News of Note

In May of last year, CRA stated:

Starting in May 2019, online authorizations for deceased business taxpayers will not be terminated upon receipt of the date of death. They will continue until 1) they are cancelled by a legal representative (ex. an executor) or by the authorized representative themselves, or 2) upon the arrival of the expiry date that was provided on the signed consent form.

The same criteria will be extended to authorizations for individual (T1) clients in February of 2020.

Neal Armstrong. Summary of May 2019 CPA Alberta CRA Roundtable, ITA Session – Q.20 under ITA s. 70(2).

BHP Billiton Limited ("Ltd"), an Australian corporation, was part of a dual-listed company arrangement (the “DLC Arrangement") with BHP Billiton Plc ("Plc"). The question of whether Ltd. was required to recognize the approximate Australian equivalent of FAPI on the resale profits of a Swiss subsidiary (in which it indirectly held a 58% interest and Plc indirectly held a 42% interest) on commodities that the Swiss sub had purchased from Plc subsidiaries turned on whether those subsidiaries were “sufficiently influenced” by Ltd. The definition of this concept stated:

a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts).

This definition is perhaps somewhat broader that the reference in ITA s. 256(5.1) to “any direct or indirect influence that, if exercised, would result in control in fact.”

In finding that this test was satisfied, the Court noted inter alia that under the agreements governing the DLC Arrangement, Ltd and Plc were required to operate "as if they were a single unified economic entity", through common boards of directors, and were also required to operate through "a unified senior executive management.”

The Court stated:

[T]he fact that Ltd and Plc operated in this way pursuant to a contract does not preclude a finding that they "sufficiently influenced" each other – otherwise, any company would be able to place itself outside the reach of the statute (of being "sufficiently influenced" by another company) by forming a contract to govern their relationship.

The Court implicitly rejected a dissenting view in the Court below that “to act in concert with a common aim and mutuality of interest was not to act in accordance with the directions, instructions or wishes of another entity.”

Neal Armstrong. Summary of BHP Billiton Limited v Commissioner of Taxation [2020] HCA 5 under s. 256(5.1).

In 1997, an individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. Over several years starting in 2004, he closed out the forward at a loss. At the time of entering into the forward, he also monetized about half of his BNS shareholding through a loan from a bank (TD Bank) affiliated with the forward counterparty to which he pledged his shares and the forward contract – but then repaid the loan in 2004. The Tax Court had accepted the taxpayer’s testimony that he had intended to profit from the anticipated decline in the value of the BNS shares under the forward contract but nevertheless retained ownership of the shares based on his belief that they would perform well in the long term.

In affirming the Federal Court of Appeal’s decision to reverse this decision on the basis of objective indications that the forward sales hedged the taxpayer’s BNS holding, Abella J stated:

The forward contract had the effect of nearly perfectly neutralizing fluctuations in the price of [the] shares held by Mr. MacDonald, pointing to a close linkage. The purpose of the forward contract as a hedging instrument is most apparent when one considers the forward contract alongside the loan and pledge agreements between Mr. MacDonald and TD Bank. Seen in this light, there was considerable linkage between the forward contract and Mr. MacDonald’s … shares.

In the course of arriving at this conclusion, she indicated that:

• A derivative contract is a hedge if its purpose is to “hedge exposure to a particular financial risk such as the risk posed by volatility”.
• “Purpose is ascertained objectively … . [T]he primary source of ascertaining a derivative contract’s purpose is the linkage between the derivative contract and any underlying asset, liability or transaction purportedly hedged.”
• “The absence of a synchronous transaction used to offset gains or losses arising from a derivative contract is not equivalent to the absence of risk and is not, by itself, determinative of the characterization of a derivative contract”, so that “The fact that Mr. MacDonald did not sell his … shares immediately to offset his losses under the forward contract does not sever this connection”.
• “[C]ash settled forward contracts and forward contracts settled by physical delivery are economically equivalent and treating them differently for tax purposes would create ‘an unjustified artificial distinction’.”
• Options (along with forwards) were “one of the “two basic types of derivatives”, so that the principle that “Gains and losses arising from hedging derivative contracts take on the character of the underlying asset, liability or transaction being hedged … . [whereas] speculative derivative contracts are characterized on their own terms, independent of an underlying asset or transaction” also applied to options.

The dissenting reasons of Côté J indicated that the majority’s decision meant that “a derivative instrument that shorted shares in TDB was a hedge of the BNS Shares regardless of the taxpayer’s intentions.”

Neal Armstrong. Summaries of MacDonald v. Canada, 2020 SCC 6 under s. 9 – Capital gain v. profit – Futures/Forwards/Hedges and General Concepts – Purpose/Intention.

Joint venture participants, who had not made a joint venture election, purchased real estate collectively through a representative who was registered for GST/HST purposes. No s. 273 joint venture election was made. The vendor did not collect GST/HST on the sale in reliance on s. 221(2) but, as it emerged, one of the purchasers was not registered.

CRA responded that, given that purchaser’s non-registration, s. 221(1) imposed liability on the vendor, but “That said, the minister may consider assessing the purchaser under paragraph 296(1)(b) where warranted.” An issue not discussed by CRA is that s. 278(2) would preclude it from collecting on any such assessment.

Respecting the absent JV election, CRA stated:

Generally, if the conditions of the … Election … have been met, and the parties have treated their transactions as if the election had been valid … and the parties are otherwise compliant with the CRA, Audit will allow this election to be backdated.

Neal Armstrong. Summary of May 2019 CPA Alberta CRA Roundtable, GST Session – Q.18 under ETA s. 221(2) and 273(4).