News of Note
CRA expands its Folio on principal residences
Email this ContentCRA has revised its Folio on the principal residence, for instance:
- Noting its discretion under s. 220(3.21)(a) to extend the time for making a principal residence designation
- Providing a simple example of the application of the transitional rule in s. 40(6.1) to a personal trust that does not come within the narrow category of excluded trusts in (c.1)(iii.1) of the principal residence exemption, i.e., a personal trust whose family beneficiaries occupied the house from the time of the trust’s acquisition of the house must recognize a gain based on the house’s appreciation by $50,000 from December 31, 2016 to the sale of the house in 2017.
Additional Summaries of Folio S1-F3-C2 under s. 220(3.21)(a) and s. 40(6.1).
Walls – Tax Court of Canada finds that a savvy home developer “knowingly” failed to report his substantial profits
A licensed real estate agent, who had been reporting income of about $20K a year, realized gains from the construction and sale (in 2006, 2008 and 2010) of three homes in Vancouver (together with a small gain from the sale of a vacant lot) totaling over $2.2 M. He professed to have constructed each home as a principal residence, but did not substantiate that he or his family occupied the homes.
Visser J affirmed the gross negligence penalties assessed on the taxpayer for his failure to report his business profits on the basis that the taxpayer “knowingly made false statements or omissions in his 2006, 2008 and 2010 tax returns.”
Neal Armstrong. Summary of Wall v. The Queen, 2019 TCC 168 under s. 163(2).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations (including three 2011 APFF Roundtable items) released in November and October, 2011. Their descriptors and links appear below.
These are additions to our set of 951 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 7 3/4 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 September.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2011-11-04 | 7 October 2011 Roundtable, 2011-0412201C6 F - Art. 160 - dividende en actions suivi d'un rachat | Income Tax Act - Section 160 - Subsection 160(1) | s. 160 could apply to a stock dividend followed by a redemption of the stock dividend shares |
| 7 October 2011 Roundtable, 2011-0412021C6 F - Financing Expenses | Income Tax Act - Section 12 - Subsection 12(2.2) | s. 12(2.2) might apply to on-charge, to ultimate group recipient of financing, of the finanacing expenses | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) - Subparagraph 20(1)(e)(ii.2) | CRA will evaluate whether the transactions are "restructuring" | ||
| 7 October 2011 APFF Roundtable Q. 17, 2011-0412171C6 F - 112(7) - Share-for-Share Exchange - 85(1) | Income Tax Act - Section 112 - Subsection 112(3) | s. 112(3) could still apply if "old" dividend-bearing shares "exchanged" under purported s. 85(1) exchange for "new" but identical shares | |
| Income Tax Act - Section 248 - Subsection 248(1) - Disposition | purported dirty s. 85 exchange of old common shares for new common shares does "not necessarily" entail a disposition | ||
| Income Tax Act - Section 85 - Subsection 85(1) | potentially no disposition if "new" share rights identical | ||
| Income Tax Act - Section 112 - Subsection 112(7) | s. 112(7) does not “technically” apply to a dirty s. 85 exchange of old shares for new shares | ||
| 2011-10-28 | 18 October 2011 External T.I. 2011-0394041E5 F - Fiducie personnelle- revenu brut | Income Tax Act - Section 3 | capital gains not included in computing income from a source |
| Income Tax Act - Section 248 - Subsection 248(1) - Gross Revenue | gross revenue from farming business did not include capital gains | ||
| 17 October 2011 External T.I. 2011-0423361E5 F - Loi sur le courtage immobilier | General Concepts - Illegality | Quebec real estate brokers can earn their remuneration through a corporation | |
| Income Tax Act - Section 9 - Nature of Income | Quebec real estate broker can generate commissions in a controlled corporation | ||
| 18 October 2011 External T.I. 2011-0422021E5 F - Purpose test - Subsection 55(2) of the Act | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) | dividend from grandchild to child likely does not engage s. 55(2) re sale of shares of grandparent |
CRA finds that employer contributions to a predecessor fund are insufficient to give rise to superannuation or pension benefits
An Irish resident transferred the funds from a conventional Irish company pension plan to an Irish Personal Retirement Savings Account (PRSA) and, following taking up Canadian residence, will transfer the PRSA funds to an Irish Approved Retirement Fund (ARF). In finding that neither the PRSA nor the ARF qualified as a pension plan or an employee benefits plan, CRA stated:
If no employer contributions have been made to a foreign retirement plan, the plan will not be considered a pension plan, nor an EBP. In accordance with Abrahamson … the fact that the original source of funds in a foreign individual retirement plan was a pension plan is not relevant.
On this basis, withdrawals from the plan would not be taxable under s. 56(1)(a) as pension income or under s. 6(1)(g) as an EBP distribution. Instead, any income or capital gains generated under the plan would be taxable in Canada on a current, annual basis.
Neal Armstrong. Summary of 3 July 2019 External T.I. 2018-0781941E5 under s. 248(1) – superannuation or pension benefit.
