News of Note
Six further full-text translations of CRA interpretations are available
Email this ContentThe table below provides descriptors and links for a French Technical Interpretation released in November 2013 and for five questions from the October 2013 APFF Roundtables, as fully translated by us.
These (and the other full-text translations covering the last 4 1/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for April.
Giguère – Court of Quebec finds that interest demanded by a receiver on a fraudulent advance did not qualify as a disposition expense on the property sold to repay the advance
The wife of the manager of a corporation received fraudulent advances from the corporation, which she used to purchase two buildings. When the corporation failed, she negotiated a settlement with the receiver (RSM) pursuant to which she sold the properties (at a significant gain) and repaid the moneys in question plus interest at 6%. In rejecting her claim that this interest paid was a disposition expense under the Quebec equivalent of ss. 40(1)(a)(i), Vaillancourt JCQ found that the taxpayer “paid the interest to RSM for the sole purpose of buying time to repay the receiver the sums which she had received without any right thereto.”
This factual characterization also scuppered her argument in the alternative that the interest was a currently deductible expense - even before getting to his finding that the properties in question were personal-use properties rather than rental properties.
Neal Armstrong. Summary of Giguère v. Agence du revenu du Québec, 2018 QCCQ 874 under s. 40(1)(a)(i).
Custodio – Tax Court of Canada allows a director’s liability appeal for failure of the Crown to tender documents proving the unsatisfied-execution requirement in s. 227.1(2)(a)
One of the requirements to impose director’s liability under s. 227.1 for unremitted corporate source deductions is that the requirements in one of s. 227.1(1)(a) to (c) has been satisfied, the most relevant of which is usually the requirement in s. 227.1(2)(a) that a certificate for the delinquent amount has been registered in the Federal Court, and that amount had been returned unsatisfied in whole or in part.
Ouimet J noted that:
This proof is normally made by the deposit of the certificate registered in the Federal Court [and] a writ of seizure and sale or a report of the default by the bailiff.
Since the Crown had done none of this, the taxpayer’s appeal was allowed. It did not matter that the taxpayer had failed to put this failure in issue in his pleadings, as the onus was on the Crown throughout to demonstrate compliance with s. 227.1(2).
Neal Armstrong. Summary of Custodio v. The Queen, 2018 CCI 47 under s. 227.1(2)(a).
ONEnergy – Federal Court of Appeal finds that litigation services to recover fraudulent bonuses following a business’ termination were acquired in connection with that business
A company (“Look”) sold all the assets of its business and then successfully sued its executives for having paid themselves inflated bonuses and option termination payments out of the sales proceeds. Webb JA found that Look was entitled to input tax credits for the HST on its related legal fees, as the litigation servicers were acquired “in connection with the…termination of a commercial activity” as per ETA s. 141.1(3)(a). In arriving at this characterization, he reasoned that the claim was essentially a claim for recovery of overpaid remuneration for services that had been rendered while Look was making taxable supplies, so that it did not matter that the legal fees were incurred after the business had ceased. The more specific provision, s. 141.1(3), effectively overrode s. 141.01(2), which arguably required that there still be a prospect of making taxable supplies at the time of acquiring the service in question.
Neal Armstrong. Summary of ONEnergy Inc. v. Canada, 2018 FCA 54 under ETA s. 141.1(3)(a) and s. 141.01(2).
CRA rules that the s. 115.2 safe harbour applied to partnerships providing mezzanine financing, and receiving profit participations though a Canadian corporate sub
The exclusion in s. 115.2 on specified conditions can provide comfort that a non-resident investor will not be considered to be carrying on a business in Canada by virtue of the provision of “designated investment services” by a Canadian manager to a Canadian partnership of which the non-resident is a “member.” The definition of designated investment services includes the “purchasing and selling” of qualified investments such as “indebtedness” and many types of shares, and investment management and advice respecting the qualified investments.
CRA ruled that this exclusion was available, respecting the acquisitions and dispositions by, and management/advice of, the Canadian manager, where a non-resident (the “Taxpayer”) invested in units of a top-tier LP which invested in project-specific subsidiary LPs that, in turn, granted mezzanine financing to borrowers and, through a Canadian taxable corporate subsidiary, were granted profit participations in the borrowers. CRA accepted that the Taxpayer not being a direct member of the lower-tier project partnerships did not jeopardize the s. 115.2 safe harbour, and also accepted that the Taxpayer being a non-resident subsidiary of a Canadian corporation that had exactly a 50% voting and equity interest in the wholly-owning Canadian parent of the manager did not engage the exclusions in s. 115.1(2)(c)(ii).
Neal Armstrong. Summary of 2017 Ruling 2017-0699531R3 under s. 115.1(2)(1) - designated investment services.
Income Tax Severed Letters 21 March 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Blackstone acquisition of Pure Industrial REIT entails a take-up of units in two tranches and contemplates a bump of a U.S. private REIT
It is proposed that all the units of Pure Industrial REIT will be acquired for cash by a B.C. ULC subsidiary of Blackstone (“Purchaser”) under a B.C. Plan of Arrangement. All but the units of the 175 smallest unitholders (holding at least 100 units) will be acquired in the first tranche – and then, 60 seconds later, the units of the remaining 175 unitholders will be acquired. This is to clarify that, for purposes of the Ontario land transfer tax exemption for mutual fund trust unit transfers, the REIT will still satisfy the relevant Ontario MFT tests at the time of the take up of most of the REIT units.
