News of Note
Bourgault – Tax Court of Canada independently assesses whether a rectification judgment was “justifiably obtained”
Email this ContentThe written agreement for the purchase by the taxpayer of shares of a real estate corporation (“Quatre Saisons”) stated that the purchase price was to be satisfied by the payment to the vendor (“Placeval”) of 50%, then 30%, of the sales proceeds of real property of Quatre Saisons - and then sewed confusion by stating that such proceeds were to be paid to Placeval as commissions. Those percentage amounts in fact were paid by Quatre Saisons directly to Placeval and CRA assessed the taxpayer for shareholder benefits under s. 15(1). Two months after this assessment, the Quebec Superior Court issued an order for the rectification of the agreement to change the stated purchase price to $1. Before assessing, CRA was aware of the application for this judgment, but did not see fit to intervene, so that the Crown was not a party to the application.
Before granting the taxpayer’s appeal from the assessment, Favreau J first indicated that the Crown was not bound by the Court order “as neither the Attorney General of Canada nor the Minister was involved in the application,” and also found that the judgment was not “res judicata.” He nonetheless found that “The parties justifiably obtained the judgment of the Superior Court to rectify the situation” in light of evidence that from the outset they had been consistently treating (e.g., in their financial statements and in invoicing procedures for services performed) the payments made by Quatre Saisons to Placeval as commissions rather than sales proceeds.
Neal Armstrong. Summary of Bourgault v. The Queen, 2019 CCI 6 under General Concepts – Rectification.
CRA illustrates the effective date of the passive income rules for non-calendar year associated corporations
New s. 125(5.1)(b), which eliminates the business limit of a Canadian-controlled private corporation if it or associated corporations had significant passive income (a.k.a. “aggregate investment income”) in their taxation years ending in the preceding calendar year, is stated to apply to taxation years that begin after 2018.
CRA provided a further example at the Annual CTF Conference (to that in 2018-0771871E5) of the operation of the effective date. Holdco and Opco are associated and both have 12-month taxation years ending on 30 June 2019 and 2020. Holdco has investment income of $150,000 per year. CRA stated:
Opco would be first subject to the passive income reduction in its first taxation year beginning after 2018 (that is, Opco’s taxation year ending June 30, 2020). For its taxation year ending June 30, 2020, Opco would include the total of all amounts each of which is the adjusted aggregate investment income of Opco (for taxation year ending June 30, 2019) and Holdco (include the $150,000 of investment income for the taxation year ending June 30, 2019) that ended in the preceding calendar year (calendar year 2019).
Neal Armstrong. Summary of 27 November 2018 CTF Roundtable Q. 16, 2018-0780031C6 under s. 125(5.1)(b).
Poirier – Tax Court of Canada considers whether ETA s. 296(2.1) can be used to overcome the 2-year deadline for claiming the NRRP rebate
An individual (Poirier) applied for the new housing rebate on his purchase of a new condo unit even though he had already agreed to lease it out effective the closing date. When this claim was denied, he then applied (shortly before the notice of assessment denying the new housing rebate) for the new residential rental property (NRRP) rebate even though this application was made past the application deadline (being two years from the month of purchase).
Poirier referred to ETA s. 296(2.1), which generally requires CRA to take unclaimed rebates into account when assessing a taxpayer.
Smith J indicated that the jurisprudence was unclear whether s. 296(2.1) could be applied to require CRA to grant an offsetting credit for the NRRP rebate when it assessed Poirier to deny the new housing rebate – so that he did not foreclose the possibility that s. 296(2.1) could thereby overcome the two-year deadline. However, he found that such a use of s. 296(2.1) was precluded in this instance because of s. 296(2.1)(b), which provided that the rebate cannot be provided as a credit against the assessment if it has already been claimed by the taxpayer. Thus, it appears that Poirier might have been better off if he had not claimed the NRRP rebate, and then objected to the assessment denying the hew housing rebate on the basis that it should have been reduced by the NRRP rebate - although, this would still have been an uphill battle.
