News of Note
Income Tax Severed Letters 13 December 2017
Email this ContentThis morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that the existence of a Quebec joint venture will be determined under common law principles
After listing general guidelines that might assist in distinguishing joint ventures and partnerships in the common law provinces, CRA stated:
The joint venture relationship is not recognized in Quebec civil law. Nevertheless, Quebec civil law does not prohibit the formation of a joint venture. Therefore, where an arrangement in Quebec is, according to the common law guidelines outlined above, a joint venture and not a partnership, it will generally be regarded as a joint venture for GST/HST purposes.
This is more accommodative to recognizing a joint venture in Quebec than what was stated in P-171R (which referred to Quebec joint ventures being recognized "in very restricted circumstances.")
CRA also indicated that “a registered social worker who is in good standing with their provincial regulatory body [and] is hired by a hospice to give a presentation to its personal support workers on providing assistance to palliative care patients in coping with their illnesses” would not be considered to be making a qualifying health care supply as this does not represent direct care services. This is reminiscent of CRA’s first-order supply doctrine (e.g., in 8394 and Memorandum 8.3).
Neal Armstrong. Summaries of Excise and GST/HST News No. 103, December 2017 under ETA s. 273(1) and Sched. V, Pt II, s. 1 - qualifying health care supply.
Masa Sushi – Tax Court of Canada finds that a corporation can only be represented in a General Procedure action by counsel (no CPAs or officers)
Rule 30(2) of the Tax Court of Canada Rules (General Procedure) provides that:
Where a party to a proceeding is not an individual, that party shall be represented by counsel except with leave of the Court and on any conditions that it may determine.
Graham J found that this rule would be ultra vires (as being beyond the scope of what was contemplated by s. 17.1(1) of the Tax Court Act), if it were interpreted as permitting a corporation, with the Court’s leave, to be represented by a non-lawyer (in this case, a CPA). Accordingly, he found that Rule 30(2) should be “read down” to provide that a corporation may only be represented by counsel.
He also indicated that the concept of a corporation appearing “in person” was nonsensical, stating:
A human can be physically present in court. A corporation, being a creation of law with no physical substance, cannot.
Accordingly, corporations cannot appear in Court through an officer. Again, representation by counsel is required.
Neal Armstrong. Summary of Masa Sushi Japanese Restaurant Inc. v. The Queen, 2017 TCC 239 under Rule 30(2).
Elfe Juvenile Products – Quebec Superior Court finds that the rigid GST/QST policy of not cancelling interest below 4% on wash transactions is unlawful
The CRA published policy is that it “will consider” cancelling the interest in excess of 4% for a failure to collect and remit GST/HST in a “wash transaction,” i.e., one where the purchaser is entitled to full input tax credits. Moore JCS found that the equivalent ARQ policy was not good enough. In annulling a decision of the ARQ to only cancel interest down to the 4% level in a wash transaction (that was not covered under a voluntary disclosure), and in sending the decision back for reconsideration by the ARQ, he stated:
[T]he Agency felt unable to cancel more than the interest portion indicated in … the Interpretation Bulletin of 4% of the uncollected sales tax.
Based on the Interpretation Bulletin, the Agency has placed itself at odds with this direction from Stemijon: "A policy can help or guide the exercise of discretion under a statute, but it cannot compulsorily dictate how this discretion is exercised."
The Agency did not consider the possibility of limiting the interest to 3%, 2% or 1% of the uncollected sales tax, or of cancelling it completely, as authorized by section 94.1 of the Tax Administration Act.
This decision is … unreasonable.
Neal Armstrong. Summary of 1092072 Ontario Inc. (carrying on business as Elfe Juvenile Products) v. ARQ, 2017 QCCS 5369 under ETA s. 281.1(1).
The Rulings Directorate has a services standard of providing an ATR within about 4 ¼ months, excluding delays for taxpayer information
Some points made by Costa Dimitrakopoulos (the new Director General) and Lori Carruthers on the Directorate's ATR service include:
- The Directorate’s services standard is for 85% of Advance Tax Ruling requests to be resolved within 90 business days of receipt of all essential information (or, it would appear from other remarks, within 90 business days of receipt of the request, but excluding the days that the ball is in the representative’s court to provide missing information). The Directorate met its service standard in 2015-16 (at 87%), but fell short this last year (at 78%). (90 business days equates to about 4 ¼ months.)
- Over the last five years, the Directorate has been experiencing a steady decline in ATRs except for an unexpected upswing in 2015-2016. In 2012-2013, it had about 175, and in 2016-2017, about 129.
- The Directorate provides input on draft legislation to Finance during drafting sessions.
- The Directorate’s most significant discovery when it reviewed the ATR programs of other countries was that some countries will not give ATRs on their anti-avoidance rules, and this became a significant topic of discussion in the Directorate’s external and internal consultations. The upshot was that the Directorate will continue entertaining ATR requests on the anti-avoidance rules including the impending MLI principal purpose test.
- External consultations revealed that the pre-rulings consultation service was not being used very much, primarily because it requires much of the same information as an ATR request, and also because it is not available on a no-names basis.
