News of Note
Villa Ste-Rose – Tax Court of Canada finds that interest and penalties on a late-filed GST return should be computed after netting rebate claims against the gross GST payable
Email this ContentA company that was not registered for GST purposes was required to self-assess itself under ETA s. 191(3) for GST on the fair market value of an assisted-living facility constructed on its behalf. It filed the required return in this regard 9 months’ late. With that return it also included rebate claims which were higher than the s. 191(3) tax. CRA accepted the GST payable and rebate amounts, but assessed interest and penalties under ss. 280 and 280.1, calculated on the gross GST amount, which it effectively treated as having been owing for the full 9-month period.
D’Auray J considered this approach to be unfair and anomalous, since if the company had instead lain in the grass and been assessed by CRA for the unreported GST, CRA would have been required under s. 296(2.1) to allow the (more than) offsetting unclaimed rebate amounts, so that no interest or late-fiing penalties could have been assessed by it. Furthermore, on her reading of s. 228(6), she considered that the same result obtained, i.e., under this rule as well, CRA was required net the rebate claims against the gross GST payable for interest and penalty purposes.
Neal Armstrong. Summaries of Villa Ste-Rose Inc. v. The Queen, 2019 CCI 60 under s. 228(6) and s. 296(2.1).
Income Tax Severed Letters 27 March 2019
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CAPREIT is accomplishing a reverse takeover of European Commercial REIT through an asset sale
European Commercial REIT (the “REIT”) is substantially expanding its size by purchasing a Netherlands subsidiary (“BV”) of CAPREIT (holding a portfolio of Netherlands rental residential properties) in consideration for having a subsidiary LP of the REIT issue exchangeable units to CAPREIT. As a result of this transaction, CAPREIT will hold over 80% of the consolidated equity of the REIT in the form of the exchangeable units, so that the transaction thus is akin to a reverse takeover of the REIT.
Nelal Armstrong. Summary of European Commercial REIT Circular under Other - Asset Purchases.
Newmont is proposing to acquire Goldcorp directly on a non-rollover basis for both ITA and IRC purposes
Newmont is proposing to acquire all the shares of Goldcorp pursuant to an Ontario Plan of Arrangement for consideration consisting of 0.3280 of a Newmont Share and US$0.02 in cash for each Goldcorp Share. This would be a direct acquisition, i.e., no Canadian Buyco, and no use of exchangeable shares. The acquisition would occur on a non-rollover basis for U.S. purposes, i.e., the cash boot is considered to be sufficient to bust the IRC s. 351 rollover.
Neal Armstrong. Summary of Goldcorp Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Direct Target Acquisitions.
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in April 2012 and (going somewhat out of sequence) April 2011. Their descriptors and links appear below.
These are additions to our set of 813 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. Next week is the “open” week for April.
Gladwin Realty – Tax Court of Canada finds that using the CDA and negative ACB rules to generate “over-integration” was abusive
The taxpayer, a private real estate corporation, rolled a property under s. 97(2) into a newly-formed LP, with the LP then distributing to the taxpayer an amount approximating its capital gain of roughly $24M realized on closing the sale of the property. Such distribution generated a negative ACB gain to the taxpayer of that rough amount under s. 40(3.1) and an addition to its capital dividend account of roughly $12M (as this occurred before a 2013 amendment that eliminated such additions). The taxpayer recognized a further $24M capital gain at the partnership year end, which increased its CDA by a further $12M to $24M. It then promptly paid a $24M capital dividend to its shareholder. Later in the same taxation year, it was permitted to generate a capital loss of $24M under s. 40(3.12) to offset the s. 40(3.1) capital gain previously recognized by it.
Hogan J confirmed CRA’s application of s. 245(2) to reduce the taxpayer’s CDA by ½ the amount of the s. 40(3.1) capital gain, thereby generating Part III tax unless an s. 184(3) election was made.
First, the CDA rule “was adopted to ensure that only one-half of a capital gain would be subject to income tax if the gain was realized indirectly by a private corporation,” whereas here there was “over-integration,” i.e., the taxpayer purported “to pay a capital dividend equal to the entire capital gain realized from the sale of the Property.”
Second, “the purpose and effect of subsection 40(3.1) are to dissuade taxpayers from extracting from a partnership on a tax-free basis funds in excess of their investment in the partnership” - and s. 40(3.1) “and the alleviating rule in subsection 40(3.12) were not enacted to encourage taxpayers to deliberately create offsetting gains and losses for the purpose of inflating their CDA.”
Before recognizing either of the two capital gains, the taxpayer was continued to the BVI in order to cease to be a Canadian-controlled private corporation and to not be subject to additional refundable taxes under s. 123.3. CRA did not challenge this planning.
Neal Armstrong. Summary of Gladwin Realty Corporation v. The Queen, 2019 TCC 62 under s. 245(4).
