News of Note
Béliveau – Tax Court of Canada finds that insurance benefits received by an ill dental surgeon to cover her practice expenses were taxable receipts
Email this ContentThe taxpayer, a self-employed dental surgeon, received benefits totalling over $600,000 under three Great-West policies during a two-year period of illness. Two of the policies provided coverage for her monthly general professional expenses, and the third policy, styled as professional sickness insurance, provided monthly amounts in the event of her illness. The taxpayer considered that there was no significant distinction between the third policy (replacing lost income) and the first two policies (covering business expenses). In affirming the Minister’s assessment, which treated the amounts paid out to the taxpayer under the first two policies as s. 9 income, Favreau J stated:
The surrogatum principle … is applicable [under which] the tax treatment of sickness insurance benefits depends on what such benefits are intended to replace being, in this case, the general expenses of carrying on the dental clinic.
He went on to indicate that the premiums under the two policies (which the taxpayer had not deducted in computing her income) were deductible.
Neal Armstrong. Summaries of Béliveau v. The Queen, 2018 CCI 87 under s. 9 – compensation payments and s. 18(1)(a) - income-producing purpose.
9118-5322 Québec – Tax Court of Canada indicates that transmitting purchaser new home rebate forms to CRA (or the ARQ) is imperative to the claiming by the builder of the rebate amount
Lafleur J indicated that a builder cannot deduct from net tax for the amount of new housing rebates credited to its home purchasers in a reporting period unless it submits the signed prescribed forms of the purchasers to the ARQ (or CRA, as applicable) in that month. Here, the builder not only failed to transmit the signed forms as required by ETA s. 254(5)(a), but also failed to get the forms signed by the purchasers on a timely basis as required under s. 254(4)(c).
Neal Armstrong. Summary of 9118-5322 Québec Inc. v. The Queen, 2018 CCI 96 under ETA s. s. 254(5)(a).
MacDonald – Federal Court of Appeal effectively affirms George Weston, and finds that the existence of a hedge does not turn on intention
An individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. Starting about seven years later, he started closing out the forward at a loss. The Tax Court had accepted the taxpayer’s testimony that he had intended to profit from the anticipated decline in the value of the BNS shares under the forward contract but nevertheless retained ownership of the shares based on his belief that they would perform well in the long term.
In finding that the taxpayer’s losses under the forward were realized on capital account, Noël CJ stated:
[A]n intention to hedge is not a condition precedent for hedging. It suffices that the person concerned owns assets exposed to market fluctuation risk when the derivative contract is entered into and that the contract has the effect of neutralizing or mitigating that risk.
Mr. MacDonald was not an “accidental hedger”. He was aware of the hedging effect which the Forward Contract would have on the BNS shares … .
After noting that George Weston dealt with a hedge of asset ownership rather than of transactional risk (and before agreeing with the Crown that George Weston was “dispositive” of the case before him), he stated:
A risk arising from ownership is equally capable of being hedged and there is no reason why the established rule that hedging gains or losses are treated the same way as the assets being hedged for tax purposes, should not apply… .
Neal Armstrong. Summary of The Queen v. MacDonald, 2018 FCA 128 under s. 9 – capital gain v. income – futures/forwards/hedges.
Pomerleau – Federal Court of Appeal finds that GAAR applied to converting soft ACB (generated from crystallizing the capital gains deduction) into pseudo-hard ACB under s. 53(1)(f.2) for use in extracting surplus
To simplify the facts somewhat by ignoring transactions in which the taxpayer accessed tax attributes of his sister, the taxpayer wanted to extract $2M from a family corporation, and was willing to do so on a basis that resulted in him receiving a deemed dividend of $1M provided that he was able to extract the other $1M tax free by using the previous step-up of the ACB of the shares of him (and his sister) to $1M using the capital gains deduction. The “hard” ACB and paid-up capital of the shares was nominal, so that the full $2M would have been deemed to be a dividend if he had simply transferred the shares to a new Holdco for cash proceeds of $2M.
