News of Note
Stover – Federal Court requires CRA to think about waiving interest that accrued during a three-year delay in dealing with a late-filed Objection
Email this ContentThe taxpayer, who had not filed a Notice of Objection within the normal 90-day period for doing so, filed his Notice of Objection barely within the one-year period under s. 166.1(7)(a) for applying to the Minister for an extension of that deadline. CRA apparently did not recognize that, under the jurisprudence, the late-filed Notice of Objection was to be treated as an implicit s. 166.1 request for an extension. It essentially did nothing until the Tax Court issued an order three years later declaring the Notice of Objection to be valid - notwithstanding that s. 166.1(5) required it to consider an extension application “with all due dispatch.” The taxpayer ultimately discontinued his Tax Court appeal (due, he claimed, to his lawyer’s mistake), but applied to CRA for interest relief under s. 220(3.1).
Favel J considered it to be unreasonable for the CRA delegate not to take the three-year delay of CRA in responding to the Objection into account in considering the interest-relief request, so that the matter was “remitted to another Delegate for redetermination of the Applicant’s entitlement to relief from interest accrued due only to delays caused by the CRA.”
Neal Armstrong. Summaries of Stover v. Canada (National Revenue), 2019 FC 1599 under s. 220(3.1) and s. 166.1(5).
CRA confirms that, where all shareholders of a private corporation are directors, an eligible dividend designation can be made through the dividend declaration
CRA essentially repeated its position in 2009-0347491C6 that examples of a valid eligible dividend designation by private corporation include identifying eligible dividends through letters to shareholders and dividend cheque stubs, or where all of the shareholders are directors of a corporation, a notation in the Minutes. CRA elaborated on this “notation in the minutes” method as follows:
Thus, where all of the shareholders are also directors of the corporation, we consider that a directors’ resolution declaring a dividend and containing a designation that such dividend is an eligible dividend constitutes valid notification in writing for the purposes of subsection 89(14).
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.16 under s. 89(14).
B.C. Investment Management – Supreme Court of Canada indicates that a statutory trust is not necessarily a trust
BCI was a B.C. Crown agent which was formed to manage and hold investments for the provincial pension plans. The B.C. governing Act (the PSPPA) created a statutory trust under which each pension plan only had an entitlement to units in the investment pools managed by BCI and did not have ownership in any investment pool assets. CRA took the view (and ultimately assessed BCI for $40M in uncollected GST on the basis) that ETA s. 267.1(5)(a) deemed the statutory trust to be a person separate from BCI as agent for the provincial Crown, so that the investment services of BCI were supplied to that separate person.
In finding that such assessments would contravene s. 125 of the Constitution Act, 1867 but for the effect of Intergovernmental Agreements between B.C. and the federal government, Karakatsanis J focused on the ownership interest of BCI (the provincial Crown agent) in the portfolio assets:
In this case, the ETA places the burden of the tax on the Portfolio assets to which BCI holds legal title. BCI, a Crown agent, has thus successfully shown that it has an ownership interest in the property which bears the federal tax. I recognize that the beneficiaries of the trust may also be seen as bearing the burden of the tax. However, the key point is that the provincial Crown’s interest is being taxed under federal law, which is not permitted by s. 125.
In interesting obiter, she questioned whether the statutory arrangement created by the PSPPA, which stated that the portfolio assets were to be “held in trust,” in fact created a trust, stating:
[I]t is not clear whether the PSPPA … contain sufficient language to satisfy the three certainties. For example, the statutory framework does not identify a beneficiary for the Portfolio assets.
Neal Armstrong. Summaries of Canada (Attorney General) v. British Columbia Investment Management Corp., 2019 SCC 63 under ITA s. 104(1) and Constitution Act, s. 125.
Dow & Duggan – Tax Court of Canada finds that CRA does not have the discretion to stipulate the documentary requirements for direct-shipment export zero-rating
Sched. VI, Pt. V. s. 1 generally zero-rates sales made in Canada to a recipient who promptly exports the goods, whereas Sched. VI, Pt. V. s. 12 may inter alia zero-rate sales made in Canada to a non-resident where the supplier itself ships the goods out of Canada. Unlike s. 1, s. 12 does not state a requirement that the supplier “maintains evidence satisfactory to the Minister of the exportation of the property by the recipient.”
Wong J noted:
This Court has previously held that the evidentiary threshold in section 1 of Schedule VI, Part V means: (1) that the Minister has the discretion to set the standard as to what evidence will satisfy her for the purposes of zero-rating under that section; and (2) this Court should not intervene unless the Minister commits a reviewable error in exercising her discretion… .
She found that the Minister did not have the same discretionary authority under s. 12, although she indicated that it would be “reasonable to refer to the Minister’s [published] list of satisfactory evidence for qualifying under section 1, as a guideline for section 12.” However, she found that most of the supplies before her were not zero-rated in the absence of satisfactory documentary support in any form.
Neal Armstrong. Summaries of Dow & Duggan Log Homes International (1993) Limited v. The Queen, 2019 TCC 280 under Sched. VI, Pt. V. s. 12 and s. 168(9).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in April and March, 2011, including 3 items from the 2010 APFF Roundtable. Their descriptors and links appear below.
These are additions to our set of 1,029 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.
GST/HST Severed Letters June 2019
This morning's release of three severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their June 2019 release) is now available for your viewing.
Landbouwbedrijf Backx – Federal Court of Appeal confirms that a Dutch company with a sole Dutch director was resident in Canada
When a Netherlands couple immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. in 2009 of the partnership interest, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on.
