News of Note
Canada Without Poverty – Ontario Superior Court of Justice declares that ss. 149.1(6.2)(a) and (b) are of no force and effect
Email this ContentA registered charity devoted most of its resources to public policy advocacy with a view to ending poverty. Although this advocacy was subordinate to its poverty-reduction purpose, it nonetheless was considered by CRA to be devoting most of its activities to (non-partisan) political activities so that it was well outside the safe harbour in ITA s. 149.1(6.2) for ancillary political activities. The charity challenged this restriction on its political activities before Morgan J.
In response to the Attorney General’s argument that “the Applicant has a right to free speech, not to subsidized speech” through the ability to issue charitable receipts, Morgan J stated:
[T]he evidence is that the Applicant cannot function – or will have difficulty in functioning – in the absence of registered charitable status.
After concluding that s. 149.1(6.2) “violates s. 2(b) of the Charter in that it burdens the Applicant’s pursuit of public policy advocacy,” he found that the Attorney General had failed to justify this infringement under s. 1 of the Charter through failure to answer the question “why Parliament has limited political speech acts done in furtherance of accepted charitable purposes.”
He went on to make a declaration that “that ss. 149.1(6.2)(a) and (b) are of no force and effect pursuant to s. 52(1) of the Constitution Act, 1982.” However, he did not really mean this (which would have the effect of eliminating any safe harbour for even minor political activity) as he earlier made a declaration “that the phrase 'charitable activities' used in s. 149.1(6.2) be read to include political activities, without quantum limitation, in furtherance of the organization’s charitable purposes.” He also stated that the exclusion for partisan “charitable activities” in s. 149.1(6.2)(c) remained. Even before this, the Government was thinking about removing or amending ss. 149.1(6.2)(a) and (b),
He did not discuss jurisdictional issues. How are non-Ontario charities affected by his declaration? In reviewing any proposed revocation of registration of this or another charity by CRA, would the Federal Court of Appeal feel obliged to apply his modification of their Act?
Neal Armstrong. Summary of Canada Without Poverty v. AG Canada, 2018 ONSC 4147 under s. 149.1(6.2).
Straessle – Tax Court of Canada finds that the beneficiary of an estate that had been wound up could appeal an assessment of the estate
The definition of a “person” indicates that such word “includes … the heirs, executors … or other legal representatives of such a person.” Lafleur J found that this definition indicated that the heir of an estate (i.e., the daughter receiving as the beneficiary of the estate of her mother), who had never been an executor or other legal representative of the estate, could object to and then appeal an assessment of the person and taxpayer in question, being the estate (which had since been wound up). She rejected the Crown’s argument that, in order to have this ability, the heir was required by the quoted wording to have been an heir who was also a legal representative, stating:
Parliament cannot have intended that an assessment be immune to a judicial challenge.
It is unclear whether there are non-procedural contexts in which a reference to taxpayer that is an estate will include an heir.
Neal Armstrong, Summary of Estate of Winifred Straessle v. The Queen, 2018 TCC 144 under s. 165(1).
Landbouwbedrijf Backx – Tax Court of Canada finds that the central management and control of a B.V. with a sole Dutch director was in Canada
When a Netherlands couple (the Backxes) immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. of the partnership interest, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on.
Smith J found that B.V. instead was subject to capital gains tax as a Canadian resident, as its central management and control was in Canada, stating:
[I]t was the Backxes who assumed effective and independent control of [B.V.] In most if not all instances, [the sister] was not even copied with the correspondence. This quite clearly suggests that she was a mere nominee who carried out clerical and administrative functions on behalf of the Backxes.
Furthermore, B.V. was resident in Canada for Treaty purposes as its effective management and control was in Canada - and if it was resident in both countries, this was a matter for the competent authorities to address and not the Tax Court. (The Treaty provided that a dual-resident corporation was not a Treaty resident in the absence of competent-authority agreement.)
He also found that there had not been any previous step-up in the adjusted cost base of the partnership interest of B.V. under s. 128.1(1)(c), as its central management and control had been in Canada from the time of the partnership’s formation.
Neal Armstrong. Summaries of Landbouwbedrijf Backx B.V. v. The Queen, 2018 TCC 142 under s. 2(1), s. 128.1(1)(c) and Treaties - Income Tax Conventions - Art. 4.
Quinco Financial – Federal Court of Appeal confirms that interest is added as usual to a GAAR assessment – and that taxpayers do not “apply” GAAR
Webb JA rejected a submission that no interest accrued by virtue of a GAAR reassessment between the balance-due date of a taxation year for which a large capital-loss claim was denied, and the date of the reassessment almost four years later, stating:
[T]he requirement that the Minister in GAAR cases must establish that a tax benefit is not consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer cannot justify a finding that any liability for any increased taxes would only arise once that reassessment is issued.
