News of Note
Income Tax Severed Letters 19 February 2020
Email this ContentThis morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Barejo – Federal Court of Appeal finds that the amount payable under a “debt” for s. 94.1(1)(a) purposes need not be crystallized until maturity
An offshore fund ("SLT"), in which the taxpayer had an interest, invested in instruments (labelled as "Notes") of non-resident subsidiaries of Canadian banks. The Notes did not bear interest and provided for a payment on maturity (15 years after their issuance, subject to earlier repayment after having given 367 days’ notice) that reflected the performance of a matching actively-managed portfolio of assets (the “Reference Assets”) held by affiliates of the bank-group obligors. If the Notes constituted "debts" for purposes of s. 94.1(1)(a) (the question posed under Rule 58), the taxpayer would be required to recognize its share of foreign accrual property income of SLT under Element C of the FAPI definition. The principal issue was whether they so constituted debts notwithstanding that the dollar amounts to be paid thereunder were unknown until the maturity date.
After stating that “subsection 94.1(1) … contemplates in express terms that an instrument that derives its value from fluctuating portfolio investments can be a debt” and that a narrow construction of “debt” would go contrary to the purpose of the above provisions of “annual imputation of income while … foreign investments are in place,” Noël CJ found that future crystallization of the amount due was sufficient, and concluded:
When regard is had to the text, context and purpose of paragraph 94.1(1)(a), a debt arises for purposes of this provision when an amount or credit is advanced by one party to another party; an amount is to be paid or repaid by that other party at some point in the future in satisfaction of the advance and this amount is fixed or determinable or will be ascertainable when payment is due. As these three conditions are present here … this suffices to dispose of the appeal … .
Neal Armstrong. Summaries of Barejo Holdings ULC v. Canada, 2020 FCA 47 under s. 94.1(1)(a) and Statutory Interpretation - Consistency.
CAA v. Jet2.com – Court of Appeal of England and Wales applies dominant purpose test to determining whether privilege applies to emails sent to both lawyers and executives
Is an email protected by legal advice privilege (“LAP”) if it is sent by an executive to multiple recipients, including an in-house lawyer but most of whom are fellow executives? Hickinbottom LJ stated:
In respect of a single, multi-addressee email sent simultaneously to various individuals for their advice/comments, including a lawyer for his input, the purpose(s) of the communication need to be identified. … If the dominant purpose of the communication is … to settle the instructions to the lawyer then … that communication will be covered by LAP. That will be so even if that communication is sent to the lawyer himself or herself, by way of information; or if it is part of a rolling series of communications with the dominant purpose of instructing the lawyer. However, if the dominant purpose is to obtain the commercial views of the non-lawyer addressees, then it will not be privileged, even if a subsidiary purpose is simultaneously to obtain legal advice from the lawyer addressee(s).
As this test was not satisfied, the emails were not privileged.
Neal Armstrong. Summary of The Civil Aviation Authority v Jet2.Com Ltd, R. (on the Application of) [2020] EWCA Civ 35 under s. 232(1) – solicitor-client privilege.
Shanda v. Maso – Privy Council confirms application of minority discount to minority bloc of public-company shares
Some minority shareholders of a Caymans NASDAQ-quoted company dissented when they were squeezed out in a going-private transaction for a modest (26%) premium over the trading price. The sole issue before the UK Privy Council was the correctness of their argument that their shares’ “fair value” should, consistently with the Delaware and Canadian corporate jurisprudence respecting compulsory minority buy-outs, be valued at a pro rata portion of the net enterprise value, rather than at a price that reflected a minority discount (which, if relevant, was 23%) to such value.
Lady Arden indicated that such jurisprudence should not be followed, in the absence of any indication that that was what was meant by “fair value.” She stated:
[I]t is a general principle of share valuation that (unless there is some indication to the contrary) the court should value the actual shareholding which the shareholder has to sell and not some hypothetical share. This is because in a merger, the offeror does not acquire control from any individual minority shareholder. Accordingly, in the absence of some indication to the contrary, or special circumstances, the minority shareholder’s shares should be valued as a minority shareholding and not on a pro rata basis.
