News of Note
Atlas Tube (on no privilege for tax due diligence reports) could be overturned
Email this ContentIn Atlas Tube, the Federal Court found that a tax due diligence report - that EY had prepared on a target in advance of its acquisition – could be required to be provided to CRA. Southcott J found inter alia that, as the report’s “dominant purpose when commissioned and generated was to inform the decision whether to proceed with the transaction and at what price” rather than to assist Stikeman in structuring the acquisition, it was not protected by solicitor-client privilege.
Arguments before the Federal Court of Appeal challenging the correctness of this decision may include the following:
- There was no requirement that legal advice be the due diligence report’s dominant purpose. Gower v. Tolko Manitoba Inc. (2001 MBCA 11) stated:
Nowhere in the definition of legal advice privilege is there any requirement that the communications between the lawyer and his/her client be for the dominant purpose of litigation. Rather, what must be present is the provision of legal advice as one of the purposes of the document….
- The characterization of the primary purpose of the report as being to inform the buyer’s business decision as to whether to buy the target (and at what price) is questionable. Instead, tax due diligence reports are an input to the commercial terms of the purchase agreement so as to inform what representations and indemnities are sought.
- Commercial use of legal advice (for which a tax due diligence report is an input) does not detract from it being legal advice.
Neal Armstrong. Summary of Steve Suarez, “FCA To Hear Atlas Tube Appeal,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 2 under s. 232(1) – solicitor-client privilege.
Alberta Queen’s Bench finds that an executor had no right of implied indemnity from the beneficiaries for estate taxes that should have been withheld
After litigation as to what, if anything, the separated spouse (Ms. Muth) of the deceased was entitled to receive under his estate, a mediated settlement was reached pursuant to which she applied for probate and distributed the estate 55% to her and 45% to her nieces and nephews. However, she withheld an insufficient amount for estate taxes before distributing without an indemnity, and subsequently sued her nieces and nephews for 45% of the deficiency.
After noting that under ITA s. 159 “Parliament could have chosen to make all beneficiaries of the estate liable as well but chose not to do so,” Little J found that the nieces and nephews were under no obligation to indemnify Ms. Muth for these taxes, stating:
… Ms. Muth had a statutory obligation to obtain a clearance certificate and failed to do so.
.. [I]f the beneficiaries did not instigate or request the breach, they cannot be obligated to indemnify the trustee. In a fiduciary relationship such as that between a trustee and a beneficiary, the logic of that corollary is that as between the two parties, one who had the obligation to perform a duty and failed and one who had neither the obligation nor the means to satisfy it, it is the former who should bear the consequences of the action or inaction.
Little J denied Ms. Muth’s motion for summary judgment and “caution[ed] the Applicant that if she continues the lawsuit, she may face a significant costs award if another judge comes to the same conclusion at the end of the suit.”
Neal Armstrong. Summary of Muth Estate, 2019 ABQB 922 under s. 159(3).
Loyer Succession – Federal Court allows review application for failure of CRA to consider a penalty-waiver agreement of the ARQ for the same unreported income
The estate of a suspected drug dealer, who had been murdered, was assessed by the ARQ for income that he had not reported. CRA followed suit with assessments made on the same basis – but CRA did not follow the ARQ’s lead when the latter agreed with the estate to waive all gross negligence penalties - and did not even mention the Agreement to this effect between the estate and the ARQ in its second level review of the estate’s request under s. 220(3.1) for relief. Before remitting the matter to another delegate for redetermination, LeBlanc J stated:
[The estate] has the right to see the Agreement considered and to know why it was not applied in this case, if that was the CRA viewpoint. The failure to do neither … had the effect… of “depriving the process of justification, transparency and intelligibility,” to adopt … Telfer … .
Neal Armstrong. Summary of Loyer (Succession) v. Canada (Attorney General), 2019 CF 1528 under s. 220(3.1).
CRA indicates that supplier documentary deficiencies can be remedied for GST/HST purposes by the recipient’s internal records
Observations of CRA on the documentary requirements for supporting input tax credit claims included:
- It is not necessary that an invoice have the supplier’s registration number. That number can be obtained in any other document.
- Deficiencies in the supplier’s documents can be remedied by the recipient’s internal records. For example, if there is only a cash register receipt that does not list the recipient’s name, that deficiency can be remedied by “sufficient evidence” in the internal records of the recipient that identify itself as the recipient.
- Invoices etc. can be issued in the name of the recipient’s agent provided that the agency arrangement is properly documented and established.
Neal Armstrong. Summaries of 19 June 2019 GST/HST Interpretation 197123 under Input Tax Credit Information (GST/HST) Regulations, s. 3(b)(i) and s. 3(c(ii).
Adélard Soucy – Court of Quebec finds that a building for warming equipment qualified as “manufacturing or processing machinery or equipment”
The taxpayer custom-fabricated pieces of heavy specialized equipment at the northern mining site of one of its mining customers. In order that its soldering work did not fracture (which required that the soldering be carried out at close to room temperature), it needed to house its operation in a pre-assembled shelter (the “Econox”) which it installed at the site. Whether the Econox qualified for Quebec investment tax credit purposes turned on whether it constituted a Class 29 property which, in turn, rested on whether it was a property described in Class 8. In finding that the Econox was a “a structure that is manufacturing or processing machinery or equipment” as per para. (a) of the Class 8 description, Popescu JCQ stated:
[T]he manufacturing and processing activities of the taxpayer could only be carried out within the Econox, which was closely linked to this activity.
