News of Note
Sunshine Coach – Tax Court of Canada finds that Alberta bus tours were separate from international flights for ETA zero-rating purposes
Email this ContentETA Sched. VI., Pt. VII, s. 3 provides for zero-rating of transportation services where the services are part of a “continuous journey” that includes air transportation, and either the origin or termination of the journey or a stopover respecting that journey are outside Canada and, in a subset of situations, also outside North America. In finding that the Canadian transportation services of a Calgary-based tour operator were not part of a “continuous journey” that included internationalflights, so that s. 3 zero-rating was not available, Campbell J noted that the bus tickets issued by the Appellant did not include the airline tickets that international passengers used to travel into and out of Canada, nor did booking companies through which some passengers arranged travel act as agents of the bus operator.
Neal Armstrong. Summaries of Sunshine Coach Ltd v. The Queen, 2019 TCC 72 under ETA Sched. VI., Pt. VII, s. 2 and s. 3.
Savics – Tax Court of Canada infers that a settlement agreement referring to partnership loss allocations included partnership gains allocations
The taxpayer was allocated losses for the initial years of his membership of three LPs and income-account gains for a subsequent year. CRA initially reassessed to deny both the taxpayer’s allocated losses and to reverse the subsequent year’s gains allocation on the basis that the LPs did not exist (i.e., on the basis that the partners were not carrying on business in common with a view to profit). A subsequent settlement agreement provided for the reinstatement of much of the losses but was silent on the treatment of the gains (although it did reference an ability of CRA to reassess to make “consequential” adjustments).
In agreeing to the settlement, the taxpayer provided a waiver of any right of appeal of an implementing assessment. Sommerfeldt J indicated that “if a settlement-implementing reassessment is not in keeping with the agreement that the taxpayer and the fiscal authority have reached, a waiver of the right to appeal will not preclude the taxpayer from appealing in respect of the aspect of the reassessment that does not coincide with the settlement agreement.”
However, he went on to find that it accorded with the settlement agreement for CRA, in its reassessments to implement the agreement, to reinclude the subsequent year’s gains in the taxpayer’s income. The settlement agreement was based on the premise that the LPs existed after all, and the gains inclusions reassessed by CRA were “consequential” on this premise. Furthermore, implementing a settlement agreement that was based on the proposition that a partner was to be allocated his share of the LP losses, but not gains, would have violated the Galway principle, which “precludes a taxpayer and the Crown from arriving at a settlement that has no basis in the ITA.”
Neal Armstrong. Summary of Savics v. The Queen, 2019 TCC 71 under s. 169(3).
Our severed letter translations go back more than 7 years
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in April and March 2012. Their descriptors and links appear below.
These are additions to our set of 825 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Gillen – Federal Court of Appeal affirms finding that property was not used in a business for s. 110.6(14)(f)(ii) purposes when it was beneficially acquired and dropped-down on the same day
Webb JA affirmed a finding of D’Arcy J that the beneficial ownership of some applications to the Saskatchewan government for potash exploitation rights that had been acquired by a limited partnership had been immediately on-transferred by it to a wholly-owned corporation for share consideration (presumably on an s. 85(2) rollover basis), so that their fleeting beneficial ownership by the LP did not qualify them as being used in a Canadian active business, as required under the s. 110.6(14)(f)(ii) test. Accordingly a gain that was realized approximately four months later when the shares were sold at a gain did not qualify for the capital gains deduction when the gain was distributed by family-trust limited partners of the LP to their family beneficiaries including, in the case of one of the family trusts, the taxpayer.
Webb JA noted that the shares in fact were not issued until shortly before their sale, but stated that “there is no prohibition on a corporation receiving payment for shares well in advance of the shares being issued.”
Neal Armstrong. Summary of Gillen v. Canada, 2019 FCA 62 under s. 110.6(14)(f)(ii).
CRA indicates that Ponzi scheme investors can generally write off their reinvested interest income in the year the perpetrators are charged
Individuals had “invested” in what turned out to be a Ponzi scheme under which for many years they reported annual income inclusions for interest which they were treated as having reinvested in the scheme. They sought to have their returns for those years adjusted in order to obtain a refund of the taxes they paid on such interest income.
The Directorate indicated that because various of the taxation years were before the 10-year period referred to in s. 152(4.2), they could not be so reassessed – and, in any event, the interest had been required to be recognized in the years in which the individuals received or were entitled to receive it.
The Directorate went on to indicate that potential relief could be provided though a subsequent bad debt deduction, likely, in the year in which the promoters were charged. It stated:
[T]he CRA generally accepts that the "time" when a taxpayer can conclude that the taxpayer’s debt has become uncollectible occurs in the year in which the Crown makes charges against the perpetrator of the fraud (the "Year of Charges").
Thus, where a taxpayer has included investment income in the computation of the taxpayer’s income for the Year of Charges or for years prior to the Year of Charges and that income becomes a debt that has not has never been recovered by the taxpayer or a third party for the taxpayer’s benefit, the CRA is generally prepared to accept that the taxpayer may claim a bad debt deduction in respect of that debt under paragraph 20(1)(p) in the Year of the Charges.