However, he also intimated that the Tax Court had gone overboard (in arriving at the same result) by stating “all taxpayers, who are directly subject to GAAR assessments, … are required to consider and apply GAAR” – which seemed to imply that the taxpayer rather than CRA is responsible under s. 245(2) for determining how the transactions’ tax consequences should be rejiggered to produce a reasonable result. (A similar statement was made in J.K. Read.) Webb JA stated:
[I]t is more accurate to state that all taxpayers who are contemplating a transaction or series of transactions that would result in a tax benefit should consider the risk that GAAR will apply to deny the tax benefit.
Neal Armstrong. Summaries of Quinco Financial Inc. v. Canada, 2018 FCA 137 under s. 161(1), s. 157(1)(b) and s. 245(2).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretation released in June 2013, as fully translated by us.
These (and the other full-text translations covering all of the 603 French-language Interpretations released in the last 5 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-06-19 | 25 April 2013 Internal T.I. 2013-0478511I7 F - Distribution à un commanditaire | Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate | real estate capital gains flowed through to limited partner retained character |
| Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) | allocated capital gains retained their character unless re services performed by partner in course of separate business | ||
| Excise Tax Act - Section 272.1 - Subsection 272.1(1) | distinction between return on partnership investment and services rendered by partner in the course of a separate business | ||
| Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) | services rendered by limited partner to LP gave rise to ACB increase if no s. 9 income inclusion for fee income | ||
| 2013-06-12 | 24 April 2013 External T.I. 2013-0476561E5 F - Coûts de drainage de terre agricole | Income Tax Act - Section 30 | costs of installing drainage tile deductible by tenant farmer, not lessor |
| 31 May 2013 External T.I. 2013-0480431E5 F - Deduction from business investment loss | Income Tax Act - Section 39 - Subsection 39(10) | capital gains deduction previously claimed by individual re capital gain allocated by trust reduced BIL subsequently realized by each of individual and trust | |
| 10 May 2013 External T.I. 2012-0442791E5 F - SENC - Revenu d'entreprise exploitée activement | Income Tax Act - Section 129 - Subsection 129(6) | Norco applied to rent paid by Opco to partnership between Opco's Holdco and Holdco's shareholder's brother | |
| 2 May 2013 External T.I. 2013-0481361E5 F - Ordre de disposition d'actions AAPE | Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(a) | FIFO method is applied to determine which of ideintical shares were disposed of first | |
| 14 May 2013 External T.I. 2012-0469591E5 F - Capital dividend received by a trust and CDA | Income Tax Act - 101-110 - Section 104 - Subsection 104(20) | no recognition of capital dividend by corporate beneficiary where received by trust in Year 1 and distributed in Year 2 | |
| Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (g) | no addition for capital dividend received by trust in Year 1 and distributed in Year 2 to corporate beneficiary |
Bonnybrook – Federal Court of Appeal finds that CRA has the discretion to extend the three-year deadline for applying for a dividend refund
CRA has had a longstanding view (e.g., in 2013-0499421I7) that s. 220(3) does not accord it the discretion to extend the limitation in s. 129(1) prohibiting a claim for a dividend refund in a return that is filed more than three years late. Woods JA has found that this position is incorrect, stating:
The CRA’s view … is that the taxpayer relief provisions cannot affect a filing requirement which restricts the issuance of a dividend refund. The problem with this reasoning is that this is exactly what the taxpayer relief provisions are intended to do — enable the Minister to provide relief from strict filing requirements. ...
Subsection 220(3) of the Act provides the Minister with a broad discretion to extend the time to file a “return”.
Neal Armstrong. Summaries of Bonnybrook Industrial Park Development Co. Ltd. v. Canada (National Revenue), 2018 FCA 136 under s. 220(3) and s. 220(2.1).
CRA confirms that the claiming of a capital gains reserve on a s. 84.1 transfer can result in a s 84.1 deemed dividend on a subsequent transfer based on the unclaimed CGE amount
On the non-arm’s length transfer of shares by an individual to a corporation, s. 84.1 prevents the use by the transferor of adjusted cost base in the transferred shares that reflects the previous claiming of the capital gains exemption (“CGE”). However, s. 84.1(2.1) indicates that for purposes of the ACB reduction under s. 84.1(2)(a.1)(ii)) respecting the non-arm’s length transfer, where a capital gains reserve is claimed under s. 40(1)(a)(iii) by the transferor or a non-arm’s length individual and it is possible for the transferor to claim the CGE, the CGE is deemed to have been claimed in the maximum amount irrespective of whether it is in fact claimed and whether in fact there is no intention to claim it.
