News of Note
Zhang – Tax Court of Canada finds that “may deduct” means “is permitted to deduct” rather than “chooses to deduct”
Email this ContentThe formula for an individual’s unused tuition, textbook and education tax credits states that it is reduced each year by “the amount that the individual may deduct” for that year. Graham J found that this was referring to “the amount that the individual is permitted to deduct” for the year, irrespective whether or not she wants to do so, rather than to “the amount that the individual chooses to deduct” for the year. The effect of this was that the taxpayer could not defer claiming the credits until a later year when they were of more use to her.
Neal Armstrong. Summary of Zhang v. The Queen, 2017 TCC 258 under s. 118.61(1).
Huntly Investments – Tax Court of Canada finds that associated-corp equivalent services can be added to the actual full time employees under the SIB definition
Paris J clarified that the over-five full time employee exclusion from a specified investment business involves a two-step test:
[I]t is first necessary to know how many full-time employees the [corporation] in fact employed in the years in issue.
The next step is to determine how many full-time employees would be required in respect of the services performed by … associated corporations [had those services not been provided].
A private corporation with a smallish portfolio of rental apartments in Vancouver fell well short of the mark. Under the first step, its building managers were mostly couples who split a full-time position, so that neither qualified as a full-time employee.
In the course of rejecting various taxpayer submissions on the second step relating to services provided by two associated corporations, he stated:
The Appellant’s contention that it would have required a full‑time CEO, executive assistant, accountant or CFO and accounting clerk is in large part predicated on the proposition that it was actively pursuing a redevelopment proposal in respect of its Stadacona site during its 2010 to 2012 taxation years. ...[T]he evidence does not support [such] a finding… .
Neal Armstrong. Summary of Huntly Investments Limited v. The Queen, 2017 TCC 255 under s. 125(7) – specified investment business.
CRA indicates that a late s. 83(3) election causes a retroactive increase to the CDA of the corporate recipient of the dividend
CRA indicated that a late but valid capital dividend election retroactively validates the dividend, so that the recipient of the dividend thereby has an addition to its capital dividend account at the time of the receipt of the dividend.
Neal Armstrong. Summary of 30 August 2017 External T.I. 2017-0718311E5 F under s. 83(3).
Finance narrowed the potential overreaching in its amendment to s. 212.3(1).
The recent amendment to s. 212.3(1) expands the scope of the foreign-affiliate dumping rules to include investments in non-resident corporation that are not foreign affiliates of the corporation resident in Canada (the “CRIC”) that makes the investment but are foreign affiliates of a corporation that does not deal at arm’s length the CRIC (the “other Canadian corporation”). As compared to the September 16, 2016 version of the amendment (which arguably could have referred to another non-arm’s length Canadian corporation of which the subject corporation was not an FA), the final version of this amendment:
clarifies that the reference to the "other Canadian corporation" is only relevant where the CRIC made an investment in a subject corporation which is not its FA (or becomes its FA as part of the series of transactions) but is an FA of the non-arm's length corporation (or become the non-arm's length corporation's FA as part of the series of transactions). This clarification appears to largely address the Joint Committee's concerns of the potential overly broad application of the FAD rules.
Neal Armstrong. Summary of Sabrina Wong, "Summary of International Amendments in Bill C-63, Budget Implementation Act, 2017, No. 2", International Tax (Wolters Kluwer CCH), No. 97, December 2017, p. 6 under s. 212.3(1).
CRA finds that the substituted-debt exclusion did not deny s. 18(9.1) deductibility of a redemption premium where the new debt was to new investors
A public company issued Series A Debentures (“SAD”), and subsequently issued Series B Debentures (“SBD”), and redeemed the SAD together with an early redemption premium. Whether it was entitled to deduct the redemption premium under s. 18(9.1) turned on whether (as per s. 18(9.1(a)) it could reasonably be considered to have paid the premium “in respect of the substitution” of the SAB for the SAD. In finding that this was not the case, the Directorate stated:
[S]ince the SAD Investors are a substantially different group of investors than the SBD Investors … it could not reasonably be considered that the SAD Investors were paid the Redemption Premium “in respect of the substitution of the [SAD]” since it was the SBD Investors, and not the SAD Investors, who provided a substitute debt for the SAD.
This upshot appears to be that the “substitution” exclusion in s. 18(9.1)(a) will not apply to an early redemption premium where the replacement debt is issued to a different group of investors.
