News of Note
CRA indicates that a corporation’s adjusted stub period accrual respecting a partnership cannot be reduced by s. 111(1)(e) losses
Email this ContentThe adjusted stub period accrual (“ASPA”) of a corporation in respect of a partnership generally is reduced, under Element B of the formula for computing the ASPA, by the corporation's share of losses (or certain allowable capital losses) of the partnership for a fiscal period of the partnership that ends in the corporation’s current taxation year. CRA indicated that this means that the corporation cannot reduce its ASPA (and, therefore, the amount to be included in its income under s. 34.2(1)) by the amount of deductions in computing taxable income, such as s. 111(1)(e) limited partnership losses.
Neal Armstrong. Summary of 12 June 2020 External T.I. 2018-0788161E5 F under s. 34.2(1) - adjusted stub period accrual – (a) – B.
Income Tax Severed Letters 15 July 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Marino – Tax Court of Canada finds that an individual not within s. 2(1) or (3) was not a taxpayer who could generate a tuition tax credit
An individual with no connection to Canada paid a lot in tuition fees while in attendance at U.S. universities prior to 2012 then, on immigrating to Canada, claimed his purported unused tuition tax credits as a deduction from Canadian tax. Given that the tax credit provisions referred to an individual’s “taxation year,” the Crown successfully argued the Oceanspan principle that “a non-resident with no source of income in Canada, was not a ‘taxpayer’ and therefore did not have a taxation year.” Monaghan J rejected the taxpayer’s position that s. 250.1(a) had the effect of deeming any non-resident to have a taxation year - and instead indicated that this provision only “applies where a non-resident must have a taxation year if a provision of the Act is to operate as it is intended to operate, including in respect of another taxpayer,” for example, respecting a non-resident trust with a resident beneficiary recognizing income under s. 104(13) based on when that trust has a taxation year end.
She also found against the taxpayer on less esoteric grounds, namely, that the tuition tax credit provision (s. 118.5(1)(b)) “applies for one purpose only: ‘for the purpose of computing the tax payable by an individual for a taxation year.’,” so that:
[A] person will not be an individual for purposes of section 118.5 in a particular year unless that individual is a taxpayer in that year because the individual is described in subsection 2(1) or 2(3) and is potentially liable to tax in Canada under Part I.
The taxpayer was described in neither s. 2(1) nor (3) prior to 2012.
Neal Armstrong. Summaries of Marino v. The Queen, 2020 TCC 50 under s. 118.5(1)(b) and s. 250.1(a).
Hunt – Federal Court of Appeal indicates that it would be prepared to consider whether any broad discretion of CRA to waive tax was unconstitutional
The taxpayer, who had been assessed TFSA advantage tax under s. 207.05, and was unhappy with the amount of the tax that the Minister had ultimately offered to waive under s. 207.06, brought a Rule 58(1) application to the Tax Court, which asked whether s. 207.05 offends s. 53 of the Constitution Act, 1867 – with counsel arguing that in light of the potential waiver under s. 207.06 “the Minister sets the rate of tax, not Parliament, and this offends section 53.”
Stratas JA effectively noted that the question, as posed, was defective, because it only referred to s. 207.05 itself, which clearly imposed a tax and delegated nothing to the Minister.
He considered, as did the Tax Court below, that the Court could exercise its discretion to go beyond the question posed and review the combined effect of ss. 207.05 and 207.06. However, he found that the Court should not so exercise this discretion given a “lack [of] adequate submissions[,] and fully developed reasons from the Tax Court.” In describing where assistance was needed, he stated:
[A]fter a full examination of the text in light of its context and purpose, the Court might conclude that Parliament’s provision, in its authentic meaning, satisfactorily constrains the Minister’s discretion and defines what she can do and how she should do it. …
But in other cases, the Court might conclude that Parliament’s provision, in its authentic meaning, gives the Minister an unconstrained, undefined discretion without criteria. The Minister, not Parliament, would be creating and imposing the tax or coming up with the tax rate on her own. She would be a law unto herself.
Under that scenario, any measure adopted by the Canada Revenue Agency to guide the improperly wide discretion Parliament has given the Minister, such as policies, practices or interpretation bulletins, would be irrelevant. They would not fix the fatal problem: Parliament’s over-delegation of taxation power in the first place contrary to section 53 … .
The above passage might be regarded as an invitation to raise this constitutional issue again in another proceeding, subject to the hurdle of identifying a provision that “gives the Minister an unconstrained, undefined discretion” to waive tax.