Instead, he transferred the shares to a new holding company (P Pom) under s. 85(1) in consideration for high ($1M) basis Class G shares and low basis Class A shares, and redeemed the Class G shares. Most of the proceeds were deemed to be a dividend, and there was a largely matching capital loss that was denied under s. 40(6) and added to the ACB of his Class A shares under s.53(1)(f.2). He now could transfer the bumped Class A shares of P Pom to Holdco, taking back high PUC shares of Holdco, which he promptly redeemed for $2M free of additional tax, or so he thought.
CRA’s assessment of a deemed dividend under s. 245(2) effectively treated the ACB of the shares that were transferred to Holdco as not having been stepped-up under s. 52(1)(f.2). In agreeing with this assessment, Noël CJ stated:
The object and spirit of this provision, or its rationale, is to prevent amounts which have not been subjected to tax to serve in extracting surplus of a corporation free of tax. Subsection 84.1(2) proceeds with this goal in targeting amounts which, while forming part of the ACB of the shares concerned, have not been subjected to tax and have been excluded in the computation of the paid-up capital of new shares. To this end, subparagraph 84.1(2)(a.1)(ii) requires going beyond the ACB of the shares concerned – or of the shares for which they are substituted – and enquiring as to the source of the funds which constituted them in order to ascertain if they were subjected to tax. …
This rationale was circumvented by the plan implemented by the appellant. Of the amount of $1,993,812 that he withdrew, $994,628 represented amounts as to which no income tax had been paid.
After noting that the application of s. 84.1 could have a punitive effect on an inter-generational transfer of a business, he stated:
That situation, if it presented itself in the context of an analysis made under the GAAR, could possibly lead to an interpretation which prevented a punitive application of section 84.1. That situation, however, is not before us.
Neal Armstrong. Summary of Pomerleau v. The Queen, 2018 CAF 129 under s. 84.1(2)(a.1)(ii).
CRA indicates that an emigration-year return generally cannot be opened up more than 6 years later to allow a FTC for foreign tax imposed on a subsequent sale
Where a Korean immigrated to Canada while holding appreciated Korean real property and then emigrated from Canada 10 years later after it had further appreciated, thereby realizing a capital gain from its deemed disposition under s. 128.1(4)(b), he would be potentially eligible under s. 126(2.21) to claim a Canadian foreign tax credit for Korean taxes that become become payable on a subsequent sale respecting the gain that accrued in Canada, provided that this credit is assessed within the extended reassessment period of six years following the emigration year. However, the Korean property might be sold more than six years later. Can this period be extended by filing a waiver with CRA?
CRA, in clarifying its comments in 2016-0660421E5, indicated that it generally would not accept a waiver beyond this six-year period, but that, as a limited exception to this proposition:
[I]f any of the circumstances to support the deduction under subsection 126(2.21) of the Act (e.g., disposition of the property and/or foreign taxes paid) are present within the statutory assessment period referred to in paragraph 152(4)(b) of the Act, it may be appropriate for the Minister to consider a taxpayer’s waiver request for the emigration year to allow the Minister sufficient time to review and process any potential reassessment for this deduction beyond the aforementioned reassessment period.
Neal Armstrong. Summary of 11 October 2017 External T.I. 2016-0673171E under s. 126(2.21).
Tusk Exploration – FCA finds that Part XII.6 tax (effectively double-taxation) was payable on CEE purportedly renounced on a look-back basis to NAL shareholders
Tusk Exploration, a Canadian exploration company, unsuccessfully argued that it was not subject to Part XII.6 tax on Canadian exploration expenses that it had purported to renounce under the look-back rule - but which were now admittedly not eligible for look back because the flow-through share investors were non-arm’s length – because the reference in Part XII.6 to CEE that it “purported” to renounce under the rule referred only to expenses which had been validly rather than invalidly renounced under the look-back rule.