- The next revision to the Information Circular will include a draft template for ruling requests and also guidelines respecting rulings on questions of fact, and refusals to rule where there is no uncertainty.
Neal Armstrong. 20 November 2017 CTF Conference - Costa Dimitrakopoulos and Lori Carruthers on "Advance Tax Rulings - 2017 and Beyond."
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for six French technical interpretations released last week and in April 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA explains why it has appealed Cameco
CRA has appealed Cameco, where the Court dismissed CRA’s application to question 25 corporate employees in the course of an audit, noting that this would essentially amount to a discovery process without the related procedural safeguards.
CRA considers that the audit process is necessarily and generally a broader process than the discovery process, because the former is directed at determining what the taxpayer did in order to come to an accurate assessment of tax, whereas in tax litigation, there is an attempt to narrow and focus on the issues still in dispute. Although for the Cameco audit, 25 interviews seems like a lot, in the context of a large transfer pricing matter, the taxpayer should have offered 5 or 10.
Neal Armstrong. Summary of 20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.12 under s. 231.1(1)(d).
CRA is deliberating on how to relax its procedures for s. 221.2 re-appropriation requests
CRA recognizes that, following Cybernius Medical and Pomeroy’s Masonry, it will need to change its current procedures for dealing with re-appropriation requests under s. 221.2. Those procedures have the effect of denying such requests except in quite narrow circumstances. It has started deliberating, and there will be clarity in 2018 on this issue.
Neal Armstrong. Summary of 20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.10 under s. 221.2.
CRA finds that a class-action settlement fund was required to file T3 returns
Settlement funds received by a law firm from the defendant in a class action suit are held in a settlement trust, to be applied solely for compensating class members after approval of the terms of the settlement by final Court order. In the meantime, a T5 slip is issued annually to the “law firm in trust” respecting interest earned on these funds.
CRA found that the trust was not exempt from tax on the interest income under s. 149(1)(w), which requires inter alia that the trust in question is “established as required under the laws of Canada or of a province,” stating that this was to be contrasted with the situation where the trust is set up “pursuant to a court decision facilitating the administration of the law.” It also indicated that the trustees of the trust were required to file T3 returns on the basis inter alia of s. 150(1.1), which requires the trust to file returns if tax is payable by it.
IT-129R (archived) (see also 9238487) states:
Where funds deposited with a lawyer by a litigant or litigants for safekeeping and investment, pending a court order or settlement establishing their proper disposition, earn income the Department considers such income to be income of a trust and recognizes that the beneficial owner is the eventual recipient of the funds. Therefore, conditional upon waivers being filed by each of the litigants and the lawyer-trustee for the relevant taxation years, the Department will defer assessment of the income until the recipient is finally determined.
It is unclear whether CRA did not mention this position only because the waivers requirement could not be satisfied, or because this position may have vanished due to a changed landscape including the enactment of s. 150(1.1). In any event, the answer given by CRA is much better than being required to issue T3 slips to hundreds or thousands of class members.
Neal Armstrong. Summaries of 28 June 2017 External T.I. 2017-0705431E5 under s. 149(1)(w) and s. 150(1.1)(b)(i).
Central Fund of Canada Ltd. will be converted into a mutual fund trust through a s. 132.2 merger with a “Newco” unit trust
Central Fund of Canada Limited (“CFCL”) is a mutual fund corporation holding gold and silver bullion that has an accrued gain of approximately Cdn.$1.7 billion. It is controlled by the Spicer family, who control its 40,000 common shares, and its 252M Class A shares (which have largely equivalent per-share economic rights to the Common Shares) are mostly held by the public. Before Sprott overtures commenced, its Class A shares had been trading on the TSX at a 7% discount to the underlying bullion value.
In order for Sprott to effectively purchase the Spicer management business and for CFCL to be converted into a mutual fund trust, it is proposed that under an Alberta Plan of Arrangement,
- the common shares will be sold to Sprott for cash consideration reflecting the value of their voting rights (there is no coattail),
- the shares of a “New Administrator” will be sold to Sprott for $85M in cash and 7M Sprott shares plus an earnout, and
- CFCL will be merged under s. 132.2 into a trust newly-formed by Sprott (Sprott Physical Gold and Silver Trust).
Under the exchange terms, the Common and Class A shares will be treated as having equal values, so that Sprott will only end up with 0.016% of the Trust units, i.e., it will have paid a 2900% premium for the common shares over what turned out to be their intrinsic value.
In addition to the Trust units being redeemable for cash equalling 95% of the lesser of their NAV and 5-day VWAP, larger blocks of units may be redeemed in specie, which is expected to largely eliminate the trading discount. Using bullion to redeem units in one’s capital is not a sale or other trading transaction, and the bullion held by the Trust should be capital property given that no significant bullion sales will occur. Gains realized on an in specie redemption will be allocated to the redeemed unitholder.
The Trust will be a PFIC.
Neal Armstrong. Summary of Central Fund of Canada Circular under Public Transactions – Internal S. 132.2/107.4 Mergers – MFC Conversion to MFT.