This suggests that one should be cautious in considering the fair market value of a minority shareholding to equal a pro rata portion of enterprise value, without building in a minority discount.
Neal Armstrong. Summary of Shanda Games Ltd v Maso Capital Investments Ltd & Ors (Cayman Islands) [2020] UKPC 2 under General Concepts – FMV – shares.
CRA maintains its position that the provincial Crown exemption does not apply to Alberta employees using their own credit card for provincial purchases
CRA has significantly expanded its GST/HST Memorandum on Provincial Governments, but by way of expanding its exposition of its positions rather than changing them.
All the provincial governments collect GST on the taxable supplies made by them, with various departments (and often various Crown agents) using the same provincial registration number, but with different filings (presumably using different branch suffixes) made for each department or agency.
All of the provinces other than Alberta, Saskatchewan and Manitoba, have agreed with the federal government to a “pay-and-rebate” model, under which all government departments and Crown agents pay the GST/HST at the time of purchase and listed entities (authorized Crown agents) subsequently claim a government rebate of 100% of the GST/HST paid or payable.
Listed entities in Manitoba, Saskatchewan, Alberta, the Northwest Territories and Yukon do not pay the GST/HST on purchases of taxable property and services, provided that an authorized official of the listed entity provides sufficient evidence to the supplier that the supplies are being purchased by a listed entity on its own behalf (as to which, CRA provides a suggested form of exemption certificate).
Otherwise taxable purchases made by employees of a listed entity in the employee’s own name (e.g., hotel and meal expenses) are subject to GST/HST even if the employee makes the purchase in the course of employment (unless the purchase is made using a credit card for which the listed entity employer is solely liable.) (This position seems to implicitly assume that it is legally impossible for an employee to purchase as agent of the employer. Absence of agency might be the case for travel expense reports which the employer might not approve, but will not always be the case, e.g., where the expenditure has been pre-approved or the employee has been accorded broad authority.)
Neal Armstrong. Summaries of GST/HST Memorandum 18-2 “Provincial Governments” February 2020 under ETA s. 122(b), s. 122, s. 239(2), s. 146, Sched. V, Pt. VI, s. 10, s. 20.
CRA sets out its positions on public colleges
CRA has published a new GST/HST Memorandum on Public Colleges. Quite a number of the points are similar to those made in the new Memoranda on Universities (20-3) and on School Authorities - Elementary and Secondary Schools (20-1), and are not repeated here.
Respecting the ETA definition of a “public college,” CRA indicates that:
- accepting mature students who do not have a high school diploma is consistent with being a “post-secondary” college or technical institute
- the requirement to cater to the “general public” is interpreted to refer to “a significant segment of the general public,” and “as long as a post-secondary college or post-secondary technical institute offers a variety of courses to the general public, it may be acceptable for a portion of the courses or programs offered to be limited to a narrow segment of the public.”
- furthermore, “funding to support job training activities is generally used by an organization to provide specific educational services over a limited time period and therefore does not relate to the ongoing provision of educational services to the general public.”
Neal Armstrong. Summaries of GST/HST Memorandum 20-2 “Public Colleges” December 2019 under ETA s. 123(1) - public college, Sched. V, Pt. III, s. 6, s. 7, s. 16.
5 more translated CRA interpretations are available
We have published a further 5 translations of CRA interpretations released in March and February, 2011. Their descriptors and links appear below.