Neal Armstrong. Summaries of Poirier v. The Queen, 2019 TCC 8 under ETA s. 297(1), s. 254(2)(b), s. 256.2(7)(a), s. 262(1), s. 296(2.1) and Interpretation Act s. 32.
Income Tax Severed Letters 23 January 2019
This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Développements Béarence – Federal Court finds that CRA cannot require a taxpayer to reformat its information for CRA’s reading convenience
Grammond J had previously made an order pursuant to s. 231.2 that the taxpayer (“Béarence,” a land developer with numerous land sales and who had been undergoing a CRA audit) provide, within five days, an Excel file containing all the daily transactions for its 2012 to 2015 years and a report of transactions by each general ledger account for those years. In finding that Béarence could not now be found to be in contempt of court for not having provided these documents, Bell J accepted Béarence’s submission that CRA already had all the information it needed to perform its audit and stated):
[N]either the CRA nor this Court can impose the format in which this information must be provided to the CRA, as all the necessary information has already been provided.
Neal Armstrong. Summary of Canada (Revenu national) v. Les Développements Béarence Inc., 2019 CF 22 under s. 231.7(4).
Prima Properties – Tax Court of Canada finds that a taxpayer was not negligent in failing to ask its accountant about a change in use of its rental property
CRA assessed the taxpayer on the basis that there was a change in use of its rental property from commercial activity to exempt rental activity, when it started to rent the property to an NPO for homeless people, thereby triggering GST equal to the previously claimed input tax credits for the property. Paris J found that the Crown had failed to establish the basis for making this assessment beyond the four-year statute-barring period.
First, no “misrepresentation” had been established, as the Crown had failed to establish that in fact the users of the facility had exempt leases or licences, i.e., for continuous occupancy of over one month.
Second, there was no “carelessness” or “neglect.” The taxpayer’s principal, as a lay person, could not be expected to recognize the issue of triggering a change of use – and to expect him “to initiate a discussion with [the company’s accountant] concerning the possible application of a highly technical provision of the Act would be to hold him to an unrealistically high standard of care.”
Finally:
Aridi … found that it was not sufficient to show negligence on the part of the taxpayer’s professional advisor in making the misrepresentation, and that the taxpayer must also be shown to have acted in a negligent or careless manner.
Neal Armstrong. Summary of Prima Properties (92) Ltd. v. The Queen 2019 TCC 4 under ETA s. 298(4)(a).
BH Parkway – Tax Court of Canada finds that a statutory penalty received by a landlord from a defaulted tenant was exempt from HST – and that a Mercedes SUV was not capped at $30K
A tenant (Trillium College) of a commercial landlord (BH Parkway) vacated the premises in breach of the terms of the lease. BH Parkway sued and there was a settlement agreement pursuant to which it received damages. Obviously, such damages were subject to ETA s. 182, so that the full amount of the damages was deemed to be inclusive of HST. However, that which is obvious may not be correct.
The heads of claimed damages of BH Parkway included $500,000 for the value of the goods removed by Trillium College of at least $250,000 together with a penalty pursuant to s. 50 of the Commercial Tenancies Act equal to 100% of such value. This penalty was intended to penalize in the situation of “a tenant in removing its goods from a premise to defeat a landlord’s ability to distrain them.”
D'Auray J found that such a penalty would be paid “as a consequence of the operation of a provincial statute rather than as a consequence of the breach of the lease.” Since the $250,000 penalty claimed represented 33% of the total amount claimed, on a pro rata basis, s. 182 applied only to 67% of the actual amount of damages received in the reporting periods in question, so that 33% of the damages were received free of HST.
