News of Note
Lilyfield –a dissolved corporation’s appeal to the Tax Court was a nullity notwithstanding a prior Tax Court approval of an application to appeal
Email this ContentSimilarly to the corresponding provision of the OBCA considered in 1455257 Ontario, s. 219(2)(a) of the Corporations Act of Manitoba provides that a proceeding commenced by a corporation before its dissolution can be continued as if it had not been dissolved. A taxpayer, before its dissolution for failure to file returns, had brought an application (to which its proposed Notice of Appeal was attached) to extend the time for launching its appeal, with that Notice being filed immediately after the granting of the application, which occurred after the corporation was dissolved.
MacPhee J found that the filing of the extension application was insufficient to consider that the proceeding (the appeal) had been launched before the dissolution – and essentially followed 1455257 Ontario in finding that the Manitoba statute “does not allow a dissolved corporation to initiate a civil procedure.”
Neal Armstrong. Summary of Lilyfield Development Inc. v. The Queen, 2020 TCC 16 under s. 169(1).
McCartie – Federal Court of Appeal agrees that it was inappropriate to make a Rule 58 reference where the evidentiary record needed to be established by witnesses
The unrepresented taxpayer appealed the determination by the Tax Court that four questions that he had sought to have determined under Rule 58, including whether evidence relied on by CRA in assessing him had been obtained in violation of his Charter rights, were not appropriate for determination under that Rule. In dismissing the appeal, Rivoalen J.A. noted that the questions would require the calling of witnesses to establish the evidentiary record, so that it was reasonable for Bocock J to consider that the objective under the Rule, that the answers provided “may dispose of all or part of the proceeding or result in a substantially shorter hearing or a substantial saving of costs,” would not be met.
Neal Armstrong. Summary of McCartie v. Canada, 2020 FCA 18 under Rule 58(2).
CRA indicates that a functional currency reporter realized a capital gain when a Cdn. dollar refund claim appreciated until receipt
Canco, which had elected to use a functional currency, claimed a refund (made in Canadian dollars as required by s. 261(11)) by filing an amended return for a year (apparently for the carryback of a loss to that year). As a result of the subsequent appreciation of the Canadian dollar as compared to the rate applicable to the particular year, it realized an FX gain (relative to the qualifying currency) when it received the refund in Canadian dollars. Was this gain ordinary income, a capital gain or a nothing?
After noting that “where a loss from a subsequent taxation year is carried back to a particular taxation year, the revised income taxes payable and any resulting refund are computed using the exchange rates applicable to that particular year, regardless of the exchange rate in the subsequent year,” CRA indicated that this situation was essentially dealt with in Folio S5-F2-C1, which addresses the reverse situation of FX gains in Canadian dollars on foreign tax refunds or payments – so that, here, the FX gain was a capital gain to be computed based on the FX rate change between that appliable to the previous year and that at the time of receipt. The response was quite vague as to how to compute the FX rate applicable to the previous year (the ILBD didn't seem to be asking for detailed guidance on this point).
Neal Armstrong. Summary of 31 July 2018 Internal T.I. 2016-0649631I7 under s. 261(5)(c).
CRA would seriously consider applying GAAR where excluded share status is achieved through shifting a professional services business
A professional corporation (PC1) whose non-voting equity was held equally by a physician (Dr. A) and Spouse A (who had no involvement in the practice) applied earnings to build up a large investment portfolio, which CRA noted very well might be an investment business (notwithstanding that a brokerage did all the investing work) given that the “courts have generally held that the level of activity required to conclude that a corporation has a business is low.” However, on December 30 of Year 1, PC1 ceased carrying on its medical services business, on December 31, Spouse A acquired 50% of Dr. A’s voting shares, and on January 1 of Year 2, Dr. A commenced carrying on the medical services business in a newly- incorporated professional corporation (PC2) with the same ownership as prior to December 30.
