News of Note
FTQ – Tax Court of Canada finds that a “gift” that relieved the taxpayer of an obligation to invest the gifted funds was not a gift
Email this ContentThe corporate taxpayer agreed with the City of Chandler that it would no longer use any loan repayment proceeds received by it from a City-owned corporation - that had failed in an costly attempt to restart a paper mill close to the City – to invest in a prospective replacement economic-development LP to be sponsored by the City, but would instead make a “gift” of the loan repayment proceeds (which ended up totalling $9.3 million) to the City, for which it received charitable receipts. From a CRA perspective, what might have been troubling about this was that, broadly speaking, this $9.3 million was not really the taxpayer’s money as, in the absence of its “gift,” it would have been received subject to an obligation to “invest” in what might likely be or become a worthless enterprise with ugly financial statements.
Ouimet J found that there was no “gift” and, thus, no s. 110.1(1)(a) deduction, stating:
Since the payment of the sums … to the City of Chandler had the effect of freeing the appellant of its obligation to negotiate in good faith to create a limited partnership, the consideration received by the appellant in exchange for such payment was the amount by which that obligation was extinguished.
He also rejected the taxpayer’s alternative argument that the payments qualified for current deduction consistently with the s. 18(1)(a) income-producing purpose test given that their purpose instead was to avoid involvement in the proposed LP and to leave to the City alone the responsibility of using the sums to economically develop the region.
Neal Armstrong. Summary of Fonds de solidarité des travailleurs du Québec (F.T.Q) v. The Queen, 2018 CCI 3 under s. 110.1(1)(a) and s. 18(1)(a) – income-producing purpose.
The new split income rules rest on a conceptually flawed foundation
The concept under the expanded split-income rules of linking business income or gains to individual contribution based on a “reasonable return” thereon is inherently intractable:
Returns are random, often yielding unintended results, from large gains to bankruptcy. There's often no demonstrable way to connect the results back to the contributions of specific people. The notion that one can do so is closely related to the … Marxist … labour theory of value – an intuitive notion that has since been thoroughly debunked… .
Paradoxically, the rules do not accommodate family members adjusting their relative gains to accord with the new normative standard. Suppose that a corporation that is owned 50-50 by two spouses is sold, and that their relative contribution to the success of the company is considered to be 60-40:
In this scenario, 20 per cent of one spouse's gain is split income, and taxed at the highest rate. There is no way around this, except to manipulate the price paid by the vendor to each spouse. That tax-guided manipulation may not be acceptable, or even possible because of the attribution rules.
Neal Armstrong. Summary of Kevyn Nightingale, "Private Company Income-Splitting Proposal Part 3: The Government Responds", Tax Topics (Wolters Kluwer), No. 2389-90, December 21, 2017, p. 1 under s. 120.4(1) – reasonable return – para. (b).
IP can be valued using the relief-from-royalty method
One common approach to valuing intellectual property is the relief-from-royalty method under which it is valued as the present value of the royalties that would have been paid, had the IP been licensed in an arm's length transaction. This entails significant judgment respecting the selection of the royalty rate to apply to the cash flows generated by the IP, and the selection of the discount rate to apply to the royalty stream.
[T]here are several "rules of thumb" which can be utilized in determining an appropriate royalty rate. One such rule is the "25 per cent profit split valuation method" which determines a royalty rate in order to allocate 25 per cent of the licensee's profits to the licensor. Although this may serve as a useful starting point to begin consideration of the value of IP, courts have been reluctant to accept this methodology.
Neal Armstrong. Summary of Peter Neelands and Suzy Lendvay, "Valuation of IP based on a royalty stream", The Lawyer's Daily (LexisNexis Canada), January 24, 2018 under General Concepts – FMV – Other.
Income Tax Severed Letters 31 January 2018
This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Stadion Amsterdam – ECJ finds that a single supply of composite items is subject to a single rate of VAT
The operator of a soccer stadium had been found to be making a single supply of tours notwithstanding that participants were entitled at the conclusion of their tour to visit an on-site museum free of additional charge. The ECJ found that this single supply was subject to the general rate of VAT rather than in part being eligible for the lower VAT rate applicable to museum admissions, notwithstanding that the separate value of the two components of the supply could be readily identified.
Neal Armstrong. Summary of Stadion Amsterdam CV v Staatssecretaris van Financiën (Secretary of State for Finances, Netherlands), [2018] EUECJ, Case C-463/16 (18 January 2018) (9th Chamber) under ETA s. 165(1).
Barker v Baxendale Walker - Court of Appeal of England and Wales finds that a tax solicitor was negligent in not warning that his interpretation might be wrong
A tax solicitor charged £2.4 million for his advice on a tax avoidance scheme. His interpretation of the key statutory provision (including the meaning to be accorded to “is” and “at any time”) was found by the Court of Appeal to likely be incorrect, so that the taxpayer was not to be faulted for settling with HMRC for £11.3 million. The taxpayer would have proceeded with the scheme if he had merely been given a “general health warning” (i.e., that any tax avoidance scheme was subject to a risk of successful challenge), but not if he had been given a specific warning of the significant risk of the particular point of interpretation being successfully challenged.
