News of Note
1074022 B.C. Ltd. v Li - BCSC finds that CRA could be directed to pay an excess s. 116 remittance to the taxpayer’s secured creditors
Email this ContentNo s. 116 certificate was obtained on a court-approved sale of a Vancouver property (arising in connection with foreclosure proceedings) by the Hong Kong owner (Mr. Li), so that the purchaser paid 25% of the purchase price (being $200,000) to CRA. Mr. Li’s tax liability was only $46,000 and he had provided CRA with an irrevocable direction to pay the excess funds (i.e., $154,000) to his lawyer (so that such funds would then be paid, in accordance with the court order, to the secured creditors of Mr. Li, including the second mortgagee (the petitioner in this case). However, CRA refused to do so on the basis that s. 164 of the ITA and s. 67 of the Financial Administration Act required a tax refund to be paid only to the taxpayer (i.e., to Mr. Li in Hong Kong, with the effect of defeating his secured creditors) and not a third party (i.e., a mortgagee).
Before determining “that Canada is obligated to pay the excess funds to Mr. Li’s lawyer in trust in accordance with the direction to pay,” Harper M stated:
In my view, Canada’s interpretation of s. 67 of the FAA and s. 164 of the ITA is overly narrow. If CRA pays the excess funds to Mr. Li’s lawyer in trust, the payment is neither an “assignment” of the excess funds to a third party, nor a payment for the benefit of anyone other than Mr. Li. The funds remain Mr. Li’s to be dealt with in accordance with the trust conditions agreed upon between him, his lawyer and the secured creditors.
Harper M went on to indicate that “Alternatively, it is acceptable that CRA pay the excess funds into court to the credit of the proceeding, or to the petitioner’s lawyer in trust, if agreed.” In this regard, she rejected the Attorney General’s argument that “it has no discretion to pay the excess funds into court, or, in fact, to do anything other than pay them to Mr. Li.”
It is suggested that this case:
may be considered to make a more general point: taxpayers should be allowed to direct where their refunds are to be paid, just as they choose the bank account into which the funds are to be deposited.
Neal Armstrong. Summaries of 1074022 B.C. Ltd. v Li, 2020 BCSC 65 under s. 116(5) and of H. Michael Dolson, "Can a Tax Refund Be Paid to a Third Party? Section 116 and Foreclosures,” Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 8 under Financial Administration Act, s. 67.
Piché – Court of Quebec finds that a family realized capital gains from the sale of 3 newly-constructed residences in 3 years
A closely-knit family, who collectively constructed and sold three single family residences over the course of three years without reporting anything on their returns, and were assessed by the ARQ for having realized gains from adventures in the nature of trade, were able to come up with convincing stories as to how, due to various “vicissitudes” and unexpected twists and turns in their personal lives, all that had occurred. They were not “building entrepreneurs” and their appeals were allowed.
The principal residence exemption was not discussed.
Neal Armstrong. Summary of Piché v. Agence du revenu du Québec, 2020 QCCQ 1283 under s. 9 – capital gain v. profit – real estate.
CRA states that a PSB can deduct the “cost” of car loan interest under s. 18(1)(p)(ii) to the extent of the benefit conferred on the individual qua employee rather than shareholder – but not CCA
Under s. 18(1)(p)(ii), a corporation carrying on a personal services business is entitled to deduct “the cost to the corporation of any benefit … provided to an incorporated employee … that would, if the income of the corporation were from a business other than a [PSB] be deductible in computing its income.” CRA was asked whether this permitted the corporation to deduct the costs of leasing an automobile provided to the individual, or interest on a loan financing an automobile provided to the individual.
The word “cost” was less than apt to describe loan interest. Nonetheless, CRA was of the view that, in either situation, the leasing or interest “cost” was deductible to the extent of any related benefit provided to the individual qua employee (provided that the general deductibility tests were satisfied), whereas there could be no such deduction if the auto was provided to the individual qua shareholder.
CRA went on to indicate that no CCA could be claimed by the corporation (stating that “a capital cost allowance amount is not the cost of a benefit”) – except that if the corporation had a sales business, CCA could generally be deducted under s. 18(1)(p)(iii) to the same extent as CCA claims could have been made under s. 8(1)(j)(ii) if the marketing activity had been carried on by the individual as a sales employee.
Neal Armstrong. Summary of 9 March 2020 External T.I. 2013-0490301E5 F under s. 18(1)(p)(ii).