These are additions to our set of 1,089 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Adou - Court of Quebec finds that a 3-year departure from Quebec entailed a 3-year cessation of ordinary residence
Unusually, the ARQ assessed the taxpayer (a somewhat recent immigrant) to deny that he was a resident of Quebec at the end of a particular year (2013) – he had claimed significant child care credits based on being a Quebec resident. He had left Montreal in September 2013 for Sudbury, followed by Toronto, with his spouse and two young children to take up intermittent studies and employment there (with his spouse getting a job in Toronto). He returned to Montreal for several months in 2014, and then returned to Montreal permanently in 2016, where he pursued more studies and got a permanent full-time job in 2017.
Breault, J.C.Q. found that the taxpayer’s “customary lifestyle and ordinary mode of living, on December 31, 2013, was in the Province of Ontario” in light of the taxpayer having severed most of his connections with Quebec (e.g., his apartment and family both moved), and also noted:
[His] visits to Quebec (during the relevant period) … were clearly only temporary and limited in nature. They were much more a matter of a short stay to take advantage of a vacation period or occasional leave than a necessary presence to devote himself to duties or obligations related to important or even secondary elements of residence in Quebec.
Neal Armstrong. Summary of Adou v. Agence du revenu du Québec, 2020 QCCQ 131 under s. 2(1).
Dreger – Tax Court of Canada finds that a distribution from a deceased father’s fund to his surviving children was a related-person transfer
The taxpayers were the named beneficiaries of a life income fund held by their late father. In reliance on Kiperchuk (which found a taxpayer not to be related to her deceased husband respecting a transfer following his death) they argued that the resulting distributions to them were from an arm’s length person, so that s. 160 did not apply to them respecting their deceased father’s tax debts. In rejecting their appeals, D'Arcy J stated:
I agree with [Kiperchuk] that under the relevant provincial law the statutory status of marriage was ended by death. However, the relationship of father and child is not a statutory relationship; it is a factual relationship. … [T]he Appellants are [still] the children of …[their father].
Neal Armstrong. Summary of Dreger v. The Queen, 2020 TCC 25 under s. 251(6)(a).
Alta Energy – Federal Court of Appeal confirms that Treaty shopping was not an abuse
A Blackstone LP and a U.S. shale company transferred their investment in a Canadian subsidiary (Alta Canada), that was to develop a shale formation in northern B.C., to a Luxembourg s.à r.l (Alta Luxembourg – which, in turn, they held through an Alberta partnership). About two years after the acquisition by Altas Canada of the exploration licences, it was sold to Chevron Canada at a significant gain. In the Court of Appeal, the Crown conceded that the gain of Alta Luxembourg was exempted from Canadian capital gains tax by virtue of the exclusion in Art. 13(4) of the Canada-Luxembourg Treaty which provided that the Alta Canada shares were not deemed immovable property (and thus not subject to Canadian capital gains tax) on the basis that the exploration licences were property of Alta Canada “in which the business of the company … was carried on.” However, it in effect argued that pure Treaty shopping was an abuse under s. 245(4).
Webb JA rejected the particular Crown arguments in this regard -- that the object, spirit and purpose of Art. 13(4) required that:
- Alta Luxembourg be an “investor” (he stated that “There is nothing to suggest that the underlying rationale for the exemption is that it would only be available to a resident of Luxembourg who invests in the particular corporation … .”)
- there be a potential to realize income in Luxembourg, whereas here the gain was offset by variable interest payable by Alta Luxembourg to the Alberta partnership (he stated “There is no basis to find that the rationale for the definition of ‘resident’ would suggest that any criteria other than the criteria included in the definition of resident in Article 4, should be used … .”)
- the exemption be accessed only by persons who have some commercial or economic ties to Luxembourg (he stated that “There is no distinction in the Luxembourg Convention between residents with strong economic or commercial ties and those with weak or no commercial or economic ties.”)
He concluded:
I agree with … MIL … that the object, spirit and purpose of the relevant provisions of the Luxembourg Convention is reflected in the words as chosen by Canada and Luxembourg.
Neal Armstrong. Summary of Canada v. Alta Energy Luxembourg S.A.R.L., 2020 FCA 43 under s. 245(4).