News of Note
Wachal – Tax Court of Canada finds that non-granular pleading of the Minister failed to shift the onus to the taxpayer
Email this ContentThe taxpayer’s eligibility for Canada child tax benefit for his son turned primarily on whether he qualified as the “eligible individual” for that child. The Crown pleaded that in the periods in question, the taxpayer “was not the parent primarily responsible for the care and upbringing of [the child],” i.e., it simply quoted from the relevant portion of the statutory definition of “eligible individual,” and did not refer to how any of the eight factors listed in Reg. 6302 for determining such primary responsibility applied, with the exception of a brief reference to a divorce judgment.
Russell J considered this pleading to be deficient, and found that, given that there was not much of a burden on the taxpayer regarding his “eligible individual” status, somewhat fluffy and poorly substantiated testimony of the taxpayer was sufficient to establish that the taxpayer so qualified for various periods in issue (other than those as to which the taxpayer had effectively conceded.)
Neal Armstrong. Summaries of Wachal v. The Queen, 2020 TCC 78 under s. 122.6 - eligible individual – (b)(ii) and s. 122.62(1).
Spouses might be able to access the lower prescribed rate for s. 74.5(2) by simply refinancing their interspousal loan
Where spouses have avoided the application of the income attribution rules through a demand loan made at the prescribed rate from one spouse to the other in reliance on s. 74.5(2), they may now wish to take advantage of the reduction in the prescribed rate from 2% to 1%.
An approach which is simpler and less costly than a sale of the income-producing asset in question and the new loan being made once the sale proceeds have repaid the original loan, is for the one spouse to make a loan at the 1% prescribed rate to the other spouse, with the other spouse using such proceeds to repay the original loan. However, according to an old Interpretation (9336625) the new loan in this latter scenario would not be used for an income-producing purpose, but rather for the purpose of extinguishing the original loan, so that the new loan would not be described by the s. 74.5(2) safe harbour. However, it is suggested that this position does not reference s. 20(3), and may be incorrect.
Neal Armstrong. Summary of Michael Goldberg and Vincent Didkovsky, “Refinancing Prescribed-Rate Loans Used for Income Splitting,” Canadian Tax Focus, Vol. 10, No. 3, August 2020, p.2 under s. 74.5(2).
Contact Lens King – Tax Court of Canada finds that on-line sales of contact lenses were not zero-rated given failure to copy purchasers’ prescriptions
A GST/HST registered U.S. corporation sold and delivered contact lenses (typically replacement contact lenses) to Canadian consumers without verifying that they had a matching prescription. In finding that such sales were not zero-rated under Sched. VI, Pt. II, s. 9 (which requires inter alia that the contract lenses “are, or are to be, supplied under the authority of a prescription prepared … by [a qualified practitioner] for the treatment or correction of a defect of vision,” Smith J stated:
[I]t is not sufficient … that the appellant's website inform the consumer of the need for a valid prescription. The appellant must itself obtain a copy of the prescription … from which it can be concluded that the consumer has a prescription "for the treatment or correction of a defect of vision."
Neal Armstrong. Summaries of Contact Lens King Inc. v. The Queen, 2020 CCI 71 under ETA Sched. VI, Pt. II, s. 9 and s. 286(1).
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in April, 2010. Their descriptors and links appear below.
These are additions to our set of 1,236 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¼ 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 August.
Insurance Institute – Tax Court of Canada finds that the parties’ subjective intention not to be employer-employee can, to some extent, override objective indicia of their relationship
Graham J wrestled with the implications of the finding in Connor Homes that significant weight should be given to the subjective intention of the parties as to whether they were in an employer-employee, rather than independent contractor, relationship, before applying the objective indicia of whether there was an employment relationship set out in Wiebe Door and Sagaz (i.e., control, ownership of tools, opportunity for profit, and risk of financial loss). He considered that what this meant was that where, as here, the parties (an NPO providing educational services to industry members, and an instructor retained by it) clearly intended their relationship to be that of independent contractors rather than of employer and employee, it was not fatal that an application of the above objective factors indicated that there was an employment relationship. Instead, all that was required in such circumstances was that they “carry on their relationship in a manner that is similar to [rather than the same as] what one would expect from their intentions.”
Thus, although here, application of the four objective factors by themselves would have indicated an employment relationship, that application only fell somewhat short of the mark (e.g., although the instructor had no risk of loss, he had an opportunity for gain in the somewhat limited sense of “an ability to increase his effective earnings through up-front investment and efficiencies in a manner similar to that of an independent contractor”), so that their relationship was that of independent contractors.
Neal Armstrong. Summary of Insurance Institute of Ontario v. M.N.R., 2020 TCC 69 under s. 5(1).
CRA confirms that goodwill and IP that were not on target’s tax books could be written up under s. 111(4)(e)
In connection with an acquisition of its control, Canco used a s. 111(4)(c) and(d) write-down of debt owing by a controlled foreign affiliate to designate the s. 111(4)(e) write-up of the capital cost of goodwill (Class 14.1), customer relationships (Class 14.1) and intellectual property (Class 12 – e.g., software or video copyright?). CRA indicated that this could be done even though, prior to the acquisition of control, these assets had no cost, i.e., these assets were internally generated. CRA also indicated that “the goodwill and the customer relationship … constitute a single property, being the goodwill in respect of the Taxpayer’s business.”