Loiselle – Court of Quebec finds that filing a revocation of a waiver confirmed that the waiver had been validly given
The taxpayer, after being asked by the ARQ to substantiate her capital gain computation for a share sale, met with the ARQ auditor (Mr. Drapeau) over three months before the expiry of the normal reassessment period and signed, at his suggestion, and on the spot and without the benefit of professional advice, a waiver, which was worded to extend to all sources of income rather than only the share sale. Shortly thereafter, she told her accountant what she had done and, on his advice, she sent a revocation of the waiver to the ARQ. Under the Quebec equivalent of ITA s. 152(4.1), six months had to run for the revocation to have effect, and the ARQ reassessed within this six month period to increase the capital gain from what she had reported.
In finding that the taxpayer could not resile from her waiver given that her signature to the waiver was “free and enlightened,” Lévesque, J.C.Q. stated:
Mr. Drapeau had explained clearly and simply to Mrs. Loiselle that her signature to the waiver enabled her to assemble the documents necessary for substantiating her computation of the capital gain and avoiding a rushed assessment, which would not be in her interests.
In fact, Mrs. Loiselle received from Mr. Drapeau all the particulars necessary in order that she could give a free and enlightened consent by signing the waiver. …
[T]he revocation only served to confirm her acceptance of the waiver.
Neal Armstrong. Summaries of Loiselle v. Agence du revenu du Québec, 2019 QCCQ 4647 under s. 152(4)(a)(ii) and s. 152(4.1).
Income Tax Severed Letters 28 August 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Frank A Smart & Son Ltd – UK Supreme Court indicates that input credits were available for fund raising costs of a taxable business
CRA may take the view that GST/HST costs incurred in raising funds, e.g., through issuing shares or debt, will not give rise to input tax credits in the absence of relief under ETA s. 185(1), because the first order supply being made is an exempt financial service. The European VAT jurisprudence initially took a similar approach, but that jurisprudence has evolved.
The taxpayer (“FASL”) purchased entitlements to an EU farm subsidy, which generated annual subsidies over several years (which initially exceeded 30 times its cattle sales revenues from its farming operation) and intended to use the money so generated to fund its future current and future business activities, which currently involved only taxable supplies.
In finding that FASL was entitled to deduct input credits for the VAT on its taxable purchases of the subsidy rights, Lord Hodge referenced the principle that such credits were available where there is “a direct and immediate link between th[e] acquired goods and services and the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products” and noted that under the VAT jurisprudence, this test could be satisfied, for example, respecting costs incurred in a fund-raising activity, such as a sale of shares, that had such a link to prospective taxable activities of the fund raiser’s business. He then stated:
I do not detect in the jurisprudence of the CJEU any basis for distinguishing expenditure incurred in a fund-raising exercise which takes the form of a sale of shares from a fund-raising exercise that involves the receipt of a subsidy over several years.
Neal Armstrong. Summary of Revenue and Customs v Frank A Smart & Son Ltd (Scotland) [2019] UKSC 39 under ETA s. 141.01(2).
CRA treats bitcoin mining as a barter exchange of services for bitcoin
After finding that “Bitcoin received by a miner to validate transactions is consideration for services rendered by the miner,” and that “As cryptocurrencies are not legal tender, it follows that when a cryptocurrency is used to pay for, or is received as payment for, goods or services, this is treated as a barter transaction,” CRA stated:
[W]here a taxpayer who is in the business of Bitcoin mining receives Bitcoin as a result of their mining activities, they must bring into income the value of the services rendered or the value of the Bitcoin received, whichever is more readily valued. In most cases, we expect the value of the Bitcoin received to be more readily valued and, accordingly, this is the amount to be brought into income.
This Interpretation is interesting because inter alia CRA characterized the mining as a services business rather than a property-production business, and tried to shoe-horn its analysis into its Bulletin on barter transactions. It is difficult to envisage examples where the revenue of a services business that generates property is anything other than the value of the property received (rather than the value of the services performed) even where there may be difficulties in valuing the property received, e.g., where a lawyer who bills her services at $500 per hour does 10 hours of work for an impoverished farmer and agrees to receive therefor all the hazelnuts she can eat (5 bushels of unprocessed hazelnuts).
Neal Armstrong. Summary of 8 August 2019 Internal T.I. 2018-0776661I7 under s. 9 – computation of profit.
MacDonald – Tax Court of Canada finds that commuter air fares were not deductible employment expense
The taxpayer flew on a close-to-weekly basis back and forth between his Ottawa home (where he claimed to have a home office) and the Regina office of his employer. In finding that the air fares were non-deductible to the taxpayer, Russell J stated:
Where a taxpayer lives is that taxpayer's personal decision, and the expenses of commuting from wherever he/she lives to his/her employer's place of business and return are personal and hence not deductible as expenses of employment.
Neal Armstrong. Summary of MacDonald v. The Queen, 2019 TCC 169 under s. 8(1)(h).
CRA comments on “qua employee” status where the individual also acquires 3% of the shares
A general response to a question as to whether a new CEO of a CCPC was receiving a housing loan qua employee (so that s. 15(2.4)(b) could apply) given that he also was acquiring 3% of the corporation’s shares may imply that CRA was not startled by the proposition that this was the case, stating:
[G]enerally … “benefits” are received qua shareholder where that person can significantly influence the corporation’s business policy. However, this might not be the case where the individual is only a minority shareholder of the corporation and does not otherwise have significant influence over the corporation.
Neal Armstrong. Summary of 14 June 2019 External T.I. 2019-0808411E5 under s. 15(2.4)(e).