News of Note
CRA notes that wire transfers can get lost because of intermediary banks cutting off essential characters
Email this ContentCRA observed that “intermediary banks often have a limit on the number of characters allowed in [a wire transfer] transaction, so this can result in some essential information being cut off” thereby resulting in difficulties allocating payments from non-residents and others to the correct account – and stated that “Currently, the best way to ensure that a wire transfer is successful is to also send a fax with the account information.”
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.13 under ETA s. 278(2).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretations released in February 2013, as fully translated by us.
These (and the other full-text translations covering all of the 657 French-language Interpretations released in the last 5 2/3 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 October.
594710 B.C. - Federal Court of Appeal finds that the allocation of partnership condo profits to a lossco that acquired its interest at year end without any economic risk was a vacuous transaction abusing ss. 96(1)(f), 103(1) and 160(1)
Income account treatment of the profits realized by a condo-project limited partnership was avoided through the corporate partners (the Partnercos) of the partnership paying safe income dividends (out of the realized but unallocated condo profits) to their respective Holdco shareholders through the payment of stock dividends of preferred shares followed by a redemption of those preferred shares – in turn, followed by a sale by the Holdcos of the Partnercos to a public company with substantial resource pools (Nuinsco). The income of the partnership for the year in which the condo sales had occurred was allocated to Nuinsco following the winding up into it of the Partnercos.
The sale of the Partnercos to Nuinsco two days before the partnership’s year end resulted in the deemed commencement of new taxation years for the Partnercos, which thereby permitted most of the income of the partnership to be allocated to Nuinsco as the principal partner at year end. In finding that such allocation was abusive for purposes of s. 245(4), Woods JA stated that it “divorc[ed] the economic consequences of the arrangement from the allocation of taxable income” given that “Nuinsco had virtually no economic interest or risk in the real estate development… except for a 10 percent ‘deal fee’.”
For similar reasons, she found that the allocation of most of the partnership income to Nuinsco also was an abuse of s. 103(1), and went on to state that “the Minister may not have had to resort to the GAAR in this case because subsection 103(1) appears to apply on its own.”
The taxpayer in this case was not any of the Partnercos, but a Holdco for one of the Partnercos that had received the stock dividend in question. Woods JA found that this stock dividend, when viewed in combination with the subsequent immediate redemption of the stock dividend shares, had the same effect as a cash dividend and, therefore effected a transfer of property to the Holdco for no consideration for purposes of s. 160. Accordingly, from a GAAR perspective, the transactions – which permitted an allocation of income to Nuinsco and the resulting avoidance of any tax liability that could flow through to the Holdco under s. 160 - also amounted to an abuse of s. 160.
Neal Armstrong. Summaries of Canada v. 594710 British Columbia Ltd., 2018 FCA 166 under s. 245(4), s. 103(1), s. 160(1) and s. 152(8).
Atlantic Packaging – Tax Court of Canada finds that s. 54.2 did not apply to the drop-down of under 68% of the assets of a business division to a Newco for Newco shares
The taxpayer, a paper products manufacturer, engaged in a hybrid transaction in which it sold some of the assets of its “Tissue Division” directly to a third-party purchaser (“Cascades”) and rolled the balance of them down to a Newco under s. 85(1) for Newco shares and sold the Newco shares to Cascades. CRA assessed on the basis that the sale of the Newco shares was on income account. The only issue before Graham J was whether s. 54.2 deemed the Newco shares to be capital property, which required that the drop-down transaction be considered to be the transfer of substantially all the assets of an active business.
Graham J found that "the test in section 54.2 is intended to be a somewhat flexible test but … there is no reason not to consider the fair market value of the assets when applying the test.” From the FMV perspective, the transferred assets represented about 68% of the assets of the Tissue Division – and perhaps significantly less, given that some of the Tissue Division assets had not been valued. He also was receptive to arguments that, given the flexibility of the test, he should also consider whether the dropped-down assets represented “the heart of the business of the Tissue Division,” but did not find any such indication on the evidence. Accordingly, s. 54.2 did not apply, and it was unnecessary for him to go on to consider whether the Tissue Division was a separate business or merely a division of a larger business.
It is unclear why CRA considered that the gain on the taxpayer’s sale of the Newco shares was not a capital gain on general principles. In 2012-0438651E5, it recognized the Continental Bank and Loewen principle to the effect that a transaction is not an adventure in the nature of trade if it cannot generate an economic profit - irrespective of whether there is a deemed (fictitious) gain as a result of an ITA deeming provision. Here, assuming that the roll-down transactions occurred immediately before the sale (similarly to Continental Bank), there would have been no reason to expect the business to have appreciated in the intervening few minutes or days, so that there would have been no commercial profit generated on the sale of the Newco shares.
Neal Armstrong. Summary of Atlantic Packaging Products Ltd./Atlantic Produits d'Emballage Ltée v. The Queen, 2018 TCC 183 under s. 54.2.
Lachance – Federal Court finds that CRA could refuse an extension to a taxpayer confused by a CRA Guide
The GST/HST Guide on the new housing rebate indicated that an Ontario new housing rebate was available in circumstances where the federal rebate would have been available but for the value of the new home having been over $450,000. The taxpayer stated she was confused by the somewhat unpacked statement to this effect, and did not realize until shortly after the two year deadline for applying for the Ontario rebate that, in fact, she had earned it.
