News of Note
CO2 Solution Technologies – Tax Court of Canada finds that a declaration of trust requiring the trustees to be the Pubco directors gave Pubco de jure and de facto control of a trust investment
Email this ContentA high-tech public company (CO2 Public) carried on its SR&ED through a private company (CO2 Technologies) that was held by a discretionary trust whose beneficiaries were CO2 Public and special-purpose subsidiaries thereof. Smith J found that CO2 Technologies was a “a corporation controlled, directly or indirectly in any manner whatever” by a public corporation (CO2 Public) and, thus, was not a Canadian-controlled private corporation (CCPC) – even before getting to the one-sided terms of the research agreement between the two corporations.
Of particular interest was a provision in the Declaration of Trust, that provided that each trustee was required to be a director of CO2 Public. Smith J found that this provision, by itself, was sufficient to give CO2 Public de jure control, i.e., the Declaration of Trust could be looked to for such purposes in the same manner as the constating documents of CO2 Technologies. Smith J went on to find that this provision also constituted “a legally-enforceable agreement whose object was to assure the control of the appellant by a public corporation, within the meaning of subsection 256(5.1).” Furthermore, the research agreement was similar to the development agreement in Aeronautics, which was found in that case to “constitute … a legally-enforceable arrangement capable of establishing de facto control under subsection 256(5.1)” – and the facts here were similar to Lyrtech and Solutions Mindready.
Respecting the argument, in the alternative, of the Crown, that the declaration of trust constituted an agreement referred to s. 251(5)(b)(i) and, having regard to there being a discretionary trust, s. 248(25) deemed CO2 Public to be beneficially interested in CO2 Trust, Smith J stated that although it was unnecessary for him to address this argument:
It appears to me however that this Court is bound by the decision … in … Propep.
Neal Armstrong. Summary of CO2 Solution Technologies Inc. v. The Queen, 2019 CCI 286 under s. 127(1) - Canadian-controlled private corporation – (a).
Auditors should not analyze a reasonable return for TOSI purposes if the taxpayer has made a good faith attempt
An excluded amount for tax on split income (TOSI) purposes includes, where the specified individual has attained age 24, a “reasonable return” in respect of the individual. Paul Wilson (Director, Medium Business Audit Division, Small and Medium Enterprises Directorate) elaborated on the statement in 2018-0771851E5 that “CRA does not intend to generally substitute its judgment of what would be considered a reasonable amount where the taxpayers have made a good faith attempt to do so... .”
Auditors are instructed to, first, question the taxpayers to determine what steps they took to verify that there was or was not split income, and if there has been a good faith attempt, then the auditors do not need to question further. Only if there has not been a good faith attempt will the auditor examine the contribution of the relevant factors such as of property or labour, and risk incurred.
Neal Armstrong. Summary of 2 December 2019 CTF Conference - Paul Wilson in "New Taxation Rules for Private Corporations: So far, so reasonable?" under “Reasonable return” under s. 120.4(1) – “reasonable return”.
Schwartz – Quebec Court of Appeal indicates that the Court of Quebec lacked the jurisdiction to cancel interest attributable to its own delays
A Court of Quebec judge cancelled part of the interest included in the ARQ assessment attributable to a delay in the hearing due to the illness of the judge and counsel for the ARQ. The Court of Appeal found that the Court of Quebec lacked the jurisdiction to do so, and that a taxpayer who wished to have interest cancelled should consider submitting an application to the Minister of Revenue for waiver (which, if declined, might then potentially be subject to a judicial review application in the Superior Court).
Neal Armstrong. Summary of Agence du revenu du Québec v. Schwartz, 2019 QCCA 2068 under s. 220(3.1).
CRA is reviewing whether a hotel would have a services business for TOSI purposes
The definition of an excluded share for TOSI purposes requires inter alia that less than 90% of the business income of the corporation have been derived from the provision of services. Paul Wilson indicated that a business of car leasing would not be regarded as a services business, whereas a landscaping business (or insurance broker business) likely would be regarded as a services business. CRA has traditionally looked at a hotel business as being a services business, but is considering whether this would be the case in the TOSI context where the only activity of the hotel is renting rooms.
Neal Armstrong. Summary of 2 December 2019 CTF Conference - Paul Wilson in "New Taxation Rules for Private Corporations: So far, so reasonable?" under “Scenario 3” et seq. under s. 120.4(1) – excluded shares – (a)(i).