Neal Armstrong. Summary of Hunt v. Canada, 2020 FCA 118 under Constitution Act, 1867, s. 53.
CRA indicates that a CCPC can generate active business income from its trading in securities
In confirming that the profitable trading of securities by a corporation, that constituted a trading business under the general criteria in IT-479R, would generally give rise to active business income, CRA stated:
In such a situation, the “principal purpose” of the trading business would generally not be to derive income from property and it would not be considered to be a “specified investment business.” As a result, the trading business may be considered an “active business” and any gains or losses from the trading business, as well as any interest or dividend income pertaining to or incident to that business, may be considered “income of the corporation for the year from an active business” under subsection 125(7) … [and] the corporation could be entitled to the small business deduction.
Neal Armstrong. Summary of 13 February 2020 External T.I. 2019-0826051E5 under s. 125(7) – specified investment business and s. 9 – capital gain v. profit - futures.
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in May, 2010. Their descriptors and links appear below.
These are additions to our set of 1,219 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2010-05-28 | 19 May 2010 External T.I. 2009-0342651E5 F - Remboursement de dépenses et allocations | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | reimbursement for employment-related moving expenses, and reimbursement of accommodation and transportation where employee temporarily assigned away from normal home base, not taxable |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) | first $650 of allowance to cover moving costs not taxable | ||
| Income Tax Act - Section 6 - Subsection 6(23) | reimbursement of expenses to obtain a mortgage is included | ||
| 30 March 2010 Internal T.I. 2010-0354391I7 F - P.VI.1:Rachat à l'enchère hollandaise modifiée | Income Tax Act - Section 248 - Subsection 248(1) - Short-Term Preferred Share - Paragraph (a) - Subparagraph (a)(i) | deemed dividends on redemption of common shares tendered under modified Dutch auction came within (a)(i) and (e)(i) FMV exception | |
| General Concepts - Fair Market Value - Shares | purchase price established under modified Dutch auction represented the tendered shares’ FMV | ||
| 2010-05-21 | 13 May 2010 External T.I. 2009-0328741E5 F - Régime "à prix coûtant majoré" | Income Tax Act - Section 248 - Subsection 248(1) - Private Health Services Plan | satisfaction of “reasonable risk” condition in IT-339R2 for cost-plus plan |
| 27 April 2010 Internal T.I. 2009-0335761I7 F - REÉR et revenu d'un Indien | Other Legislation/Constitution - Federal - Indian Act - Section 87 | s. 87 exemption did not apply to blatant RPP/RRSP stripping arrangement | |
| Income Tax Act - Section 146 - Subsection 146(10) | ss. 146(9) and (10) applicable to RRSP purchase of Coop units at undervalue and loan by Coop to annuitant | ||
| 2010-05-14 | 13 May 2010 External T.I. 2009-0343971E5 F - Société de services pour les professionnels | Income Tax Act - Section 67 | deductibility of management fees paid by professional practice to services corporation |
CRA finds that having a purpose of selling an apartment building is consistent for GST/HST purposes with holding each apartment for the purpose of leasing it
In order for a builder of a multiple unit residential complex to receive the new residential rental property rebate, the included residential units must qualify as “qualifying residential units.” One of the relevant requirements (in s. (a)(ii)(A.1) of the definition of “qualifying residential unit”) is that the unit is held by the builder for the purpose of making exempt supplies of residential accommodation to a person “under a lease … for the purpose of its occupancy by an individual as a place of residence.” CRA found that this requirement can be satisfied even where, by the time for testing the eligibility for the rebate (i.e., at the time of the self-supply under s. 191(3) at the later of substantial completion and first occupancy), the builder had agreed to sell the whole complex.
CRA helpfully reasoned that “the terms ‘residential complex’ and ‘residential unit’ … are two distinct things,” so that:
[T]he Builder can hold the Complex (a residential complex) for the purpose of making a supply by way of sale to the Purchaser, and also hold the residential units contained therein for the purpose of making exempt supplies of the units by way of lease to individuals who will occupy the units as a place of residence.
Neal Armstrong. Summary of 10 October 2019 GST/HST Interpretation 193324 under ETA s. (a)(ii)(A.1) of the definition of “qualifying residential unit” in s. 256.2(1).
