News of Note
7 more translated CRA interpretations are available
Email this ContentWe have published a translation of a CRA interpretation released last week, as well as the previous week, and a further 5 translations of CRA interpretations released in August and July 2010. Their descriptors and links appear below.
These are additions to our set of 1,187 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. You are currently in the “open” week for June.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2020-05-27 | 9 April 2020 External T.I. 2014-0527261E5 F - Beneficial ownership discretionary power of trustees | Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) - Subparagraph 73(1.01)(c)(ii) | "right to receive" all the income not satisfied where trustees' discretion to accumulate income |
| Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(1) - Paragraph 107.4(1)(a) | discretion of trustees to retain capital or income rather than distribute to the sole current beneficiary does not preclude the latter being the beneficial owner | ||
| Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(1) - Paragraph 107.4(1)(i) | discretion of trustees to retain capital or income rather than distribute to the sole current beneficiary precluded s. 73(1.01)(c)(ii) application and satisfied s. 107/4(1)(i) | ||
| General Concepts - Ownership | discretion of trustee to accumulate rather than distribute income to sole beneficiary did not detract from beneficial ownership | ||
| 2020-05-20 | 15 May 2020 External T.I. 2020-0848511E5 F - Deferred salary leave plans (DSLPs) | Income Tax Regulations - Regulation 6801 - Paragraph 6801(a) - Subparagraph 6801(a)(i) | employer can defer the 6-year deferral period, e.g., for those with COVID-disrupted travel, pending Finance review |
| 2010-08-13 | 19 May 2010 Internal T.I. 2008-0279441I7 F - Canadian-controlled private corporation | Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation - Paragraph (a) | future acquisition right under a USA of 50% Canadian shareholder gave its non-resident shareholder de jure control of underlying corporation |
| Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(i) | future acquisition right under a USA gave indirect 50% non-resident shareholder de jure control | ||
| 2010-08-06 | 7 July 2010 External T.I. 2010-0370611E5 F - Purchase of Shares by Subsidiary - Sec. 245 | Income Tax Act - Section 84.1 - Subsection 84.1(1) | realization by an individual of capital gain by selling shares to the corporation’s Newco sub requires inter alia that any basis created in Newco not be abused |
| Income Tax Act - Section 245 - Subsection 245(4) | position that an individual potentially can realize a capital gain by selling shares to a Newco sub of the corporation for cash does not depend on there being a s. 87 or 88 merger of Newco and the corporation | ||
| 28 June 2010 External T.I. 2010-0362391E5 F - Revenus de récompenses | Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) | awards for winning music competitions might or might not be prescribed prizes | |
| 26 July 2010 External T.I. 2009-0349481E5 F - 212(1)d)(i)-Marque de commerce utilisée au Canada | Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) | royalty for use outside Canada of trademark is subject to withholding | |
| 26 July 2010 External T.I. 2010-0368991E5 F - CIAPH - Société de personnes | Income Tax Act - Section 118.05 - Subsection 118.05(1) - Qualifying Home | partner is not precluded from claiming HBTC for residence acquired by partnership | |
| 2010-07-16 | 24 June 2010 External T.I. 2010-0358981E5 F - Déductibilité de dépistage de la XXXXXXXXXX | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | expense of bacteria testing can be deductible even though expenditures do not themselves generate revenue |
Laliberté – Federal Court of Appeal confirms that the Cirque du Soleil’s bearing most of the $41.8M cost of a space trip for its controlling shareholder gave rise to a shareholder benefit
The founder and controlling shareholder of Cirque du Soleil, had been found by the Tax Court to have received a taxable benefit under s. 15(1) (or alternatively, under s. 246(1)) equalling approximately 90% of the $41.8 million cost of sending him on a trip to the international space station in September and October 2009, given that the cost was borne by his family holding company and then largely passed through to the top operating company (“Créations Méandres “) in the Cirque du Soleil group, but with there being a matching contribution of capital by the holding company to Créations Méandres so that independent shareholders would not bear any of the cost of the trip.
In dismissing the appeal, Geason JA rejected a submission that the Tax Court had focused insufficiently on whether there had been a corporate intent to impoverish the corporations, stating that “even if intent to impoverish the corporation were required, such intent cannot be equated with a controlling shareholder’s subjective intent and most especially not with an intent that was formulated [as in the case here] after the corporate expenditure was engaged”.
She also effectively indicated that, consistently with Youngman, it was appropriate for the Tax Court to have “calculated the value of the shareholder benefit at the end of the case based upon all the evidence tendered” rather than there having been a shifting of the burden to the Minister to establish this value once the evidence demonstrated that the Minister’s assumption of a 100% taxable benefit was incorrect.
Neal Armstrong. Summaries of Laliberté v. Canada, 2020 FCA 97 under s. 15(1) and General Concepts – Onus.
CRA announces that it “is resuming a full range of audit work”
At the end of March 2020, CRA announced on a webpage:
For the vast majority of taxpayers, the CRA will temporarily suspend audit interaction with taxpayers and representatives. Interaction with taxpayers will be limited to those cases where the legal deadline to reassess a tax return is approaching, and in cases of high risk GST/HST refund claims that require some contact before they can be paid out.
