News of Note
Praesto Consulting – Court of Appeal of England and Wales finds that a company was entitled to input tax credits for VAT on legal-fee invoices addressed only to its executive
Email this ContentA key employee (Mr Ranson) of an IT consulting firm (“CSP”) left along with three other employees to set up a competing firm (“Praesto”). They were sued by CSP for breach of fiduciary duty but for tactical reasons, Praesto itself was not sued. The law firm acting for Mr Ranson (“Sintons”) addressed eight invoices to him alone, which were paid by Praesto, and Sintons declined a request to address its invoices to Praesto.
The availability to Praesto of an input tax credit for the VAT included in the Sintons invoices turned on a VAT provision providing such a credit for “VAT on the supply to him [the taxable person] of any goods or services being … goods or services used or to be used for the purpose of any business carried on or to be carried on by him.” In finding that Praesto was entitled to such ITCs, Hamblen, LJ stated.
CSP was seeking to put Praesto out of business as its competitor. …
The FTT [below] was satisfied and found that the litigation was effectively being brought against Mr Ranson and Praesto, even though Praesto had not been joined to the proceedings. That reflected the economic reality. It was also borne out by CSP's stated intention to join Praesto if and when Mr Ranson's liability for breach of fiduciary duty was established… .
Neal Armstrong. Summary of Praesto Consulting UK Ltd v HM Revenue and Customs [2019] EWCA Civ 353 under ETA s. 169(1).
1680169 Ontario - Federal Court finds that it was not unreasonable for CRA to decline to waive interest attributable in part to failings of a third party (the company’s accountant)
An applicant for interest and penalty relief had filed returns for its 2009 to 2013 taxation years in April 2015. CRA granted partial interest relief for the 2009 and 2010 returns, on the basis that it was not until 2010 that the applicant began to be aware of substantial failings of its new accountant. The applicant attributed its substantial further delay in filing the returns to the difficulties of reconstructing its financial records after turning to yet another accountant for assistance. In finding that it was not unreasonable for CRA to deny further relief, Dinar J stated:
[T]he Minister’s Delegate …reasonably concluded that the Applicant’s circumstances were not “beyond its control”.
… [T]his Court has held that even when penalties were assessed as a result of accountant error, the Minister is not required to exercise her discretion … . The fact that the Applicant made attempts to remedy the situation by reconstructing financial statements which took a significant amount of time does not render the Decision unreasonable.
Neal Armstrong. Summary of 1680169 Ontario Limited v. Canada (Attorney General), 2019 FC 562 under s. 220(3.1).
CRA confirms that employee home office expenses generally cannot include property taxes or insurance
At the October 2018 APFF Roundtable (2018-0768871C6 F), CRA indicated that the home office expenses of an employee (other than a commission employee governed by s. 8(1)(f) rather than s. 8(1)(i)) may include “property taxes, and home insurance costs associated with maintaining the office.” CRA has now issued a correction, stating:
Where a taxpayer claims a deduction under paragraph 8(1)(i), property taxes and home insurance premiums are not deductible. Those are not included in home office expenses for office rent for purposes of subparagraph 8(1)(i)(ii) of the Act. Similarly, they are not included in the cost of supplies that were consumed directly in performance of the duties of the office or employment for the purposes of subparagraph 8(1)(i)(iii).
Neal Armstrong. Summary of 28 March 2019 External T.I. 2019-0799241E5 F under s. 8(13).
CRA indicates that the partnership agreement illuminates which partners control a corporation held by the partnership
In the course of a routine response, CRA noted its position that “when a partnership owns shares in a corporation … [t]he partnership agreement and the equity interest of the members must be examined to determine which member(s) of the partnership can exercise voting rights in respect of the shares of the corporation. In the case of a limited partnership … it is usually the general partner that can exercise these rights.” 2000-0038055 F and 2013-0484031E5 are similar.
This effectively elevates the partnership agreement to a similar status to articles and unanimous shareholder agreements in determining control and relatedness.