After finding that (i) the medical services business of PC1 constituted a related business in respect of Spouse A as regards any dividends paid on December 31 of Year 1 notwithstanding that such business had been previously discontinued and (ii) that such dividends paid by PC1 likely were “derived directly or indirectly” from such related business “given that the capital invested in the Portfolio was wholly-derived from either after-tax earnings of PC1’s medical services business or reinvested investment income,” CRA turned to the question of whether, if PC1 had an investment business the shares of Spouse A qualified as “excluded shares” in Year 2 - and found that this technically appeared to be the case. In particular, the test under para. (c) of the excluded share definition was by its terms to be applied to the results of the previous year (Year 1) and “all or substantially all of the income of PC1 is derived directly or indirectly from one or more related businesses (i.e., the medical services business and the investment business) in Year 1, and PC1 is still carrying on these businesses in Year 1” so that “any dividends paid from PC1 to Spouse A in Year 2 would be an ‘excluded amount’ and not subject to TOSI.”
However, CRA stated:
[T]he facts in the above scenario strongly suggest that these transactions were undertaken primarily to ensure that the shares of PC1 could meet the definition of “excluded shares” such that the “excluded amount” exemption would be available to Spouse A. If it is determined that any transaction, either alone or as part of a series, has been undertaken primarily to obtain the “excluded amount” exemption under paragraph 120.4(1) in a manner that would frustrate the object, spirit and purpose of section 120.4, the CRA would seek to apply the GAAR.
The condition in para. (c) of “excluded shares” would not be satisfied in Year 3 or subsequently, so that the shares of Spouse A would not be excluded shares in those years. Furthermore, "any dividend paid by PC1 to Spouse A would be considered to be derived directly or indirectly from a 'related business' carried on by PC2 (and not PC1) in Year 2 and subsequent years," given that the "derived directly or indirectly" phrase was to be construed broadly.
Neal Armstrong. Summaries of 10 January 2020 External T.I. 2019-0819431E5 under s. 120.4(1) – “related business”, “excluded shares” – (c) and "excluded amount" - (e)(ii).
Income Tax Severed Letters 29 January 2020
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Minority shareholders transferring their shares of Power Financial Corporation to Power Corporation of Canada must elect under s. 85 to get rollover treatment
Power Corporation of Canada (“PCC”), whose subordinate voting common shares trade on the TSX, holds approximately 2/3 of the common shares of Power Financial Corporation (the “Company”), with the balance of those common shares trading on the TSX. In order to eliminate the holding company discount for this structure and to effectively privatize the Company (thereby reducing costs) it is proposed that each of the minority’s common shares be exchanged under a CBCA Plan of Arrangement for 1.05 subordinate voting common shares of PCC and $0.01 of cash. The exchanging shareholders will thereby receive, as an economic matter, an incremental 0.7% interest in the assets and liabilities of the Company they already own, plus a 36.7% interest in the non-Company assets of PCC.
Eligible (i.e., taxable) minority shareholders may provide an s. 85 election form to PCC within 120 days of the Arrangement in order to secure rollover treatment. The exchange is taxable for U.S. purposes.
Neal Armstrong. Summary of Power Financial Corporation Circular under Mergers & Acquisitions – Mergers – Privatizations.
Muir – Tax Court of Canada finds that s. 160 did not apply to moneys transferred subject to an informal arrangement to discharge liabilities of the transferor
A professional corporation sold all its assets for $1.2 million, with most of this sum being applied at closing to pay off corporate liabilities, but with the balance of $124,000 being paid to the corporation’s dentist shareholder (Ms. Muir) on the understanding that she would use this sum first to pay off remaining creditors who would have been difficult to deal with on the closing, e.g., returning trust accounts for orthodontic patients who did not want to continue with the purchaser’s dentist. As it turned out, there were a lot of unhappy patients, and all of the $124,000 was so applied. The next year, the Corporation was unexpectedly reassessed, and in due course, CRA assessed Ms. Muir under s. 160.
Boyle J found that the $124,000 had been paid to her in consideration for equivalent consideration (her taking on the discharge of the remaining Corporate obligations), so that the s. 160 assessment was vacated. He stated:
[I]t appears her patients and the Corporation’s creditors would have had legal rights to trace any of the monies involved had the Corporation transferred it to her for any other purpose … .
… I do not accept that it was the intention of Parliament or … Livingston to have section 160 apply in circumstances where CRA not only wasn’t but could never be … in any different position whatsoever as a result of the transfer.