In finding that the tax solicitor was negligent in failing to warn of this specific risk, Asplin LJ stated:
[I]t is perfectly possible to be correct about the construction of a provision or, at least, not negligent in that regard, but nevertheless to be under a duty to point out the risks involved and to have been negligent in not having done so … .
…There was a significant risk that the … advice was wrong and in all the circumstances, a reasonably competent solicitor would have gone beyond his own view and set out the risks.
Neal Armstrong. Summary of Barker v Baxendale Walker Solicitors (a firm) & Anor, [2017] EWCA Civ 2056 under General Concepts – Negligence and Statutory Interpretation – Interpretation Act – s. 10.
Referred Realty – Federal Court sets aside a CRA decision not to apply a credit under s. 221.2 based on the taxpayer’s slowness in filing returns
The taxpayer had very substantial difficulties (relating to two successive incompetent bookkeepers) in getting its records into accurate shape, that resulted in a four-year delay in filing any income tax returns although, in the meantime, it kept remitting estimates of its tax. CRA garnished its bank account in an amount that was excessive in light of its ultimately-filed tax liabilities. The excess amounts collected by CRA were non-refundable due to the return-filing delays, and the taxpayer applied under s. 221.2 for these credits to be deducted from future tax liabilities.
CRA denied the request on the grounds that the taxpayer must bear the consequences of its poor record-keeping and extensive delays in filing returns. Campbell J set aside this decision on the basis that this did not constitute “a clear and supportable justification to deny the Applicant’s re-appropriation request given the large sum of money under consideration” and it constituted “the delivery of a punishment to the Applicant for perceived failure to meet the [Minister’s] Delegate’s unclear expectations.”
Neal Armstrong. Summary of Referred Realty Inc. v. Canada (Attorney General), 2018 FC 59 under s. 221.2(1).
Seven further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for four French technical interpretations released in January 2014 and three question from the October 2013 APFF Roundtable, as fully translated by us.
These (and the other full-text translations covering the last 4 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the ”open” week for February.
Gauthier – Federal Court finds that CRA is not precluded from using information received under the VDP to reassess taxation years before the 10-year s. 220(3.1) period
The applicant transferred $300,000 to a Bahamas bank account in 1978. In order to put his affairs in order for his heirs, he made a voluntary disclosure for his 2005 to 2014 taxation years (i.e., all the years within the 10-year period permitted by s. 220(3.1)), which was accepted by CRA, so that penalties were waived and interest relief provided for those taxation years. 14 months later, CRA on the basis of the information provided under this voluntary disclosure began a review of the applicant’s 1980 to 2004 taxation years with a view to including of unreported income and assessing penalties for failure to file T1135s for those years.
The taxpayer noted that it was contrary to CRA’s practices to go back before a period covered by a voluntary disclosure where there was insufficient documentation respecting the earlier periods, and sought an injunction prohibiting CRA from reassessing him for the earlier years. In refusing this request, Martineau J indicated that, under ss. 165(3) and 171, the Tax Court had the power to cancel an assessment, and stated:
…The public interest — i.e. the orderly application of the ITA — takes precedence here over the financial and other inconveniences that the applicant may face by having, like all taxpayers, to follow the normal challenge procedure set out in the ITA.
It does not appear to have been disclosed to Martineau J why CRA chose to open up the earlier taxation years following the voluntary disclosure. By making the disclosure, the taxpayer effectively was admitting that he had been careless, thereby permitting CRA to meet its onus of establishing carelessness for the otherwise statute-barred earlier years. Thus, he appears to have been punished for participating in the VDP. If CRA does more of this sort of thing, it will have a further chilling effect on the VDP.
Neal Armstrong. Summary of Gauthier v. MNR, 2017 FC 1173 under s. 220(3.1).
Mammone – Tax Court of Canada finds that an RPP revocation beyond the normal reassessment period retroactively validated an unsupportable reassessment under s. 56(1)(a)(i)
The CRA revocation of a registered pension plan (the “New Plan”) was invalid due to inadvertent failure to comply with the 30-day notice requirement in s. 147.1(12). The taxpayer argued that this meant that the contemporaneous assessment of him under s. 56(1)(a)(i) for having purportedly transferred the commuted value of his (OMERS) pension plan to the New Plan was ill-founded at the time – and that CRA’s subsequent issuance of a further retroactive deregistration of the New Plan represented a new basis for reassessment that was prohibited by s. 152(9).
Graham J rejected this argument, finding that the retroactive nature of the subsequent valid revocation caused “an altered timeline to replace the original timeline,” so that the assessment under s. 56(1)(a)(i) was retroactively validated. In rejecting the argument under s. 152(9), he stated:
The basis for reassessment is and always has been that the commuted value of the OMERS pension was transferred to a non-registered pension plan. … [D]ue to the retroactive nature of the revocation, the facts underlying that basis of reassessment were always present.
It did not matter that the second (this time, valid) revocation occurred well beyond the normal reassessment period. However, Graham J stated that if the reassessment in question had also been issued beyond the normal reassessment period, it would have been statute-barred, as the taxpayer could not be imputed with knowledge, at the time of filing his return, of the subsequent retroactive invalidation of the plan.
Neal Armstrong. Summaries of Mammone v. The Queen, 2018 TCC 24 under s. 152(1), s. 152(9), s. 152(4)(a)(i) and General Concepts – Effective Date.