News of Note
CRA provides numerical speed limits on a pipeline for a company with a marketable securities “business”
Email this ContentCRA has provided the usual rulings for a pipeline transaction in which the estate sells a company with a “business” of investing and trading in marketable securities to a Newco for consideration comprising mostly a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time.
The ruling letter stipulates that the amalgamation will occur no sooner than 12 months after the sale to Newco, and that thereafter the note will be paid off no faster than 15% per quarter for the first year. This contrasts with, for example, 2014-0540861R3 F and 2014-0548621R3, where these two parameters were 12 months and 25% per quarter, and 2016-0670871R3, where they were 30 months and 15% per quarter.
Neal Armstrong. Summary of 2018 Ruling 2018-0767431R3 under s. 84(2).
The GAAR Committee is looking at a lower percentage of the GAAR cases
After an audit team has made the mandatory referral of any proposed GAAR assessment to the Abusive Tax Avoidance Division at Headquarters, Headquarters then determines whether such assessment is clearly warranted or unwarranted under the jurisprudence or is respecting a structure already considerd by the Committee. In any such case, the proposal does not continue to the GAAR Committee. The GAAR Committee therefore looks at fewer matters than it used to, meets less frequently - and there is a greater tendency to send technical people rather than the named Committee representative to meetings.
Neal Armstrong. Summary of 7 March 2019 CTF Seminar on GAAR: Alexandra MacLean on GAAR under s. 245(4).
Revera Long Term Care – Federal Court requires CRA to reconsider whether a taxpayer’s negligence in over-reporting income in a statute–barred year permits CRA to reassess that year
The taxpayer discovered that it had overreported its income for ITA purposes by $9 million per year for years that were before the normal reassessment period. It requested that CRA reassess it for those years to exclude those amounts from its income - on the basis that the error was due to negligence so that such reassessments were permitted under s.152(4)(a)(i). CRA declined this request, based on a determination that the Minister did not have discretion under s.152(4)(a)(i) in situations where the taxpayer’s negligence leads to over-reported rather than under-reported income.
Ahmed J found CRA’s reasoning to be conclusory and agreed with the taxpayer that as CRA did “not conduct any textual, contextual, and purposive analysis as the Supreme Court of Canada requires” such decision was unreasonable and the request should be returned to CRA for a further decision.
Neal Armstrong. Summary of Revera Long Term Care Inc. v. Canada (National Revenue), 2019 FC 239 under s.152(4)(a)(i).
We have over 800 full-text translations of CRA Interpretations
We have published a further 6 translations of interpretations released in June and May, 2012. Their descriptors and links appear below.
These are additions to our set of 801 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Finance outlines GAAR amendments that have been thought about
Comments of Brian Ernewein on the GAAR Committee and the future of GAAR included:
- Finance participates on the Committee for a window on what is happening and to offer insights on the policy underlying the Act.
- However, Finance does not bring “inside information” to this policy question as GAAR should be applied to the scheme of the law, as evidenced in the public record.
- Although perhaps five years ago (i.e., before a spate of more favourable decisions), this same conclusion might not have been reached, it now appears on balance that the introduction of GAAR has been an improvement: it has put a brake on some overly aggressive planning, without unduly impeding legitimate activity; and it has effectively engaged the Courts and CRA to give more than lip-service to something resembling a textual, contextual, and purposive analysis of legislation.
- Finance has considered:
- Whether a GAAR penalty should be introduced (the potential downside is that this might have a deleterious effect on the jurisprudence, i.e., fewer Crown wins)
- Explicitly incorporating economic substance into GAAR.
- Overruling Wild (which found that surplus-stripping transactions were not subject to GAAR before the surplus was actually stripped – and “seems inconsistent with the expressed intention of Parliament.”)
- Perhaps also requiring more reporting of aggressive transactions.
- That being said, any GAAR changes should be made with extreme caution.
- If, at the time of introducing new rules to shut down transactions, CRA is pursuing those transactions under GAAR, Finance will add a statement to the Explanatory Notes that GAAR can apply to those transactions.
Neal Armstrong. Summaries of 7 March 2019 CTF Seminar on GAAR: Brian Ernewein on GAAR – Past and Future under s. 245(4).
Klopak – Federal Court confirms an apparent denial of penalty relief for voluntarily disclosing a tax return error
Although the facts are quite unclear, what may have happened is that the Canadian-resident individual, who worked in the U.S. as a subcontractor to a rock band, originally filed late Canadian tax returns on the basis that his Canadian tax liability was offset by foreign tax credits for the U.S. taxes payable on his income. However, on getting advice, he later determined that he was Treaty-exempt on that income, sought a refund of the U.S. taxes, and filed amendments to his Canadian returns, showing Canadian taxes payable. CRA (in addition to assessing the Canadian income taxes payable and interest) also assessed him penalties since it now appeared that at the time of the original filing of his “nil” returns, Canadian taxes in fact had been owing.
The taxpayer argued inter alia that as he “came forward with a voluntary disclosure in a timely fashion … it was unreasonable for the [CRA] Delegate to not exercise discretion in waiving the penalties.” McVeigh J denied penalty relief essentially on the basis that the taxpayer did not fall within the conventional narrow criteria of CRA in IC-07 for penalty relief, e.g., no extraordinary circumstances justifying the late filing of the returns, such as natural disaster, had been established, and that this situation also did not fall within the four corners of CRA’s published voluntary disclosure program.
