News of Note
Mandel v. 1909975 Ontario Inc. – Ontario Superior Court declines jurisdiction in a requested shareholding rectification whose raison d’être was a CRA assessment
Email this ContentIn order to avoid a deemed disposition under the s. 104(4) 21-year deemed realization rule, two family trusts for the children of Mr. Mandel or Ms. Pike distributed their shares of a holding company (holding the respective family interest in the Opco) under s. 107(2) to the respective children beneficiaries, who then transferred those shares on a s. 85(1) rollover basis to a newly-incorporated “Child Corporation” (of which Mr. Mandel or Ms. Pike held special voting shares) in consideration for non-voting common shares of the Child Corporation. However, Mr. Mandel or Ms. Pike then subscribed a nominal amount for a large number of convertible shares of the Child Corporation whose conversion (which they professed might occur only if a divorced spouse of a child received the non-voting common shares) would substantially dilute the entitlements of such non-voting common shares.
CRA reassessed Mr. Mandel and Ms. Pike on the basis that these transactions generated a taxable benefit under s. 15(1) to each of approximately $15 million. Each objected – but no appeal to the Tax Court had yet been launched.
Koehnen J declined to assume jurisdiction respecting a requested rectification of the corporate records of the Child Corporations (made on the basis that the shares therein of Mr. Mandel or Ms. Pikes had never been paid for by them, contrary to s. 23(3) of the OBCA), stating:
… [T]he Tax Court has jurisdiction to interpret s. 23(3) of the OBCA. …
Parliament has created a specific court with expertise in tax matters and has created a specific process to address tax issues. Given that the raison d’être of this application is the tax assessment, the issues should in my view be determined by the body with specialized expertise in that area.
Koehnen J went on to indicate that, even if he had assumed jurisdiction, he would have declined the application, referencing in this regard, “the unexplained conflict in the evidence before me about whether the applicants had paid for their shares, the absence of any dispute within the corporations and the potential for unknown consequences in granting a retroactive declaration… .”
In addition to seeking rectification on equitable grounds, the applicants had also relied on OBCA s. 250, which contemplates “an order requiring the registers or other records of the corporation to be rectified.” Koehnen J stated:
In this case, rectification is not appropriate because the corporate records accurately reflect what the parties intended in 2014 and 2015. At that time, the applicants intended to be the controlling shareholders of the Child Corporations. They signed several documents reflecting that intention.
… [T]he applicants do not require a court order to correct the books and records of the Child Corporations. They can and in fact have changed those records to show that the applicants are no longer controlling shareholders.
Neal Armstrong. Summary of Mandel v. 1909975 Ontario Inc., 2020 ONSC 5343 under General Concepts – Rectification.
Gardner – Tax Court finds that car travel expenses between a home office and the employer offices were deductible
A cosmetics sales rep, who did most of her work based out of her home office but travelled around once or twice a week to the company offices 72 kilometres away (where no office was set aside for her) for meetings with the sales team or her boss, was found to be able to deduct (with the requisite Form T2200 employer certification) her “commuting” expenses of around $13,000 for the year, as they thus were incurred in the course of her employment. Russell J noted that Campbell (which he had argued for the taxpayer) “established that when the work circumstances reasonably require that the worker have an office, and an office is not provided by the employer, then the worker can locate the required office somewhere including in their home and have it regarded as an employment location.”
Neal Armstrong. Summary of Gardner v. The Queen, 2020 TCC 108 under s. 8(1)(h.1).
McNeeley – Tax Court of Canada finds that a substantial distribution from an EBP to the founding shareholder was made to him qua employee, and was taxable
A distribution to an employee under an employee benefit trust (EBP) is taxable under s. 6(1)(g) rather than being subject to the usual trust distribution rules in s. 107. However, there is a carve-out from the EBP definition which, as explained by Russell J, effectively indicates that s. 6(1)(g) does not render, as taxable, a distribution which, in the absence of the EBP rules, would not have been taxable to the beneficiary under s. 6(1)(a).
The founding shareholder (Mr Baker) of a software company, who received the lion’s share of a distribution of the company shares held by an EBP, argued that he was not taxable on the distribution because it was received by him qua founding shareholder rather than qua CEO (he received about 70% of the distribution so that there was no unacceptable dilution.)
