News of Note

In connection with finding that the taxpayer had made a misrepresentation attributable to neglect when he had treated the adjusted cost base of a property he had sold as having been increased by alleged expenses such as municipal and school taxes and financing expenses incurred during the holding of the property, Favreau J noted in particular that the same types of ACB adjustments had been denied for the disposition by the taxpayer of another parcel of vacant land by the Court of Quebec in 2008 QCCQ 7197. The year of disposition thus was validly reassessed beyond the normal reassessment period.

Neal Armstrong. Summaries of D’Anjou v. The Queen, 2019 CCI 208 under s. 152(4)(a)(i) and s. 54 – ACB.

Under Regs. 403(1) and (3), a property insurer (or, in this case, a reinsurer) is required to allocate its taxable income to the provinces on the basis of the respective proportions of its net property insurance premiums that are arrived at by allocating its net premiums to the provinces where the insured property is situate – except that if it does not have a permanent establishment in a particular province, the net premiums for the insured property in that province are allocated to the province which has a PE to which those net premiums are “reasonably attributable.”

CRA indicated that, even in this specialized context, it considers that a limited or general partner has a PE wherever the partnership has a PE, so that the reinsurer in question was considered for Reg. 403 purposes to have a PE in various provinces by virtue of being a partner - even though the partnership in question did not carry on any insurance business.

Neal Armstrong. Summary of 8 June 2018 Internal T.I. 2018-0744881I7 under Reg. 403(3).

A taxpayer used U.S.$82M that had largely been indirectly financed by Twentieth Century Fox to fund, as partner, prints and advertising expenses (“P&A expenses”) respecting a film that Fox allegedly had sold to the partnership for US$128.3M, but with Fox having an alleged option to repurchase the film. The second related taxpayer, engaged in a quite similar transaction.

In denying the claimed losses, Hogan J stated:

[T]he Appellants invested in the … Partnerships solely to avail themselves of the tax savings that the promoters led them to believe they could expect and that they felt secure in the knowledge that Fox had agreed to reacquire the films prior to their commercial release.

Accordingly, I conclude that the options were shams designed to mask the parties’ agreement that Fox would reacquire the films prior to their commercial release.

Consequently, the P&A expenses allegedly borne by the partnerships were not incurred for the purpose of earning income. Likewise, the financing and other expenses incurred by the Appellants with respect to their partnership interests are not deductible.

Hogan J went on to find, in the alternative, that even if his finding on sham was wrong (i.e., the “options” were something less than binding purchase obligations of Fox), s. 231.7(6) of the tax shelter rules precluded the deduction of the losses given inter alia that no tax shelter registration had been made, the P&A expenses had been represented to be deductible and the taxpayers’ expectation of the exercise of those options gave rise to a prescribed benefit under Reg. 231(6).

Neal Armstrong. Summaries of Paletta v. The Queen, 2019 TCC 205 under General Concepts – Sham and Reg. 231(6).

Observations on income tax considerations relevant to s. 149(1)(o.2) corporations include:

• A s. 149(1)(o.2)(iii) corporation is precluded from issuing “bonds, notes, debentures or similar obligations.” Hudson’s Bay v. OMERS indicates that there is no legal relationship between a limited partner (e.g., an (o.2) corp) and 3^rd parties who have contracted with the limited partnership (i.e., the general partner thereof). In any event, comfort is provided by s. 253.1, which indicates that such limited partner is not considered to be carrying on any “activity” of the LP (including presumably its borrowing activities).
• Where the (o.2)(iii) corp has guaranteed debt of the LP, the guarantee likely would not be considered to be a similar obligation because there is no creditor-debtor relationship under which the guarantor is primarily liable.
• In order that a s. 149(1)(o.2)(ii) real estate corporation can avoid issues arising out of a CRA position that its activities respecting co-owned real estate should be proportionate to the interest held by it (or other quailed entities), it may headlease its interest to a headlessee which carries on the activities in question.
• Borrowing to fund a tenant inducement payment should generally satisfy the borrowing restrictions under s. 149(1)(o.2)(ii)(C), since the purpose of the borrowing is to earn rental income from the real property being leased. However, borrowing to lend money to a tenant to fund tenant improvements is not permitted, since any income earned from the loaned money will be interest income earned on the loan, not income earned from real property.

Hersh Joshi and Jack Silverson, “Understanding and Doing Business with Tax-Exempt Entities,” 2018 Conference Report (Canadian Tax Foundation), 29:1 – 35 under s. 149(1)(o.2)(iii)(C), s. 149(1)(o.2)(iii)(B), s. 149(1)(o.2)(ii)(A), s. 149(1)(o.2)(ii)(C) and Reg. 8501(2)(a).