News of Note
Rio Tinto Alcan – Federal Court of Appeal finds that fees incurred by a public board in determining to make a bid, as contrasted to implementation, were currently deductible
Email this ContentPelletier JA confirmed the distinction between fees relating to acquisition and divestiture transactions of the taxpayer (“Alcan”) that were “incurred as part of Alcan’s decision-making process” (“oversight expenses”) and fees that “were incurred in the course of putting into effect Alcan’s decision once it had been made” (“implementation costs”). Accordingly, he confirmed Hogan J’s finding that the substantial portion of investment dealer fees incurred by the Alcan board that represented input to its decision to launch a hostile bid for a French public company (i.e., 65% of the Morgan Stanley fee and 35% of the Lazard Frères fee) was currently deductible, whereas the balance of the fees relating to assistance in the bid was a capital expenditure (and, thus, an addition to the adjusted cost base of the acquired shares). $19M in fees paid to a French lobbyist firm, whose purpose “was to facilitate the implementation of the Pechiney transaction by heading off possible political and public relations issues which might derail the transaction,” also fell into the implementation cost category, and were capital expenditures.
The same principles applied to investment dealer fees incurred respecting a subsequent butterfly spin-off transaction, so that the portion of Lazard Frères fees that related to advice on various divestiture options up to the time of the final board decision to effect a butterfly spin-off was fully deductible.
Pelletier JA also confirmed Hogan J’s finding that the same oversight costs that were the applicable portion of the investment dealer fees would also have qualified for deduction under s. 20(1)(bb). This entailed accepting the proposition that fees incurred in connection with the advisability of acquiring or spinning-off a whole company qualified as being paid for “advice as to the advisability of purchasing or selling a specific share … of the taxpayer.”
Neal Armstrong. Summaries of Canada v. Rio Tinto Alcan Inc., 2018 FCA 124 under s. 18(1)(b) – capital expenditure v. expense – oversight and investment management, s. 20(1)(bb) and s. 20(1)(g).
Income Tax Severed Letters 27 June 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Canada Life- Ontario Court of Appeal finds that a transaction resulting from a tax mistake should not be remedied under the Court’s general equitable jurisdiction
A Canada Life subsidiary (CLICC) had sought to realize an accrued loss on its LP interest in a subsidiary partnership by winding it up. This was accomplished by transferring pro rata interests in the partnership to its two partners, namely, CLICC and a wholly-owned GP, based on their respective 99% and 1% interests - followed immediately by a winding-up of the GP corporation into CLICC. CRA reassessed to deny the loss on the basis that the s. 98(5) rollover applied.
All that CLICC requested was for the Ontario Court of Appeal to cancel the winding-up of the GP, rather than to rectify the transactions. It argued that Fairmont “left open the ability for a court, in the exercise of its general equitable jurisdiction, to correct a mistake.” Before concluding that no remedy was available, van Rensburg JA construed the scope of Fairmont and Jean Coutu quite broadly, stating:
[I]it is not possible to alter corporate transactions on a nunc pro tunc basis to achieve particular tax objectives. In other words, the Supreme Court has signaled that retroactive tax planning by order of the Superior Court exercising its equitable jurisdiction is impermissible.
She also found that the remedy of equitable rescission of voluntary dispositions was unavailable.
Neal Armstrong. Summary of Canada Life Insurance Company of Canada v. Canada (Attorney General), 2018 ONCA 562 under General Concepts – Rectification & Rescission.
CRA rules on a combined pipeline and split-up butterfly
CRA ruled on a combined pipeline and split-up butterfly transaction respecting DC, which invested in marketable securities, and the shares in which passed to the estate with their adjusted cost based having been stepped-up under s. 70(5). DC then transferred its marketable securities to three transferee corporations (TCs) for the three beneficiaries in consideration for “butterfly shares” – but with DC holding onto the notes that it received on the immediate redemption of the butterfly shares for a redacted period of time. After that, DC was wound-up into the TCs, thereby resulting in deemed winding-up dividends and in the notes being extinguished on their being assigned to the TCs.
DC had refundable dividend tax on hand. This sequencing of the two deemed dividends (coupled with the appropriate choice by the TCs of their first year end) avoided Part IV tax circularity issues.
The ruling letter specified that thereafter, the TCs sell their remaining investments and distributed the proceeds on a specified gradual basis.
Neal Armstrong. Summary of 2017 Ruling 2016-0646891R3 under s. 84(2).
Ritchie – Tax Court of Canada finds that an early signing bonus was part of the proceeds of disposition of the subject property
A farmer, who rented his farm to his corporation, received an early “signing bonus” of $255,790 from Enbridge for entering into an agreement with Enbridge by the stipulated deadline under which he granted an easement for a pipeline to Enbridge. The Agreement stipulated that the $255,790 was “an incentive for early signing of the easement agreement” rather than part of the (separately stipulated) compensation for the easement.
Notwithstanding this clause, D’Arcy J found that in substance, the “signing bonus” was part of the taxpayer’s proceeds of disposition for disposing on an interest in land (the granting of the easement) and, thus, gave rise to a capital gain.
This case is helpful to the view that inducements paid to security holders for their agreement to exchange or tender their securities early are part of their proceeds rather than fee or inducement income.
