News of Note
We have translated 5 more CRA Interpretations
Email this ContentWe have published a further 5 translations of CRA interpretations released in March, 2010. Their descriptors and links appear below.
These are additions to our set of 1,256 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/3 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 September.
Rogers Enterprises – Tax Court of Canada finds no GAAR tax benefit where an alleged excessive CDA addition was not yet distributed to individual shareholders (and also no abuse)
To simplify somewhat, a group of private corporations owned for the benefit of the Rogers family structured their affairs such that one corporation (“CGESR”) was the beneficiary of policies on the life of Ted Rogers whereas a company (“ESRL”) holding shares of CGESR through another CCPC (“ESRIL 98”) was the policyholder and had been paying the premiums, so that its adjusted cost basis (“ACB”) was $42M. On the death of Mr. Rogers in 2008, the full proceeds of the policies ($102M) were added to the capital dividend account (“CDA”) of CGESR, which used such proceeds to pay actual and deemed capital dividends in that amount. However, not all of these proceeds were fully distributed up the chain, so that, on the trial date, ESRIL 98 continued to have a CDA of approximately $42M.
CRA considered that it was abusive for the group to benefit from the full $102M addition to the CGESR CDA rather than an amount net of the $42M ACB to the policyholder (ESRL). However, Sommerfeldt J. found that there was no “tax benefit” for GAAR purposes because, so far, no tax had been avoided, i.e. any intercorporate dividends would have been free of tax (in light inter alia of the availability of the s. 184(3) election) irrespective of whether they were paid as “taxable” or capital dividends, and the “abusive” portion of the $102M increment to CGESR’s CDA had not, so far, been used by the estate or any other individual.
In any event, there was no abuse under s. 245(4). In 1977, there had been a legislative change to reflect a policy that the addition to a corporate beneficiary’s CDA would now only be reduced by the policy’s ACB to it rather than by the ACB of the policy to any person. Accordingly, taking advantage of the fact that CGESR itself had a nil ACB for the policies, so that the bump to its CDA was $102M rather than by $60M ($102M - $42M) accorded with the object and spirit of the provisions. Sommerfeldt J. stated that “this is one of those, perhaps rare, situations where the underlying rationale of the Reduction [for ACB] Provision in 2008 and 2009 was no broader than the text itself.”
Notwithstanding some “self-serving” language of Finance to the contrary, a 2016 amendment “clearly changed” the object and spirit of the provisions so that, from thence onwards, there was to be a reduction in the bump to the corporate CDA for the policyholder’s ACB.
Neal Armstrong. Summaries of Rogers Enterprises (2015) Inc. (successor by amalgamation to CGESR Limited) v. The Queen, 2020 TCC 92 under s. 245(1) – tax benefit, s. 245(4), and s. 89(1) – CDA – (d)(iii).
J.D. Irving – Court of Quebec finds that a property serviced by the user was not a leasing property
The taxpayer and another pulp and paper company in the Irving group (“IPPL”) engaged in several transactions to effectively transfer non-capital losses (“NCLs”) from an oil refining company (“IOL”) in the Irving group to the taxpayer. In a representative transaction, IOL acquired pollution control equipment (“PCE”), that IPPL had been using in its pulp facilities, from IPPL on a rollover basis at a nominal agreed amount. The taxpayer almost immediately acquired the PCE from IOL for $120 million (claiming 100% of this amount as CCA for that year), and agreed to operate the PCE in consideration for “throughput fees” and cost reimbursements payable to it by IPPL pursuant to “Operating and Services Agreements” (“OSAs”) governed by New Brunswick law. In January of the next year, the taxpayer transferred the PCE “back” to IPPL on a rollover basis with a nominal elected amount – so that similar transactions could be repeated for that year, and so on.
The ARQ attacked on the basis that the PCE constituted leasing property to the taxpayer, so that the Quebec leasing property restriction rules denied the deduction of CCA so as to generate NCLs. In particular, although the OSAs provided that the taxpayer was to operate the PCE, the taxpayer delegated to IPPL, in consideration for fees, the performance of all such operating services, so that nothing changed “on the ground.”
In allowing the taxpayer’s appeal and finding that the PCE generated business income rather than leasing revenue to it, so that the targeted NCLs were generated, Fournier JCQ accepted the submissions of the taxpayer that a “legal right of exclusive possession is essential to the existence of a lease at common law” and that here “no legal right of possession of the PCE is conferred upon IPPL under the Operating and Services Agreement, let alone an exclusive right of possession.” Furthermore, the delegation of the performance of the services to IPPL (who had been performing them all along) did not detract from the services nature of the OSAs: similarly to Stubart, the taxpayer “carried on business through an agent, in this case IPPL.”