Rivoalen JA found that there was no reversible error in the Tax Court’s finding that B.V.’s central management and control was in Canada, given the evidence that “the shareholders in Canada were making the decisions, not the director in the Netherlands.”
Rivoalen JA next addressed the Tax Court’s finding that that there had been no previous step-up to B.V. in the adjusted cost base of the partnership interest under s. 128.1(1)(c), as it was likely that B.V. had been resident in Canada from the time of the acquisition of the farm. She allowed B.V.’s appeal and referred the matter back to the Tax Court for reconsideration of this finding based on what appears to be a minor linguistic quibble: in one part of its reasons, the Tax Court had expressed its finding in this regard on the basis that “there was no evidence that [B.V.] actually ceased to be a resident of the Netherlands” - rather than stating that there was no evidence that B.V. had not been resident in Canada at all times. (Given that central management and control was in Canada at all times, this appears to be a distinction without a difference.)
Furthermore, the Tax Court had found that B.V. was resident in Canada for Treaty purposes as its effective management and control was in Canada - and if it was resident in both countries, this was a matter for the competent authorities to address, which had not been done. The Tax Court merely quoted Art. IV(3) of the Treaty in this regard – which provides:
Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both States, the competent authorities of the States shall endeavour to settle the question by mutual agreement ... . In the absence of such agreement, such person shall be deemed not to be a resident of either State for the purposes of Articles 6 to 21 inclusive and Articles 23 and 24.
The Tax Court did not go on to indicate (presumably because this was obvious) that, given that the competent authorities had not been engaged, this meant that the Treaty could have no application to B.V. Rivoalen JA found that there also was an error here:
[T]he Convention provides an exception or relief to the appellant, it would take precedence over the Act. The Tax Court did not apply and consider the provisions of the Convention to the facts of this case.
The allowing of its appeal likely will be an illusory victory for B.V.
Neal Armstrong. Summaries of Landbouwbedrijf Backx B.V. v. Canada, 2019 FCA 310 under s. 2(1), s. 128.1(1)(c) and Treaties - Income Tax Conventions - Art. 4.
CRA indicates that there can be no interest ultimately payable to the extent that a life interest trust realizes a capital loss in the stub period following death
Life interest trusts, such as alter ego trusts and joint spousal trusts, are deemed under s. 104(4)(a) to have a deemed year end on the date of the death of the last life interest beneficiary and to have disposed of certain property on the date of death. However, if there is a loss in the first taxation year after death, this loss will be reported on the tax return filed for that year and carried back to offset or reduce the gain for the year ending with the death.
However, CRA noted that s. 104(13.4)(c), which postpones the balance due date for the first deemed taxation year to March 31 (or March 30 for a leap year), can provide relief. Suppose that a capital loss sustained in the second taxation year ending on December 31 equals or exceeds the capital gain realized in the first taxation year ending on, say, July 31. By filing the two tax returns, and the loss-carryback request before the balance due-date of March 31, once the first taxation year has been reassessed to recognize the loss for the second taxation year, the effect should be that no Part I tax is payable, and the Part I tax that was initially assessed on the first taxation year should be reversed.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.15 under s. 104(13.4)(c)(i).
CRA indicates that a replacement property can be acquired before disposing of the former property
In order to expand its operations, a manufacturer acquires vacant land, takes three years to build a new plant, moves its operations there and, eight months later, sells the former property. CRA indicated that there is no requirement that the replacement property be acquired after the former property is disposed of – so that the acquisition of the new property in advance of the disposition of the former property would not prevent it from being a replacement property for ss. 13(4.1) and 44(5) purposes.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.14 under s. 44(5).
CRA indicates that GAAR may apply to the use of a “Midco” to step up the tax basis of a target investment on a triangular amalgamation
In a conventional domestic triangular amalgamation, in which the shareholders of Targetco receive shares of Parentco, and Parentco receives shares of the Amalco resulting from the amalgamation of Targetco and Subco (a wholly-owned subsidiary of Parentco), ss. 87(9)(a.4) and (c) limit the cost of such Amalco shares to Parentco. Some ancient technical interpretations of CRA indicated that Parentco could achieve a step-up of its investment to fair market value if it inserted a “Midco” between it and Subco. On the amalgamation, Parentco receives additional shares of Midco (having an FMV equaling the FMV of the shares of Parentco issued to the former shareholders of Targetco and to compensate it for such issuance (and Midco receives compensatory shares of Amalco).
CRA continues to acknowledge that as a purely technical matter, the “compensatory” shares issued by Midco to Parentco have full (FMV) basis (although of course the cost of the shares issued by Amalco to Subco continues to be limited by ss. 87(9)(a.4) and (c).) However, CRA indicated that if an amalgamation is subject to the application of s. 87(9), and is structured in a manner to frustrate the application of ss. 87(9)(a.4) and (c), it will potentially be subject to the application of GAAR.
Accordingly, for transactions implemented after the Conference date of December 3, 2019 (or for amalgamations implemented before March 31, 2020 as part of a series of transactions or an arrangement that were substantially advanced, as evidenced in writing, before December 3, 2019) taxpayers should not rely on the old technical interpretations.
CRA has now provided its official written responses to the Canadian Tax Foundation, which are available to those who attended the conference. In its oral comments, CRA queried whether giving FMV tax basis to Parentco for the shares issued by Midco, which would be in excess of the basis described in ss. 87(9)(a.4) and (c), would be in accordance with the scheme of such provisions, and the scheme of the Act’s rollover provisions in general.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.13 under s. 87(9)(a.4).