Neal Armstrong. Summary of Ritchie v. The Queen, 2018 TCC 113 under s. 12(1)(x)(viii).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six 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 4 3/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for July.
CIBC – Tax Court of Canada finds that Visa’s fees to CIBC were subject to GST given inter alia that it was not a “person at risk”
CIBC issued Visa credit cards and utilized a credit card payment system that was operated and managed by Visa Canada. Visa Canada essentially acted as a largely automated go-between between the “issuer,” who provided the funds for a purchase at a merchant by a cardholder, and the “acquirer,” who used such funds to pay the merchant. Visa Canada added $18M in GST or HST to its charges for its services to CIBC in the years in question, and CRA denied CIBC’s s. 261 rebate claim therefor.
Rossiter CJ found that the services of Visa were “quintessentially administrative in nature” so as to be excluded from being a financial service by virtue of s. 4(2)(b) of the Financial Services and Financial Institutions (GST/HST) Regulations. Furthermore, Visa did not qualify as a “person at risk” so as to be excluded from the application of this Regulation: Rossiter CJ accepted a statement by Finance “that the person at risk exception is not meant to apply to risks which have only a remote chance of occurring.”
But for this Regulation, the services supplied by Visa Canada would have qualified as exempt “financial services” under para (l) of the definition (arranging for payment) or para. (i) therof (services relating to an agreement for which credit card vouchers were issued). As in Global Cash Access, the exclusions from financial service that were added in paras. (r.3) to (r.5) of the financial services definition did not have much traction.
Neal Armstrong. Summaries of CIBC v. The Queen, 2018 TCC 109 under ETA s. 123(1) – supply, asset management service, financial service – s. (l), s. (i), s. (r.3), s. (r.4), s. (r.5), Financial Services and Financial Institutions (GST/HST) Regulations, s. 4(2)(b), s. 4(3)(c), s. 4(1) – person at risk.
CRA will still demand tax accrual working papers from difficult taxpayers with large unexplained tax reserves
Gordon Parr (Director) indicated that, partly in response to the BP decision, CRA is currently updating its internal communiqué with respect to obtaining information from taxpayers, registrants and third parties. The communiqué will outline that CRA officials can seek the production of tax accrual working papers, provided that the request for such records is relevant to a specific risk issue or item under audit and the CRA official is using a certain level of restraint in seeking this information.
Tax accrual working papers may be sought where there are identified unresolved tax issues and there is a higher risk of non-compliance. Factors that may be considered include the level of non-compliance, large unexplained tax reserves, and potential tax at risk. The taxpayer’s list of uncertain tax positions that relates to tax reserves in the taxpayer’s financial statements is considered to be part of the taxpayer’s books and records and is not a privileged document unless otherwise demonstrated.
While CRA officials may, in certain circumstances, request the list of what the taxpayer has determined to be its uncertain tax positions, in considering the structures and transactions outlined, CRA officials should perform their own research and analysis in forming the basis of any potential reassessment. Provided that all of the relevant facts of the transactions are included in their uncertain tax positions, exclusions of the advisors’ analysis of the legal and tax effects of the transactions may be considered.
Neal Armstrong. 24 May 2018 CTF Seminar - Preventing, Navigating, and Resolving Tax Disputes under “Managing Tax Risk, The Ins and Outs of Reporting and Compliance” (Gordon Parr).
CRA has adopted mandatory referrals from auditors to Headquarters
Comments made by Assistant Commissioner Ted Gallivan included:
- CRA’s tightening of the voluntary disclosure program was in part responsive to concerns expressed by elected officials and other stakeholders who would have preferred to scrap the program entirely.
- CRA is making more referrals to Criminal Investigations.
- CRA is less likely to go back quite a number of taxation years for taxpayers who are generally compliant and cooperative during the audit process.
- With the help of its additional funding, CRA has substantially increased its ability to detect non-compliance, and is bringing lawyers into its investigations program to give it insights from the beginning.
- CRA has decided to adopt mandatory referrals from auditors to Headquarters, so that audit teams no longer have the discretion to refer to Headquarters for help or advice: there were too many files where Headquarters was brought in too late in the process.
- The audit teams can have litigation advice on request. However, this will not stop the entire audit report from being available to taxpayers.
- In more significant matters, proposal letters now often reflect input from Justice and Finance.
- CRA is revising its procedures on when it will request and use information under s. 231. CRA is committed to being systemic and consistent, and to explain why it needs information.
Neal Armstrong. 24 May 2018 CTF Seminar - Preventing, Navigating, and Resolving Tax Disputes under “Challenges of an Evolving Tax Landscape” (Ted Gallivan).
CRA indicates that financial institutions cannot provide T3s etc. to their clients in electronic form without written or electronic consent of the clients
Given the wording of Reg. 209(3), CRA does not consider that financial institutions can provide their clients with electronic copies of information slips (e.g., T3s) on a secure website without the written or electronic consent of the clients, even where the T3s etc. have also been provided in written form (subject to a limited exception permitting the provision of T4s in electronic form).
Neal Armstrong. Summary of 21 March 2018 Internal T.I. 2017-0730761I7 under Reg. 209(3).