News of Note
5 more translated CRA interpretations are available
Email this ContentWe have published a further 5 translations of CRA interpretations released in March, 2011 (all of them, from the 2010 APFF Roundtable). Their descriptors and links appear below.
These are additions to our set of 1,073 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Montecristo – Federal Court of Appeal states that “delivery” for ETA purposes had its meaning under the Sale of Goods Act
ETA Sched VI, Pt. V, s. 12(a) zero-rates a supply of tangible personal property where the supplier “ships the property to a destination outside Canada that is specified in the contract for carriage of the property.” A Vancouver retailer of expensive watches and jewellery would accommodate customers who purchased such items (the “Jewellery“) as gifts to take with them on flights back to China by essentially arranging (by going through various hoops) to have the Jewellery personally delivered to the customers just as they were about to board their flights and just after a CBSA officer stamped a customs form attesting to the immediate exportation of the Jewellery. Dawson JA affirmed the finding below that this was not good enough to satisfy the zero-rating requirement, stating:
Even on a broad interpretation of paragraph 12(a), the appellant did not ship the jewellery to a destination outside of Canada that was specified in a contract of carriage.
As the place of “delivery” of the Jewellery was in Canada (i.e., at the Vancouver airport), its sale was taxable. In this regard, she stated:
The concept of delivery … is to be interpreted in the same manner as …delivery in the applicable sales of goods legislation (Jayco…). The British Columbia Sale of Goods Act… defines “delivery” to mean the “voluntary transfer of possession from one person to another”… [which] occurred when the customer received the jewellery at the airport in Vancouver.
Neal Armstrong. Summaries of Montecristo Jewellers Inc. v. Canada, 2020 FCA 12 under ETA Sched VI, Pt. V, s. 12(a) and s. 142(1)(a).
Promutuel Réassurance – Tax Court of Canada finds that 27 insurance companies who acted in a cooperative manner were a “group of persons” for s. 256(7)(d) purposes
27 mutual general insurance companies (the “MGICs”), which were non-share corporations carrying on insurance businesses in their respective territories in Quebec, were found by Favreau J to constitute a “group of persons,” so that s. 256(7)(d) applied to their transfer of (Class A) shares, representing the voting control of a taxable Canadian trust company (“ProCap”), to a corporation without share capital (“ProRé”) engaged in the reinsurance of casualty risk and of which they were members. Since s. 256(7)(d) applied, this transfer was deemed not to entail an acquisition of control of ProCap, so that its non-capital loss was preserved.
These findings turned in significant part on the role of a non-share corporation (the “Federation”) which did not have any capital participation in ProRé, and whose affairs were administered by a board of directors consisting of 10 individuals – seven directors and three managing directors of different MGICs. In finding that the MGICs constituted a group of persons (who in fact acted in concert in the transaction), Favreau J noted that with the assistance of the Federation they operated using the same accounting and technological platform, they had a common objective, decided unanimously to implement the transaction and in the meantime had decided the basis upon which representatives on the board of the Federation were to be allocated (i.e., approximately equal representation for each of the three geographic regions of Quebec). Furthermore, Favreau J found that since the corporate Act governing ProRé specifically provided that the Board of Directors of ProRé was appointed by the Board of Directors of the Federation, it was clear that the de jure control of ProRé was held by the Federation through its Board of Directors. He concluded:
Since the MGICs, as a group of persons, controlled the Federation and the Federation controlled ProRé, the MGICs must be considered to also control ProRé by virtue of the simultaneous control principle set out in subsection 256(6.1) of the ITA, both immediately after and immediately before the disposition by the MGICs of the Class A shares of ProCap to ProRé.
At the level of ProCap, the evidence revealed that the MGICs, as a group, also controlled ProCap, immediately prior to the disposition by the MGICs of the Class A shares of ProCap to ProRé. ProCap's shareholders' agreement and the amendments made to it demonstrate that the MGICs had the power to exercise control of the corporation through their ability to appoint the majority of the members of the board of directors of the corporation.
Before concluding that s. 256(7)(d) applied on the above basis, he rejected an alternative basis for the application of that provision, namely, that the Federation itself (as contrasted to the MGIC group of persons) controlled ProCap before the transaction (false), and controlled ProRé both before and after the transaction (true). Although there was a shareholders agreement giving the MGICs the right to appoint the board of the Federation from amongst their board members, this agreement did not constitute a unanimous shareholders agreement (and, thus, was to be ignored for de jure control purposes) given that nothing in the corporate statute governing ProRé “allowed ProCap's shareholders to enter into agreements to take away or restrict the powers normally vested in ProCap's directors.”
Neal Armstrong. Summaries of Promutuel Réassurance v. The Queen, 2020 CCI 13 under s. 256(7)(d) and s. 256(8.1).
Frank-Fort Construction – Tax Court of Canada reverses gross negligence penalty for failure of new home builder to report two sales
D’Auray J found that a one-man corporation that had a business of constructing (through using third-party contractors) and selling about 10 or 20 new homes per year had not been demonstrated by the Crown to be liable for gross negligence penalties for failure to report in its GST returns two of the home sales it made in the 2 ½ year audit period. Factors noted by her included:
- all the necessary information for preparing the tax returns and financial statements had been provided to the taxpayer’s CPA firm
- due to an inexplicable error on the part of the CPA firm, the receipts from the two sales had been recorded as proceeds of mortgage loans received by the taxpayer
- the GST returns were prepared and signed by an accountant at the CPA firm, which delegation did not constitute gross negligence on the part of a taxpayer whose principal had no accounting background and a modest education
- although there also had been failures to report sales in preceding reporting periods for which QST penalties had been assessed, the taxpayer had been assured by a different accountant at the CPA firm that he would now personally attend to the file
Neal Armstrong. Summary of Frank-Fort Construction Inc. v. The Queen, 2020 CCI 6 under ETA s. 285(1).
