News of Note
CRA considers that “income” under the related business income test in (c) of “excluded shares” includes taxable capital gains without reduction for allowable capital losses
Email this ContentPara. (c) of the excluded share definition contains a requirement that all or substantially all of the income of the corporation for the most recent year is “income” that is not derived, directly or indirectly, from related businesses in respect of the specified individual (other than of the corporation itself). Although in 2018-0743961C6 indicated that that “income” in para. (c) refers to gross income, being generally that amount which would come into income for taxation purposes, CRA has now indicated that in the situation where the corporation has realized capital gains and capital losses in the year, the amount that goes into its “income” for para. (c) purposes is the amount of the taxable capital gains for the year without any deduction for allowable capital losses realized in the year.
Although CRA acknowledges that the amount that is included in income under s. 3(b) of the Act is the net taxable capital gains (i.e., as reduced by the allowable capital losses for the same year), CRA considers that looking only at the “gross” taxable capital gains for the year generally conforms with the 2018-0743961C6 approach.
Neal Armstrong. Summary of 4 May 2019 External T.I. 2019-0802331E5 under s. 120.4(1) – excluded share – para. (c).
Income Tax Severed Letters 10 July 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
National Car Parks – Court of Appeal of England and Wales finds that car park machines that did not refund coin payments thereby received extra consideration for VAT purposes
A customer pays for parking in a car park by going to the ticket machine which, on its tariff board, displays a price for one hour of £1.40 – but also states that change is not given. She deposits £1.50 in coins into the machine, which flashes up 'press green button for ticket', which she does. The amount paid is printed on her ticket, as is the expiry time of one hour later. The customer displays the ticket in her car and leaves the car park.
In finding that the consideration received by the car park owner (NCP) for VAT purposes was £1.50, and rejecting NCP’s submission that £0.10 was a gratuitous payment, Newey LJ stated:
The best analysis would seem to be that the contract was brought into being when the green button was pressed. On that basis, the pressing of the green button would represent acceptance by the customer of an offer by NCP to provide an hour's parking in return for the coins that the customer had by then paid into the machine. At all events, there is no question of the customer having any right to repayment of 10p. The contract price was £1.50.
Neal Armstrong. Summary of National Car Parks Ltd v Revenue and Customs [2019] EWCA Civ 854 under ETA s. 123(1) – consideration.
Promised Land Ministries – Tax Court of Canada finds that charity’s failure to generate receipts for Christian mission work in “cash economies” justified a one-year suspension
After poor record-keeping was identified on audit, a registered charity (PLM) entered into a compliance agreement with CRA. In a follow-up desk audit of a subsequent PLM taxation year, CRA asked for receipts to support expenses shown for missions to Africa and Europe (mostly, Poland, the pastor’s country of origin). After no receipts were provided (but with protestations that with improved accounting help such deficiencies would no longer occur), CRA determined to suspend PLM’s receipting privileges and qualified donee status for one year pursuant to s. 188.2(2)(a). At the Notice of Objection stage, PLM provided some documentary support for about half of the mission expenditures.
In rejecting PLM’s submission that a one-year suspension was too harsh a consequence in the circumstances, Lyons J indicated that difficulties in securing receipts in “cash economies” did not justify the failures, and stated:
[T]he breach justifies the lesser sanction of the Suspension especially since there has been repeated non‑compliance involving receipts for expense amounts for activities outside Canada, it could only account for half of such expenses and the production of documentation and such receipts were not timely and the fact remains that PLM has still not produced all such receipts … .
Neal Armstrong. Summary of Promised Land Ministries v. The Queen, 2019 TCC 145 under s. 188.2(2)(a).
The broad Canadian concept of series should not inform the implicit concept of series in the MLI’s PPT
A key component of the principal purpose test in the MLI references obtaining a benefit as “one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.” In this regard, the authors conclude:
[W]hile the expression “arrangement or transaction” as used in the PPT is broad enough to include a series of transactions, for this purpose a “series” must be given its ordinary and natural meaning (i.e., pre-ordained or pre-ordered transactions that can be construed as a single composite transaction)… [and] the extended meaning of series under the ITA, as set out by the SCC … should not be relevant … .