Neal Armstrong. Summary of 29 May 2017 Internal T.I. 2017-0689161I7 under s. 18(9.1)(a).
Cussens – European Court of Justice describes leases that were entered into in order to trigger a taxable supply at a favourable level of VAT as having “no commercial reality”
Halifax plc v Customs and Excise Commissioners [2006] EUECJ C-255/02, [2006] STC 919, established the European VAT tax avoidance doctrine that:
[I]n the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
…Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. ….[T]he prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.
Some Irish taxpayers, who had constructed holiday homes, leased the homes shortly before sale to a related company, which then leased the homes back to the taxpayers. These leases were then mutually surrendered before the sales, and the taxpayers took the position that the sales were not subject to VAT because there already had been a taxable supply of the homes (under the lease).
The European Court of Justice confirmed that, in applying the second Halifax test, regard was to be had only to the objective of the leases preceding the sales of the homes, rather than of the joint objective of those leases and sales as a whole. In commenting on what might be found to be the purpose of the leases, the Court stated:
…[T]he leases … had no commercial reality and were entered into … with the aim of reducing the VAT liability on the sales of immovable property … which they envisaged carrying out subsequently. As regards the fact that, as the appellants… have contended…, those leases were intended to achieve the sales in the most tax efficient way, that objective cannot be regarded as constituting an aim other than obtaining a tax advantage, as the desired effect was to be achieved specifically by a reduction of the tax liability.
Neal Armstrong. Summary of Cussens & Ors v Brosnan, Case C‑251/16, [2017] BVC 61 (European Court of Justice, 4th Chamber) under ETA s. 274(4).
Harvest Operations – Alberta Court of Appeal states that it cannot use its general equitable jurisdiction to do an end run around the narrow (post-Fairmont) rectification doctrine
Dario J followed the maverick approach to tax rectification of Graymar rather than the more generous Juliar approach. The maverick subsequently was elevated and wrote the majority decision in Fairmont. In now trying to reverse Dario J’s decision, the appellant argued that the Alberta Court of Appeal should exercise its “general equitable jurisdiction to rectify the errors,” citing TCR as an example where this had occurred.
No go. The Court stated:
Without commenting on the merits of the assertion that a superior court has “equitable jurisdiction to relieve persons from the effect of their mistakes”, we fail to see how we can do this without undermining the rectification doctrine and ignoring the precedential value of Fairmont Hotels.
There is no principled basis, in the guise of exercising our equitable jurisdiction, to pump theoretical steroids into the rectification doctrine and give it the strength or force that the Supreme Court of Canada recently and consistently has declined to do.
Neal Armstrong. Summary of Harvest Operations Corp. v. Attorney General of Canada, 2017 ABCA 393 under General Concepts – Rectification.
Geissel – European Court of Justice finds that a letter box address is a valid address for VAT purposes
The European VAT rules require that an invoice provide the “full” name and address of the supplier. The 5th Chamber of the ECJ has held that this requirement can be satisfied by a “letter box” address of a correctly-named supplier, noting that the principal focus of the purchaser, and the tax authority auditing its input tax deduction claim for the VAT charged by the letter box supplier, should be on whether that supplier had a valid VAT registration.
This policy is reflected in the Input Tax Credit Information (GST/HST) Regulations, which do not require disclosure of the supplier’s address. However, a similar issue might arise under the interprovincial place-of-supply rules which, in various contexts, reference “the address in Canada obtained by the supplier.” As with the VAT rule, there is no explicit prohibition against a letter box address.
Neal Armstrong. Summary of Rochus Geissel, as liquidator of RGEX GmbH v Finanzamt Neuss (Neuss Tax Office), C‑374/16, [2017] BVC 58 (European Court of Justice, 5th Chamber) under New Harmonized Value-added Tax System Regulations, Pt I, s. 13(1).
Lavrinenko – Tax Court of Canada finds that 40/60 is not “near equal”
The definition for Canada child benefit purposes of a “shared-custody parent” refers inter alia to a parent residing with the child “on an equal or near equal basis”. In Zara, Boyle J found that a father who was a bit over that 40% mark so qualified. Now in Lavrinenko, Paris J has found that a taxpayer whose access “approached 40%” fell short of the mark, and stated that “even a 60%/40% split would not qualify the Appellant as a shared‑custody parent.”
Neal Armstrong. Summary of Lavrinenko v. The Queen, 2017 TCC 230 under s. 122.6 – shared-custody parent.
Income Tax Severed Letters 3 January 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.