News of Note

The definition of split income includes trust income distributions under s. 104(13) but not preferred beneficiary amounts under s. 104(14). Accordingly, where a services partnership that was set up by the partners of an accounting firm earns income from the provision of back office services to the firm, and that income is then allocated in part to a limited partner that is a trust with a preferred beneficiary, the income included in the preferred beneficiary’s income under s. 104(14) will not be subject to the tax on split income.

Neal Armstrong. Summary of 6 July 2018 External T.I. 2018-0759521E5 under s. 120.4(1) – split income – para. (c).

A registered charity devoted most of its resources to public policy advocacy with a view to ending poverty. Although this advocacy was subordinate to its poverty-reduction purpose, it nonetheless was considered by CRA to be devoting most of its activities to (non-partisan) political activities so that it was well outside the safe harbour in ITA s. 149.1(6.2) for ancillary political activities. The charity challenged this restriction on its political activities before Morgan J.

In response to the Attorney General’s argument that “the Applicant has a right to free speech, not to subsidized speech” through the ability to issue charitable receipts, Morgan J stated:

[T]he evidence is that the Applicant cannot function – or will have difficulty in functioning – in the absence of registered charitable status.

After concluding that s. 149.1(6.2) “violates s. 2(b) of the Charter in that it burdens the Applicant’s pursuit of public policy advocacy,” he found that the Attorney General had failed to justify this infringement under s. 1 of the Charter through failure to answer the question “why Parliament has limited political speech acts done in furtherance of accepted charitable purposes.”

He went on to make a declaration that “that ss. 149.1(6.2)(a) and (b) are of no force and effect pursuant to s. 52(1) of the Constitution Act, 1982.” However, he did not really mean this (which would have the effect of eliminating any safe harbour for even minor political activity) as he earlier made a declaration “that the phrase 'charitable activities' used in s. 149.1(6.2) be read to include political activities, without quantum limitation, in furtherance of the organization’s charitable purposes.” He also stated that the exclusion for partisan “charitable activities” in s. 149.1(6.2)(c) remained. Even before this, the Government was thinking about removing or amending ss. 149.1(6.2)(a) and (b),

He did not discuss jurisdictional issues. How are non-Ontario charities affected by his declaration? In reviewing any proposed revocation of registration of this or another charity by CRA, would the Federal Court of Appeal feel obliged to apply his modification of their Act?

Neal Armstrong. Summary of Canada Without Poverty v. AG Canada, 2018 ONSC 4147 under s. 149.1(6.2).

When a Netherlands couple (the Backxes) immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. of the partnership interest, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on.

Smith J found that B.V. instead was subject to capital gains tax as a Canadian resident, as its central management and control was in Canada, stating:

[I]t was the Backxes who assumed effective and independent control of [B.V.] In most if not all instances, [the sister] was not even copied with the correspondence. This quite clearly suggests that she was a mere nominee who carried out clerical and administrative functions on behalf of the Backxes.

Furthermore, B.V. was resident in Canada for Treaty purposes as its effective management and control was in Canada - and if it was resident in both countries, this was a matter for the competent authorities to address and not the Tax Court. (The Treaty provided that a dual-resident corporation was not a Treaty resident in the absence of competent-authority agreement.)

He also found that there had not been any previous step-up in the adjusted cost base of the partnership interest of B.V. under s. 128.1(1)(c), as its central management and control had been in Canada from the time of the partnership’s formation.

Neal Armstrong. Summaries of Landbouwbedrijf Backx B.V. v. The Queen, 2018 TCC 142 under s. 2(1), s. 128.1(1)(c) and Treaties - Income Tax Conventions - Art. 4.

The table below provides descriptors and links for six Interpretation released in June 2013, as fully translated by us.

These (and the other full-text translations covering all of the 603 French-language Interpretations released in the last 5 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.