Neal Armstrong. Summary of Michael N. Kandev and John J. Lennard, “Interpreting the Expression “Arrangement or Transaction” in the Principal Purpose Test of the MLI,” International Tax (Wolters Kluwer CCH), June 2019, No. 106, p. 1 under Treaties – MLI – Art. 7(1).
Gagnon – Quebec Court of Appeal allows class action to proceed against Amazon for “deceptively” collecting GST/QST on exempt product sales
The class-action plaintiffs sought damages equal to the GST and QST that had been erroneously charged to them on their purchases from the defendant (Amazon). The two year period for applying to the ARQ for a refund under ETA s. 261 (and under the Quebec equivalent) had expired. The plaintiffs alleged that the Amazon invoices were “deceptive,” and relied on s. 227.1 of the Consumer Protection Act (Quebec) (“CPA”), which provided:
No person may, by any means whatever, make false or misleading representations concerning the existence, charge, amount or rate of duties payable under a federal or provincial statute.
Marcotte JCA accepted that the Quebec Superior Court would have had no jurisdiction to consider this claim if it was merely “a disguised attempt to receive a tax refund to which the [class action] members no longer have a right.” However, before allowing the claim to proceed, she stated:
[T]o the extent that the alleged failure relates to a deceptive invoicing practice contrary to the CPA, and not simply to the collection of taxes on exempt products, I consider that the Superior Court remained competent to be seized of such action.
It is unclear what it was about Amazon’s tax-related disclosure on its invoices for exempt products that was alleged to be “deceptive” [“trompeuse”].
Neal Armstrong. Summary of Gagnon v. Amazon.com Inc., 2019 QCCA 1166 under ETA s. 261.
We have over 900 full-text translations of CRA Interpretations
We have published a further 6 translations of CRA interpretations released in December and November, 2011. Their descriptors and links appear below.
These are additions to our set of 903 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 2/3 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2011-12-02 | 24 November 2011 External T.I. 2011-0416791E5 F - Shareholder Benefit | Income Tax Act - Section 15 - Subsection 15(1) | payment by Opco of whole life insurance premiums on policy of which it is beneficiary, but sole shareholder is holder, generates s. 15 benefit – but not policy loan advance |
| 21 November 2011 External T.I. 2011-0416881E5 F - Late-filed designation - paragraph 88(1)(d) | Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) | provided year of property disposition not-statute-barred, CRA generally will accept a late designation allocating s.88(1)(d) excess pro rata amongst the eligible properties | |
| 22 November 2011 External T.I. 2011-0420451E5 F - Canadian resource property | Income Tax Act - Section 66.2 - Subsection 66.2(5) - Canadian development expense - Paragraph (e) | farm-in policy inapplicable where an option that might not be exercised: CDE addition as cash and exploration expenditures made | |
| 31 October 2011 External T.I. 2011-0422981E5 F - Whether property is eligible for a bump | Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(v) | properties not bumpable as the subsidiary control was deemed by s. 88(1)(d.2) to be acquired at the same time as it acquired the properties | |
| Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(vi) | bump unavailable given previous non-arm's length acquisition | ||
| Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d.2) | properties not bumpable as not owned at subsidiary's formation by related person | ||
| 2011-11-25 | 7 October 2011 Roundtable, 2011-0411911C6 F - Exploitation entreprise par SP | Income Tax Act - Section 96 | Quebec partnership need not carry on business |
| Income Tax Regulations - Regulation 2601 - Subsection 2601(1) | property income of partnership is taxable only to partner (as to its share) in its province of residence | ||
| 7 October 2011 Roundtable, 2011-0411831C6 F - Définition du mot mois | Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share - Paragraph (b) | individual required to have held shares for 24 months plus one day to and including day of the determination time | |
| Statutory Interpretation - Interpretation Act - Section 35 | 24-month period preceding time on Date X interpreted as extending back 24 months from the day before Date X |
Gordon – Federal Court notes that in theory a genuine belief that records falsification was a legitimate accounting practice might be a defence to charges under s. 239(1)(c)
A company (“JAD”) that promoted itself as an SR&ED specialist firm, created backdated records in support of R&D claims that it and its principals (Deacur and Gordon) made on behalf of numerous clients. Deacur and Gordon were committed to stand trial, but the prosecution ended when Crown counsel entered a stay of proceedings. Deacur and Gordon, and JAD, brought an action for damages for inter alia malicious prosecution. CRA had failed to understand that backdating records was an acceptable accounting practice, and that the prosecution had no chance of success.
