News of Note
Owen J finds that it was costly for Justice to pursue its allegations of sham in the Cameco transfer-pricing litigation
Email this ContentOwen J made a lump sum award for legal fees of Osler borne by Cameco in its successful appeal of transfer-pricing adjustments for three of the years in dispute (2003, 2005 and 2006) of $10.25M, which represented about 35% of the Osler fees charged for those years. Factors mentioned by Owen J included:
- Settlement offers made by Cameco (one less than 30 days before trial, and one after trial) did not have any real bearing on his award given their “de minimis nature” (i.e., although Cameo offered “$32 million of additional taxable earnings in 2006 … no additional tax in any of the three years under appeal” was offered.
- The “volume of work was significantly increased by the Respondent’s reliance on sham, i.e., Cameco had “to address minute administrative details of how it and its subsidiaries carried on business.”
- He did “not accept the Respondent’s submission that it could not have anticipated the costs incurred by the Appellant given the Respondent’s vigorous pursuit of the allegation of sham.”
Neal Armstrong. Summary of Cameco Corporation v. The Queen, 2019 TCC 92 under Tax Court of Canada Rule 147(3).
CRA confirms that there is no rollover for tax deferred cooperative shares on a triangular amalgamation
Where s. 87(2)(s) applies to an amalgamation of agricultural cooperative corporations, then shareholders will not be considered to have realized income as a result of the disposition of their “old” tax deferred cooperative shares for equivalent new shares, there will be no withholding required under s. 131.1(7) and their new shares will be treated as tax deferred cooperative shares until such time as they are disposed of. CRA has confirmed that s. 87(2)(s) will not apply to shares that are exchanged for shares of the parent on a triangular amalgamation, so that the exchanging shareholders will be required to recognize proceeds of disposition under s. 131.1(2).
Neal Armstrong. Summary of 25 February 2019 External T.I. 2019-0793911E5 F under s. 87(2)(s)(ii).
Income Tax Severed Letters 8 May 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Universo Home – Tax Court of Canada finds that a backdated declaration of trust did not preclude a finding that a company was the beneficial owner of a new home construction
CRA denied the ability of a home builder (“Universo Home”) to claim a GST new home rebate purportedly assigned to it pursuant to ETA s. 254(4) on the basis that Universo Home had no interest in the property at the time the home was constructed and, therefore, did not qualify as its “builder.” The difficulty centered on the fact that the 2011 purchase and 2013 sale documentation named the wife (Mrs. Dhesi) of the sole shareholder (Mr. Dhesi) of Universo Home as the purchaser and vendor of the property, and the fact that Declaration of Trust, which named Mrs. Dhesi as the nominee for Universo Homes, was found by Bocock J to have not been signed until sometime before (perhaps, shortly before) the closing of the 2013 sale.
Bocock J nonetheless found that Universo Home was the beneficial owner for some period prior to the sale, partly on the basis that it paid for the construction work and reported the property as an asset for financial statement purposes. Accordingly, it qualified as a builder for rebate purposes.
Bocock J also intimated in obiter that even if Universo Home had not acquired beneficial ownership, it still would have qualified as having an “interest” in the property (which was all that the “builder” definition required) by virtue of potential builder’s liens on the property for the construction work that it had performed.
Neal Armstrong. Summary of Universo Home Construction Ltd. v. The Queen, 2019 TCC 87 under ETA s. 254(4).
CRA indicates that "an interest … in a corporation other than shares" includes debt
A private foundation that, at the end of a taxation year, holds more than 20% of a class of a corporation’s class of shares (for example, as the result of a bequest) faces a potential penalty under s. 188.1(3.1). Could this excess be resolved by the corporation redeeming the shares for a promissory note? The issue lies in s. 188.1(3.2), which states that if a private foundation enters into a transaction to avoid a “divestment obligation percentage” by substituting shares for "an interest … in a corporation other than shares," then such interest is deemed to have been converted back into shares at their FMV.
When asked about this, the Charities Directorate stated:
[W]e take the said term [“interest”] to include (in a broad, general sense) any right to have the advantage accruing from anything, and any right in the nature of property (such as a right of a creditor for repayment from the debtor's assets, as in the foundation's case), and not limited to stock options or other rights to acquire shares … .
Neal Armstrong. Summary of 12 December 2018 Interpretation Letter of the CRA Charities Directorate to Simon Cheung under s. 188.1(3.2) and summary of Simon Cheung, "Private Foundations: Exceeding the 20 Percent Limit", Canadian Tax Focus, Vol. 9, No. 2, May 2019, p. 5 under s. 188.1(3.1).
Colitto – Tax Court of Canada finds that a director’s s. 227.1 liability cannot flow through to a transferee under s. 160 unless the s. 227.1(2) claim procedures have first occurred
The taxpayer’s husband (Mr. Colitto) was acknowledged to be liable under s. 227.1 for the failure of his corporation to remit source deductions between February and August, 2008. On May 2, 2008, Mr. Colitto transferred real estate to the taxpayer (Ms. Colitto) for nominal consideration. In 2016, CRA assessed Ms. Colitto on the basis that Mr. Colitto’s s. 227.1 liability had flowed through to her under s. 160 (to the extent of the real estate value). At issue was whether, under s. 160(1)(e)(ii), such liability was an amount that the transferor of the real estate (Mr. Colitto) was liable to pay under the Act in “or in respect of the taxation year in which the property was transferred or any preceding taxation year.”