The Econox also was fixed equipment which permitted the plaintiff to manufacture and process industrial and mining items.
… In default of being able to speak of permanent physical integration, one can certainly speak of a functional integration as the plaintiff could not carry out its operations in the Great North without the Econox.
Neal Armstrong. Summary of Adélard Soucy (1975) Inc. v. Agence du revenu du Québec, 2019 QCCQ 6956 under Schedule II – Class 8(a).
Patrie – Tax Court of Canada found that a value-enhancing home renovation could qualify for home accessibility tax credit purposes
The house of the taxpayer and his wife had rickety stairs leading down to the yard. To address increasing mobility issues of his wife, the taxpayer replaced these with a deck with a 5-foot wide stairway and aluminum railing – and claimed the $10,000 home accessibility tax credit. CRA was bothered that, with the exception perhaps of the railing, this was what anyone who was trying to improve his home might have built. The definition of “qualifying expenditure” excluded an outlay or expense “made or incurred primarily for the purpose of increasing or maintaining the value of the eligible dwelling.”
In the course of allowing the taxpayer’s appeal, Bocock J stated:
The intention to add or maintain value must be primary. Absent some evidence that the taxpayer foremost sought to improve or maintain the value of the property and only secondarily solve accessibility, the exclusion in sub-paragraph (g) of being “primarily undertaken” to increase or maintain value cannot be sustained.
Neal Armstrong. Summaries of Patrie v. The Queen, 2019 TCC 276 under s. 118.041(1) - “qualifying renovation”, “qualifying expenditure” - (g).
Income Tax Severed Letters 18 December 2019
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Stover – Federal Court requires CRA to think about waiving interest that accrued during a three-year delay in dealing with a late-filed Objection
The taxpayer, who had not filed a Notice of Objection within the normal 90-day period for doing so, filed his Notice of Objection barely within the one-year period under s. 166.1(7)(a) for applying to the Minister for an extension of that deadline. CRA apparently did not recognize that, under the jurisprudence, the late-filed Notice of Objection was to be treated as an implicit s. 166.1 request for an extension. It essentially did nothing until the Tax Court issued an order three years later declaring the Notice of Objection to be valid - notwithstanding that s. 166.1(5) required it to consider an extension application “with all due dispatch.” The taxpayer ultimately discontinued his Tax Court appeal (due, he claimed, to his lawyer’s mistake), but applied to CRA for interest relief under s. 220(3.1).
Favel J considered it to be unreasonable for the CRA delegate not to take the three-year delay of CRA in responding to the Objection into account in considering the interest-relief request, so that the matter was “remitted to another Delegate for redetermination of the Applicant’s entitlement to relief from interest accrued due only to delays caused by the CRA.”
Neal Armstrong. Summaries of Stover v. Canada (National Revenue), 2019 FC 1599 under s. 220(3.1) and s. 166.1(5).
CRA confirms that, where all shareholders of a private corporation are directors, an eligible dividend designation can be made through the dividend declaration
CRA essentially repeated its position in 2009-0347491C6 that examples of a valid eligible dividend designation by private corporation include identifying eligible dividends through letters to shareholders and dividend cheque stubs, or where all of the shareholders are directors of a corporation, a notation in the Minutes. CRA elaborated on this “notation in the minutes” method as follows:
Thus, where all of the shareholders are also directors of the corporation, we consider that a directors’ resolution declaring a dividend and containing a designation that such dividend is an eligible dividend constitutes valid notification in writing for the purposes of subsection 89(14).
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.16 under s. 89(14).
B.C. Investment Management – Supreme Court of Canada indicates that a statutory trust is not necessarily a trust
BCI was a B.C. Crown agent which was formed to manage and hold investments for the provincial pension plans. The B.C. governing Act (the PSPPA) created a statutory trust under which each pension plan only had an entitlement to units in the investment pools managed by BCI and did not have ownership in any investment pool assets. CRA took the view (and ultimately assessed BCI for $40M in uncollected GST on the basis) that ETA s. 267.1(5)(a) deemed the statutory trust to be a person separate from BCI as agent for the provincial Crown, so that the investment services of BCI were supplied to that separate person.
In finding that such assessments would contravene s. 125 of the Constitution Act, 1867 but for the effect of Intergovernmental Agreements between B.C. and the federal government, Karakatsanis J focused on the ownership interest of BCI (the provincial Crown agent) in the portfolio assets:
In this case, the ETA places the burden of the tax on the Portfolio assets to which BCI holds legal title. BCI, a Crown agent, has thus successfully shown that it has an ownership interest in the property which bears the federal tax. I recognize that the beneficiaries of the trust may also be seen as bearing the burden of the tax. However, the key point is that the provincial Crown’s interest is being taxed under federal law, which is not permitted by s. 125.
In interesting obiter, she questioned whether the statutory arrangement created by the PSPPA, which stated that the portfolio assets were to be “held in trust,” in fact created a trust, stating:
[I]t is not clear whether the PSPPA … contain sufficient language to satisfy the three certainties. For example, the statutory framework does not identify a beneficiary for the Portfolio assets.
Neal Armstrong. Summaries of Canada (Attorney General) v. British Columbia Investment Management Corp., 2019 SCC 63 under ITA s. 104(1) and Constitution Act, s. 125.