not claimed until much later
S. 125.7(3) essentially feeds into s. 12(1)(x) by deeming “CEWS” wage subsidies to be government assistance received immediately before the end of the period (of approximately one month) in question. Notwithstanding that, CRA considers it to be quite possible that the assistance will be income under s. 9 rather than s. 12(1)(x). As for the timing of that income inclusion (under either s. 9 or 12(1)(x),) CRA indicated that the CEWS amounts must be included in the taxation year in which the periods fall even if the claims are not made (and received) until after the tax return has been filed for that taxation year. (This will require an amendment to the originally-filed return to be made.)
The one exception to this is illustrated by the example of a June 30, 2020 taxation year of the eligible entity, where the end of period 4 falls on July 4, 2020 (i.e., a few days after the taxation year end). In that case, if s. 12(1)(x) rather than s. 9 is considered to govern, there is a deemed receipt of government assistance on that date, so that the s. 12(1)(x) inclusion will fall into the subsequent taxation year.
Neal Armstrong. Summary of 6 November 2020 Internal T.I. 2020-0865661I7 under s. 125.7(3).
Income Tax Severed Letters 13 January 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.