Visser J found that Mr. Colitto’s s. 227.1 liability did not arise until 2011, when the last precondition for its application was satisfied, i.e., the corporation’s source-deduction tax debt was executed and returned unsatisfied. Hence, “Mr. Colitto’s liability arose pursuant to section 227.1 … in his 2011 taxation year and was not in respect of his 2008 taxation year” – so that the condition in s. 160(1)(e)(ii) quoted above was not satisfied. Although the reasoning of Visser J thus was quite straightforward, he provided a detailed contextual discussion of ss. 227.1 and 160 and their interplay, given that he was disagreeing with four prior Tax Court decisions, which found that the s. 227.1 liability arises at the time of the failure of the corporation to remit rather than when the subsequent steps to collect that corporate liability have failed.
Neal Armstrong. Summary of Colitto v. The Queen, 2019 TCC 88 under s. 160(1)(e)(ii).
Van Steenis – Federal Court of Appeal affirms that “return of capital” distributions by a mutual fund reduced the unitholder’s deductible interest
The taxpayer borrowed $300,000 to purchase units of a mutual fund trust in 2007. The distributions made thereafter by the trust were exclusively return-of-capital distributions, and by 2015, about 2/3 of the taxpayer’s capital had been returned. Most of these distributions were used for personal purposes. The Tax Court had confirmed CRA's denial of a portion of the loan interest expense claimed in the 2013 to 2015 period, on the basis that the current use of a portion of the borrowed funds was now such personal use.
In dismissing the taxpayer’s appeal, Laskin JA stated:
We are not persuaded that the requirement to trace the borrowed money to a current eligible use applies only where there has been a disposition, in whole or in part, of the original investment. … The focus of [s. 20(1)(c)] is the current use of the borrowed money, not on the current ownership status of the property initially acquired with it.
Neal Armstrong. Summary of Van Steenis v. Canada, 2019 FCA 107 under s. 20(1)(c)(i).
6 more translated CRA interpretations are available
We have published translations of a CRA interpretation released last week and a further 5 released in March 2012. Their descriptors and links appear below.
These are additions to our set of 849 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for April.
Praesto Consulting – Court of Appeal of England and Wales finds that a company was entitled to input tax credits for VAT on legal-fee invoices addressed only to its executive
A key employee (Mr Ranson) of an IT consulting firm (“CSP”) left along with three other employees to set up a competing firm (“Praesto”). They were sued by CSP for breach of fiduciary duty but for tactical reasons, Praesto itself was not sued. The law firm acting for Mr Ranson (“Sintons”) addressed eight invoices to him alone, which were paid by Praesto, and Sintons declined a request to address its invoices to Praesto.
The availability to Praesto of an input tax credit for the VAT included in the Sintons invoices turned on a VAT provision providing such a credit for “VAT on the supply to him [the taxable person] of any goods or services being … goods or services used or to be used for the purpose of any business carried on or to be carried on by him.” In finding that Praesto was entitled to such ITCs, Hamblen, LJ stated.
CSP was seeking to put Praesto out of business as its competitor. …
The FTT [below] was satisfied and found that the litigation was effectively being brought against Mr Ranson and Praesto, even though Praesto had not been joined to the proceedings. That reflected the economic reality. It was also borne out by CSP's stated intention to join Praesto if and when Mr Ranson's liability for breach of fiduciary duty was established… .
Neal Armstrong. Summary of Praesto Consulting UK Ltd v HM Revenue and Customs [2019] EWCA Civ 353 under ETA s. 169(1).
1680169 Ontario - Federal Court finds that it was not unreasonable for CRA to decline to waive interest attributable in part to failings of a third party (the company’s accountant)
An applicant for interest and penalty relief had filed returns for its 2009 to 2013 taxation years in April 2015. CRA granted partial interest relief for the 2009 and 2010 returns, on the basis that it was not until 2010 that the applicant began to be aware of substantial failings of its new accountant. The applicant attributed its substantial further delay in filing the returns to the difficulties of reconstructing its financial records after turning to yet another accountant for assistance. In finding that it was not unreasonable for CRA to deny further relief, Dinar J stated:
[T]he Minister’s Delegate …reasonably concluded that the Applicant’s circumstances were not “beyond its control”.
… [T]his Court has held that even when penalties were assessed as a result of accountant error, the Minister is not required to exercise her discretion … . The fact that the Applicant made attempts to remedy the situation by reconstructing financial statements which took a significant amount of time does not render the Decision unreasonable.
Neal Armstrong. Summary of 1680169 Ontario Limited v. Canada (Attorney General), 2019 FC 562 under s. 220(3.1).