News of Note
Quebec Ombudsperson criticizes the ARQ for not following the Galway principle in settlement agreements
Email this ContentQuebec’s Public Protector (a.k.a. Ombudsperson) has issued a report containing eight recommendations for improvements in the way that the ARQ handles the process of seeking and entering into settlements with taxpayers.
It found that the internal policy of the ARQ has contemplated settling cases where the facts in the record cannot support its position, or the ARQ fears having its reassessments reversed by the Courts. The report found that it was abusive and improper for the ARQ to reassess without an adequate evidentiary foundation capable of surviving judicial scrutiny – and that, in such instances, the reassessment should be dropped. The Public Protector also found that the ARQ has an obligation to ensure that taxpayers are fully informed of the tax and legal consequences of any settlement, and referenced the CRA’s AD-19-01 Audit Agreement and Waiver of Objection Rights Guidelines in this regard.
After listing the eight Recommendations, the Report gave the ARQ until April 30, 2020 to submit an action plan and timetable in response.
Some will consider that this Report is relevant to how the ARQ has been administering the GST/QST.
Neal Armstrong. Summary of 27 February 2020 Report of the Quebec Ombudsman entitled “So that taxpayers’ rights are upheld in payment arrangement proposals with Revenu Québec” summarized under ETA s. 306.1(2).
CRA ruling letter contemplates successive transfer of losses to new Losscos, which then are wound-up into the Profitco
A parent company (Aco), whose only source of taxable income was foreign accrual property income from a non-resident subsidiary but which had losses because of issuing debt to the public, received rulings for the transfer of its losses to a domestic Profitco (held through an intermediate Holdco). This was to be accomplished by Holdco incorporating a new corporation (Lossco1), which would generate losses through triangular transactions between Aco, it, and a Newco incorporated by Aco, with Lossco1 (once it had generated those losses) being transferred on a s. 85(1) rollover basis to Profitco, and wound-up into Profitco on a s. 88(1) rollover basis.
The ruling letter describes a repetition of these transactions (i.e., with a new Lossco and Newco) in a subsequent taxation year, but no rulings are provided (presumably only because CRA requires ruled–upon transactions to be implemented somewhat promptly).
Neal Armstrong. Summaries of 2017 Ruling 2017-0711911R3 under s. 111(1)(a) and s. 88(1.1).
CRA indicates that an annuity issued by a registered charity did not qualify for the s. 60(l) rollover
In order for an annuity to be eligible for a tax-deferred rollover under s. 60(l), s. 60(l)(ii) requires that the annuity issuer must be a person licensed or otherwise authorized under the laws of Canada or a province to carry on an annuities business in Canada. In rejecting the proposition that a registered charity could issue a charitable gift annuity that was eligible for the rollover, CRA stated:
[T]he fact that provincial insurance law may exempt a charitable organization from the application of certain legislative requirements with respect to the issuance of charitable gift annuities does not amount to the organization being licensed or otherwise authorized under that law to carry on an annuities business in Canada.
Neal Armstrong. Summary of 23 January 2020 External T.I. 2019-0830781E5 under s. 60(l)(ii).
CRA confirms that the s. 8(1)(c) does not entail any home office requirement
CRA confirmed that, in order to be eligible for the clergy residence deduction under s. 8(1)(c), there is no requirement for a minister to maintain an office in her residence or use it in connection with her duties as a member of the clergy.
Neal Armstrong. Summary of 23 January 2020 External T.I. 2019-0796121E5 F under s. 8(1)(c).
Grands Palais – Court of Quebec finds that consideration for parking spots was part of the consideration for (condo) residential complexes for new housing rebate purposes
The Quebec new housing rebate is essentially the same as the ETA equivalent, except that entitlement to it is lost at a lower dollar level of total consideration for the “residential complex” that is purchased. Croteau, J.C.Q. found that the consideration paid by purchasers for new condo units in a complex also included the $25,000 they paid for an underground parking spot. In particular, she found that the parking spot was “attributable to the [condo] unit and … reasonably necessary for the use and enjoyment of the unit,” stating:
The location of the various high-rise residential buildings and the advantages that indoor parking spaces can provide led 99.44% of purchasers to express their intention to acquire at least one parking space at the same time as their residential unit.
[A]lthough they constitute different cadastral lots … the interdependence and interconnection of the parking spaces to the residential units are such that they could not be considered, for the purposes of establishing the amount of the Rebate to which the purchasers were entitled, as separate components.
Accordingly, for 93 of the purchases, the total consideration exceeded the dollar threshold, after taking the extra $25,000 into account.
Like ETA s. 254(6), the builder under the QSTA is not liable for the denied rebate (which has almost invariably been assigned to the builder in larger projects) except where it “knows or ought to know” that the individual purchaser is not eligible for the rebate. In finding that the builder could not escape liability on this ground, Croteau, J.C.Q. found that although the rebate form itself did not explain the point at all well, the builder should have been able to ascertain the CRA/ARQ position on the rebate in various published Bulletins.