Neal Armstrong. Summary of 3 April 2019 Internal T.I. 2018-0787561I7 under s. 251(2)(c)(i).
CRA indicates that the 5 year work component of “excluded business” in the TOSI rules can be satisfied decades previously
Ms. B worked full time in the active business of Mr. A’s corporation (Opco) for 5 years, quit, and then 12 years later, married Mr. A and was issued shares by Opco. Whether dividends on her shares qualified for the excluded amount exception turned on whether the Opco business was an excluded business on the basis that she was “actively engaged on a regular, continuous and substantial basis in the activities of the [Opco] business … in … any five prior taxation years.” In finding that her having put in her 5-year stint many years ago while an arm’s length employee was no barrier to meeting this test, CRA stated:
[T]here is no requirement that the prior taxation years where the specified individual is actively engaged on a regular, continuous and substantial basis must be consecutive, nor is there a requirement that the specified individual must be related to the particular source individual at the time such qualifying activities are performed. … [and] these years can be before the effective date of the amendments to section 120.4.
Neal Armstrong. Summary of 27 February 2019 External T.I. 2018-0783741E5 under s. 120.4(1) – excluded business – para. (b).
Income Tax Severed Letters 1 May 2019
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
984274 Alberta – Tax Court of Canada finds that CRA had no statutory authority under the Act to recover $1.7M that it had paid to a taxpayer in error
The taxpayer (“984”) reported a capital gain on its 2003 sale of land on the basis that it had acquired it from its parent (Henro) on a rollover basis. In 2010, the Minister assessed Henro (to include an income account gain) and 984 (to reverse the previously reported capital gain and refund the capital gains tax plus interest, totalling $1.7M) on the basis that the 2003 drop-down had occurred on a non-rollover basis – but its assessment of 984 was found to be void as being statute-barred. In a 2015 settlement agreement of the Minister with Henro and 984, it was agreed that the 2010 reassessments of both 984 and Henro would be reversed. However, the resulting 2015 reassessment of 984 could not be justified as valid based on s. 169(3) because the 2010 assessment was itself invalid – hence, 984 was not an appealing “taxpayer” referred to in s. 169(3) (as it was not engaged in a valid appeal procedure).
This meant that the only basis for justifying the 2015 assessment of 984 was that, pursuant to s. 160.1(1), the 2010 refund represented an amount that had been “refunded to a taxpayer … in excess of the amount to which the taxpayer was entitled as a refund under this Act.”
Preliminarily to considering this issue, Smith J determined that there had been no “overpayment” by 984 for the purpose of s. 164(1) because the 2010 assessment purporting to refund the capital gains tax was void, so that there was no reduction in the capital gains tax amount, and there therefore had been no overpayment thereof. Accordingly, there had been no refund pursuant to s. 164(1) of an overpayment.
Turning now to s. 160.1(1), Smith J found “that in order to reassess a taxpayer pursuant to subsection 160.1(1) and (3), the amount refunded must be pursuant to a provision of the Act” – and, as noted, the refund had not occurred pursuant to s. 164 and had not occurred pursuant to any other provision of the Act. Hence, the 2015 assessment of 984 also could not be justified under s. 160.1(1).
He went on to find, in the alternative, that if he were incorrect that the payment was required to be made pursuant to a specific provision of the Act in order to qualify as a refund for s. 160.1(1) purposes, the 2010 payment was not a “refund” in the ordinary sense of the word, stating that this term referenced “the return of an overpayment.” Accordingly, “either way subsection 160.1(1) would not apply.”
The appeal was allowed.
Neal Armstrong. Summaries of 984274 Alberta Inc. v. The Queen, 2019 TCC 85 under s. 160.1(1), s. 164(1), s. 169(3), s. 152(4)(a)(ii) and s. 152(8).
