News of Note
Income Tax Severed Letters 31 July 2019
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that the winding-up of a labour union gives rise to capital gains to the union members
A union that was eligible for the s. 149(1)(k) exemption and that had been collecting union dues, ceased to be the accredited bargaining agent for the employer, as a result of which it is being wound-up and will be distributing its remaining assets to its members as required under its articles. CRA ruled that the amount so paid to the members will constitute proceeds of disposition of their rights as members in the union, thereby resulting in a capital gain.
Neal Armstrong. Summary of 2019 Ruling 2018-0779221R3 F under s. 149(1)(k).
CRA expands its GST/HST Memorandum on Passenger Transportation Services
CRA has more than doubled its GST/HST Memorandum on passenger transportation.
Much of the additional material relates to expanding the discussion to include the provincial place-of-supply rules, covering some new rules, e.g., the revised municipal transit rules and the ride-sharing rules, and expanding the examples provided. It has ported some of its positions on the transportation zero-rating provisions into the place-of-supply arena, e.g., its positon that a scheduled stop of less than 24 hours generally will not be a “stopover.”
Neal Armstrong. Summaries of GST/HST Memorandum 28.3 Passenger Transportation Services July 2019 under ETA Sched. V, Pt. VI, s. 24, Sched. VI, Pt. VII, s. 1 – stopover, continuous journey, s. 2, s. 3, x s. 5, Sched. IX, Pt. VI, s. 4.1, New Harmonized Value-Added Tax System Regulations, s. 21, s. 22(1), s. 23, ETA s. 123(1) – taxi business.
Kim – Federal Court of Appeal indicates that a taxpayer may not be able to avoid a s. 163(2) penalty even where the Crown does not have its own witnesses
The taxpayer, who had claimed substantial fictitious business losses based on an unintelligible theory espoused by the “Fiscal Arbitrators” tax preparers, stated at the outset of the trial that the only issue being pursued by him was the gross negligence penalties. The Tax Court Judge then incorrectly told the taxpayer that he had the burden of convincing the Court that the facts underlying the penalty assessment were incorrect. After thus being misled by the Court, the taxpayer presented oral testimony of himself and the creator of Fiscal Arbitrators, before his appeal was dismissed.
Webb JA noted that if the taxpayer had remained seated rather than proffering this testimony, there would have been no evidence for the Crown to have satisfied its s. 163(3) onus. He nonetheless did not direct a fresh trial, applying the principle in Mercure, 2013 FCA 102 that:
The mere fact that a breach of procedural fairness occurred is enough to warrant a new trial. This general rule has only one exception, which is the case in which the question before the court has an inevitable answer.
If the taxpayer had not testified on his own account, the Crown could have compelled him to stand up as a Crown witness which, given the extreme facts, would have been sufficient to sustain the penalty.
Neal Armstrong. Summaries of Kim v. Canada, 2019 FCA 210 under s. 163(3) and Rule 135(2).
9 more translated CRA interpretations are available
We have published a CRA interpretation released last week, another two released in the previous week, and a further 6 translations of CRA interpretations released in November, 2011. Their descriptors and links appear below.
These are additions to our set of 918 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. Next week is the “open” week for August.
CRA revises its Folio on capital dividends to address the CDA/55(2) interface
CRA has revised its Folio on capital dividends to reflect the position it reached in 2018-0780071C6. Para. 1.30 now states:
1.30 Where a deduction under subsection 112(1) is permitted on a dividend that results from an increase in paid-up capital, subparagraph 53(1)(b)(ii) prevents what may be described as the non-safe income portion of the dividend being added to the cost of the share on which the dividend was received. However, when such dividend is subject to the application of subsection 55(2), it is considered that a deduction under subsection 112(1) was not permitted in respect of that dividend and there is no denied increase in cost under subparagraph 53(1)(b)(ii).
CRA provides similar comments respecting the absence of a denied increase under s. 52(3)(a)(ii)(A)(II) where s. 55(2) has applied.
CRA has expanded its comments on the CDA adjustments respecting life insurance policies in light of the 2016 amendments.
Neal Armstrong. Summaries of revised S3-F2-C1 under s. 53(1)(b)(ii), s. 52(3)(a)(ii)(A)(II) and s. 89(1) – capital dividend account – (d).
1378055 Ontario – Tax Court of Canada allocates invoices between commercial and exempt activities based on general oral testimony
Individuals within the same extended family and a corporation controlled by family trusts sent vaguely worded invoices to a family company (the appellant, or “137ON”) for services rendered, without giving any allocation between the portion that related to 137ON’s exempt activity of earning exempt residential rentals, and its commercial activity of trying to get one of the residential sites developed as a commercial storage site. Sommerfeldt J concluded on the basis of relatively sparse oral testimony on this point that 75% of the invoices rendered (other than invoices rendered by a family member who was responsible for administering the residential rental activity and whose services were found to be only 25% commercial) related to the commercial development activity (which did not particularly progress in the years in question) rather than to the exempt residential rental activity, so that, subject to invoice-documentation issues, input tax credits were available as to the indicated percentages.
