News of Note
Tozer – Tax Court of Canada confirms that bankruptcy does not start the two year director’s assessment period running
Email this ContentSmith J confirmed that the appointment of a receiver upon a corporation’s bankruptcy did not cause the taxpayer to cease to be a director, so that the two-year time limitation for assessing director’s liability for unremitted corporate GST did not start running at that point. As to the due diligence defence, the taxpayer was required to take active efforts to pursue the timely remittance of the GST rather than relying on his CFO once he became aware of the corporation’s financial difficulty, which did not occur in this case.
The relevant ITA directors' liability provisions are essentially the same.
Neal Armstrong. Summaries of Tozer v. The Queen, 2018 TCC 56 under ETA s. 323(5) and s. 323(3).
Stewardship Ontario – Tax Court of Canada finds that statutorily-mandated waste recycling charges were consideration for a taxable supply
Stewardship Ontario (“SO”) was a not-for-profit corporation that operated, as part of a regime governed by the Waste Diversion Act, 2002 (Ontario), an Ontario program for recycling various types of waste such as paints, solvents, batteries, empty propane tanks and antifreeze. It collected the waste and paid for its processing or disposal. “Stewards,” being persons who had a commercial connection with such waste, were statutorily responsible for paying fees to SO to reflect their reasonable share of the associated costs.
In rejecting the Crown’s argument that SO was not making supplies but instead merely performing a statutory duty, D’Arcy J stated:
…[T]he only question that is relevant when determining whether a person made a supply is whether the person provided something. The reason why a person provided the something is irrelevant… .
As to the Crown’s argument that the “Steward Fees” were a “regulatory charge” rather than a “user fee,” he stated that they were payable by “operation of law” (i.e., under the Waste Diversion Act) and thus came within the definition of consideration.
Since SO’s costs clearly related to its cost recovery charges (the Steward Fees), CRA was directed to allow SO’s claim for full input tax credits for the HST on its costs.
Neal Armstrong. Summaries of Stewardship Ontario v. The Queen, 2018 TCC 59 under ETA s. 123(1) – supply, consideration, service, s. 141.01(2).
Income Tax Severed Letters 28 March 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Fournier – Court of Quebec finds that a taxpayer could reverse an assessment for a taxable benefit by subsequently engaging in self-help rectification
The ARQ assessed the taxpayer and his wife for taxable benefits for a period of approximately 2 ½ years on the alleged basis that during that period they occupied on a rent-free basis a condo that was owned by a non-arm’s length corporation. (Along with many other missing key facts, including the role of the taxpayer’s wife, the judgment did not describe the corporation’s ownership or why the taxable benefit was assessed under the Quebec equivalent of s. 56(2) rather than s. 15(1).) Apparently well after these assessments, the taxpayer entered into a “correcting” notarial deed with the corporation to move back the date of the transfer of ownership of the condo unit to him from the corporation from the end to the beginning of this 2 ½ year period.
Guénard JCQ found that this amendment “did not rewrite history” but instead “achieved an accurate reflection of what the parties wished to write down from the outset” in light of convincing testimony of the taxpayer that it was intended that he be the owner “from Day 1,” which was corroborated by him and his wife having borne the utilities and municipal taxes during the 2 ½ year period, and by a hypothec, where the taxpayer was named as the grantor. No taxable benefit was applicable.
Neal Armstrong. Summary of Fournier v. Agence du revenu du Québec, 2018 QCCQ 786 under General Concepts – Rectification.
Westsource – Federal Court of Appeal finds that a materially incomplete T661 resulted in a denied SR&ED claim
Boxes 240, 242 and 244 of the prescribed SR&ED form (T661) filed by the taxpayer were left blank. V Miller found that this scuppered the taxpayer’s SR&ED claim as those boxes addressed the key legislative requirements of technological advancement and uncertainty, and systematic investigation. In affirming this finding, Woods JA stated that while there is a “legislative objective of encouraging research and development activities … another objective is to facilitate tax administration by denying the tax incentives if the filing requirement has not been satisfied.”
Neal Armstrong. Summary of Westsource Group Holdings Inc. v. Canada, 2018 FCA 57 under s. 37(11).
Chad – Federal Court refuses to take CRA’s word for it that it needed to redact materials in order to conceal its audit methodology
Federal Court Rule 317 provides that “A party may request material relevant to an application that is in the possession of a tribunal [e.g., CRA] whose order is the subject of the application….” The taxpayer requested material relevant to its requested order that CRA requirements for information pursuant to ss. 231.1 and 231.6 be set aside on the basis that they were invalid or overly broad. CRA provided material, but in redacted form, and sought an order pursuant to s. 37 of the Canada Evidence Act to justify this redaction based on full disclosure being injurious to the public interest. The only support provided for this request was a certificate issued by the Director General of the International and Large Business Directorate baldly asserting that such disclosure could be used to circumvent ongoing audit operations.
Noël J essentially indicated that he would not be doing his job as a judge if he simply took CRA’s word for it rather than reviewing the unredacted material himself on an ex parte basis, and so ordered. He also stated that, consistently with s. 2(b) of the Charter, “open and transparent judicial proceedings are fundamental principles of the Canadian legal system,” and indicated that any redaction would need to be quite justifiable. This principle of openness has broader implications.
Neal Armstrong. Summary of Canada (Attorney General) v. Chad, 2018 FC 319 under Canada Evidence Act, s. 37 and Charter s. 2(b).
Six further full-text translations of CRA interpretations are available
The 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).