News of Note
Lockwood Financial – Tax Court of Canada finds that shares received on a deferred basis from a successor of a client were fee income in the year of entitlement to receive
Email this ContentA broker (Lockwood) whose business included brokering deals for junior resource companies earned an up-front fee for brokering a farm-in deal for a client (LEO) in 2010. Its fee included a component that was payable in the form of 833,333 shares of LEO (which the payment agreement stated had a “deemed value” of $250,000 in total) when LEO had earned an interest in the subject resource property by having made the targeted exploration or development expenditures. However, in June 2011, LEO was taken over by a second company (AOI - which happened to be the other party to the farm-in deal) under a plan of arrangement. Lockwood brought an action to receive shares of AOI (based on the exchange ratio under the plan of arrangement) in lieu of the promised shares of LEO, and in June 2012, it was agreed that it would receive a smaller number of shares of AOI in full satisfaction of its claim. Lockwood disposed of these shares during the balance of the same (2012) taxation year.
Lockwood submitted that this fee component should have been recognized by it in its 2010 rather than 2012 taxation year in the amount of $250,000 and that the excess of the proceeds received by it in 2012 over this amount was a capital gain. St-Hilaire J instead found that:
- This fee did not become receivable, and was not to be recognized as income, in 2010, as “its right to receive this compensation cannot be said to have been ‘absolute and under no restriction’” in 2010.
- Had it been received, the payment of the LEO shares would have been a payment to Lockwood for services rendered and, hence, would have been business income.
- Since the AOI shares received in 2012 under the settlement replaced the LEO shares, the AOI shares, valued on the settlement date, were received for services rendered, so that such value was business income to Lockwood in its 2012 taxation year.
- This amount recognized as the consideration for Lockwood’s services “thus becomes the adjusted cost base of the AOI shares received in 2012. That is the amount that the taxpayer gave up to acquire the shares”.
- Thus, the proceeds for the AOI shares received in excess of that ACB was a capital gain.
Neal Armstrong. Summaries of Lockwood Financial Ltd. v. The Queen, 2020 TCC 128 under s. 12(1)(b) and s. 54 – ACB.
Keybrand Foods – Federal Court of Appeal finds that a transaction with a financially subordinate company was a non-arm’s length transaction
The taxpayer (“Keybrand”) and its wholly-owning parent (“BWS”) were guarantors of loans made to a start-up company (“Vidabode”) by GE Capital. In order to fund the discharge of the GE Capital loans following a Vidabode default, Keybrand subscribed $19.5 million for Vidabode common shares (of which $14.3 million was funded with a bank borrowing), thereby resulting in Keybrand holding about 39% of the common shares of Vidabode in addition to the 41% already held at that point by BWS. A receiver was retained two weeks later by BWS in its capacity of a secured creditor of Vidabode, and on May 6, 2011, Vidabode filed for bankruptcy.
Webb JA confirmed that Keybrand did not generate an allowable business investment loss on its subsequent disposition (under s. 50(1)(b)(iii)) of its shares of Vidabode, on the basis that the share subscription transaction was one between persons not dealing at arm’s length – so that s. 69(1)(a) deemed the cost of those shares to Keybrand to be their nil fair market value.
Webb JA made note of the “directing mind” test applied in the Robson Leather case (whose facts revealed “a striking similarity,” as in both cases there was “substantial debt” owing by a company with poor prospects to the relevant family.) He then stated:
Given the degree of financial dependence of Vidabode on BWS and Keybrand and the lack of any negotiation with respect to the terms and conditions (including the price) related to the share subscription, it is more likely than not that Keybrand controlled both sides of the transaction related to the issue of shares by Vidabode to Keybrand.
Webb JA also confirmed that the interest on the bank loan to fund the shares subscription was non-deductible, given that the factual findings of the Tax Court supported its conclusion “that Keybrand did not have a reasonable expectation of income in acquiring the shares of Vidabode and hence did not borrow the money for the purpose of earning income from property.”
Neal Armstrong. Summaries of Keybrand Foods Inc. v. Canada, 2020 FCA 201 under s. 251(1)(c), s. 20(1)(c)(i) and General Concepts - Purpose/Intention.
ACN 154 - Federal Court of Australia, Full Court finds that gold refining included refining gold that was already at the precious metal level of purity
ETA Sched. VI, Pt. V, s. 6.3 zero-rates “a supply made to a non-resident person that is not registered [for GST/HST purposes] of … a service of refining a metal to produce a precious metal.”
An Australian GST provision effectively zero-rated a supply of “precious metal” (relevantly defined as gold, in an investment form, of at least 99.5% fineness) if it was the “first supply of that precious metal after its refining by … the supplier”. The Australian Commissioner argued that an Australian company did not qualify as refining gold “scrap” purchased by it (which was generally of at least 99.99% fineness, but nevertheless was scrap gold because it was not in investment form) because its mooted refining was of gold that thus already exceeded the statutory threshold of 99.95% fineness.
In rejecting this submission, the Full Court stated:
The ordinary meaning of the word “refining” … and the statutory context suggest that the word “refining” in s 38-385 is referring to a process by which metal is brought to a finer state or form. It may be accepted that, as the Commissioner submits, this is concerned with increasing the metallic fineness of the metal. But this does not require that the process be directed towards increasing the metallic fineness of the metal above the requisite standard of fineness (99.5% in the case of gold). …
[E]ven if …the primary objective of these processes was to provide quality assurance (rather than to increase the metallic purity), the processes nevertheless constituted “refining” in the sense outlined above.
Neal Armstrong. Summaries of ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190 under ETA Sched. VI, Pt. V, s. 6.3 and s. 123(1) – precious metal.
