News of Note
Income Tax Severed Letters 20 May 2020
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Atlantic Packaging - Federal Court of Appeal finds that a drop-down of 68% by value of the assets of a division in a hybrid transaction did not satisfy s. 54.2
The taxpayer, a paper products manufacturer, engaged in a hybrid transaction in which it sold some of the assets of its “Tissue Division” directly to a third-party purchaser (“Cascades”) and rolled the balance of them down to a Newco (“722”) under s. 85(1) for shares of 722 and sold those shares to Cascades. CRA assessed on the basis that the sale of the shares was on income account.
Graham J found that the transferred assets represented about 68% of the fair market value of the assets of the Tissue Division – and perhaps significantly less, given that some of the Tissue Division assets had not been valued. Accordingly, the requirement of s. 54.2 - that all or substantially all of the assets of the business have been transferred to a corporation – had not been met, so that s. 54.2 did not deem the gain on the share sale to be a capital gain.
Webb JA affirmed this finding, stating:
I agree with the Tax Court Judge that conveying 68% of the assets used in the Tissue Division to 722 would not satisfy the requirement that all or substantially all of the assets of the Tissue Division be conveyed to 722.
The taxpayer sought to argue for the first time before the Court of Appeal that the share sale gain was a capital gain on ordinary principles. Webb JA found that it was too late for this issue to be raised. Although the evidence before the Tax Court could have permitted it to address most of the factors that were relevant to the capital account issue, Webb JA noted that one of the relevant factors in this regard was “the frequency or number of other similar transactions completed by the taxpayer,” and stated:
While it would be presumed that Atlantic Packaging would not be frequently selling off an entire division, there is no indication of whether Atlantic Packaging followed a similar pattern or similar transactions in disposing of other depreciable property.
Accordingly, there would have been potential prejudice to the Crown in now addressing that issue.
Neal Armstrong. Summaries of Atlantic Packaging Products Ltd. v. Canada, 2020 FCA 75 under s. 54.2 and s. 9 – capital gain v. profit – machinery and equipment.
Baril – Court of Quebec finds that executive with furnished apartments in Calgary and a family home in Montreal failed to establish Alberta residency
An executive of an airport security firm (Garda) was assigned significant responsibilities for the Prairie provinces (but not to the exclusion of duties performed in Montreal and Toronto). She rented a succession of furnished apartments in Calgary and took the position that she had become a resident of Alberta – notwithstanding that she remained the co-owner with her husband of the family home in Montreal, where two of their four children were still under their charge, and that she “visited” Montreal much more than her husband visited Calgary (in addition to seeing her family during Florida vacations).
In finding that the taxpayer had failed to establish Alberta residency, Lewis JCQ stated:
The evidence tends to show that Ms. Baril never intended to live in Alberta other than to carry out her duties as Garda required. …
Ms. Baril did not develop any social life in Alberta, claiming that her schedule was too busy at work. The Court does not doubt that she worked a lot, but does not believe that this prevented her from having any social life or any relaxation activities.
Neal Armstrong. Summary of Baril v. Agence du revenu du Québec, 2020 QCCQ 1466 under s. 2(1).
Drolet – Quebec Court of Appeal finds that a written conveyance by a tax debtor to his spouse was not fleshed out as a written separation agreement by virtue of a subsequent retroactive divorce judgment
After a rift and the taxpayer’s husband moving out, he conveyed a ½ co-ownership interest in the family home to the taxpayer for nominal stated consideration but on the understanding that she would not be seeking support from him. The family home then was sold, and she received ½ of the net proceeds. The ARQ subsequently assessed her under the equivalent of ITA s. 160. At issue was the exclusion, under the equivalent of s. 160(4), which applied “where the property is transferred to a spouse pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement.” Unfortunately for her, there was nothing in writing at the time of the transfer of the co-ownership interest to her, other than the conveyance itself, which made no mention of the alleged consideration provided by her to him of foregoing support and, in fact, it did not even state that they were separated.
The Court of Quebec had concluded that the mere mention in the divorce judgment that was issued about five years later that the effects of the partition of the family patrimony dated back to the time of the conveyance was not sufficient to meet the criteria of the Quebec equivalent of s. 160(4).
Before dismissing the taxpayer’s appeal, Schrager, JA noted that “where it has been argued that the deed of transfer or assignment in itself constitutes the separation agreement, the case law has been unanimous that it must contain a reference to the separation pursuant to which the transfer was made,” and that the extremely expansive interpretation of the s. 160(4) language urged by the taxpayer would have the effect of “opening up the potential for a taxpayer with huge tax debts to benefit from the transfer of the family home through the division of the family patrimony a number of years later.”
Neal Armstrong. Summary of Drolet v. Agence du revenu du Québec, 2020 QCCA 636 under ITA s. 160(4).
5 more translated CRA interpretations are available
We have published a further 5 translations of CRA interpretations released in September 2010. Their descriptors and links appear below.
These are additions to our set of 1,174 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA ruling recharacterizes a levered buyout of a public corporation as a s. 84(2) distribution
A public company (Pubco), with a single class of shares outstanding, had received cash proceeds of the sale of one of its business segments. Rather than using s. 84(2), or ss. 84(4.1)(a) and (b), to distribute the proceeds pro rata to its shareholders, it was proposed that the larger corporate shareholders of Pubco, and the key employees, roll their Pubco shares into a Newco, with Newco using proceeds of a daylight loan to acquire all the remaining Pubco shares for cash and then amalgamating with Pubco - so that Amalco could use the cash proceeds referred to above to repay the daylight loan.