D'Auray J also accepted evidence that BH Parkway had purchased a $73,000 Mercedez Benz SUV in order to permit its principal to move goods to and from business premises. On this basis, it was not an “automobile,” whose ITA definition (applicable also for ETA purposes), excluded a “van or pick-up truck, or a similar vehicle” (interpreted by CRA to include an SUV) “the use of which … is all or substantially all for the transportation of goods, equipment or passengers in the course of gaining or producing income.” Accordingly, its cost was not limited for input tax credit (or, presumably, CCA) purposes to $30,000.
Neal Armstrong. Summaries of BH Parkway Place Ltd. v. The Queen 2019 TCC 7 under ETA s. 182(1) and s. 201.
6 further translations of CRA interpretations are available
We have published the final 3 translations of 2012 APFF Roundtable questions as well as translations of 3 interpretations released in October 2012. Their descriptors and links appear below.
These are additions to our set of 759 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¼ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
GE Energy Parts – High Court of Delhi finds that GE U.S. companies had a PE in India based on the intensive involvement of their employees in India in contact negotiations
Various non-resident General Electric companies employed non-resident employees (the “expatriates”) in an office in India to secure customers and negotiate contracts with them. Bhat J found that as this was an intensive process, their services were not merely of “a preparatory or auxiliary character,” and the office constituted a fixed place of business and, thus, a permanent establishment for purposes of the India-U.S. Convention.
As with some other Indian PE cases, the facts are quite unclear, including the respective work performed by the expatriates and by an Indian subsidiary which had local Indian employees. Bhat J appeared to find (somewhat at odds with his finding above) that the Indian subsidiary was also an agency PE of the non-resident GE companies given that it was considered through its Indian employees or (somehow) the expatriates to have an extensive involvement in the negotiation of the contracts.
Bhat J accepted a finding below that, in the absence of any evidence of the profits generated from the sales in India, they should be estimated at 10% of such sales, and that 26% of this profit was attributable to the operations carried out by the PE in India.
Neal Armstrong. Summary of GE Energy Parts Inc. v. Commissioner of Income Tax (International Taxation), ITA 621/2017, 21 December 2018 (High Court of Delhi) under Treaties – Income Tax Conventions – Article 4.
Delia – Court of Quebec finds that a director showed due diligence in relying on accounts for his corporation that did not show a remittance obligation
The ARQ commenced a QST audit of a corporation (Motostar) after its voluntary dissolution by its sole individual shareholder (Delia) and assessed Motostar for some unremitted QST – and then assessed Delia for the same amount under the Quebec equivalent of ETA s. 323(1) (and ITA s. 227.1(1).) Cameron JCQ found that the assessment of Motostar was void given that the equivalent provision in the Quebec BCA to CBCA s. 226(2) did not (unlike s. 226(2)) provide that a proceeding may be brought against the dissolved corporation within X years after its dissolution, and instead merely provided that “judicial or administrative proceedings to which the corporation was a party” are continued against its shareholder on the dissolution. (As noted, the “administrative proceedings,” i.e., audit, were commenced after the dissolution.)
Nonetheless, the assessment against Delia was valid but for the due diligence defence given that the Quebec equivalent of ETA s. 323(2)(b) (and of ITA s. 227.1(2)(b)) merely required that the corporation have been dissolved (or was in the process of dissolution proceedings) and did not require that a claim for the corporation’s liability have been proved. (The ARQ dropped an argument that Delia also was liable under the BCA for the QST in his capacity of shareholder of the dissolved corporation.)
In finding that the due diligence defence was made out, Cameron JCQ indicated that it was reasonable in the circumstance for Delia to rely on his accounting staff and to treat the accounts of Motostar, which at the time of its winding-up did not disclose any QST liability, as if they were accurate.
This case, for example, supports the view that the director of a corporation - which has been attentive to its tax reporting obligations but mistakenly missed a withholding tax obligation, e.g., under Part XIII - has a due diligence defence in relying on the corporation’s accounting staff (cf. 2015-0622751I7).
Neal Armstrong. Summaries of Delia v. Agence du revenu du Québec, 2018 QCCQ 9487 under CBCA, s. 226(2), ETA s. 323(1) and s. 323(3).