News of Note

CRA finds that recurring ordinary dividends can constitute a transfer of property sufficient to engage s. 125(5.2)

The business limit reduction under s. 125(5.1)(b) takes into account the passive income (a.k.a. “adjusted aggregate investment income”) of associated corporations. S. 125(5.2) deems two related corporations to also be associated where one of them directly or indirectly transfers assets to the other and one of the reasons for the transfer can reasonably be considered to be to reduce the passive income of the associated group for s.125(5.1)(b) purposes.

Opco, which is owned by five Holdcos, each of which are related to one another but are not associated, will continue its established pattern of annually distributing substantially all of its income as dividends, with the result that the Holdcos’ now-substantial accumulated investment funds will continue growing. Would s. 125(5.2) apply? CRA stated:

Whether subsection 125(5.2) would apply… remains a question of fact … . However, if it may reasonably be considered that one of the reasons that the payment of dividends was made was to reduce the adjusted aggregate investment income … in respect of Opco … then … the anti-avoidance rule in subsection 125(5.2) could apply.

Neal Armstrong. Summary of 7 June 2019 STEP Roundtable Q. 16, 2019-0798461C6 under s. 125(5.2).

Wardlaw – Tax Court of Canada notes that the effective s. 163(2) penalty rate can exceed 50% where there has been a loss carryback

The taxpayer claimed a fictitious business loss of over $357,000, and requested that the excess of the claimed loss over what he could use in the current year be carried back to the prior three years. The s. 163(2) penalty was computed by multiplying the 50% penalty rate by the amount of additional tax that would have been payable by him in the current year if the false $357,000 claim were added to his reported taxable income for the year. Given that this produced a higher effective tax rate than the tax applicable to the taxable income of the prior years to which the carryback had been applied, the penalty worked out to over 70% of the tax he sought to eliminate.

Jorré DJ stated:

[I]t does seem odd that what is apparently meant to be a 50% penalty can, where a loss carry back is involved, become a significantly higher percentage.

The Appellant may wish to consider making an application for a reduction of the penalty and interest under … subsection 220(3.1) … .

Neal Armstrong. Summary of Wardlaw v. The Queen, 2019 TCC 199 under s. 163(2).

It can be unclear whether CRA denial of a request for a s. 247(10) downward adjustment can be appealed to the Tax Court

Some senior CRA officials have the discretion under s. 247(10) to make downward transfer-pricing adjustments. CRA Appeals takes the position that the Appeals Branch has no authority to review a denied downward adjustment, and considers a notice of objection in which a denied downward adjustment is the only issue in dispute to be invalid.

Furthermore, given that IC 87-2R contemplates denial of a downward adjustment request where the taxpayer is able to obtain relief under the mutual agreement procedure of an applicable tax treaty:

The CRA has declined a request for a downward adjustment that was initiated by a Canadian taxpayer where the corollary adjustment requested by the taxpayer's US subsidiary led to the US subsidiary being reassessed first. The CRA denied the request on the basis that the adjustment request was the result of the actions of another tax authority.

Given the discretionary nature of s. 247(10), one might expect that the Federal Court was the appropriate forum for challenging the denial of a s. 247(10) downward adjustment. However, s. 247(11) incorporates the usual Part I objection provisions into the (Part XVI.1) transfer-pricing provisions "with such modifications as the circumstances require." Consequently, it is arguable that the Tax Court has jurisdiction to hear an appeal from a denied downward adjustment, since the denial is pursuant to a provision found in Part XVI.1.

Having regard inter alia to the Exchequer Court jurisprudence dealing with income computation provisions that were subject to Ministerial discretion, it is suggested that:

[I]n reviewing a denied downward adjustment request, the Tax Court could review the decision to ensure both that the amount of the downward adjustment request by the taxpayer is correct and that the minister has exercised his or her discretion appropriately (that is, the minister's decision-making process contains a rational justification that is transparent and intelligible, and the decision itself falls within a range of possible, acceptable outcomes that are defensible in respect of the facts and the law).


Where there is no assessment to which the taxpayer can object, it is questionable whether [the s. 247(11) "with such modifications as the circumstances require” language] permits the taxpayer to treat the letter denying the downward adjustment as tantamount to a notice of assessment to which the taxpayer can object or appeal.

Neal Armstrong. Summaries of Daniel Sandler and Lisa Watzinger, “Disputing Denied Downward Transfer-Pricing Adjustments,” Canadian Tax Journal, (2019) 67:2, 281-308 under s. 247(10) and s. 247(11).

Tedesco – Federal Court of Appeal finds that individual partners could continue their own appeals following discontinuance of the partnership’s similar appeal

CRA issued Notices of Determination to deny losses of a limited partnership (TSI). Both TSI and its partners launched appeals to the Tax Court. However, TSI then filed a Notice of Discontinuance, which resulted in its appeal being deemed by s. 16.2(2) of the Tax Court of Canada Act to have been dismissed. The individual partners continued with their appeals, arguing that the Notices of Determination had been statute-barred.