CRA auditors may apply a low threshold for determining whether there is a business for TOSI purposes
Paul Wilson (Director, Medium Business Audit Division, Small and Medium Enterprises Directorate), in discussing the audit approach to the new tax on split income (TOSI) rules, provided comments on inter alia the scenario where a $5 million investment portfolio (held by a corporation owned equally by four mature shareholders who are siblings) is professionally managed by a third party investment manager and earns a large dividend return, with the shareholders meeting with the investment manager once a quarter to review the investment strategy and also meeting once a year to determine the annual dividend.
He indicated that given that the courts have indicated a very low threshold for when a corporation has a business, the corporation would likely be considered to have a business for TOSI purposes. However, he conceded that if the corporation only held GICs, it would be considered to earn income from property, so that the TOSI rules could not apply.
Neal Armstrong. Summary of 2 December 2019 CTF Conference - Paul Wilson in "New Taxation Rules for Private Corporations: So far, so reasonable?" under “Scenario 2” under s. 120.4(1) – related business.
12 more translated CRA interpretations are available
We have published full-text translations of the 10 items from the 11 October 2019 APFF Financial Strategies and Instruments Roundtable that were officially released by the Rulings Directorate last week. We published full translations of the answers to these questions, along with summaries of the questions posed, in October. Now you also have the full-text translations of the questions posed. The answers to the remaining two questions (Q.1 and Q.3) have not yet been released by CRA. We have also published a further 2 translations of CRA interpretations released in March, 2011 (being two items from the 8 October 2010 APFF Roundtable). The descriptors and links appear below.
These are additions to our set of 1,041 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
GST/HST Severed Letters July 2019
This morning's release of three severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their July 2019 release) is now available for your viewing.
Income Tax Severed Letters 23 December 2019
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
FCR is converting to a REIT using an exchangeable unit structure
The shareholders have approved a conversion of First Capital Realty Inc. into a REIT to occur on December 30, 2019 under a Plan of Arrangement. The shareholders will transfer their shares of FCR on a taxable basis in exchange for units of a newly-formed Ontario unit trust (the REIT) – except that those who legitimately seek rollover treatment can elect to receive exchangeable units of a newly-formed subsidiary Ontario LP of the REIT (FCR LP). The number of exchangeable LP units that may be issued is capped at 20% of the currently outstanding number of FCR common shares. The REIT and FCR LP then transfer (under s. 85(2) in the case of FCR LP) their common shares of FCR to a Newco in consideration for notes and shares of Newco. In addition to other tidying-up steps, Newco then amalgamates with FCR.
The final structure portrayed in the Circular is of the REIT holding Amalco directly and through FCR LP. The exchangeable units of FCR LP must be exchanged by December 23, 2023.
As part of the steps, the REIT will become bound by the terms of the FCR’s Debenture Indenture, with FCR (then Amalco) remaining as a co-principal debtor, but being released from numerous covenants. The common shares held by FCR LP and the REIT in Amalco will be retractable.
Neal Armstrong. Summary of First Capital Realty Circular under Offerings – REIT and LP Offerings – Domestic REITs.
Latulippe – Quebec Court of Appeal finds that subdividing a rental property to substantially enhance the sales proceeds did not entail conversion to inventory
Three individuals who had purchased an eight-unit rental property in co-ownership, determined around 4 ½ years later to sell the property due to a change in personal circumstances of one of them. A real estate broker advised that they could achieve a higher price if they instead sold the eight units separately. This was accomplished by entering into an “indivision agreement,” which meant that each purchaser purchased as a co-owner but with rights of exclusive access to a particular unit. As a result of effectively subdividing the property, they increased their aggregate proceeds by around 25%.
They reported capital gains. The ARQ (but not CRA) reassessed on the basis that the gain that arose after the indivision agreement was business income (i.e., on the basis that the property at that time had been converted to inventory).
In finding that the taxpayers realized capital gains, Rochette JCA noted the absence of any connection between the taxpayers’ employment and real estate or of prior dealings in real estate, their initial intention of generating additional income on retirement and the decision to sell being brought on by changed circumstances, the low cost in dividing into co-ownership units and the low commercial risk associated with this step, and the sale of all the units occurring within the same year.
Neal Armstrong. Summary of Latulippe v. Agence du revenu du Québec, 2019 QCCA 2177 under s. 9 - Capital Gains v. Profit - Real Estate.