In rejecting this argument, Russell J, after first citing Savage, stated:
[T]he broad wording of paragraph 6(1)(a) requires only the slightest connection between the benefit and employment. That does not preclude benefits received where, in addition to the required connection between benefit and employment, there also may have been considerations extraneous to employment.
Here, the absence of the slightest connection to Mr. Baker’s employment was not established given that the EBP, by its very terms, restricted beneficiaries to employees, and Mr Baker had not established that the two other trustees making the unanimous distribution decision had not taken into account his substantial contribution to the company over the past 12 years qua CEO.
Neal Armstrong. Summaries of McNeeley v. The Queen, 2020 TCC 90 under s. 248(1) – EBP and Reg. 4800.1.
CRA considers that deductions of successored resource expenditures cannot generate a non-capital loss
CRA indicated that even though taking deductions under s. 66.7(3) to (5) from successored resource pools against income from successored properties can have the effect of preserving all or part of a current year’s loss from another business, such deductions cannot create or increase a taxpayer’s non-capital loss, stating that:
This is because a deduction under section 66.7 may only be applied to reduce current year income under paragraph 3(c) as it is a deduction that is permitted only pursuant to a specific provision within subdivision e.
CRA then stated:
[T]he above position, to the extent that it relates to deductions in respect of successored cumulative Canadian development expense and successored cumulative Canadian oil and gas expense, may differ from the CRA’s historic assessing practice. For taxation years ending after 2020, the CRA’s assessing practice will take into account the above position for all types of successored resource pools.
Neal Armstrong. Summaries of 11 August 2020 Internal T.I. 2018-0782181I7 under s. 66.7(3) and s. 18(1)(a) – incurring of expense.
Income Tax Severed Letters 30 September 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Harrison – Federal Court rejects the published CRA position that disputing a tax debt in an objection or appeal constitutes an acknowledgement of the debt
Under ss. 222(5) and (6)(b), the 10-year limitation period for the Minister to collect an amount payable by the taxpayer is restarted if the taxpayer “makes a written acknowledgement of the tax debt.” The published CRA position is that the filing of a notice of objection or an appeal to the Tax Court is an acknowledgment of the related tax debt. In rejecting this position as being unreasonable, Strickland J stated that “the plain meaning of ‘acknowledgment’ requires an admission or confirmation by the person making the acknowledgment of the thing alleged, be it an admission of liability for damages, blame, responsibility or liability for a tax debt,” whereas here the taxpayer in her Notice of Appeal instead “dispute[d] the validity of the amounts assessed.”
Neal Armstrong. Summaries of Harrison v. Canada (National Revenue), 2020 FC 772 under s. 222(6)(b) and s. 222(8)(a).
Pike – Federal Court of Australia, Full Court finds that an individual had his centre of vital interest where he was employed, rather than where he had his greater personal ties
Unusually, the tiebreaker rule for individuals in the Australia-Thailand Treaty applied the test of the country of the individual’s habitual abode second, and the country “with which the person’s personal and economic relations are the closer” third, rather than in the reverse order. An individual (Mr Pike) and his family emigrated from Zimbabwe to Australia where his wife could find work but not he (given his specialty). He instead obtained employment in Thailand, from which he supported his family, and visited them in Australia four to six times a year (amounting to 32 to 155 days annually), over the nine taxation years in question.
The Court confirmed the primary judge’s conclusion that Mr Pike had a habitual abode in both countries, stating inter alia that “there is no warrant … for imputing that the habitual abode of a person is the place where the individual has spent more days.” Turning to the “personal and economic relations” test, the primary judge considered Mr Pike’s personal relations to be closer to Australia than Thailand (where he nonetheless had a range of personal relations), but found:
In contrast and overwhelmingly, Mr Pike’s economic relations were closer to Thailand.
The Court found that there was no reviewable error in finding that, by virtue of this test, Mr Pike was a Treaty resident of Thailand.
Neal Armstrong. Summary of Commissioner of Taxation v Pike [2020] FCAFC 158 under Treaties – Income Tax Conventions – Art. 4.
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in February and January, 2010. Their descriptors and links appear below.