CRA finds that the making of a loan at the prescribed rate under s. 189(1) does not prelude a penalty under s. 188.1(4)
S. 189(1) generally imposes tax on a taxpayer to the extent that the interest paid on loan made to the taxpayer that is a non-qualifying interest was less than the prescribed rate. Under s. 188.1(4), where an “undue benefit” (defined in s. 188.1(5)) has been conferred on a person by a registered charity, the charity is liable to a penalty equal to 105% (or 110%) of the value of the undue benefit conferred.
Headquarters rejected the proposition that where a registered charity that is a private foundation makes a loan at the prescribed rate of interest when the loan recipient receives the loan because of that debtor’s relationship with the private foundation or the foundation’s board of directors, the avoidance of any s. 189(1) tax on the debtor (because of the prescribed rate being used) means that there cannot be a penalty for undue benefits imposed on the private foundation under s. 188.1(4) in respect of the loan.
Neal Armstrong. Summary of 5 December 2019 Internal T.I. 2017-0683831I7 under s. 188.1(4).
[Corrected title] CBS – Federal Court of Appeal finds that Galway did not permit the Crown to resile from a settlement agreement negotiated in good faith
The Justice Department entered into a settlement agreement with the taxpayer in which it agreed to permit the taxpayer to carryforward an agreed portion of a $23.4M non-capital loss – and then promptly sought to repudiate the agreement on the basis that CRA had discovered that the non-capital loss in question did not exist, so that implementing the settlement would be contrary to law, which Galway said was bad. In affirming the decision below that the Crown was bound by the settlement agreement, Woods JA stated:
Galway does not address the circumstances in which one party seeks to resile from an agreement.
Second, the parties in this case intended to enter into an agreement that applied the law to the facts. The agreement was not intended to be a compromise settlement of the type considered in Galway.
Third, the Crown does not suggest that the defect within the settlement agreement is self-evident to the Court as it was in Galway. …
The general rule is that parties should be bound by the agreements that they make.
She also found that a Tax Court order implementing a provision in the settlement agreement that tax was to be increased in a subsequent year did not violate the Last principle that the Crown was not permitted to appeal its own reassessment.
Neal Armstrong. Summaries of CBS Canada Holdings Co., 2020 FCA 4 under s. 169(3) and s. 171(1)(b).
Krumm – Tax Court of Canada applies the tax shelter rules on a private purchase of property described as Class 12 available-for-use property
The taxpayer acquired a 50% interest in software after being provided with a valuation report that indicated that the software was Class 12 property and qualified as being available for use. Visser J found that this was sufficiently tantamount to representing that the cost of the software could be written off over two years and found that there thus was an unregistered tax shelter, resulting in the CCA claims being denied under s. 237.1(6). He also rejected a submission that “the tax shelter rules are intended to apply only to publicly marketed tax shelters and not to private transactions between two parties.”
Neal Armstrong. Summary of Krumm v. The Queen, 2020 TCC 7 under s. 237.1(1) – tax shelter – (b).
CRA indicates that a grandfathered LLLP cannot treat itself prospectively as a corporation without losing grandfathering
2017-0691131C6 stated that one of the conditions for allowing Delaware or Florida LLLPs formed before April 26, 2017 to file as a partnership was that “no member of the entity and/or the entity itself takes inconsistent positions from one taxation year to another … between partnership and corporate treatment.” Two LLLPs (held by Canadian resident corporations) that had filed as partnerships for Canadian tax purposes since the time of their formation proposed to now treat themselves as corporations on a prospective basis. CRA found that this would violate such condition (“the change by the LLLPs from partnership to corporate treatment constitutes taking an inconsistent position from one taxation year to the next”) and added:
As stated at IFA 2017, where any of these conditions is not met in respect of any such entities formed before April 26, 2017, the CRA may issue assessments or reassessments to the members and/or the entity, for one or more taxation years, on the basis that the entity was always a corporation.
The LLLPs will not be viewed as corporations for Canadian tax purposes on a solely prospective basis.
Neal Armstrong. Summary of 1 August 2019 External T.I. 2018-0768561E5 under s. 96.
Income Tax Severed Letters 22 January 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A Starlight LP realized and distributed gains on US rental properties through use of partnerships
The Starlight U.S. Multi-Family (No. 1) Value-Add Fund is an Ontario LP established in June 2017 that was targeted to stay in existence for three years, during which time it was to acquire US rental apartment buildings, undertake “high return, light value-add capital expenditures” and then sell the buildings for a price reflecting the resulting increased rents. That now has occurred.
In order to avoid the realization of foreign accrual property income gains, and instead realize (non-FAPI) capital gains that could be integrated with capital gains treatment to the Fund unitholders, the gains were not realized within the corporate subsidiary (a US private REIT) and instead were realized on internal transfers by subsidiary LPs. In order to get the proper basis adjustments for the distribution of such capital gains, various tiers of partnerships were wound-up on a bottom-up basis as a part of the distribution of proceeds, and with the net sales proceeds ultimately distributed in redemption of the Fund units.
FIRPTA of course was recognized on the gains on the sales.
Neal Armstrong. Summary of Starlight U.S. Multi-Family (No. 1) Value-Add Fund Circular under Other – Asset Purchases.