Income Tax Severed Letters 29 April 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Employees may need to be required to work at home for 6 months during COVID-19 to deduct their home office expenses
Can employees who are now working from home deduct their home office expenses? In addition to needing to meet the requirements of s. 8(1)(i) or (f) and for a form T2200, s. 8(13)(a)(i) or (ii) must be satisfied. Notwithstanding the subsequent elevation of Webb J, 2013-0481171E5 did not address his comment in Landry that the home office “meeting” requirement in s. 8(13)(a)(ii) can be satisfied with phone calls.
As for the alternative requirement under s. 8(13)(a)(i) that the home office be “the place where the individual principally performs the duties of the … employment,” it is suggested that perhaps:
the "principally" test should be determined over the course of the full period of employment in the calendar year, rather than for just the part of the year during which the employee is required to work from home for that employment. This would imply … at least 6 months in order to meet the test.
Neal Armstrong. Summary of Jiani Qian, “COVID-19 and Employees' Home Office Expenses,” Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 2 under s. 18(13)(a).
CRA considers a referral bonus received by a registered plan to be a directed contribution to the plan
S. (a)(v) of the advantage definition in s. 207.01(1), as paraphrased by CRA in Folio S3-F10-C3, excludes “a promotional incentive under a program offered to a broad class of persons in a normal commercial or investment context.” When asked to elaborate, CRA indicated inter alia that:
[W]hether an incentive offered only to a “select group” of clients would qualify for the exception would depend on the size of the group relative to the financial institution’s client base as a whole as well as on the particular criteria used to select eligible investors. A recent example we considered not to be an advantage was an investment fee incentive offered only to members of a particular professional group and their immediate family members.
and that:
[F]actors indicating that an incentive program is not commercially reasonable would include disproportionate benefits relative to investment size, parties acting in concert and other commercially unreasonable behaviour that suggests a main purpose of the arrangement is to allow the investor to benefit from the registered plan’s tax exemption.
CRA also indicated that a referral bonus paid into a registered plan is a contribution to the plan. It reasoned:
[A] referral bonus is paid as a consequence of the relationship between the existing investor and the new investor. When a registered plan is involved, it is actually the plan’s controlling individual who earns the referral bonus, not the plan itself. Therefore, if payment of the referral bonus is directed to the registered plan, we would consider it to be a contribution or premium paid to the plan by the controlling individual.
Neal Armstrong. Summaries of 3 April 2020 External T.I. 2019-0830101E5 under s. 207.01(1) – advantage - (a)(v), and s. 146(1) – premium.
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in October 2010. Their descriptors and links appear below.
These are additions to our set of 1,158 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ½ 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 May.
CRA provides FAQ on Canada emergency wage subsidy
Points made by CRA in its new FAQ webpage on the Canada emergency wage subsidy (CEWS) include:
- Under the s. 125.7(9) rule , if an eligible employer has determined that it has experienced the required 15% reduction in qualifying revenue for the March 15 to April 11, 2020 claim period, it is automatically considered to have experienced the required 30% reduction in revenue for the immediately following claim period (April 12 to May 9, 2020). CRA confirmed:
In a situation where the eligible employer, subsequently determines that it actually experienced the required reduction in revenue, without applying the deeming rule, for the second claim period - April 12 to May 9, 2020, the eligible employer will be considered to have experienced the required reduction in revenue for that third claim period because of the deeming rule that can now be applied to the third period … .
- CRA provides a simple example of the operation of the special rule in s. 127.5(4) for computing changes in qualifying revenue where the eligible entity has revenue from persons or partnerships with which it does not deal at arm’s length: the eligible employer derives all its revenues from the provision of management services to a related corporation, and they elect such that its qualifying revenue for the current reference period is determined by reference to the required reduction in qualifying revenue for the related corporation in that reference period. CRA then goes through a more intricate example where there are two related corporations.
- CRA also provides a simple example of the election under s. 127.5(4)(a) to measure qualifying revenues on an unconsolidated basis: the consolidated financials of the parent show a decline in the qualifying revenues for it and its subsidiary of 10% for the first period, so that neither is eligible for the subsidy. However, given that the unconsolidated qualifying revenues of the subsidiary have declined by 20%, they can make the election, so that the subsidiary can qualify.
- CRA seems to consider that if the above election is not made, then each member of a group that prepares consolidated financial statements determines its qualifying revenues using those financials. What then is the point of the election under s. 127.5(4)(b) to elect to use consolidated financials? CRA provides an example of two silos making the election, e.g., two corporations each owned 100% by a spouse, with one having no percentage reduction, but on a consolidated basis there being a 25% drop in qualifying revenue.