Neal Armstrong. Summaries of J.D. Irving Limited v. Agence du revenu du Québec, 2020 QCCQ 2423 under Reg. 1100(17) and General Concepts – Agency.
CRA indicates that, in the COVID context, companies without Treaty protection should demonstrate that board meeting locations were not manipulative
The CRA's COVID Guidance on international transactions indicates that it will consider administrative relief for non-resident entities which are resident in non-Treaty countries “on a case-by-case basis”. When asked to elaborate, CRA indicated that it avoided bright-line tests in order to avoid accommodating tax avoidance techniques but that, broadly speaking, taxpayers should be prepared to illustrate how the location and timing of the board meetings were necessary from a business corporate governance perspective and not intended to exploit the relief in the Guidance for tax avoidance purposes.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.9 under s. 2(1).
CRA’s COVID guidelines do not include dispensation from source deductions for non-resident employers whose employees work from Canada due to travel restrictions
CRA indicated that where an employee not ordinarily resident in Canada is present in Canada due to COVID-related travel restrictions and works remotely (for the non-resident employer) from Canada, the nonresident employer would now be subject to Canadian withholding obligations (including where the employer did not consent to this work occurring in Canada) unless a waiver of withholding was obtained – including in the situation where it did not consent to this Canadian nexus? However, CRA would seek to be flexible when withholding problems were encountered, as extraordinary circumstances can make compliance difficult.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.3 and Q.4 under s. 153(1)(a).
CRA comments further on the meaning of a “travel restriction under its COVID Guidelines
CRA's Guidance on international income tax issues raised by the COVID-19 crisis provides relief respecting adverse impacts of COVID-related travel restrictions on such matters as being considered to have become a Canadian resident. CRA indicated that a mandatory quarantine period is a travel restriction, a government recommendation that does not have legal force may qualify as a “travel restriction” depending on the surrounding facts and circumstances, and that a government recommendation to return to Canada would generally be viewed as a “travel restriction.”
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q. 1 under s. 2(1).
Income Tax Severed Letters 26 August 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA intimates that it is looking to get Cameco/Alta Energy reversed one way or the other
Although he did not state it this baldly, Ted Gallivan intimated, in the context of comments heard by him of Parliamentarians, that unless CRA gets a better result in the Supreme Court in cases such as Cameco (for which the period for applying for leave has not yet expired) and other FCA decisions (presumably including Alta Energy, for which leave was recently granted), then in order to protect the fisc, amendments to the ITA transfer pricing rules will be required.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q. 17 under s. 247(2)(b).
CRA now emails and will start videoing
CRA will accept emails from taxpayer representatives and, provided that it reads out a caveat first about the dangers of email, is generally now willing to send emails to representatives.
Having discussions by video was cleared at the beginning of August.
The maximum size of file-uploads on My Business Account has been greatly increased, so it should now be straightforward to provide large volumes of documentation through the account.
Neal Armstrong. Summary of 2020 IFA-YIN Seminar on COVID-19 Guidelines, Q. 13 under s. 152(1).
Banque Laurentienne – Tax Court of Canada finds that fees paid by the issuer of subscription receipts to the investors themselves were deductible under s. 20(1)(e)
In order to finance an acquisition, Laurentian Bank issued subscription receipts to two private placement investors (the Caisse for $100 million and a labour fund for $20 million) at a subscription price representing a 2% discount to the market trading price, and with the subscription proceeds being held in trust until the closing of the acquisition, at which point, the subscription receipts were converted, without further payment, into common shares of the Bank. The Bank was required by the subscription agreements to pay “transaction fees” of 4% of the subscription amounts on the closing to the investors.
Ouimet J concluded that these transaction fees were deductible at the 20% p.a. rate provided under s. 20(1)(e). He rejected the Crown’s position that the transaction fees were in substance discounts to the issue price, and instead accepted testimony that the taxpayer had received a financing service and a service in the form of a positive signal to the marketplace that the Caisse would become its largest shareholder. In addition to finding that the fees were incurred “in the course of” the subsequent common share issuance, he also rejected a Crown submission that a qualifying fee could not extend to one paid to the subscriber itself.
The Crown also asserted that the fees were unreasonable in amount, but bore the onus in this regard as it had not made this assumption in assessing, and had failed to bring any expert evidence on this issue.
Neal Armstrong. Summaries of Banque Laurentienne du Canada v. The Queen, 2020 CCI 73 under s. 20(1)(e) and s. 67.