Respecting the form of the invoices, he found that it was not necessary to spell out payment terms (notwithstanding the requirement in s. 3(c)(iii) of the Input Tax Credit Information GST/HST) Regulations to this effect) given that there was an implied payment term:
[I]f a contractual document (which presumably includes an invoice) does not state express terms of payment, the fee or price that is the subject of the invoice is payable in cash currently or perhaps within a reasonable time.
However, the failure of some invoices to state the HST registration number of the supplier was fatal to the claiming ITCs for those invoices.
Implicitly, he found that the vague invoice descriptions of the services rendered (e.g., “administration, consultation and management services”) was sufficient to satisfy s. 3(c)(iv) of such Regs.
Neal Armstrong. Summaries of 1378055 Ontario Limited v. The Queen, 2019 TCC 149 under ETA s. 141.01(2), s. 169(1) – B(b), Input Tax Credit Information GST/HST) Regulations s. 3(c)(iii) and s. 3(b)(i).
CRA considers that a corporation with no listed shares can satisfy the Reg. 4800(2)(a)(i) test that more than 90% of its listed shares be held by insiders
Pubco was a corporation that was now closely held but nonetheless was deemed to be a public corporation under s. 87(2)(ii) given that it resulted from the amalgamation of a public corporation and another predecessor. However, at no time since that amalgamation had any class of its shares been listed on a designated stock exchange in Canada (or qualified for distribution to the public). This created a problem for its ability to elect under (c)(i) of the definition of “public corporation” in s. 89(1) to cease to be a public corporation - which was that it did not literally satisfy the requirement in Reg. 4800(2)(a)(i) that “insiders of the corporation shall hold more than 90 per cent of the issued and outstanding shares of each class … that was, at any time after the corporation last became a public corporation, listed on a designated stock exchange in Canada [or of designated surrogate qualified-for-distribution shares under Reg. 4800(2)(a)(ii)].” The problem of course was that there were no such listed (or qualified) shares of Pubco to which the 90% test could be applied. Can 90% of 0 be greater than 0?
CRA however took a “liberal” approach and ruled that the election could be made, so that on the subsequent further amalgamation of Pubco, the resulting Amalco was not tainted as a public corporation under s. 87(2)(ii) (which, in turn, meant that PUC could be distributed to non-resident shareholders of Amalco without withholding tax.)
Neal Armstrong. Summary of 2018 Ruling 2018-0752531R3 under Reg. 4800(2)(a).
Eyeball Networks - Tax Court of Canada finds that a promissory note that was backed only by intercompany debt was worthless
“Oldco,” which had both a largely defunct and worthless business (the “old business”) and a business valued at $30M (the “new business”), implemented a spin-off of the new business to a corporation (“Newco”) incorporated by its sole individual shareholder. The spin-off mechanics were conventional, and at their conclusion, there were two promissory notes for $30M owing by Oldco and Newco to each other – which then were set-off. Newco was assessed under s. 160 for a reassessment that had been made of Oldco following the spin-off.
Bocock J accepted that all the transactions up to the set-off entailed value-for-value exchanges, so that these entailed no transfer to which s. 160 applied. However, he found:
The FMV of the Oldco Note held and owned by Newco was nominal in any fair market for such negotiable bills.
Accordingly, he found that there was a transfer of property for insufficient consideration to which s. 160 applied at the time of the set-off transaction.
The $30M note owing by Oldco was supported, in turn, by the $30M note owing to it by Newco, which indeed had $30M of independent assets. He implicitly appeared to consider that since the only value underlying the $30M Oldco note was as described above, rather than there being independent asset backing, that the Oldco note only had nominal value.
Neal Armstrong. Summary of Eyeball Networks Inc. v. The Queen, 2019 TCC 150 under s. 160(1).
Masson – Federal Court finds CRA reasonably declined to grant a late s. 85 election
In finding that it was reasonable for CRA to deny the taxpayer’s request to file a late s. 85(1) election respecting transfers made by him quite a number of years previously, Roussel J stated:
Considering that no evidence was presented to show the initial intention to proceed by rollover under subsection 85(1) of the ITA and that the errors of a third party do not constitute circumstances that justify a late election, it was open to the Minister’s representative to exercise her discretion to deny Mr. Masson’s late election.
Neal Armstrong. Summary of Masson v. Canada (Attorney General), 2019 FC 887 under s. 220(3).