That and related statements have been replaced on that webpage by the following indication that it is ramping back up again (presumably on the basis that its systems are getting better able to handle remote working):
The CRA is resuming a full range of audit work and adapting our practices to reflect the health and economic impacts of COVID-19. We are prioritizing actions that are beneficial to the taxpayer or where taxpayers have indicated there is an urgency to advancing their audit. In prioritizing our resumption, we are also focusing on higher dollar audits first, audits close to completion, and those with a strategic importance to the Government of Canada, provinces and territories, or our tax treaty partners. In addition, efforts to combat suspected fraud and other criminal activity are advancing.
New methods of taxpayer and registrant interaction will be required, and the CRA is working to develop procedures and protocols to adapt these to the current reality. For example, we are providing taxpayers with the option to send us information via e-mail. Some key changes will relate to offering additional time and upfront consultation on requests to provide the CRA with information and access. Public Health directives will be respected, and additional reasonable measures will be extended both in terms of timing or another other aspect of a CRA request.
In addition, Requirements for Information (RFIs) issued prior to March 16 and due after that date will be reviewed and taxpayers and third parties, including financial institutions, will be contacted where the CRA continues to require the information in the RFI.
CRA has not changed its indication that most Objections already received are still being held in abeyance.
Neal Armstrong. Summaries of Collections, audit, objections and appeals (CRA webpage updated on 28 May 2020) under s. 165(3), s. 152(1) and s. 222(2).
Ludmer – Quebec Court of Appeal confirms that CRA had abusively applied Reg. 7000(2)(d) to equity-linked notes and, thus, inconsistently with published positions
The Canadian-resident taxpayers were shareholders of a BVI company (“SLT”) which, in turn, held notes issued by two foreign subsidiaries of two Canadian banks. The notes were payable in 15 years’ time and the amount payable was calculated by reference to the performance of a reference portfolio of equities or bonds.
CRA considered that there was a requirement to recognize deemed interest income on the notes under Reg. 7000(2)(d) given that, in contrast to the usual equity-linked notes that were available to investors at the time, these notes had “internal puts,” i.e., SLT had the right to terminate the notes at any time, on 367 days’ notice, at the market value of the reference assets. On this basis, it considered that the “the maximum amount of interest thereon that could be payable thereunder in respect of that year” was the difference between the maximum value of the reference assets at the end of the year and the maximum value in the prior years, and assessed accordingly, to treat such annual increase as foreign accrual property income of SLT under element A of the s. 95(1) FAPI definition.
In rejecting the Crown’s position that the trial judge erred in awarding damages stemming from various finding including that CRA’s assessing position based on Reg. 7000 was inconsistent with its past practice, Schrager JA stated:
What the trial judge ruled as unreasonable was the lack of consistency and publicity. The CRA sought to apply a position solely to the Appellants, choosing to ignore that other equity-linked notes had pre-maturity redemption rights (albeit at the initiative of the holder rather than the issuer as was the case with SLT). Moreover, the CRA did not publicize its position adopted with respect to the Appellants apparently because of the plethora of equity-linked notes issued by Canadian financial institutions. All of this led him to the conclusion that the results ought by those spearheading the assessments was dictated by an unreasonable approach. I am consequently not convinced of any reviewable error in the trial judge’s conclusions that the conduct of the CRA in arriving at and applying the assessing position under Regulation 7000 was, in the circumstances of the case, unreasonable and, as such, constituted a fault.
In rejecting the taxpayers’ submissions that punitive damages should also have been awarded, Schrager JA stated:
The conduct of the CRA in performing the audits, driving the file, responding to ATIA requests and issuing the assessments and, finally, the manner of resolving the assessments was, as the trial judge ruled, abusive and constitutive of fault. However … to succeed, the claim for punitive damages must rest upon a finding of intentional conduct and an unlawful deprivation of property. … However abusive the CRA’s conduct might have been, it is difficult to subscribe to the Appellants’ arguments that there was here an intention to unlawfully deprive the Appellants of their property.
Neal Armstrong. Summaries of Ludmer v. Attorney General of Canada, 2020 QCCA 697 under Reg. 7000(1)(d) and General Concepts – Negligence.
CRA finds that discretion of trustees to retain capital or income rather than distribute to the sole current beneficiary does not preclude the latter being the beneficial owner
Two of the conditions for the s. 107.4 rollover to apply to a disposition of capital property by an individual to a trust is that the disposition “not result in a change in the beneficial ownership of the property” (s. 107.4(1)(a)), and that s. 73(1) (ignoring any election out of s. 73(1) and any application of s. 73(1.02)) does not apply to the disposition (s. 107.4(1)(i)). CRA appeared to find that both conditions could be satisfied where an individual transferred capital property to a trust of which he and another were the trustees. Under the trust deed, he was the sole beneficiary during his lifetime, but any remaining corpus would, in accordance with Art. 1297 of the Quebec Civil Code, go to his estate on his death. Furthermore, the trustees had the discretion to retain capital and income rather than distribute it to him.