Matthew Macisaac Consulting – Tax Court dismisses request for Rule 58 determination that reporting gains as on capital rather than income account was not a “misrepresentation”
The taxpayer was reassessed for quite a number of taxation years for which the main substantive issue was whether dispositions of shares in an offshore fund were on capital account – but many of the earlier years were beyond the normal reassessment period. The taxpayer sought to reduce the scope of the dispute to the latter years by bringing a motion for the Court to permit a Rule 58 determination that the earlier years could not be reassessed under s. 152(4)(a)(i), because this required that there have been a misrepresentation. In particular, in light of the French version of s. 152(4)(a)(i), “misrepresentation” referred to a factual misrepresentation, and the question of whether a gain was a capital gain or income account gain instead was one of mixed fact and law and, therefore, outside of the meaning of s. 152(4)(a)(i).
Wong J stated that the “English and French versions are of equal force and effect, and there is no basis to prefer one version over the other without further context.” In dismissing the motion, she stated:
I cannot agree with the Appellant’s proposition … that a question of income versus capital necessarily amounts to a difference in opinion. … [T]he factual circumstances of the appeal will determine whether the issue of income versus capital is purely a difference of opinion or not. …
The question of whether a misrepresentation under subparagraph 152(4)(a)(i) contemplates fact only or mixed-law-and-fact, should properly remain with the trier of fact to determine in conjunction with the related substantive issues.
This seems to be an indication that whether reporting gains as capital gains was a misrepresentation in light of both the English and French versions could, in her view, turn on a determination of the factual circumstances by the trial judge.
Neal Armstrong. Summaries of Matthew Macisaac Consulting Inc. v. The Queen 2020 TCC 44 under Rule 58 and s. 152(4)(a)(i).
CRA indicates that a unit trust redemption fee would generally be exempted from GST/HST if it was payable by the redeeming unitholder to the trust rather than the fund manager
The Master Trust Agreements between the manager of various private unit investment trusts and such Funds’ trustee stipulated that redemption charges were payable by the unitholders on redeeming their units. It seemed likely, but unclear, to CRA, based on the limited information provided to it, that such charges were consideration for the service of the Funds in redeeming the units and, therefore, were exempted under para. (d) of the financial services definition as being consideration for the “transfer of ownership” of financial instruments (i.e., it apparently was sufficient that the unitholders ceased to be owners and that it did not matter that there was no new owner of the units).
If, on the other hand, the redemption fees were consideration payable to the Fund manager for its service of “arranging for” the “transfer of ownership” of the units, CRA indicated that this created the possibility that such redemption fees were part of a single supply of taxable management services made by the manager (pursuant to a management agreement between it and the unitholders) for periodic management fees.
Neal Armstrong. Summaries of 3 September 2019 GST/HST Interpretation 173195 under ETA s. 123(1) – financial service – para. (d) and para. (q).
Iris Technologies – Federal Court of Appeal states that CRA’s assessing does not oust Federal Court jurisdiction to review exercises of CRA discretion
During an audit of the appellant (Iris), CRA refused Iris’ requests for immediate payment of its refund claims, suspecting that Iris was participating in a “carousel” scheme (i.e., under which GST/HST is never remitted at the other end of the chain). Iris considered that the requirement in ETA s. 229(1) that net refund claims be paid “with all due dispatch” meant that it should be paid right away rather than awaiting the conclusion of the audit, and appealed the dismissal of its motion in the Federal Court, for an interim mandatory injunction to compel the payment of $62.3 million in GST/HST refunds, to the Court of Appeal.
Rennie JA endorsed the findings in Express Gold that “the obligation to pay a refund with all due dispatch did not displace the Minister’s obligation to verify that the refund is in fact payable under the ETA” and that “’a reasonable interpretation of subsection 299(1) is that the Minister may choose to audit a claim for a net tax refund, in order to determine whether the amount is properly claimed’”.
Respecting the meaning of “with all due dispatch,” he noted:
In what appears to be a relatively complex case, the CRA’s estimate that the audit would take ten months to complete is reasonable. Those ten months have not yet elapsed.
Rennie JA further stated (also similarly to Express Gold):
… I do not wish to be taken as endorsing the Minister’s arguments that the issuing of the notices of assessment deprives the Federal Court of jurisdiction to consider the Minister’s exercise of discretion under the ETA.
…[T]he Federal Court retains jurisdiction to consider the application of administrative law principles and obligations to the exercise of discretion by the Minister in the application of the ETA. Examples of this include allegations of acting for an ulterior purpose or in bad faith, abuse of his or her powers or not proceeding in a reasonable time frame.
Neal Armstrong. Summary of Iris Technologies Inc. v. Canada (National Revenue), 2020 FCA 117 under ETA s. 229(1).