CRA ruled based on “Previous positions and jurisprudence” that notwithstanding this form of a levered buyout, s. 84(2) would apply, so that “each holder of Public Shares having such shares purchased by Newco will be deemed to have received, a dividend to the extent that the amount paid by Newco to each such holder on the Public Share Sale exceeds the amount of PUC attributable to such holder’s shares.”
Neal Armstrong. Summary of 2019 Ruling 2019-0809581R3 under s. 84(2).
Cristofaro – Court of Quebec finds that a non-resident with no sources of income in Quebec nonetheless could transfer a tax credit to a Quebec taxpayer
In 2003-0026827, CRA applied Oceanspan to find that a non-resident student who has no Canadian sources of income is precluded from transferring her unutilized tuition credits to her resident father under ITA s. 118.9 because:
an individual who is not resident in Canada and who has no Canadian source income would not be entitled to the tuition and education tax credits. The individual is not liable to pay tax in Canada, and therefore has no need to utilize the provisions permitting the tax credits.
Although this federal position does not appear to have been mentioned to him, Cameron JCQ rejected a similar position advanced by the ARQ to justify the denial of a tuition credit transfer (under the Quebec equivalent of s. 118.9) by a daughter studying in Scotland, who was resident in Ontario and had no Quebec sources of income, to her father, also an Ontario resident, who had Quebec professional income allocated to him by a cross-country professional firm. Cameron JCQ stated:
The legislation does not suggest that in any year where a Quebec resident who is a student does not have liability for tax pursuant to articles 22 or 25 TA, she would not be able to transfer the unusable credit to a parent. To interpret the law as implying that would be a direct contradiction of the purpose of the legislation, that of permitting a taxpaying parent to reduce tax liability because of the support of the child for education.
He went on to indicate (at para. 49) that in any event, the daughter could be considered to be “subject to tax” (or “liable for tax” to use his preferred translation, and also essentially the phrase considered in Crown Forest):
The income tax legislation … applies to all Canadian residents … because they may, in one year or another, earn business income in Quebec… . In that sense, the daughter is “subject to the tax” to use Revenu Québec’s phrase, because she could, potentially, depending on circumstances, get some business income generated in Quebec even without being a resident here.
Neal Armstrong. Summary of Cristofaro v. Agence du revenu du Québec, 2020 QCCQ 1461 under s. 118.9.
CRA considers that a Treaty exemption for income does not preclude being an eligible entity for CEWS purposes
The definition of “eligible person” in the “CEWS” (wage subsidy) legislation includes (in para. (a)) a corporation “other than a corporation that is exempt from tax under this Part or is a public institution” and includes (in para. (d)) a specific and limited range of persons that are exempt from tax under s. 149(1). CRA considers that, in light inter alia of this structure, the only exempts excluded from being eligible persons are s. 149(1) exempts who are not specifically listed in para. (d) (or partnerships thereof). Accordingly, CRA has concluded:
[A] non-resident corporation that operates an airline, a portion of whose Canadian source income is not included in the computation of its income under Part I of the Act as a result of the operation of paragraph 81(1)(a) and a provision under an income tax convention between Canada and another State is not a corporation “exempt from tax under Part I” under the definition of “eligible entity” in subsection 125.7(1) and therefore would not be prevented from being an “eligible entity” on that basis.
Neal Armstrong. Summary of 8 May 2020 External T.I. 2020-0847791E5 under s. 125.7(1) – eligible entity – para. (a).
Income Tax Severed Letters 13 May 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Roofmart – Federal Court of Appeal states that Hydro-Québec regarding limitations on unnamed person requirements (UPRs) “ought not to be followed”
Roofmart, a large supplier of roofing materials to residential and commercial contractors in Ontario, has unsuccessfully appealed the Federal Court’s granting of an application by the Minister under s. ITA 231.2(3) and ETA s. 289(3) for Roofmart to disclose various particulars for all of its customers who in the past 4 ½ years had made purchases of construction materials from Roofmart exceeding specified dollar thresholds.
In rejecting Roofmart’s reliance on the statement in Hydro-Québec that "[w]hen the group is generic and has no connection to the ITA, and information can be requested outside of the scope of the ITA (such as identifying the business clients of a public utility) there is no longer any limit on the fishing expedition," Rennie JA stated that this “passage is not a legal test but analysis of whether, on the facts of that case, there was an ‘ascertainable group’ and whether the information was required for the purposes of verifying compliance,” and that ”the suggestion in the reasons that the information sought was available through other means and therefore could not be obtained through a UPR [unnamed person requirement] is inconsistent with this Court’s jurisprudence, and ought not to be followed.” He further stated that the “fact that the UPR may target an unspecified or large number of accounts or that a significant amount of financial information may be captured does not affect its validity,” and that “GMREB established that a pending or existing tax audit of a particular individual is not a precondition to the exercise of power under subsection 231.2(3).”
Neal Armstrong. Summaries of Roofmart Ontario Inc. v. Canada (National Revenue), 2020 FCA 85 under s. 231.2(3) and s. 231.2(3)(a).