News of Note
CRA indicates that a s. 88(1)(d) late designation could be made for a statute-barred year that CRA was assessing within the expanded cross-border reassessment period
Email this ContentS4-F7-C1, para. 1.40 indicates that it does not allow a late-filed s. 88(1)(d) designation where the particular eligible property to be bumped was disposed of in a taxation year that was statute-barred. CRA has now relaxed this position in the situation where:
- The Canadian Acquireco formed by a non-resident acquired all the shares of a Canadian public-company target (whose assets included the shares of a U.S. sub) and amalgamated with it.
- The Amalco then sold the shares of the U.S. sub to a non-resident affiliate, and did not make the s. 88(1)(d) designation at the first taxation year end following the amalgamation (“year-end #1”) because a professional appraisal indicated that there was no gain on those shares.
- The TSO proposed to reassess that sale (beyond the normal reassessment period but within the extended s. 152(4)(b)(iii period) by substantially increasing the proceeds of disposition of those shares.
After quoting from Nassau Walnut to the effect that a late designation was acceptable where the situation “does not raise the spectre of retroactive tax planning,” the Directorate stated:
[I]f the CRA has the ability to reassess the Taxpayer’s Part I income tax return for year-end #1 pursuant to subparagraph 152(4)(b)(iii) with respect to its disposition of the … US shares … the Taxpayer’s late-filed designation request could be considered.
Neal Armstrong. Summary of 30 May 2019 Internal T.I. 2019-0806761I7 under s. 88(1)(d).
Income Tax Severed Letters 14 August 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
SLFI Group – Federal Court of Appeal finds that the Invesco group successfully reduced their HST-taxable management fees by having a third party take over the funding of broker commissions
A non-resident bank (Citibank) agreed to fund the payment of the upfront brokerage commissions that were payable on the issuance of units in the Invesco/Trimark funds (the “Funds”) in consideration for receiving an assignment of a portion of the amounts that otherwise would have been earned by the Invesco manager as management fees. More precisely, the manager agreed to reduce its management fees (i.e., reduce its percentage charge of NAV), and the Funds agreed to pay the same percentage amounts to a special purpose non-resident Citibank-formed vehicle (“Funding Corp”) essentially in consideration for Funding Corp paying the brokerage commissions. Funding Corp then immediately sold its fee-amount entitlements to Citibank.
The Tax Court had essentially found that taking care of the brokerage commissions was part and parcel of the management duties of the manager, and that delegating that duty to Funding Corp did not detract from its performance being a management function. Therefore, the consideration paid by the Funds to Funding Corp was tainted as Funding Corp was providing a management service.
Woods JA found that history is bunk, i.e., it was irrelevant that what Funding Corp was receiving was in a sense in lieu of what previously had been paid by the Funds as management fees. She stated:
[T]he character of the supply is determined by its dominant element, which … is in the nature of a financing service provided by third party financial institutions.
The amounts paid by the Funds to Funding Corp were for an exempt “financial service” under para. (a) or (l) of the definition.
Although the facts grounding this finding in this case were unique, Woods JA made a finding with broader ramifications, namely that the denial under s. 261(2)(b) of the right to claim a rebate for tax that has been assessed applied even where it is another person to whom the assessment was issued.
Neal Armstrong. Summaries of SLFI Group v. Canada, 2019 FCA 217 under ETA s. 123(1) financial service – para. (l), para. (q), s. 261(2)(b) and Statutory Interpretation - Interpretation Act, s. 8.1.
Moose Factory – Tax Court of Canada finds that arrangements were not structured to give rise to a debt
After quoting the statement in Sattva that “While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement,” Owen J found that, contrary to the taxpayer’s understanding of the arrangements as reflected in its financial statements, the arrangements at issue had not in fact been structured so as to give rise to a debt owing to the taxpayer by a corporation that subsequently became bankrupt. Hence, no business investment loss (or capital loss).
Neal Armstrong. Summary of Moose Factory Restaurant Properties Ltd. v. The Queen, 2019 TCC 156 under s. 39(1)(c)(iv) and s. 12(11) – investment contract.
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 November, 2011 (all of them, from the October 2011 APFF Roundtables). Their descriptors and links appear below.