Roughly ¼ of the REIT’s properties are U.S. properties which are held in a U.S. private REIT subsidiary of a B.C. holding company (“CanCo SPV”) that, in turn, is held by the REIT. The Trust has covenanted that it will not do anything that “could reasonably be expected to have the effect of preventing Purchaser or a wholly-owned subsidiary of Purchaser, from obtaining the benefit of a ‘full tax cost bump’ pursuant to the Tax Act” respecting the shares of the U.S. REIT. Opinions will be delivered at closing to a REIT sub and Blackstone sub that the U.S. REIT has qualified as such for Code purposes.
The only corporate step in this corporate plan of arrangement is a transaction in which a B.C. subsidiary of Purchaser, immediately before the acquisition of the REIT units, subscribes $805 for 80.5M CanCo SPV preferred shares with undisclosed attributes.
As this is a purchase rather than redemption transaction, there are no Part XIII.2 withholding issues.
Neal Armstrong. Summary of Pure Industrial REIT Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Trust Acquisitions by Corporations.
Brochu – Quebec Superior Court decision suggests that a requirement to provide documents “immediately” is contrary to s. 231.2
The Sherbrooke police seized $1.4M in cash and jewels, along with guns, of the plaintiff (“Brochu”), who had “underworld dealings.” The ARQ then arrived at the same premises (his residence) at 10 p.m. and served him with a requirement pursuant to the Quebec equivalent of ITA s. 231.2 to produce a wide range of documents “immediately,” and then carted away 13 boxes of documents. Before finding that this requirement was a disguised seizure made without judicial authorization, and awarding Brochu $10,000 in damages for “trouble, vexation and inconvenience,” as well as $100,000 in punitive damages “in order to make the ARQ and its auditors understand that ‘the end does not justify the means’,” Villeneuve JCS stated:
[W]hen the ARQ required that Brochu provide documents “immediately,” it infringed the spirit of the TAA as it provided absolutely no period in which the latter could comply, and furthermore imposed its ultimatum in a place serving as a taxpayer’s residence.
The absence of any period within which to produce by itself rendered the Requirements abusive.
Furthermore, the impressive quantity of particulars and documents demanded of Brochu rendered it impossible to respond immediately, particularly when taking into account that the Requirements extended to five companies as well as the personal affairs of Brochu over a period of almost 15 years. …
[A] requirement certainly cannot be used to disguise a seizure made without judicial authorization.
In such circumstances, section 8 of the Charter … was infringed by the ARQ… .
Although the ARQ acted hastily because it was concerned about the destruction of evidence, the correct remedy for this was an Anton Pillar order, which required judicial authorization (none was obtained)
Neal Armstrong. Summary of Brochu v. Agence du revenu du Québec, 2018 QCCS 722 under s. 231.2(1).
Seven further full-text translations of CRA interpretations are available
The table below provides descriptors and links for the French Technical Interpretation released last week, for two French Technical Interpretations released in November 2013 and for four questions from the October 2013 APFF Roundtable, as fully translated by us.
These (and the other full-text translations covering the last 4 1/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
6094350 Canada Inc. and Genex Communications - Court of Quebec finds that tax advice with clearly flawed factual assumptions did not meet a director’s due diligence defence
The individual taxpayer (Demers) was a director of the owner of the RadioX team, which was a minor professional hockey team that played in the Ligue Nord-Americaine de Hockey (which was popular with some fans for having over 5-times more fights per game than the NHL). The corporation had been treating its players (and other staff) as employees rather than independent contractors for Quebec health tax purposes in accordance with the known views of the ARQ, but then commenced to treat them as independent contractors. The players did not register for GST/QST purposes or invoice for their services, and declined to sign a written contract (which did not reflect the realities of how the team continued to be operated), and the only substantive change made was that the team manager was incorporated.
After finding that the players continued to be employees, Cotnam JCQ next dealt with the due diligence defence of Demers under the equivalent of ITA s. 227.1(3) (the corporation having since been wound up without paying any of the source deductions), which was based on the proposition that he had been advised by his tax advisor, Ms. Rochette (who was also his wife and a co-director of the corporation) that the players were now independent contractors. In rejecting this defence, Cotnam JCQ noted that the views of Ms Rochette were based on a factually incorrect matters that could have been readily checked by her, including that the players could play for other teams, that they had their own tools and that the team did not reimburse them for their expenses, and also noted that Ms. Rochette had not consulted the jurisprudence. She then stated:
Mr. Demers, in his capacity of director, could not blindly rely on an opinion whose assumptions were clearly incomplete.
However, she went on to find that the assessment of Mr. Demers was statute-barred.
Neal Armstrong. Summaries of 6094350 Canada Inc. and Genex Communications Inc. v. Agence du revenu du Québec, 2018 QCCQ 556 under s. 5(1), s. 227.1(3) and s. 152(1).