News of Note
Filion – Court of Quebec finds that a director is not liable for unremitted source deductions if he had no reason to suspect financial difficulty
Email this ContentThe taxpayer, who was a titular director (but not the sole director) and a shareholder, was duped by those managing the company into believing it was in good financial shape. Accordingly, he established a due diligence defence under the Quebec equivalent of S. 227.1(3). After discussion the federal and Quebec jurisprudence, Massol JCQ concluded:
[T]he liability of a director is not engaged until the time that the corporation commences, to the knowledge of the director, a period of financial difficulty such that the corporation cannot meet its obligations or, worse, begins to favour some creditors to the detriment of the fisc.
Neal Armstrong. Summary of Filion v. Agence du revenu du Québec, 2018 QCCQ 2759 under s. 227.1(3).
Pay Audio – Federal Court considers that the denial of remission of tax overpaid due to an honest mistake was not unreasonable
An agent of a partnership (Pay Audio) incorrectly told an ARQ auditor that the place of supply for digital music services supplied by Pay Audio to Telus was in Ontario rather than Alberta, and the ARQ assessed Pay Audio accordingly for uncollected Ontario HST. Pay Audio did not realize that, in fact, the place of such supplies (based on the relevant Telus servers being in Alberta) was in Alberta until about a year later when it had unsuccessfully sought to recover such tax from Telus, at which point the time had expired for objecting from the assessments or applying for refunds under ETA s. 261.
In confirming that the decision of the Remission Committee to deny Pay Audio’s application for a remission of the tax was within the range of what was reasonable, Lafrenière J stated:
"Equity aids the vigilant, not those who sleep on their rights" and the lack of attention and undue delay by Pay Audio in rectifying the error undermines its arguments for equitable relief.
Since Pay Audio had no identified reason for doubting the accuracy of the relevant employee’s misinformation about the location of the Telus servers, the quoted lack of diligence might be referencing the slow response from Telus (although it is hard to find fault here too, given that Pay Audio fully expected Telus to pay).
Neal Armstrong. Summary of Pay Audio Services Limited Partnership v. The Queen, 2018 FC 494 under Financial Administration Act, s. 23(2).
CRA rules on exiting a post-acquisition sandwich structure through using the s. 88(1)(d) bump and a continuance outside Canada
A non-resident partnership and its non-resident co-investors wished to acquire a Canadian public-company target (Target), whose only significant assets were non-resident subsidiaries (Subcos 1 and 2), and then eliminate this sandwich structure through the distribution of the Subcos to them.
Accordingly, they capitalized a Canadian Buyco (Parent), which acquired the shares of Target under a Plan of Arrangement for cash (or, interestingly, in the case of the only shareholder of Target who was a specified shareholder, for a combination of cash and shares of Parent). Parent then amalgamated with Target and the Subco shares were bumped under s. 88(1)(d) – but with the bump amount being reduced by any Subco surpluses described in Reg. 5905(5.4).
So far, this is essentially following the script for a buy, bump and run transaction. However, distributing the bumped Subco shares out of Amalco to the non-residents would have attracted a FIRPTA-style tax in the local tax jurisdictions for the Subcos. This local tax was avoided by continuing Amalco to a jurisdiction of convenience for the non-residents (perhaps, Delaware). The bump minimized the s. 128.1(4) tax on emigration. CRA ruled that the Parent/Amalco paid-up capital, which had been ground under s. 212.3(7)(c), was reinstated under s. 219.1(4) for purposes of computing the s. 219.1 emigration tax.
A further wrinkle in response to the local tax regime was that the amalgamation of Parent and Target was not a conventional amalgamation but one which was specified under the Plan of Arrangement to entail the continued existence of Target. The s. 88(1)(d) bump ruling effectively treated this as a good s. 87(11) amalgamation.
Neal Armstrong. Summaries of 2017 Ruling 2016-0643931R3 under Reg. 5905(5.4), s. 219.1(4) and s. 87(1).
6 further full-text translations of CRA interpretations are available
The table below provides descriptors and links for the Technical Interpretation released last week, a further Technical Interpretation also provided by us last week (which has not yet been released under the severed letter program, hence the absence of a bundle date) and four Technical Interpretations released in October 2013, all as fully translated by us.
The above translated interpretations (and the other full-text translations covering the last 4 1/2 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA confirms that a subsequently admitted partner benefits from a s. 34 WIP election made for a professional partnership’s 2017 year
Although the benefit of the election under s. 34 to exclude professional work-in-progress from income is being phased out over a five-year period, that election (in the case of calendar-year practices) cannot be made after 2017. CRA confirmed that since the election is made at the partnership level, where an election was made for the 2017 year of a professional partnership by an authorized partner in accordance with s. 96(3), a partner who is subsequently admitted to the partnership (in the posited example, a personal corporation to which an individual’s partnership interest was assigned) will benefit from the election as to its share of the partnership income.
Neal Armstrong. Summary of 26 March 2018 External T.I. 2017-0734381E5 F under s. 34.
CRA finds that making the ETA nil consideration election can have punitive results respecting GST/HST on related employee benefits
Although ETA s. 173(1) often imputes a taxable supply by an employer based on the amount of taxable benefits conferred by it under ITA s. 6(1)(a), s. 173(1)(d)(i) provides that this rule does not apply where the employer was denied an input tax credit under s. 170 on its acquisition of the property or service that, in turn, was provided to the employee. S. 170(1)(b) generally denies the ITC where such property was acquired for the exclusive personal consumption of an employee so as to engage s. 6(1)(a).