Neal Armstrong. Summary of Grands Palais du nouveau Saint-Laurent Inc. v. Agence du revenu du Québec, 2020 QCCQ 281 under ETA s. 123(1) – residential complex – (b).
CRA indicates that a discretionary family trust is required to make a pro rata allocation of safe income respecting a dividend distributed to its beneficiaries
CRA indicated that when a discretionary family trust distributes a dividend received from Opco to a corporate and an individual beneficiary (with a s. 104(19) designation being made), “the safe income on hand associated with the dividend would be allocated on a pro rata basis amongst the portions of the dividend received by the corporate and individual beneficiaries,” rather than the trustees being permitted to allocate all of safe income to the dividend received by the corporate beneficiary.
Neal Armstrong. Summary of 27 January 2020 External T.I. under s. 55(2.1)(c).
Income Tax Severed Letters 26 February 2020
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on a self-cancelling circular transaction to convert net capital losses into stepped-up UCC
Aco, and its subsidiary Bco, have available capital losses that they wish to use in stepping up the undepreciated capital cost of trademarks (Class 14.1 properties, presumably having a nominal or modest capital cost) which Bco uses in the course of carrying on its business. In broad terms, this is accomplished by Bco using up its losses in spinning the trademarks off to Aco on a partial rollover basis, and by Aco dropping the trademarks down to Bco to also use up its losses. More specifically:
- Aco establishes a new sister to Bco (Newco) to which Aco does an s. 85(1) drop-down of preferred shares of Bco having a fair market value equaling that of the trademarks;
- Bco spins-off the trademarks to Newco on a partial rollover basis in consideration for prefs of Newco, thereby using Bco’s net capital losses to effect a ½ step-up of the UCC of the trademarks under s. 13(7)(e)(ii) – and with Newco licensing the trademarks back to Bco for royalties;
- The prefs in 1 and 2 above are cross-redeemed (with reliance on the s. 55(3)(a) exception to s. 55(2));
- Newco is wound-up under s. 88(1);
- Aco does an s. 85(1) drop-down of the trademarks back to Bco, but choosing an elected amount so as to uses up its net capital losses and to effect a further ½ step-up of the trademarks' UCC under s. 13(7)(e)(ii).
The CRA summary of this transaction emphasizes that Reg. 1102(14) deems the trademarks to have the same (Class 14.1) class to Newco, Aco and Bco in succession. It is unclear whether this reflects someone’s sensitivity to a Mara Properties issue (property retaining its character as it is bounced around in the group) or a Hickman Motors/Reg 1102(1)(c) issue (transitory income-producing purpose).
Neal Armstrong. Summary of 2019 Ruling 2018-0772921R3 under s. 13(7)(e)(ii).
Clément – Tax Court of Canada finds that s. 8(1)(b) did not cover legal costs of an action to extend the period of employment
The taxpayer worked as a provisional judge for the Montreal Municipal Court up until 2005, and then served as a full-time judge up until 2012, at which time he was forced to resign as he had attained the age of 70 – which meant that he was 23 months short of the requisite years of full-time service required to generate a full pension.
Lafleur J found that the legal expenses he incurred in an unsuccessful court action to obtain redress were not deductible under s. 8(1)(b). Respecting the first ground of his action - seeking a declaration that he was entitled to continue to exercise his office as a judge of the Montreal Municipal Court after the age of 70, thereby accumulating credits for obtaining a full pension - Lafleur J essentially noted that this did not represent attempted recovery of amounts he earned for working up to 70, but instead related to an attempted extension of his employment. Respecting his alternative ground - seeking a declaration that the three years during which he acted as a provisional judge be taken into account in the calculating his pension – she noted inter alia that s. 8(1)(b) did not extend to amounts that would have been included in his income under s. 56 rather than s. 5.
Neal Armstrong. Summary of Clément v. The Queen, 2020 CCI 33 under s. 8(1)(b).
Al-Rubaiy – Tax Court of Canada finds that the common law rule of discoverability does not apply to GST/HST rebate claim deadlines
The taxpayer was charged HST on his purchase of a dental practice and, after changing accountants, applied for a rebate of the HST (presumably on the basis that the purchase was exempt under inter alia ETA ss. 141.1(1)(b), 200(3) and 167.1).) Although his rebate application was made well after the two-year limitation in s. 261(3), he unsuccessfully argued that under the common law principle of discoverability, the two-year period did not start running until he discovered his overpayment on his change in accountants. Wong J added, obiter:
No evidence was introduced to show that the joint election was made with respect to subsection 167(1) for the tax-free supply of the Vendor’s business assets. Therefore, since no election appears to have been made, this transaction was subject to GST/HST and the tax in issue was likely not paid in error.
Neal Armstrong. Summary of Al-Rubaiy v. The Queen, 2020 TCC 34 under ETA s. 261(3).