News of Note
Almadhoun – FCA finds that the TCC, after finding against the taxpayer, improperly directed CRA to “seriously” consider interest relief and tax remission
Email this ContentThe Tax Court had held that the taxpayer was not entitled to the Canada child tax benefit during the years in question, but referred the matter back to the Minister so that “taxpayer relief in the form of a waiver of any applicable interest and penalties under the Act and also a remission of taxes pursuant to the Financial Administration Act” may be “seriously consider[ed].”
In striking this referral part of the judgment, De Montigny JA stated:
It is only when the Tax Court allows an appeal that it can refer the assessment back to the Minister for reconsideration and reassessment.
Nor is it for the Tax Court to interfere with the discretion of the Minister, if only by suggesting that the Minister “may” seriously consider taxpayer relief in the form of a waiver of any applicable interest and penalty under the Act, and a remission of taxes … .
Neal Armstrong. Summaries of Almadhoun v. Canada, 2018 FCA 112 under s. 122.6 – “eligible individual” - (e), s. 171(1)(b)(iii), Charter s. 15(1) and Statutory Interpretation - ordinary meaning.
Freitas – Federal Court of Appeal finds that a statute-barred reassessment was valid for the purpose of being objected to and vacated on substantive grounds
The taxpayer, a retired Deloitte partner, was assessed by CRA in 2009 to impose a CPP contribution obligation on an amount of income that was distributed to him under ITA s. 96(1.1). CRA denied the taxpayer’s request four years later for a refund of this amount on the grounds that this request had not been made within the required three-year period – and in the resulting 2014 reassessment it in fact denied some deductions/credits that had been initially allowed in its 2009 assessment.
A threshold issue was whether the 2014 reassessment had been made pursuant to ITA s. 152(4.2) (also applicable for CPP purposes), which deals with a reassessment made “for the purpose of determining … the amount of any refund.” Characterization as a s. 152(4.2) reassessment would have meant that ITA s. 165(1.2) would have invalidated the taxpayer’s objection to it. Webb JA stated that “a reassessment that increases a person’s tax liability is not one that was made for the purpose of determining a refund but instead would be made for the purpose of determining that person’s liability.”
In response to a further Crown argument that the 2014 reassessment was statute-barred, Webb JA noted that the reassessment was deemed by s. 152(8) to be valid subject to being vacated. Accordingly it could be objected to on substantive grounds (in addition to being vacated on the grounds that a reassessment outside the normal reassessment period cannot increase the taxpayer’s liability in the absence of misrepresentation.)
The reassessment was vacated on substantive grounds since a s. 96(1.1) distribution did not satisfy the applicable requirement in s. 14 of the CPP Act that it be “his income for the year from all businesses … carried on by him” (he instead was retired).
Neal Armstrong. Summary of Freitas v. Canada, 2018 FCA 110 under s. 152(4.2), s. 152(8) and Canada Pension Plan Act, s. 14.
CRA indicates that U.S.-dividend income attributed under s. 75(2) does not generate FTCs for the related withholding tax
CRA noted that the attribution of foreign source income (e.g., U.S. dividend income) of a trust (e.g., an alter ego trust) to the settlor under s. 75(2) does not entail the attribution of the non-business taxes (i.e., withholding taxes) thereon so that the settlor cannot claim a foreign tax credit. However, the trust itself may be able to claim a s. 20(11) or (12) deduction in calculating the income that is attributed to the settlor.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.13 under s. 126(1).
International Hi Tech – ITCs were lost because they had been claimed by the wrong group entity
A corporation (“Garmeco”) had made timely claims for input tax credits for GST on legal invoices (based on alleged advice of a CRA official that it was the right person to make the claims), but was found by the Tax Court of Canada not to be entitled to them. A subsidiary of Garmeco (“IHI”) then claimed the ITCs on the basis that the Tax Court judgment had found that it was the right party to make the claims.
Russell J has now found that IHI also was precluded from claiming the ITCs because it had made the claims beyond the four-year period set out in s. 225(4)(b) – so that the fact that its parent had made the claims on a timely basis did not count for anything.
Neal Armstrong. Summary of International Hi Tech Industries Inc. v. The Queen, 2018 TCC 531 under s. 225(4)(b) and General Concepts -Estoppel.
CRA indicates that Canadian residents who are subject to the U.S. transitional tax generally will not be entitled to a foreign tax credit
A U.S. citizen resident in Canada holds a controlling interest in a U.K. company. The U.S. imposes its one time transition tax on the "earnings and profits" of the U.K. company held at certain dates in 2017. CRA indicated that the individual would not be entitled to a foreign tax credit, given that the income in question was Subpart F income that did not qualify as income under the ITA, so that typically the formula in s. 126 would not work.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.12 under s. 126(1).