The Part XII.6 tax was also argued to be a proxy for interest, and the non-arm’s length shareholders were assessed interest on their denied CEE claims for the look-back year, resulting it what was argued to be a double interest imposition. After referring to the s. 69(1) example, Webb JA stated:
[T]he potential for double taxation exists in the ITA when transactions are completed between parties who do not deal with each other at arm’s length.
Neal Armstrong. Summaries of Tusk Exploration Ltd. v. Canada, 2018 FCA 121 under s. 211.91(1) and s. 248(28).
Our translations of CRA interpretations now go back 5 years
The table below provides descriptors and links for the Technical Interpretation released last week and for five Interpretation released in July 2013, as fully translated by us.
These (and the other full-text translations covering all 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. You are currently in the “open” week for July.
CRA confirms its policy of not assessing interest on loss substitutions
Aco first applied a $1,000 non-capital loss from Year 1 to offset a $1,000 taxable capital gain realized in Year 2. However, it then realized a $1,000 allowable capital loss in Year 3 and filed an amended Year 2 return to deduct that net capital loss under s. 111(1)(b), thereby restoring its $1,000 non-capital loss from Year 1.
CRA stated that, notwithstanding that the wording of s. 161(7)(b) does not accommodate this:
[I]t remains the CRA’s longstanding administrative practice not to assess interest where there is a substitution of losses, such as the replacement of a non-capital loss from a prior year with a net capital loss from a subsequent year, provided that there was no tax payable on either the original or amended return. Therefore … in the example above, the CRA would not assess interest.
Neal Armstrong. Summary of 21 March 2018 External T.I. 2017-0736291E5 under s. 161(7)(b).
CRA discusses the relationship between the s. 15(2) and s. 80.4(2) income inclusions respecting an unpaid shareholder loan
A shareholder receives a loan from the corporation in 2017, does not repay the loan but chooses to report the loan in 2019. CRA indicated that the application of s. 15(2), so as to include the loan amount in the shareholder’s income, is suspended until the time period in s. 15(2.6) has been passed (i.e., the end of 2018). In the meantime, s. 80.4(2) “would apply for the entire period during which the loan or debt was not repaid,” so as to impute interest throughout 2017 and 2018. When the 2017 income inclusion was reported in 2019, the previous inclusions under s. 80.4(2) would be backed out of the taxpayer’s income by virtue of s. 80.4(3)(b).
Neal Armstrong. Summaries of 6 April 2018 External T.I. 2018-0738871E5 F under s. 15(2.6) and s. 80.4(3)(b).
PPP Group – Federal Court of Appeal confirms that automobile replacement “warranty” payments did not qualify for ITCs
The Court of Appeal has briefly affirmed a decision of Tardif J respecting a Quebec company (“PPP”) which, through car dealers, offered motor vehicle replacement “warranties.” In the event of the loss of the vehicle through accident or theft, the warranties covered the difference between the depreciated value of the vehicle (which was covered by the regular insurer) and the cost of a new replacement vehicle. The consumer who had purchased the PPP warranty was required to acquire the new replacement vehicle from the dealer, and the dealer was paid directly by PPP.
PPP was unsuccessful in its contention that it was entitled to input tax credits under ETA s. 175.1 for a pro rata portion (e.g., 5/105, ignoring QST) of the claims paid by it. First, s. 175.1 did not apply to "insurance policies,” which Tardif J considered to be a more apt description of this product than “warranty.” Second, s. 175.1 required that the warranty be “in respect of the quality, fitness or performance” of the product, which Tardif J unsurprisingly found was getting at things like manufacturing defects rather than loss of a vehicle from theft or catastrophic accident.
ITCs also were unavailable under more general principles (under ETA s. 169) since the person acquiring the property or services funded by the “warranty” payment was the consumer getting the replacement vehicle rather than PPP itself (although PPP valiantly argued that it was paying for a valuable claim processing service received from the dealer.)
Neal Armstrong. Summaries of PPP Group Ltd v. The Queen, 2017 TCC 2, briefly aff'd 2018 CAF 123 under ETA s. 175.1, 169(1) and General Concepts – Illegality.