Neal Armstrong. Summaries of 27 March 2018 Internal T.I. 2017-0691941I7 F under s. 152(4.2), s. 20(1)(p)(i) and General Concepts – Effective Date.
Cameco – Federal Court of Appeal finds that CRA cannot under s. 231.1(1) compel oral answers to its questions other than for aid in auditing taxpayer books and records
Cameco had appealed transfer-pricing assessments to the Tax Court. CRA then audited subsequent years, where essentially the same issues arose, and applied to the Federal Court for an order pursuant to s. 231.7(1) compelling Cameco to submit 25 listed employees of it and subsidiaries to CRA interviews. The Federal Court dismissed this application.
In dismissing the Crown’s appeal of such dismissal, Rennie JA found that s. 231.1(1)(d) was limited to providing CRA aid in its “inspection, search, examination or review of records,” whereas here, CRA sought “oral answers to oral questions” in order to facilitate its “understanding of Cameco's potential tax liability.”
The Crown submitted that the word “audit” in the power under in s. 231.1(1)(a) to “inspect, audit or examine” encompassed the authority to ask questions of employees of a taxpayer, including the employees of its overseas subsidiaries, and to require that they be answered orally.
Rennie JA instead found that the word “audit,” like the words “inspect” and “examine,” were directed to “the book and records” of the taxpayer and that “[o]ral examination is not the ordinary meaning of the word audit.” He also found it telling that 1986 amendments eliminated the word “orally” from the stated duty to answer all proper questions “relating to the audit.”
Neal Armstrong. Summaries of Canada (National Revenue) v. Cameco Corporation, 2019 FCA 67 under s. 231.1(1)(a) and Statutory Interpretation – Ejusdem generis and Redundancy.
Grondin – Court of Quebec confirms that the Quebec equivalent of s. 13(21.1)(b) applies irrespective of an intention to dispose of the underlying land
The uninsured barn of a pig farmer burned down. Lafrenière JCQ confirmed the application by the ARQ of the Quebec equivalent (in Art. 93.3) of s. 13(21.1)(b) to reduce what otherwise would have been that taxpayer’s terminal loss by one-half, stating:
[T]he exception provided in Articles 93.1 to 93.3 … applies without regard to whether the disposition is voluntary or involuntary, and also applies independently of whether or not there was a wish to dispose of the underlying land.
He also quoted with approval similar findings made by the Tax Court in 9136-6872 Québec.
Neal Armstrong. Summary of Grondin v. Agence du revenu du Québec, 2019 QCCQ 1059 under s. 13(21.1)(b).
CRA indicates that it has not been deluged by ruling requests on the s. 55(2.1)(b) purpose test
CRA repeated an earlier statement that it can provide rulings on the application of the purpose test in s. 55(2.1)(b) provided that “all manifestations of purpose and corroborating circumstances support the absence of one of the purposes described in paragraph 55(2.1)(b)” and the taxpayer represents “that the purposes for which the dividend was paid do not include one of [such] purposes.” CRA unsurprisingly indicated that it “other than rulings on loss-consolidation, the CRA has not been deluged by requests for rulings on this topic.”
The “Manual used … [in] audits of small and medium-sized businesses does not contain any information on the application of subsection 55(2) and the purpose test, in particular.”
Neal Armstrong. Summary of 9 May 2018 CPA Roundtable Q. 11, 2018-0765271C6 under s. 55(2.1)(b).
Income Tax Severed Letters 3 April 2019
This morning's release of five letters from the Income Tax Rulings Directorate is now available for your viewing.
Kerry (Canada) – Federal Court finds that a request to hold notices of objection in abeyance pending Canadian competent authority review amounted to implied waivers
A Canadian company (Kerry Canada) was reassessed under s. 247 to increase its income from product sales to a US affiliate and disallow deductions for royalties paid to an Irish affiliate. Kerry Canada objected to these reassessments, but requested that its objections be held in abeyance pending a decision by the Canadian competent authority (CCA) of these transfer-pricing issues. In its ensuing application to the CCA, Kerry Canada reiterated that it had requested such abeyance.
After the CCA agreed with Kerry Canada on the product transfer pricing issue, CRA issued second reassessments to give effect to that adjustment. Kerry Canada did not object to the second reassessments. Subsequently, the CCA also agreed with Kerry Canada on the deductibility of the royalties, but CRA refused to implement this favourable decision because the taxation years in question were now statute-barred.
Walker J found that Kerry Canada’s request to keep the objections in abeyance until a CCA decision on the two issues amounted to an implied waiver for those years, so that CRA was still permitted under s. 152(4)(c)) to reassess those years by virtue of having received the waivers. Kerry Canada had made the mistake of not objecting to the second reassessments. However, this was essentially irrelevant to the point that the implied waivers nonetheless had been given (albeit, in connection with objecting to reassessments that were replaced by, and, therefore, voided by, the second reassessments.)
Since CRA had not addressed this point, the matter was referred back to CRA for reconsideration of the request of Kerry Canada to reassess it to implement the favourable CCA decision.
Neal Armstrong. Summary of Kerry (Canada) Inc. v. Canada (Attorney General), 2019 FC 377 under s. 152(4)(c).