CRA denies a deduction for the employer’s source deduction payment for s. 7 RSU benefits where that payment is funded by reducing the RSU shares issued
An employee who otherwise would be entitled to receive, say, 30 shares of the employer’s parent (ParentCo) as a result of restricted share units (“RSUs”) vesting, instead is only issued 18 shares to reflect that the employer (EmployerCo) will make a cash payment to the Receiver General on behalf of the employee on account of the required income tax withholding on the taxable benefit under s. 7(1) arising in the year of issuance.
In finding that s. 7(3)(b) prohibited EmployerCo from claiming a deduction for this payment in computing its income, CRA stated:
[A] portion of the rights of the employee under the RSU Plan is considered to have been disposed of by the employee in exchange for EmployerCo paying the required income tax withholdings arising from the issuance of shares of ParentCo under the RSU Plan. Consequently, the employee is deemed to have received a benefit under paragraph 7(1)(b) equal to the amount of income tax remitted by EmployerCo on behalf of the employee.
Since the benefit … arises from the issuance of shares, paragraph 7(3)(b) precludes a deduction by EmployerCo in respect of that benefit.
This analysis seems to implicitly treat the 30 shares that were agreed to be issued as having been issued for s. 7(3)(b) purposes even though, in fact, only 18 are issued.
Neal Armstrong. Summary of 28 September 2020 External T.I. 2020-0840681E5 under s. 7(3)(b).
CRA confirms that a long-term project election under s. 13(29) need only be filed once
Where a major construction project (other than of a rental building) is expected to extend beyond three years, the adverse impact of the available-for -use rules on potential capital cost allowance claims in the third and subsequent years often can be ameliorated by making a s. 13(29) election. The wording of the election form (which likely will be amended in this regard) seems to suggest that the election must be made annually, starting generally with the third year.
CRA has clarified that this is incorrect – the election need only be made once (generally with the return for the project’s third taxation year).
Neal Armstrong. Summary of 1 October 2020 Internal T.I. 2019-0821651I7 under s. 13(29).
Income Tax Severed Letters 18 November 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
PCI Géomatics – Quebec Court of Appeal finds that a loan that was not repayable if the borrower’s revenues consistently declined was a forgivable loan
A company (PCI) engaged in R&D activities for the development of software for satellites, received a non-interest-bearing loan from Industry Canada that was repayable by it (on a formula basis) over the following 15 years: in equal annual instalments if its revenues were stable; in amounts up to 1.65 times the advances received if its revenues increased consistently and significantly over the 15-year repayment period – but not at all if its revenues decreased steadily throughout the 15-year repayment period.
Hogue, J.C.A. found that, in light of this last feature, the loan was a “forgivable loan” and, thus, “government assistance” (under a Quebec definition similar to that in ITA s. 127(9)) so that its amount reduced R&D tax credits of PCI for Quebec purposes. In distinguishing McLarty, she stated that here, by way of contrast:
[T]he Agreement does not have the effect of [merely] limiting the remedies available to the government in the event of a PCI default. Rather, it provides that PCI’s obligation to repay will only arise if its revenue is maintained or increases, which is a future and uncertain event. This condition goes to the very nature of the debt.
Neal Armstrong. Summary of Agence du revenu du Québec v. PCI Géomatics Entreprises Inc., 2020 QCCA 1342 under s. 127(9) – government assistance.
CRA indicates that amounts received out of a UK FURBS are taxable except to the extent there can be a lump sum rolled into an RRSP or RPP
A UK resident is a member of a “funded unapproved retirement benefit scheme” (“FURBS”), which is a UK trust to which the taxpayer’s employer had contributed and the benefits from which are attributable to services rendered by the taxpayer while resident in the UK and before the time of retirement. CRA indicated that, if the individual became a Canadian resident, amounts paid out of the plan would be taxable under s. 56(1)(a)(i) if the plan was a foreign pension plan, and if it was any other form of EBP, such amounts would be taxable under s. 6(1)(g).
If an amount received out of the UK retirement plan was a lump sum amount taxable under s. 56(1)(a)(i), a deduction could be accorded under s. 60(j) regarding a transfer to an RRSP or a registered pension plan. No Treaty exemption (nor the s. 56(1)(a)(i)(C.1) exemption for IRAs and kin) would be available.
Neal Armstrong. Summary of 11 September 2020 External T.I. 2019-0824281E5 under s. 56(1)(a)(i).
Richard A. Bureau Barrister & Solicitor Inc. – Tax Court of Canada leans in favour of giving a registrant its day in court
In granting an extension for an incorporated lawyer to appeal HST assessments to the Tax Court, Russell J accepted the testimony of the lawyer that his strategy was to see if anticipated income tax reassessments (both of his professional corporation and him personally) might assist the corporation’s HST position in its HST appeal. Russell J further stated:
I consider it just and equitable to permit an entity its day in court absent a clear rationale for declining to do so. As well … procedural gaffes are not so egregious as to require or demand denial of this application.
The tests in ETA s. 305(5)(b) for granting an extension are similar to ITA s. 166.2(5)(b) except that there is a further test in ETA s. 305(5)(b)(iv) that “there are reasonable grounds for appealing from the assessment.” Russell J stated in this regard that “there is a semblance of logic to … [the corporation’s] position, sufficient to constitute reasonable grounds.”
Neal Armstrong. Summary of Richard A. Bureau Barrister & Solicitor Incorporated v. The Queen, 2020 TCC 119 under ETA s. 305(5)(b).
We have translated 6 more CRA Interpretations
We have published 6 further translations of CRA interpretation released in November, 2009. Their descriptors and links appear below.
These are additions to our set of 1,321 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.