CRA finds that a tax-exempt Norwegian fund received a Canadian REIT distribution that was “taxable” in Norway, so that Treaty-reduced withholding applied
Art. 22(2) of the Canada-Norway Treaty provides that where a resident of Norway derives income falling under the Article from a source in Canada, Canada may tax that amount. However, it goes on to provide:
Where such income is income from a trust, other than a trust to which contributions were deductible, the tax so charged shall, provided that the income is taxable in the Contracting State in which the beneficial owner is a resident, not exceed 15 per cent of the gross amount of the income.
CRA stated:
[I]f a distribution from a Canadian-resident trust would otherwise be included in the Norwegian resident’s taxable income, but the recipient itself is, under Norwegian tax law, exempt from the imposition of income taxation, we would consider that the “income is taxable” for the purpose of paragraph 2 of Article 22. In contrast, if the distribution were made to a Norwegian resident that was otherwise taxable under Norwegian tax law but entitled under Norwegian tax law to exclude the distribution from income, the requirements of paragraph 2 would not be met.
CRA went on to find that since an income distribution from a Canadian REIT to a Norway resident was exempt in its hands because of a general exemption from Norwegian income tax rather than because of a specific exclusion of the distributions from its income, the income distribution was eligible for the Treaty-reduced rate of 15%.
Neal Armstrong. Summary of 28 March 2018 External T.I. 2016-0672941E5 under Treaties - Art. 22.
Emjo Holdings – Tax Court of Canada finds that “key man” insurance premiums on a universal life policy were non-deductible
A corporate borrower was required by its lender to take out key man insurance and assign the policy to the lender (a credit union). None of the premiums were deductible under s. 20(1)(e.2) for various reasons including that no evidence had been adduced to distinguish between the cost of the “universal life” policy in question and “the net cost of pure insurance”, the cost of which would be deductible under s. 20(1)(e.2)(ii). Smith J also indicated that s. 20(1)(e.2) required the deduction to “be correlated to the amount of the loan ‘owing from time to time’,” whereas here the amount owing had been reduced to approximately 10% of its original amount at the commencement of the first taxation year in question (so that any deduction would need to be prorated accordingly) and was repaid in full shortly thereafter (reducing any deduction to nil).
Neal Armstrong. Summary of Emjo Holdings Ltd. v. The Queen, 2018 TCC 97 under s. 20(1)(e).
Income Tax Severed Letters 6 June 2018
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CIBC World Markets – Tax Court of Canada finds that an ETA s. 150(1) election denied zero-rating for services provided to a parent’s non-resident branches
Administrative services provided by CIBC World Markets Inc. (WMI) to its parent (CIBC) respecting activities carried on by CIBC through its non-resident branches would have been zero-rated but for an ETA s. 150(1) election that had been made between them (which deemed services and licences of property supplied between members of the closely-related CIBC group to be exempt financial services). (Zero-rating would have generated input tax credits.) WMI made a subtle argument that although those non-resident branches were deemed non-resident persons respecting their branch activities for zero-rating purposes, they could not be members of a closely-related group to the extent of such activities.
Bocock J recognized that finding that the election denied zero-rating “renders a ‘sub-species’ of exported financial services less competitive.” Nonetheless, he found the statutory language deeming financial services following a s. 150 election to be exempt rather than zero-rate to be too emphatic and specific to accommodate what might have been the broader policy.
Neal Armstrrong. Summary of CIBC World Markets Inc. v. The Queen, 2018 TCC 103 under Schedule VI, Pt. IX, s. 1.
CRA finds that s. 75(2) does not apply to the deemed s. 104(4) capital gain arising in an alter ego trust on the life beneficiary’s death
CRA expanded on the discussion in 2017-0717831E5 by also discussing the treatment of a capital gain arising from the deemed disposition by an alter ego trust of capital property pursuant to s. 104(4) on the death of the beneficiary. CRA indicated that essentially s. 104(6) prevents a deduction to the trust for that taxable capital gain, so that it remains in the trust. Furthermore, if s. 75(2) applies, it does not attribute the gain to the beneficiary because the deemed disposition resulting from the beneficiary’s occurs at the end of that day, at which point there is not longer an individual in existence to whom the taxable capital gain can be attributed.
Neal Armstrong. Summaries of 29 May 2018 STEP Roundtable, Q.11 under s. 104(6)(b) – B – (i).