CRA found that this s. 173(1)(d)(i) exclusion did not apply where the property in question (an automobile) was acquired by a closely-related corporation and then leased to the employer with the benefit of the s. 156 nil-consideration election, with the automobile being provided for the exclusive personal benefit of an employee. CRA reasoned that as there was no GST/HST payable by the employer on its lease payments, it should not be said that it was being denied ITCs under the s. 170 rule. CRA implicitly accepted that the automobile was being acquired by the employer exclusively for commercial use notwithstanding the personal use of the automobile by its employee.
The above result appears to be anomalous. If the s. 156 election had not been made, the employer would have claimed ITCs on the lease payments made by it to its affiliate, so that the net additional amount required to be remitted by it under s. 173 might be small or minimal. As a result of making the election, it must still compute the same imputed GST/HST s. 173 benefit amount, but without getting a somewhat offsetting ITC.
Neal Armstrong. Summary of 21 December 2017 Interpretation 164739 under ETA s. 173(1)(d)(i).
Smith – Tax Court of Canada finds that two individuals jointly controlling a company were acting in concert respecting the payment of dividends so as to engage s. 160
Two individuals held their 50-50 Opco through a holding company held by a family trust, in the case of Mr Smith, and through a family trust in the case of Mr Scott. Whether unpaid tax liabilities attached under s. 160 to dividends paid regularly by the Opco, for distribution up the chain, turned on whether they were not dealing at arm’s length with Opco. Although each did not control Opco, D’Arcy J followed Fournier in finding that they were acting in concert respecting the payment of the Opco dividends, so that s. 160 so applied:
Mr. Smith and Mr. Scott as the Operating Company’s only directors and officers acted in concert and with a common economic interest to decide how they would withdraw the profits made by the Operating Company for their personal use.
Neal Armstrong. Summary of HLB Smith Holdings Limited v. The Queen, 2018 TCC 83 under s. 251(1)(c).
CRA confirms that partner time will not be included in professionals’ WIP
Accountants, dentists, lawyers, physicians, veterinarians and chiropractors are, on a phased in basis, being required to include the lower of the cost and fair market value of their work in progress in income. These professionals will maximize their deferrals if they choose to follow the direct cost method rather than the absorption cost method in determining the cost of their WIP (so that they will not be required to include the costs of fixed overheads such as rent). The cost of their WIP will include payroll costs including benefits but will not include any value of partner time.
For most professionals, the lower of cost and FMV will be cost determined on this basis. However, in the case of personal injury lawyers and others earning income on a contingency fee basis, their WIP will generally be valued under s. 10(4)(a) at “the amount that can reasonably be expected to become receivable in respect thereof after the end of the year,” i.e., nil.
Neal Armstrong. Summaries of 1 May 2018 letter to APFF, 2017-0709101E5 F under s. 10(5)(a) and s. 10(4)(a).
CRA indicates that generally accumulated “other comprehensive loss” recognized under IFRS or US GAAP does not reduce retained earnings for thin cap purposes
In the course of finding that a Canadian subsidiary that prepared its financial statements only under U.S. generally-accepted accounting principles was not required to reduce its retained earnings for thin cap purposes by the amount of a separately reported OCI debit balance (i.e. an accumulated other comprehensive loss) in those financial statements, the Directorate stated:
We understand that under US GAAP, OCI is a component of equity that is presented separately from retained earnings and paid-in capital … . IFRS similarly requires that OCI be presented as a separate component of equity and not included in retained earnings. …
However, since the Taxpayer’s financial statements are prepared using GAAP of another country, the CRA could question the appropriateness of reporting any specific item as OCI, rather than retained earnings, where such treatment deviates from the treatment under Canadian GAAP (including IFRS) and such deviation has a significant impact on the amount of deductible interest under the thin capitalization rules.
Neal Armstrong. Summary of 19 January 2018 Internal T.I. 2017-0721641I7 under s. 18(5) – equity amount – (a)(i).
Barr – Tax Court of Canada finds that broker fees paid to locate purchasers of a private company were HST-taxable
The sole individual shareholder retained two brokers for the sale of his company or its assets. Whether the commissions that they charged on the ultimate sale of the shares to a purchaser whom they had found were exempt from HST turned, in part, on whether their services were those of “arranging for” the sale of the shares. In finding that this exemption for a “financial service” was not available, Pizzitelli J referred inter alia to the following factors:
- The brokers merely brought potential purchasers to the shareholder and had no involvement in negotiating or concluding the sale, including even the price.
- They did not undertake to find a purchaser for the shares as contrasted to the assets – and, in fact, when they found the ultimate purchaser, that purchaser initially made an offer for the assets (at which point the brokers dropped out of the picture) and, only later, was a share sale negotiated.
- The “brokers were not registered business or securities brokers.”
The first point (which was consistent with 106288) could be viewed as stating that the brokers here did most of what typically is done by brokers who have been retained to find a business buyer. The second point seems asymmetrical in that presumably the commissions could not have been treated as exempt if an asset sale had culminated (and also given that any GST/HST charged likely would have been creditable on an asset sale). As elements of the first two points often are present where brokers are retained to find purchasers for a wholly-owned business, this decision increases risks that commissions paid on the sale of such business may not be considered to be GST/HST exempt.
The alternative position of CRA was that the services of the brokers were excluded by (r.4) of the “financial services” definition. This exclusion refers inter alia to market research and promotional services that are preparatory to an “arranging for” financial service. Market research and promoting the company to potential purchasers was mostly what the brokers did, so that Pizzitelli J considered that the commissions also would have been taxable on this alternative ground. This broad scope accorded to (r.4) appears to be inconsistent with Global Cash Access, a leading decision which apparently was not brought to his attention (and is also inconsistent with Rojas, also not cited). Nonetheless, his decision may embolden CRA to continue applying (r.4).
Neal Armstrong. Summaries of Barr v. The Queen, 2018 TCC 86 under ETA s. 123(1) – financial service – para. (l), para. (r.4).