It is unclear why it was reasonable for the Delegate not to consider that the Applicant presumably could have received relief if he had formally applied under the voluntary disclosure program rather than simply sending in a T1 adjustment.
This case illustrates that the common practice of sending in nil returns quite late is fraught.
Neal Armstrong. Summary of Klopak v. Canada (Attorney General), 2019 FC 235 under s. 220(3.1).
Kaye v. Fogler Rubinoff – Ontario Superior Court of Justice stays a negligence action against a law firm pending disposition of the related tax appeal
An estate sued its law firm in negligence after CRA assessed it over $9 million on the basis that the method used to transfer shares to a charitable foundation did not generate a donation credit.
In granting the motion of the defendant law firm for a stay of the negligence action pending the disposition of the tax appeal, Josefo, M. stated:
[T]he ultimate decision of the Tax Court on the propriety of the method or structure for transferring shares recommended by the law firm and lawyer to the Estate will, in my view, very much influence if not be determinative of much if not all of this within negligence action.
Neal Armstrong. Summary of Kaye et al. v. Fogler Rubinoff LLP et al., 2019 ONSC 1289 under Courts of Justice Act (Ontario), s. 106.
Tax authorities may be increasing their use of the profit-split method
The profit-split method “identifies the relevant profits to be split for the associated enterprises from a controlled transaction and then splits those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been agreed at arm's length."
A one-sided transfer-pricing (TP) analysis hypothesizes that if the tested party earns an arm's-length return that is appropriate for its functional characterization, then the other related entity is assumed to earn an arm's-length return, too. The tax authorities can be concerned because there is no visibility of the profitability of the other related entity, and may favour the PSM which is a two-sided analysis that explicitly evaluates whether the profit split between the related entities is appropriate.
Furrthermore, country-by-country reporting (CbCR) requires the multinational corporation (MNC) to disclose relative profitability in each jurisdiction and the required master file (MF) entails the disclosure of the drivers of business profits, such as a description of the supply chain and intellectual property used within the group. It is suggested:
Tax authorities, armed with the additional information available through the CbCR and the MF, are expected to use the PSM as either a primary or a secondary TP method to assess the reasonableness of the TP policies that are applied by an MNC.
Neal Armstrong. Summary of Adrian Tan, “The Emergence of the Profit-Split Method,” Canadian Tax Highlights, Vol. 27, No. 2, February 2019, p. 1 under s. 247(2).
CRA considers shares of Targetco now held 100% by Acquisitionco, and with a formal delisting imminent, to still be listed
There is a problem in the wording of the definition of a public corporation. Even if a heretofore public corporation has made a good election under (c)(i) of that definition to cease to be a public corporation, it will continue to be a public corporation under para. (a) of the definition at that time if its shares are still listed. Accordingly, the Joint Committee has submitted that para. (a) should be amended by adding a proviso that the corporation nonetheless will not be considered to be a public corporation under para. (a) if it ceased to be a public corporation under para. (c) because of a valid election or designation.
The background is this. 2017-0723771C6 indicated that where Acquisitionco acquired all the shares of Targetco, a public corporation, and immediately amalgamated with it, Amalco could potentially make an election on behalf of Targetco under (c)(i) of the public corporation definition for Targetco not to be a public corporation so that Amalco was not deemed to be a public corporation under s. 87(2)(ii). This response was problematic because this election could not be made by Amalco until the Targetco shares were delisted, which might take several days to occur, and because CRA needed to accept that the fact that the Targetco shares no longer existed did not preclude the making of this election (as to which it was prepared to rule on a case-by-case basis rather than giving any blanket assurances).
CRA recently declined to give a Technical Interpretation that if, shortly before the amalgamation of Targetco with Acquisitionco, Acquisitionco held all the Targetco shares and the Stock Exchange had been notified to delist the shares, the Targetco shares would not be considered to be listed for purposes of paragraph (a) of the definition of public corporation.
Neal Armstrong. Summary of 4 March 2019 Joint Committee Submission on Definition of “Public Corporation” under s. 89(1) - public corporation – para. (a).
FTQ – Federal Court of Appeal affirms that a payment in substance made to walk away from a worthless investment did not qualify under s. 18(1)(a)
The taxpayer agreed with the City of Chandler that it would no longer use any loan repayment proceeds received by it from a City-owned corporation - that had failed in an costly attempt to restart a paper mill close to the City – to invest in a prospective replacement economic-development LP to be sponsored by the City, but would instead make a “gift” of the loan repayment proceeds (which ended up totalling $9.3 million) to the City, for which it received charitable receipts. Ouimet J found that there was no “gift” in the context of the taxpayer being relieved of its obligation to invest in an enterprise of questionable worth.
He also rejected the taxpayer’s alternative argument that the payments qualified for current deduction consistently with the s. 18(1)(a) income-producing purpose test given that their purpose instead was to avoid involvement in the proposed LP and to leave to the City alone the responsibility of using the sums to economically develop the region.
The case was appealed on the second ground and has now been briefly affirmed by the Federal Court of Appeal.
Summaries of Fonds de solidarité des travailleurs du Québec (F.T.Q) v. The Queen, 2018 CCI 3, aff'd on s. 18(1)(a) grounds 2019 CAF 36 under s. 110.1(1)(a) and s. 18(1)(a) – income-producing purpose.