News of Note

CRA has published its Communiqué on “Obtaining Information for Audit Purposes” including tax accrual working papers and CRA’s interpretation of BP.

It was drafted before the Cameco decision was affirmed in the FCA. CRA states that “Pending a final decision in this case, CRA officials can continue to … request that individuals be interviewed.”

CRA considers that tax accrual working papers, “particularly the list of uncertain tax positions,” can be requested “where CRA officials determine there is a higher risk of non-compliance” – and the Communiqué states that “A taxpayer with large unexplained tax reserves may be considered to be at a higher risk of non-compliance.”

CRA also states:

The taxpayer’s list of uncertain tax positions that relates to the tax reserve in their financial statements is not a privileged document. …

Provided all the relevant facts of the transactions are disclosed, including the taxpayer's purpose or purposes in undertaking a transaction or series of transactions, exclusions of their advisors’ analysis of the legal and tax effects of the transactions may be accommodated.

The CRA’s position is that taxpayers are required to disclose sufficient detail regarding their business and tax transactions for the CRA to fulfill its mandate of assessing taxes owing. Where the criteria outlined in the communiqué are met, the CRA considers that it retains the right to request tax accrual working papers, including a list of uncertain tax positions. A request for the taxpayer’s list of uncertain tax positions in these circumstances is not a request that the taxpayer self-audit.

Neal Armstrong. Summary of AD-19-02 Obtaining Information for Audit Purposes 2019-03-21 under s. 231.1(1)(a).

A survivor benefit under a registered pension plan (“RPP”) is paid in a taxation year to the Quebec Unclaimed Property Directorate pursuant to the Quebec Unclaimed Property Act because the person entitled thereto (the “right-holder”) has not been determined. That person, when subsequently identified, receives from the Directorate the net amount that the Directorate, in turn, had received from the RPP (i.e., the survivor benefit payable under the RPP (as reduced by income tax source deductions) is paid by the Directorate to the right-holder, as further reduced by its administration fee.

CRA indicated that the amount to be included under s. 56(1)(a)(i) in the right-holder’s income is the gross amount of the survivor benefit payable under the RPP, as indicated in the T4A slip issued by the RPP administrator, which should be included for the taxation year in which the Directorate transferred that amount to the right-holder. Its reasoning was that the amount could not be considered to be “received” as a pension benefit in the year of payment by the RPP administrator to the Directorate because the right-holder had not yet been identified – whereas in the subsequent year of payment over by the Directorate to the right-holder, that right-holder is receiving that amount under s. 56(1)(a)(i) as being “in lieu of” a superannuation or pension benefit.

CRA also indicated that where the right-holder is an estate, it should include the survivor benefit under s. 56(1)(a)(i) in computing its income for the year of receipt – but with a deduction to it and an inclusion to its beneficiaries being applicable where those amounts are distributed in accordance with the usual ss. 104(6), (13) and (24) rules. However, where the administration of the estate has been completed prior to the Directorate being in a position to pay the amount, CRA accepts that an estate beneficiary directly includes the amount under subparagraph 56(1)(a)(i) in computing his or her income.

Neal Armstrong. Summaries of 2 April 2019 Internal T.I. 2016-0649821I7 F under s. 56(1)(a)(i) and General Concepts – Payment and Receipt.

ETA s. 141.02 provides somewhat detailed guidance on the need for financial institutions to consistently apply acceptable methodologies for determining their entitlement to input tax credits for GST/HST on their inputs. Comments of CRA included that:

• Most inputs are likely to be allocable as “exclusive” or “direct” inputs rather than being “non-attributable” inputs.
• Direct tracking of inputs should be used where possible rather than “causal allocation,” i.e., using a systematic methodology to approximate the use of inputs.
• Generally, the categorization and allocation of business inputs must be done on an input-by-input basis and not based on “cost pools” of business inputs. The latter “are only appropriate where the use of grouping or pooling of business inputs results in the same ITC allocation result as would be arrived at if each business input was allocated without the use of pooling.”.

Neal Armstrong. Summary of 26 September 2018 Interpretation 167875 under s. 141.02(12).

An individual, who was the sole limited partner of a Quebec limited partnership (“SEC”) that owned and operated multiple farms, and the president of its general partner, argued that he was not a limited partner under the Quebec equivalent of ITA s. 96(2.4)(a), so that he could deduct his share of a substantial loss of the LP. He relied in this regard on s. 2244 of the Civil Code, which provided that a limited partner “may not negotiate any business on behalf of the partnership or act as mandatary or agent for the partnership,” and pointed to his involvement in the business of the LP including negotiating with suppliers and making various purchases.

The Court of Appeal found no error in the findings of Breault JCQ below in connection with confirming the ARQ’s application of the s. 96(2.4)(a) equivalent, including that the identified activities of the individual in relation to SEC were “more linked to his role as mandatary or representative of the general partner” rather than of SEC, so that he had limited liability.

Neal Armstrong Summary of Vinet v. Agence du revenu du Québec, 2019 QCCA 574 under s. 96(2.4)(a).