CRA found that this discretion did not detract from him being the continued beneficial owner, stating:
Having regard to paragraph 248(3)(e) and subsection 248(25), it is reasonable to consider that the transfer of property to a trust governed by the C.C.Q. of which the transferor is the sole beneficiary does not result in a change in beneficial ownership for the purposes of paragraph 107.4(1)(a).
Thus, a discretion accorded to the trustees, under the terms of the trust indenture, as to when they may distribute capital and income to the beneficiary, would not, in and of itself, affect the determination of whether or not there is a change in beneficial ownership as long as the individual is, as a result of the transfer of the property to the trust, the sole person beneficially interested in the trust within the meaning of subsection 248(25).
Regarding, s. 107.4(1)(i), this situation did not meet the requirement in s. 73(1.01)(c)(ii) that, after transferring the capital property to the trust, the “individual is entitled to receive all of the income of the trust that arises before the individual’s death” given the trustees’ discretion to retain income. Accordingly, s. 107.4(1)(i) also was satisfied.
Neal Armstrong. Summaries of 9 April 2020 External T.I. 2014-0527261E5 F under s. 107.4(1)(a) and s. 107.4(1)(i).
Income Tax Severed Letters 27 May 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Express Gold – Federal Court suggests that a taxpayer can bring a mandamus motion if CRA drags out an audit of GST/HST refund claims for ulterior or strategic reasons
ETA s. 229(1) requires that a net tax refund claimed in a return is to be paid “with all due dispatch after the return is filed.” Pentney J found that this provision required that the Minister proceed “with all due dispatch” in determining whether the refund should be paid (i.e., if CRA so chooses, it can apply an “audit first with all due dispatch, then pay” system, rather than a “pay right away, audit later” system, as argued by the registrant.)
Here, the registrant claimed a net refund claim of $9.13 million in its August 2018 return, and then, on December 6, 2018 - which was only two months after having been notified by CRA that that return would be audited and that, in the meantime, no refund would be paid - made an application for a mandamus order to compel the Minister to pay the net refund. This was found not to have been a reasonable time in which to require an audit to be performed.
Pentney J stated:
I have concluded that the Applicant brought its application before a reasonable time for the performance of the [“with all due dispatch”] duty had elapsed, and so I am dismissing the application. In doing so, it is worth underlining that if the Applicant has or obtains evidence that the CRA is acting for an ulterior purpose, or that the audit is being continuously expanded in bad faith, or otherwise not proceeding in a reasonable time-frame, it can bring another motion.
Neal Armstrong. Summary of Express Gold Refining Ltd. v. Canada (National Revenue), 2020 FC 614 under ETA s. 229(1).
GST/HST Severed Letters August 2019
This morning's release of nine severed letters from the Excise and GST/HST Ruilngs Directorate (identified by them as their August 2019 release) is now available for your viewing.
CRA announces that pending a Finance COVID-19 review, it will not require the termination of a deferred salary leave plan if the leave of absence is deferred beyond 6 years
The deferred salary leave plan (DSLP) rules permit the deferral of salary for up to six years before the leave period commences. Finance is addressing issues that have arisen under the DSLP rules, including the effect on health care and other essential workers who are currently needed even if the six-year deadline for taking leave is arriving.
CRA has announced:
Pending completion of the Department of Finance Canada review, the CRA will not require an employer to terminate an individual’s DSLP in the event that the individual defers their leave of absence beyond the six-year maximum deferral period. This administrative position will apply regardless of the reason for deferring the leave. In addition to providing flexibility to health care workers and others providing essential services, it will accommodate, for example, individuals who had planned to travel during their leave but who are now unable to because of travel restrictions.
Neal Armstrong. Summary of 14 May 2020 External T.I. 2020-0848641E5 under Reg. 6801(a)(i) (15 May 2020 External T.I. 2020-0848511E5 F is similar).
Eisbrenner – Federal Court of Appeal finds that the onus of proof rested at all times with the taxpayer
One of the difficulties of the taxpayers in a charitable gift program for the donation by them of entitlements to pharmaceuticals (acquired in a distant land) to a registered charity is that they had no granular evidence that they had indeed acquired beneficial ownership of the supposedly-donated pharmaceuticals. Although they had pled that they had acquired the pharmaceuticals, this was also a pleaded assumption of the Minister in her reply.
One of the taxpayers (through counsel) argued that “he only had to raise a prima facie case, which he submitted was a lower standard than the balance of probabilities,” whereupon the onus of proof shifted to the Minister.
This argument was especially unlikely to persuade Webb JA. After noting that in Sarmadi, he had concluded that “[i]f the taxpayer has, on the balance of probabilities, disproven the particular facts assumed by the Minister, …there is no burden to shift to the Minister to disprove what the Tax Court judge has determined that the taxpayer has proven,” he concluded:
[B]ecause Mr. Eisbrenner pled that he had acquired ownership of certain pharmaceuticals and transferred these pharmaceuticals to the in-kind charity, he had the onus of proving that he owned these particular pharmaceuticals on a balance of probabilities.
Neal Armstrong. Summary of Eisbrenner v. Canada, 2020 FCA 93 under General Concepts - Onus.