Mammone - Federal Court of Appeal finds that s. 152(9) did not permit CRA to change the factual basis for its reassessment beyond the normal reassessment period
In December 2013, CRA purported to retroactively revoke the registration of a pension plan (the “New Plan”) to which a transfer had been made in 2009 of the commuted value of the taxpayer’s interest in his old (OMERS) registered pension plan. CRA, in reliance on the retroactive character of that revocation, then immediately reassessed the taxpayer to include the amount of the transfer in his income under s. 56(1)(a)(i) on the basis that the exemption for RPP-to-RPP transfers was not available. However, the initial revocation was invalid due to inadvertent failure by CRA to comply with the 30-day notice requirement in s. 147.1(12). CRA did not discover this mistake until well after the normal reassessment period for 2009, and then issued a second (this time, valid) notice of revocation.
Woods JA applied the statement in Gramiak “that allowing the Minister to raise an argument based on a legal and factual basis that is different from the one underlying the assessment after the normal reassessment period has expired would in effect do away with the limitation period.” She indicated that a valid revocation notice was an essential factual underpinning for the s. 56(1)(a)(i) income, and since a valid revocation in fact did not occur until 2017, “clearly, this was not a factual basis on which the reassessment was based when it was issued.” Thus:
[T]he Minister’s position impermissibly avoids the limitation period for the 2009 taxation year. The Minister’s reliance on the 2017 revocation notice was a new factual basis underlying the reassessment raised long after the limitation period had expired.
As the factual basis for the Minister’s reassessment had changed beyond the normal reassessment, the Minister was precluded from relying on having validly made a retroactive revocation of the New Plan.
Woods JA was well aware of s. 152(9), which at that time stated that “the Minister may advance an alternative argument in support of any assessment at any time after the normal reassessment period” but found that s. 152(9) had no traction, stating:
Moreover, this was more than a “new basis” to support the reassessment. It was also a new fact that did not materialize until after the limitation period had expired, when the Minister issued the second notice. (emphasis added)
S. 152(9) now states that “at any time after the normal reassessment period, the Minister may advance an alternative basis or argument”. She stated that this amended language “expands the scope of the new arguments that the Minister may make after the expiry of the limitation period,” but given the bolded language above, it is not clear that this expanded language would have changed the result.
Neal Armstrong. Summaries of Mammone v. Canada, 2019 FCA 45 under s. 152(4) and s. 152(9).
Ipsen SA acquisition of Clementia Pharmaceuticals includes a significant contingent cash payment (CVR)
The cash consideration for the proposed acquisition of Clementia Pharmaceuticals (a Canadian-incorporated NASDAQ-listed clinical-stage biopharmaceutical company) by a Canadian Buyco subsidiary of Ipsen S.A. includes not only an up-front cash payment of US$25.00 per share (for an aggregate of US$1.04 billion) but also a deferred payment, on the achievement by the end of 2024 of FDA approval of a new drug application made by Clementia, in the form of a contingent value right ("CVR") of US$6.00 per Share. The Canadian tax disclosure states that the proceeds of disposition to a Clementia shareholder are the Canadian-dollar equivalent of the full U.S.$31 per Share, but that the Clementia shareholders should consult with their tax advisors as to the availability of an s. 42(1)(b) capital loss if the timely FDA approval is not achieved.
The U.S. tax consequences to U.S. shareholders turn on whether the fair market value of the CVRs is “reasonably ascertainable.”
Neal Armstrong. Summary of Clementia Pharmaceuticals Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
Prince – Federal Court finds that a 30-day letter is not a judicially-reviewable “decision”
Annis J found that a CRA “fairness” letter to the taxpayer setting out proposed reassessments for his 2007 to 2016 taxation years and giving him 30 days to provide additional information and representations was not a “decision” that he had the jurisdiction to review under the Federal Courts Act.
In addition, even if he had such jurisdiction, he would not have exercised it in the taxpayer’s favour. Much of the taxpayer’s complaint was that the taxpayer at the same time was advancing his position that CRA should accept a “voluntary” disclosure made by him as being within the ambit of the CRA VDP program. Annis J found that there was nothing in this that was prejudicial given that “even if the VDP application was granted after the assessment was made, the CRA would issue a new reassessment taking into account its decision.”
Neal Armstrong. Summaries of Prince v. MNR, 2019 FC 348 under Federal Courts Act, s. 18.1(3) and ITA s. 220(3.1).
Supreme Court grants leave in MacDonald
The Supreme Court has granted leave to appeal in MacDonald, where the Federal Court of Appeal found that the question of whether a derivative was acquired as a hedge should be determined on an objective basis rather than having substantial regard to whether or not it was the intention of the taxpayer to acquire the derivative as a hedge.
Leave was declined in Rio Tinto (finding that fees incurred by a public board in determining to make a bid, as contrasted to its implementation, were currently deductible).
Neal Armstrong. Summary of The Queen v. MacDonald, 2018 FCA 128, leave granted 21 March 2019, under s. 9 – capital gain v. income – futures/forwards/hedges.