Neal Armstrong. Summary of Muir v. The Queen, 2020 TCC 8 under s. 160(1).
The Explanatory Notes on s. 247(2.1) do not reflect the text
The Explanatory Notes to s. 247(2.1) indicate that where Canco makes a loan at 1% to a non-arm’s length (non-CFA) non-resident, s. 247(2) operates first to deem the interest rate to be increased to the arm’s length rate of 3% - then s. 17 is applied second, and has no application since 3% is a reasonable rate for s. 17 purposes.
But that’s not what s. s. 247(2.1) says. S. 247(2) adjustments (under s. 247(2.1)(b)) are stated to operate only on “initial amounts”, which are defined as the amounts “determined for purposes of the Act” (without regard to ss. 247 and 245). Does that mean, for example, that s. 17 is to be applied first (to increase the interest rate from 1% to the prescribed rate of 2%), with s. 247(2) then applied second (to increase the s. 17 rate of 2% to the arm’s length rate of 3%)? (This approach would generate a lower s. 247(3) penalty.)
Next, there is s. 247(2.1)(c), which states that the amounts as adjusted under s. 247(2) are then to be subjected to the provisions of the Act (other than ss. 247(2) and 245(2)). What does this mean, given that all the provisions of the Act (other than GAAR) have already been applied to make any dollar adjustments (although there would still be room for character adjustments)?
It is clear from proposed subsection 247(2.1) that in calculating the “initial amounts,” it is intended for some provisions of the Act to apply only after the subsequent application, where applicable, of adjustments under subsection 247(2). But the legislative test does not provide any clarity as to which provisions apply and which do not in determining the “initial amounts.”
Neal Armstrong. Summary of Marc Roy, “Proposed Transfer Pricing Ordering Rules,” International Tax (Wolters Kluwer CCH), December 2019, No. 109, p. 3 under s. 247(2.1).
Pangaea - Federal Court of Appeal finds that an agreement with another shareholder to enter into a share sale with a 3rd party was a restrictive covenant
A non-resident shareholder (“Pangaea”) of a Canadian corporation (“Public Mobile”) was required under the terms of the unanimous shareholder agreement to agree to any sale of the Public Mobile shares. Telus wanted to acquire 100% of the Public Mobile shares, but Pangaea professed reluctance to sell. A resident shareholder (“Thomvest”) paid Pangaea a lump sum as an inducement for its agreement to execute a share purchase agreement with Telus.
In confirming the view of Smith J that the lump sum payment was “in respect of a restrictive covenant” described in s. 56.4, so that it was subject to Part XIII tax under s. 212(1)(i), Woods JA stated (at paras 13, and 16):
[T]he language used [in the “restrictive covenant” definition] clearly applies more broadly than to non-compete agreements. …
[T]he letter agreement between Pangaea and Thomvest is a “restrictive covenant,” as defined, because the agreement is intended to affect the provision of property by Pangaea by having an effect on its disposition. The intention of the letter agreement is to require Pangaea to sell its shares of Public Mobile by executing the share purchase agreement with Telus. In this way, the agreement is intended to affect the disposition by Pangaea of its shares of Public Mobile.
Neal Armstrong. Summary of Pangaea One Acquisition Holdings XII S.À.R.L. v. The Queen, 2020 FCA 21 under s. 56.4(1) – restrictive covenant.
CRA accepts the feasibility of having a back-to-back supply of essentially the same service
In its new GST/HST Memorandum on Child Care Services, CRA has provided further confirmation of the rather odd concept of a double supply of essentially the same service. A non-profit organization (NPO), which acts as liaison between parents and in-home child care providers, contracts with the self-employed child care providers for their services (and provides various administrative services to them for a commission), and also contracts for the supply of child care services with the parents, who pay all child care services fees to the NPO. From the fees paid to it, the organization keeps the 5% commission, and pays the balance to the child care provider.
CRA indicated that there was a double supply of an exempt child-care service by the child care worker to the NPO, and by the NPO to the parents (although the 5% commission was taxable). The concept of a double supply of a service was also accepted in Caithkin.
Neal Armstrong. Summary of GST/HST Memorandum 21-1 “Child Care Services“ December 2019 under ETA Sched. V, Pt, IV, s. 1.