Before dismissing their actions, Barnes J stated:
Messrs. Deacur and Gordon are perhaps fortunate that the Crown elected to stay their prosecution. The actus reus of a fraud was clearly present. Based on JAD’s widespread use of misleading backdated records and an untenable taxation theory, an inference of a guilty intent could also have been reasonably drawn. … [T]he only argument potentially available to them was one that was successfully employed in R v Patry, 2018 BCSC 1524 [which stated]:
... [D]espite my conclusion that Mr. Patry's tax strategy was flawed, I conclude that it is at least possible that Mr. Patry believed he had formulated a viable tax strategy. He cannot be convicted for being wrong, only for knowingly being wrong. ...
The fact that mens rea might have been negated in the prosecution of Messrs. Deacur and Gordon based on a wholly untenable but mistaken belief that their methods were sound does not, however, lead to a conclusion that the prosecution was legally unsound. … [T]he investigation was thorough, fair, objective and competently carried out.
Neal Armstrong. Summaries of Gordon v. Canada, 2019 FC 853 under s. 239(1)(c) and General Concepts – Malicious Prosecution.
CRA announces that it successfully applied transfer pricing penalties to an inbound hybrid loan
CRA provided a cryptic diagram portraying a borrowing by Canco of, say, $100M from U.S. parent (a C Corp) at, say, 10% interest, with Canco funding the cash interest payments of $10M p.a. through the receipt of those sums as prepayments under agreements for the forward sale of treasury shares by it to a U.S. LLC subsidiary of U.S. parent (which, in turn, funds the payments by LLC under the prepaid forwards by annually contributing $10M to LLC). This arrangement presumably was targeted to not generate interest income in the U.S., and an interest deduction to Canco.
After noting that it had “resolved a file regarding a hybrid mismatch arrangement involving the deduction of non-arm’s length interest in a series of transactions that included a forward subscription agreement (outlined in the diagram …) on the basis that paragraphs 247(2)(b) and (d) … and transfer pricing penalties applied,” CRA stated:
It is the CRA’s general view that such transactions are undertaken primarily to obtain a tax benefit and that they would not be undertaken by parties dealing at arm’s length. When the CRA finds transactions similar to the example …, the Transfer Pricing Review Committee will be consulted regarding the application of paragraphs 247(2)(b) and (d). Where these paragraphs apply, related transfer pricing penalties will generally apply on the basis that taxpayers engaging in this type of tax planning did not use reasonable efforts to use arm’s length prices, terms and conditions in their transfer pricing.
This is odd. Once CRA acknowledges that interest on the loan is deductible and that the only issue is whether the interest rate exceeds the arm’s length standard, the fact that Canco used commercially unusual arrangements to fund its interest payments becomes irrelevant. The question as to whether s. 247(2)(d) can or should be applied here to rejigger the loan terms so as to support CRA arguments for a lower arm’s length rate is no different here than where there is a plain vanilla inbound unsecured "covenant lite" loan. As to whether the interest rate should reflect implicit parent credit support, see General Electric, ENMAX and Chevron, see also McKesson.
Neal Armstrong. Summary of CRA Notice to Tax Professionals, 7 July 2019 under s. 247(2)(d).
CRA has revised its policy on employee merchandise discounts at the Minister’s request
At the Minister’s request, Folio S2-F3-C2 (on employee benefits) was removed in October 2017 from the CRA website, and CRA “drafted new wording” respecting employee discounts on merchandise.
The revised folio continues to undergo additional review as per our internal procedures. During the review period, the CRA continues to administer employee discounts on merchandise in accordance with the administrative policy outlined in Guide T4130, Employers Guide – Taxable Benefits and Allowances … .
Neal Armstrong. Summary of 4 December 2018 TEI Roundtable Q. E2, 2018-0782361C6 under s. 6(1)(a).