These are additions to our set of 933 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 3/4 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Royer – Court of Quebec finds that the principal residence did not include the portion thereof occupied by the grandmother performing an essential care function
Similarly to the federal principal residence exemption, the Quebec exemption requires that “the housing unit is ordinarily inhabited in the year by the individual, his spouse or former spouse or his child.” The house of the taxpayers (a couple with two children, one of them disabled) had a basement apartment that was occupied by the grandmother in order to enable her to take care of the disabled child on a full-time basis. Boutin JCQ found that, because the rest of the family essentially did not use this basement apartment (it was almost exclusively the private quarters of the grandmother), the portion of the capital gain realized by the couple on the sale of their house that was allocated by the ARQ to the basement apartment was not eligible for the exemption.
A second issue related to the fact that, on the sale, the taxpayers were granted a usufruct by the purchaser, which permitted them to continue using the residence for nine years, and with somewhat under half of the purchase price not coming due until this usufruct expired. Boutin JCQ rejected the taxpayers’ argument that because they had this usufruct following the sale, therefore they had not yet disposed of the property.
Neal Armstrong. Summary of Royer v. Agence du revenu du Québec, 2019 QCCQ 4163 under s. 54(1) – principal residence - (a) and s. 248(1) – disposition.
Connolly – Tax Court indicates that there may be no authority for a Notice of Confirmation to pass on subsequent taxation years
Before going on to grant the taxpayer’s claim for a disability tax credit for her 2014 taxation year (but not the three earlier years), Jorré DJ noted that the Minister in her Notice of Confirmation had indicated that the taxpayer was eligible for the DTC for her 2015 and later years even though the Notice of Confirmation was dated before her filing-due date for her 2015 year, and stated obiter:
[I]t would be surprising if on a proper interpretation the relevant statutory provisions gave the Minister the power to make a determination with respect to future eligibility. However, I can see nothing that would prevent the Minister from determining that the person was eligible in certain past years and informing the person that the Minister’s present intention was to assume that the person would continue to be eligible for certain future years.
Neal Armstrong. Summary of Connolly v. The Queen, 2019 TCC 160 under s. 118.3(1)(b).
CRA clarifies that for TOSI excluded-share purposes, a services business can generate revenue from both goods sold and services performed from the same customer on the same job
CRA has provided fresh examples of the calculation of the 90% services test in (a)(i) of the "excluded share" definition in the tax on split income (TOSI) rules. To mention two of the six examples:
- Where a corporate cleaning business “separately” sells cleaning supplies to some of its customers, but also consumes cleaning supplies in performing its cleaning services, revenues from the former will be respected as not belonging to services revenue, whereas the latter will be included in the services revenue even if charges therefor are separately identified in its invoices.
- A corporation, that constructs and repairs decks, charges for its materials and labour for each job. Its services revenue is determined by backing out its charges for materials from its total revenues.
Neal Armstrong. Summary of Tax on split income – Excluded shares (CRA webpage), 10 July 2019 under s. 120.4(1) – excluded shares – (a)(i).
CRA indicates that a dissolved corporation can be a “participating employer” in an RPP
Where more than one employer participates in a registered pension plan, s. 147.2(2)(a)(vi) requires that the assets and actuarial liabilities be apportioned in a reasonable manner among the participating employers in respect of their employees and former employees. CRA considers that for this purpose and other uses of the concept of a participating employer, an employer is considered to be a participating employer even if it has been dissolved or otherwise ceased to exist. Thus, in the example of the application of s. 147.2(2)(a)(vi), RPP assets and liabilities continue to be apportioned to the dissolved employer.
Neal Armstrong. Summary of 26 June 2019 Internal T.I. 2019-0791761I7 under s. 147.2(2)(a)(vi) and Statutory Interpretation – Interpretation Act, s. 33(3).
Gekas – Federal Court finds that CRA’s denial of relief from penalty tax on TFSA over-contributions relating to errors of the financial institution was unreasonable
S. 207.06(1) indicates that the Minister may waive the tax on an excess TFSA contribution where “the individual establishes to the satisfaction of the Minister that the liability arose as a consequence of a reasonable error” and the excess (together with any income thereon) is distributed “without delay.” The individual made two excess contributions of $10,000 each to his TFSA in 2016 due to his financial institution garbling instructions that he had given. Immediately on finding out about these over-contributions (when he was assessed by CRA), he withdrew those excess amounts.
Boswell J remitted the matter for redetermination by a fresh CRA delegate, stating:
[T]he Delegate’s decision is unreasonable because it did not fully assess the extent to which the excess contributions resulted from the mistakes of persons other than the Applicant.
Neal Armstrong. Summary of Gekas v. Canada (Attorney General), 2019 FC 1031 under s. 207.06(1).