These are additions to our set of 1,278 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the open” week for October.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2010-02-05 | 15 January 2010 External T.I. 2009-0343841E5 F - Application du paragraphe 127(10.22) | Income Tax Act - Section 127 - Subsection 127(10.22) | interposition of Holdco broke a condition for application of s. 127(10.22) |
| 1 February 2010 Internal T.I. 2010-0354671I7 F - Frais de gestion à une fiducie | Income Tax Act - Section 67 | CRA policy of not challenging reasonableness of bonuses paid by CCPC to an individual holding through Holdco does not apply where individual holds through trusts | |
| 21 December 2009 Internal T.I. 2008-0296131I7 F - Fraction à risque | Income Tax Act - Section 96 - Subsection 96(2.2) - Paragraph 96(2.2)(c) | exception from s. 96(2.2)(c) for legitimate business loans from related parties | |
| 14 January 2010 Internal T.I. 2009-0323991I7 F - Débenture échangeable et opération à terme | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(f) | only ½ deduction under s. 20(1)(f)(ii) for premium paid on cash-settling an exchangeable debenture under pre-2010 policy, and no s. 20(1)(f) deduction for cash settlement of forward | |
| Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges | premium was paid on capital account in closing out a cash-settled forward entered into in order to monetize a shareholding | ||
| Income Tax Act - Section 152 - Subsection 152(1) | CRA position of applying changes in published policy prospectively | ||
| Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) | full deduction of amounts only partly, or not, deductible under s. 20(1)(f) would have caught the eye of a wise and prudent person reviewing the return | ||
| 2010-01-29 | 26 January 2010 External T.I. 2009-0344121E5 F - REER, déduction pour cotisations excédentaires | Income Tax Act - Section 146 - Subsection 146(8.2) - Paragraph 146(8.2)(c) | a reference in Part I to a notice of assessment refers to a Part I notice of assessment |
Irish Bank Resolution Corp – England and Wales Court of Appeal effectively finds that the Treaty PE Article has an embedded thin cap rule
HMRC increased the UK branch profits of the Irish taxpayers’ branch banking, or home mortgages, businesses by attributing to their UK permanent establishments notional additional free capital on the basis that if they had operated as distinct and separate enterprises, they would have had a higher amount of free capital and therefore a correspondingly lower amount of borrowed capital – with the result that HMRC disallowed interest which was actually paid to third parties.
The taxpayers unsuccessfully argued that this was contrary to the “comparator provisions” of the PE Article in the UK-Ireland Treaty, which required that there be attributed to a UK permanent establishment “the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment.” They submitted that this rule “requires an assumption to be made not only that the PE is engaged in the same or similar type of business to the one it actually carried on but also that it should be taken to have traded with the same ratio of free to borrowed capital as it actually employed during the relevant accounting period.”
In rejecting this argument (and dismissing the taxpayers’ appeals) Patten LJ stated:
In order to operate the hypothesis of a distinct and separate enterprise dealing at arm's length including with the overseas company of which it is part, it seems to me that it is necessary to compare the way in which the PE financed and accounted for its business with what it would have done had the PE operated as a separate enterprise. Otherwise the comparator provisions … cannot work. To construe the phrase "same or similar conditions" as requiring the PE's actual ratio of free to borrowed capital to be applied would be self-defeating.
He was fortified in his conclusions by passages in the 2008 OECD Commentaries notwithstanding that he was dealing with a 1976 Treaty, stating that the 2008 Commentary would “only be inadmissible if the new material made substantive changes which are inconsistent with the commentaries in existence at the time of the 1976 Convention.”
Neal Armstrong. Summaries of Irish Bank Resolution Corporation Ltd v Revenue and Customs [2020] EWCA Civ 1128 under Treaties – Income Tax Conventions - Art. 7 and General.
CRA rules on qualification of a seniors facility for the 83% GST rebate
One of the requirements for the receipt of the 83% GST rebate by a registered charity operating a nursing home was that (under (a)(iii)(B) of the definition of “facility supply”) “a physician … be at, or be on call to attend at, the … qualifying facility at all times when the individual is at the … qualifying facility.” CRA ruled favourably regarding an arrangement under which:
Where the chronic care residents at the facility have medical problems that require a high level of health care, a physician is present at, or on-call to attend at, the Facility at all times during the resident’s stay.
This seems to imply that the “on call” arrangement was not required for the residents when they did not have “high level” requirements. In addition, there was a doctor (who also had his own family practice) titled the “Medical Director” who was at the facility on a part-time basis.
Neal Armstrong. Summary of 6 July 2020 GST/HST Ruling 123293 under ETA s. 259(1) – facility supply – (a)(iii)(B).