Neal Armstrong Summary of 19 May 2020 Internal T.I. 2020-0841791I7 under s. 111(4)(e).
984274 Alberta – Federal Court of Appeal finds that nil assessment was an “assessment” giving rise to an s. 164(3.1) overpayment
The taxpayer (“984”) reported a capital gain on its 2003 sale of land on the basis that it had acquired it from its parent (Henro) on a rollover basis. In 2010, the Minister assessed Henro (to include an income account gain) and 984 (to reverse the previously reported capital gain and refund the capital gains tax plus interest, totalling $1.7M) on the basis that the 2003 drop-down had occurred on a non-rollover basis. On March 23, 2015, the Minister implemented a settlement agreement (effectively agreeing with 984’s and Henro’s initial filing position) by inter alia assessing 984 to claim back the 2010 payment, including the refund interest, plus arrears interest since 2010, in what Noël CJ found (contrary to the Tax Court below) to be in proper reliance on ss. 160.1(1), 160.1(3) and 164(3.1).
Noël CJ noted that, although the 2010 assessment of 984 was a nil assessment, and although Okalta found that a nil assessment is not appealable, nonetheless:
[A]n assessment that levies tax and a nil assessment have the same legal effect i.e. both start the limitation period when issued as the original notice, both replace a prior assessment or reassessment when issued as the last notice, and both fix the tax payable for the year.
Given that the 2010 nil assessment was an “assessment” including for the purposes of s. 164(1)(a)(iii), it followed “that the 2010 payment was a refund authorized to be made pursuant to subparagraph 164(1)(a)(iii)”, from which it further followed “that the refund interest paid by the Minister to the respondent in 2010 can be recovered pursuant to subsection 164(3.1)”.
Furthermore, it did not matter that the 2010 assessment was issued more than three years after the previous 2003 (re)assessment of 984, given that the “three-year limit [in s. 152(4)] does not apply to a notice that no tax is payable.”
Finally, it did not matter that no reassessment had been issued to bring the 2003 tax payable back from zero, as per the 2010 nil assessment, to the amount initially assessed, given that inter alia “ Markevich makes it clear that an excessive refund can be assessed even if the power to issue a reassessment for the year pursuant to subsection 152(4) has expired” (para. 77).
Accordingly, the 2015 assessment for an overpayment and interest was valid.
Noël CJ in passing agreed with the taxpayer that the FCA’s finding in Freitas that a statute-barred reassessment was voidable rather than void, was not to be followed “as the Court manifestly overlooked [the] established line of cases”.
Neal Armstrong. Summaries of Canada v. 984274 Alberta Inc., 2020 FCA 125 under s. 164(1), s. 160.1(1), s. 152(4) and General Concepts – Stare Decisis.
Income Tax Severed Letters 29 July 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Building Products – Federal Court confirms CRA’s refusal to grant more than partial interest relief for failure of CRA to point out an ability to apply NCLs
When the taxpayer was assessed to deny SR&ED deductions or credits for its 2009 taxation year, the CRA auditor failed to follow the requirement in the Audit Manual to obtain a written response from the taxpayer as to whether the taxpayer wished to apply available non-capital losses (NCLs) to offset the assessed taxable income and eliminate the tax and interest. Although there were sufficient NCLs to this end, their specific amount was unclear until January 2015, at which time the taxpayer filed its request to have the NCLs so applied. This request was denied as being filed after the end of the normal reassessment period, which ended on September 3, 2014.
Shore J considered that it was reasonable of the Minister’s delegate to grant only partial interest relief under s. 220(3.1) respecting the assessed interest, on the basis that it was ultimately the taxpayer’s responsibility to decide whether it wished to apply its NCLs before the end of the normal reassessment period, which it had failed to do. He also considered that there was no procedural unfairness in the failure of the Minister’s delegate to consult the above Manual policy before granting only partial interest relief, indicating that the delegate should not have been expected to be aware of this policy and it was up to the taxpayer to bring the Manual to the delegate’s attention, which it did not do (i.e., it is the taxpayer’s duty to bring largely internal CRA documents to CRA’s attention?).
Unlike 1455257 Ontario, Shore J did not suggest that there was no statutory authority for the CRA policy in the Manual – a policy which is broadly consistent with the right to claim discretionary reserves from reassessed income (see the Trial decision referenced in Abed Estate) and make late designations (Nassau Walnut, Lussier – also narrowly construing s. 152(6)).
Neal Armstrong. Summary of Building Products of Canada Corp. v. Canada (Attorney General), 2020 FC 784 under s. 220(3.1).
CRA rules that hospitals could access the high hospital GST/HST rebate rate under a collective property procurement arrangement
An Ontario hospital typically is entitled to a high rebate of GST/HST on its non-creditable costs in the course of its hospital activities, and to a lower rebate respecting other purchases. A group of Ontario hospitals and similar facilities entered into a group procurement arrangement under which one hospital contracted as principal with an outside supplier of property, but provided such property mostly to the other hospitals (but also partly for its own use) in their hospital or similar activities, and was reimbursed by them on an equitable basis.
But for ETA s. 259(7), the purchasing hospital would only have been entitled to rebates at the low rate on its purchases. CRA ruled that pursuant to s. 259(7), it was entitled to rebates at the high rate given that the other hospitals used the acquired property “exclusively in the course of their hospital authority activities.”
Neal Armstrong. Summary of 25 February 2020 GST/HST Ruling 202245 under ETA s. 259(7).