CRA denied her extension request on the grounds that the Guide disclosure was not inaccurate – and none of the other published grounds for taxpayer relief were met. Manson J stated that he had “sympathy for the Applicant’s position that the language in the Guide could be more clearly articulated,” but nonetheless dismissed her application for review of the extension refusal, stating that the CRA conclusion “that the [Guide] language does not mislead or misinform, is reasonable.”
The language in ETA s. 256(3)(b) providing for an extension for applying for the new housing rebate to any “date that the Minister may allow” is similar to the provision for the extension of the (very short) deadline in s. 167(1.1) for filing a s. 167 election to “such later date as the Minister may determine on application of the recipient.” Would it be a reviewable error for the Minister to decline an extension under s. 167(1.1) on the grounds that there was no natural disaster, serious illness, or CRA fault?
Neal Armstrong. Summary of Lachance v. Canada (National Revenue), 2018 FC 925 under s. 256(3)(b).
CRA accepts that a nominee can be a “participant” in a real estate JV if it also has a small beneficial interest
CRA has made it clear (e.g., in Notice 284) that it will no longer accept that a real estate nominee can be a valid “operator” of a real estate joint venture (unless its role, in fact, is much more than that of nominee). CRA has now confirmed that the nominee will qualify as a “participant” in the joint venture if, in addition to holding 100% of the registered title to the real estate, it also holds a “small” beneficial co-ownership interest (e.g., 0.001%?) – and, as a participant, it could then be designated as the JV operator. CRA did not discuss what would be required for purchases, and rentals or sales, to be considered to be made by the nominee on behalf of the other co-owner(s).
When asked to confirm the questioner’s understanding that CRA will be publishing its position that where an agreement is a joint venture at law, it is a joint venture for purposes of the s. 273 JV election,” notwithstanding any provision in the particular agreements governing the joint venture which may state otherwise,” CRA stated:
[W]e will confirm the position that a joint venture at law is considered to be a joint venture for purposes of the joint venture election under section 273 in a planned publication. Where particular joint venture agreements contain provisions that cause us to question the status of the joint venture, the agreements will be examined.
This likely indicates that CRA accepts the proposition that whether there is a JV is determined by reference to the Williston criteria set out in Westcan and is not significantly affected by the labels the parties attach to their relationship. Perhaps the pending publication will also comment on Medallion.
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.11 under s. 273(1).
CRA finds that SLFI tax must be remitted irrespective of a failure of a SLFI supplier to charge the tax going into the SAM formula
A Canadian financial institution makes a taxable supply of services to an unrelated Canadian selected listed financial institution (SLFI) for cash consideration, but erroneously fails to invoice and collect any GST/HST thereon. Since the SLFI computes its SLFI tax under the “SAM” formula in s. 225.2(2) based on the tax payable by it, it nonetheless would be required to take the tax payable by it to the supplier into account in computing that SAM formula tax. The questioner suggested in light of s. 278(2), which provides that a person is not required to remit a tax amount where “the amount is required under section 221 to be collected by another person,” that the SLFI was not required to remit the related component of its s. 225.2(2) tax (based on the tax payable to the supplier) because of the obligation of its supplier to have collected and remitted that tax.
CRA considered this suggestion to be quite at odds with the scheme of the SAM formula rules, which required the SLFI to compute and remit an amount which was quite distinct from the tax paid to its suppliers. Essentially, the SAM formula computes a normative amount of provincial HST based on the residence of the SLFI's ultimate stakeholders, and compares this with the actual provincial HST paid to its suppliers – and then requires that the difference be reported and claimed as refunds or remitted as tax, in interim and final returns. Thus, the SAM tax is essentially by definition distinct from the tax that was remittable by the SLFI supplier.
Neal Armstrong. Summaries of 8 March 2018 CBA Commodity Tax Roundtable, Q.10 under s. 278(2) and s. 225.2(2).
CRA finds that the s. 110.6(31) limitation on LCGE claims applied to capital gains reserves distributed by a personal trust
S. 110.6(31) provides that where a previously-claimed capital gains reserve is recognized as a capital gain in a subsequent year under s. 40(1)(a)(ii), the total lifetime capital gains exemption (LCGE) claim of the taxpayer in the subsequent year cannot reflect the benefit of any increases (e.g., from indexing for inflation ) in the quantum of the exemption from the year of the original disposition.
CRA has found that the s. 110.6(31) limitation applies as well where a personal trust realized the capital gain (e.g., from qualified small business corporation shares), claimed the reserve, and then distributed the reserve amount to a beneficiary in the subsequent year utilizing ss. 104(21) and (21.1) designations.
Neal Armstrong. Summary of 3 August 2018 Internal T.I. 2018-0755351I7 under s. 110.6(31) and s. 104(21.2).
Kwan – Tax Court of Canada rejects a contention that child care expense cannot have an educational aspect
The taxpayer (whose wife also worked full time) successfully made child care expense claims for the costs of after-school programs (e.g., chess programs, math tutoring classes and Chinese language classes) for his 10 and 12-year old children, who finished school at 3:00 pm. Pizzitelli J found that it did not matter that these activities had a significant educational component. In addition, he rejected a Crown submission that it was inappropriate for the taxpayer to pay bilingual university students to mind the children at $5 more per hour than high school students would cost, stating that this was an appropriate exercise of “parental discretion.”
Neal Armstrong. Summary of Kwan v. The Queen, 2018 TCC 184 under s. 63(3) – child care expense.
Income Tax Severed Letters 19 September 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.