For example, Father transfers shares of Opco (a small business corporation whose shares are eligible for the CGE) to his children in consideration for a note that is payable over 10 years, claims the capital gains reserve, but does not claim the CGE. The children transfer the Opco shares to a new Holdco in consideration for a note of Holdco, with a view to Opco dividends funding note repayments.
At the 2018 STEP Roundtable, CRA confirmed that this is how s. 84.1(2.1) operates, so that in this example, the children are deemed to receive a dividend on their receipt of the Holdco note. It is irrelevant that the transferor may have CGE room that he wishes to retain for future use - all the available room effectively is deemed to be used.
In its official response, CRA added three examples illustrating the interrelationship between the s. 84.1(2) ACB adjustment, the amount of CGE actually claimed and the amount of unutilized CGE at the end of the year of the transfer.
For example, if Father realized a $100,000 capital gain, claimed a $50,000 reserve, claimed a $25,000 CGE while still having $10,000 unclaimed CGE at the year end, he would be deemed to have claimed a CGE (of $35,000) re $70,000 of the capital gain.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.17 under s. 84.1(2.1).
CRA confirms that a non-resident trust can be retroactively (going back 5 years) deemed to have been resident in Canada if a non-resident contributor immigrates
A non-resident trust has resident beneficiaries with a current potential entitlement to receive income or capital and its contributor (Mr. X) had made a contribution to the trust less than 60 months before becoming resident.
At the 2018 STEP Roundtable, CRA indicated that in light inter alia of the lookback rule in s. 94(10), the trust is deemed to be resident for the five taxation years before the taxation year in which the individual became resident in Canada. Thus, the trust will be subject to interest and late-filing penalties for failure to have filed T3 returns (reporting its income for those years) and (where applicable) T1135 or T1134 returns for those years.
In the official written response provided to STEP Canada a few days ago, CRA expanded on the example provided orally by providing two further examples:
- where the contributor (Mr. Z) was not a non-resident for 60 months prior to making the contribution (i.e., Mr. Z became a non-resident in 2010 and made the contribution in 2013, before becoming resident again in 2018), the non-resident trust would be deemed to be resident in Canada by virtue of s. 94(3) commencing in the taxation year during which the contributor made the contribution to the non-resident trust (i.e., 2013)
- it is unnecessary for the contributor to have never been a resident of Canada before making the contribution to a non-resident trust for s. 94(10) to apply (e.g., Mr. Y became a non-resident in 2008, made the contribution in 2013 and became resident again in 2018).
Neal Armstrong. Summaries of 29 May 2018 STEP Roundtable Q.14 under s. 94(3)(a) and s. 94(10).
ST Productions – Court of Quebec finds that a USD contract price that was paid for in instalments as the work was performed was to be translated with each payment
In May 2008, the Quebec taxpayer (ST Productions) agreed to pay another company with which it was affiliated in some manner (Hybride) approximately U.S.$6 million in eight monthly instalments for producing special effects for a film production. The amount of the Quebec film tax credit which ST Productions could claim turned on when its expenses “arose” under the Quebec equivalent of ITA s. 261(2)(b). The taxpayer claimed that the expense arose only when the work was completed and it was invoiced for it (at which time the U.S. dollar had appreciated), rather than as the work was performed and paid for.
After noting that, although the contract provided for adjustments to the contract price in the event of specified changes to the costs of performing the work, no such adjustments occurred, Massol JCQ stated that “the percentage-of-completion method [which] takes into account the work effected as it occurs … should be considered … the method to be adopted,” and that “the foreign currency conversion arose at the time of each due date.”
Neal Armstrong. Summary of 9189-7397 Québec Inc. v. Agence du revenu du Québec, 2018 QCCQ 4692 under s. 261(2)(b).
CRA finds that compliance with the arm’s length standard does not oust the FAPI base erosion rules
A Canadian public company received and paid for R&D work done for its benefit by direct and indirect wholly-owned U.S. subsidiaries. It unsuccessfully argued that the fee income to these subsidiaries was not foreign accrual property income to it under s. 95(2)(b)(i)(A) because the fees paid by it satisfied the arm’s length standard in s. 247(2). The Rulings Directorate stated:
Paragraph 95(2)(b), as well as the other FAPI base erosion rules under paragraphs 95(2)(a.1) to (a.4), were enacted before the current transfer pricing rules … [and] we see no inconsistency and no operational conflict in the combined application of these two sets of rules … .
They also noted that there were issues to address in determining whether and to what extent the Canadian company would be entitled to a foreign accrual tax deduction for U.S. taxes of the subsidiaries, but that it was premature to address those issues given the stage of the file.
Neal Armstrong. Summaries of 1 February 2018 Internal T.I. 2016-0671921I7 under s. 95(2)(b)(i)(A), s. 95(3)(b), s. 95(3)(d) and Reg. 5907(1.3).