Webb JA reversed the finding below that it was an abuse of process for the partners to continue their individual appeals. It was an arid technical point to focus on the TSI appeal having been deemed by s. 16.2 to have been dismissed. In reality, the question at issue (of the interpretation of s. 152(1.4)) had not yet been passed on by a court, so that hearing the individuals' appeals could not be characterized as abusive relitigation of that issue.

Neal Armstrong. Summary of Tedesco v. Canada, 2019 FCA 235 under General Concepts - Abuse of Process.

Finance proposes to grandfather post-2016 proceeds from pre-March 22, 2016 ECP dispositions

A CCPC disposed of eligible capital property (ECP) before the Budget 2016 date, but with part of the proceeds not becoming receivable until after 2016, which meant that they were subject to the refundable tax regime.

In response, Finance indicated that it would recommend that a taxpayer may elect respecting a disposition of ECP that occurred before March 22, 2016 so that, where an amount becomes receivable after 2016 and before 2024 as proceeds of disposition upon the satisfaction of a condition that was part of the agreement under which the disposition was made, then the resulting gain, rather than being a capital gain, will instead be governed by the old ECP regime (i.e., ½ recognized as business income, and the other ½ added to the taxpayer's capital dividend account). The taxpayer must file this election by the filing-due date for its first taxation year that ends after September 30, 2019.

Neal Armstrong. Summary of 29 July 2019 Finance Comfort Letter TL-24 entitled “Eligible Capital Property (ECP) Transitional Issue” under s. 14(1).

Yen proposed to be added as an available functional currency

Finance has provided a comfort letter recommending that the yen be added (to the U.S. and Australian dollars, euro and pound) as a “qualifying currency” in s. 261(1), effective for taxation years beginning after 2019.

Neal Armstrong. Summary of 29 July 2019 Comfort Letter TL-23 entitled “Functional currency tax reporting - currency of Japan” under s. 261(1) – qualifying currency.

Lohas – Tax Court of Canada finds that buyers made purchases of iPhones as agents for a grey market reseller

A grey marketer (Lohas) of newly-released iPhones purchased them in Vancouver-area Apple stores for export to Hong Kong and Taiwan, where those models were still unavailable. In order to get around Apple’s limit of two iPhones per purchase, Lohas used friends and acquaintances to make the purchases (the “buyers”). As the buyers did not charge GST to Lohas, whether it was entitled to input tax credits (ITCs) for the GST charged on their purchases turned on whether they purchased as its agents and on whether the documentation for their purchases satisfied the Input Tax Credit Information (GST/HST) Regulations.

The Crown’s best argument for the absence of an agency relationship was that “the buyers could not affect the legal position of Lohas, since the principal could not have contracted with Apple.” In rejecting this argument, D’Auray J stated:

… [A]ssuming the buyers purchases were in violation of Apple policy[,] at most, this made the purchase contracts voidable and not void. It is clear from the evidence that the contracts were never avoided and remained binding on Lohas.

Although many of the receipts issued by the Apple stores had missing, fictitious or unreadable names for the buyers (as agents of Lohas), D’Auray J found that such deficiencies were cured in the case of purchases for which a “memo prepared by Lohas showed the name of each buyer, the iPhones purchases, the tax and the commissions paid” – so that ITCs were denied only for the relatively small number of purchases where this was not done.

Neal Armstrong. Summaries of Lohas Farm Inc. v. The Queen, 2019 TCC 197 under General Concepts – Agency, Input Tax Credit Information (GST/HST Regulations, s. 3(c)(ii) and General Concepts – Onus.

Income Tax Severed Letters 25 September 2019

This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Wise – Tax Court of Canada finds no immediate taxable benefit to a landlord-shareholder from improvements made to the leased building by the tenant-corporation

An individual leased a building under a 5-year lease with a 5-year renewal option to a corporation (VMS) wholly-owned by her and her son. VMS then paid for substantial renovations to the building.

Smith J referenced the principle in Kennedy that “Where a tenant improves the leased premises, the extent to which, if at all, the improvement confers a benefit on the landlord will depend on the extent to which the improvement increases the value of the reversionary interest,” and then found that, here, no taxable benefit should be recognized until the termination or maturity of the lease, in which event the residual value of the reversionary interest of the taxpayer would have to be valued.

Neal Armstrong. Summaries of Wise v. The Queen, 2019 TCC 196 under s. 15(1) and General Concepts – Effective Date.

CRA acknowledges general deductibility of legal fees incurred for periodic support (but not for a lump sum settlement)

CRA acknowledges that legal fees incurred in order to make a (non-frivolous) claim for periodic support will generally be deductible in computing the claimant’s income even if the amount ultimately awarded is a lump sum that therefore (generally) does not qualify as a “support amount” – and that, conversely, legal fees incurred in order to claim a lump-sum payment that does not qualify as a support amount generally will not be deductible.

Neal Armstrong. Summary of 25 July 2019 External T.I. 2018-0787011E5 under s. 18(1)(a) – legal fees.