A pipeline where there are non-resident beneficiaries might use high-PUC shares, not a note
A post-mortem pipeline is normally effected by the estate transferring its shares of Opco (whose adjusted cost base, but not their paid-up capital, was stepped-up on death) to a new a Holdco in consideration for a Holdco note (which then is gradually paid off following a subsequent amalgamation of Opco and Holdco). Under the expanded look-through rule in s. 212.1(6), this transaction would be quite problematic if, for example, a non-resident beneficiary was one of two equal heirs. Ss. 212.1(6)(b) and 212.1(1.1)(a) would deem Holdco to pay a pro rata (1/2) dividend to X, i.e., ½ of the excess of the note consideration over the Opco PUC. This dividend would not reduce the estate’s proceeds of disposition.
There is a generally better result if Holdco issues high-PUC shares to the estate rather than a note. S. 212.1(1.1)(b) grinds the PUC of the Holdco shares by ½ of of the increase in their PUC over that of the Opco shares. Significantly, the resulting deemed dividend when the Holdco shares are repurchased will be excluded from the estate’s “proceeds of disposition” (under para. (j) of the definition), thereby producing a capital loss to the estate that it could potentially carry back under s. 164(6). There also may be a CDA or RDTOH balance.
Neal Armstrong. Summary of Alexander Demner and Kyle B. Lamothe, "Section 212.1 Lookthrough Rules Create Issues for Trusts with Non-Resident Beneficiaries", Tax for the Owner-Manager, Vol. 19, No. 2, April 2019, p. 2 under s. 212.1(6).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in March 2012. Their descriptors and links appear below.
These are additions to our set of 843 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.
Des Groseillers – Court of Quebec decision indicates no s. 7(1)(b) application to option cash-out amount assignments, and no s. 69(1)(b) application to s. 7(1)(b) dispositions
An individual (Des Groseillers) who donated some of his employee stock options on the shares of his public-company employer (“BMTC”) to arm's length registered charities was assessed by the ARQ on the basis that the Quebec equivalent of s. 69(1)(b) deemed the “value of the consideration for the disposition” received by him to be equal to the options’ fair market value of $3M, thereby resulting in the receipt of deemed employment income in that amount by him pursuant to the Quebec equivalent of s. 7(1)(b). (S. 69(1)(b)(ii) is not limited to non-arm's length gifts.)
Bourgeois, JCQ reversed the assessment. To him, a crucial factor was that the stock option plan specified that a permitted donee of the options was not entitled to physically exercise the options, and instead was only permitted to realize on them pursuant to a clause in the plan permitting the option holder to require the corporation to pay the in-the-money value of the options to their holder. Accordingly, Des Groseillers had effectively only donated a right to receive cash, rather than an agreement to issue shares as contemplated by the s. 7(1)(b) equivalent, so that s. 7(1)(b) equivalent did not apply. In other words, “the intention of the parties was never to assign the options on shares … but rather to transfer the sums to the foundations.”
He further found, in the alternative, that even if the s. 7(1)(b) equivalent applied, it only applied on the basis of the nil consideration actually received by Des Groseillers rather than being expanded by the s. 69(1)(b) equivalent to deem the consideration to be $3M. In this regard, he agreed with Des Groseillers’ submission that the stock option rules constituted “a complete code which by itself contains an exhaustive treatment of the rules for computing income on the issuance of securities of an employer.” After quoting the equivalent of ITA s. 7(3)(a), he stated:
Thus … [the s. 69(1)(b) equivalent] cannot be engaged in order to fill in the rules for computing income provided in [the stock option rules].
Since the ARQ assessments and pleadings had not relied, in the alternative, on the equivalents of ITA ss. 6(1)(a) and 15(1)), and the ARQ’s assessments based on a mooted expansive effect of the s. 69(1)(b) equivalent had been demolished, Des Groseillers’ appeal was allowed.
Neal Armstrong. Summaries of Des Groseillers v. Agence du revenu du Québec, 2019 QCCQ 1430 under s. 7(1)(b), s. 7(3)(a) and Reg. 100(1) – employer.