- The “CEWS” wage subsidy is reduced by the full amount of the 10% temporary wage subsidy that may be claimed rather than the amount of the latter that is actually claimed (e.g., where it has not yet been fully claimed through available reductions in source deduction remittances).
Summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 23 April 2020 under s. 125.7(9), s. 125.7(1) – qualifying entity – (c)(ii), eligible employee, eligible remuneration, s. 125.7(4)(d), s. 125.7(4)(a), s. 125.7(4)(b) and s. 125.7(2) – B.
Colitto – Federal Court of Appeal finds that a director’s s. 227.1 liability can flow through to a transferee under s. 160 well before the s. 227.1(2) claim conditions have been met
The taxpayer’s husband (Mr. Colitto) was acknowledged to be liable under s. 227.1 for the failure of his corporation to remit source deductions between February and August, 2008. In 2016, CRA assessed Ms. Colitto on the basis that Mr. Colitto’s s. 227.1 liability had flowed through to her under s. 160 (given the gratuitous transfer to her by him of real estate in 2008). The Tax Court found that Mr. Colitto’s s. 227.1 liability did not arise until 2011, when the last precondition for its application was satisfied (i.e., the corporation’s source-deduction tax debt was executed and returned unsatisfied) and, hence, his s. 227.1 liability had not arisen “in respect of” his 2008 taxation year,” as required under s. 160(1)(e)(ii) in order for that liability to flow through to her on the 2008 real estate transfers.
In allowing the Crown’s appeal, Dawson JA first noted that the wording of s. 227.1(1), although ambiguous, was consistent with that provision addressing not only who was liable (i.e., a director at the time of the corporate failure to withhold in 2008), but also when that director’s liability arose (i.e., at that same time, in 2008). Conversely, the expansive effect given by the Tax Court to the exclusion from director’s liability in s. 227.1(2) had the effect of reading two words into that provision, namely, that a director is not liable for the corporation’s default unless “and until” the specified s. 227.1(2) procedures took place (in 2011).
These considerations were reinforced by the purposes of s. 227.1, which had been judicially stated to be “to strengthen the Crown’s ability to enforce the statutory obligation imposed on corporations to remit source deductions,” whereas the Tax Court interpretation “render[ed] this purpose nugatory and pointless.”
Neal Armstrong. Summary of Canada v. Colitto, 2020 FCA 70 under s. 227.1(1).
Loblaw - Federal Court of Appeal finds that a Barbados bank sub of Loblaw conducted its business of investing in short-term debt principally with arm’s length persons (no FAPI)
The taxpayer, an indirect wholly-owned subsidiary of the Loblaw public company, wholly-owned a Barbados subsidiary (Glenhuron), that was licensed in Barbados as an international bank and that used funds mostly derived from equity injections by the taxpayer to invest in U.S.-dollar short-term debt obligations, loans to several thousand independent U.S. distributors of Weston baked goods (i.e., drivers) and intercorporate loans – and entered into cross-currency and interest rate swaps with an arm’s length bank to effectively convert much of its income stream into fixed rated Canadian-dollar interest. CRA assessed on the basis that Glenhuron had realized $473 million of foreign accrual property income (FAPI) between 2001 and 2010.
In allowing the taxpayer’s appeal, Woods JA found that Glenhuron have conducted its business principally with arm’s length persons, stating:
Parliament could not have intended that the foreign bank exclusion should be denied as a result of support and oversight provided by a parent corporation … .
[T]he vast majority of Glenhuron’s assets were invested in US denominated short-term debt securities, cross-currency swaps, and interest rate swaps … [which] generated by far the most income. Except for Loblaw’s supporting role discussed above, this business activity was conducted entirely with arm’s length persons.
In finding that what the Crown argued to be the “receipt side” of Glenhuron’s business, i.e., “the capital investments by the Loblaw group [,] were not part of Glenhuron’s conduct of business” she stated:
Applying the meaning of “business,” there is no reason to conclude that the capital invested by the Loblaw group would have occupied the time and attention of Glenhuron in any meaningful way. ...
[T]his approach is consistent with long-standing jurisprudence which draws a distinction between “capital to enable [people] to conduct their enterprises” and “the activities by which they earn their income” … .
Neal Armstrong. Summaries of Loblaw Financial Holdings Inc. v. Canada, 2020 FCA 79 under s. 95(1) - investment business - (a), s. 248(1) - business, General Concepts - Separate Existence and Statutory Interpretation - Reading in Words.