News of Note
Rousseau – Court of Quebec finds that no penalty was payable by a Quebec individual with Alberta work and a Quebec home for not filing in Quebec
Email this ContentAn individual (Mr. Rousseau) who had worked in Quebec as a heavy machinery operator, started working in Alberta in 1999 but, in addition to renting a room in Edmonton, he kept his house in Quebec, where his wife and children stayed and where he stayed as well on vacation or longer leave periods. In finding that Mr. Rousseau continued to reside in Quebec for the taxation years in issue (2003 to 2011), Allen JCQ stated:
The entirety of the evidence demonstrates that Mr. Rousseau left Quebec solely for work purposes and that he never had the intention to sever his connections with Quebec, which was the place with which he maintained his strongest links between 2003 and 2011.
However, in finding that Mr. Rousseau had made out a due diligence defence to the imposition of penalties under the Quebec equivalent of ITA s. 162(1) for failure to file Quebec income tax returns for those years, Allen JCQ stated that Mr. Rousseau “relying on the independent opinion provided by his accountant, believed sincerely and in good faith that he was resident in Alberta.”
The taxpayer was assessed for the 2003 to 2011 taxation years by the ARQ on October 24, 2013. They were not statute-barred as he had not filed Quebec returns for them until returns were demanded by the ARQ. The reasons of Allen JCQ do not disclose whether the taxpayer applied for reassessments of the earlier years to vacate the Alberta tax within the 10-year time period described federally in s. 152(4.2).
After noting that he lacked jurisdiction to do anything more than this respecting the Alberta taxes, Allen JCQ stated:
[T]he Court is of the view the Minister should, in all equity, take steps under the agreements between the federal government and the other provinces, including Alberta so as to avoid this double taxation.
Neal Armstrong, Summaries of Rousseau v. Agence du revenu du Québec, 2018 QCCQ 7340 under s. 2(1), s. 162(1) and s. 152(4.2).
CRA finds that a suspended loss on the sale of CFA1 to CFA2 was not de-suspended on the s. 95(2)(e) wind-up of CFA1 into CFA2
Canco realized a suspended loss when it contributed its shares of a controlled foreign affiliate (CCo) to another CFA (BCo), and then took the position that such loss was de-suspended when CCo was then liquidated into BCo. This position turned on the proposition that s. 40(3.5)(c)(i) did not apply because such liquidation did not satisfy two requirements in order for s. 40(3.5)(c)(i) to apply: the liquidation (a.k.a., winding-up) was not a "merger" of the loss corporation (CCo) with another corporation (BCo); and such "merger" resulting in the formation of a corporation (BCo).
CRA inferred from the somewhat loose meaning of the term “merger” and the fact that various provisions (but not s. 40(3.5)(c)(i)) exclude a winding-up from a merger, that the winding-up of CCo into BCo was a merger of the two corporations, and then took the even more questionable position that it could be inferred from the fact that s. 40(3.5)(c)(i) is stated not to apply to mergers referred to in s. 40(3.5)(b) - which refers to rollover transactions, some of which do not result in a new legal entity being formed - that BCo (which, of course, was already in existence) nonetheless was to be regarded as having been formed on the liquidation.
This CRA internal Interpretation is more detailed than 2018-0745501C6, where CRA took essentially the same approach to a suspended loss transaction followed by a s. 88(3) wind-up (rather than s. 95(2)(e) wind-up) of the loss corporation. In particular, CRA discussed its view of the policy of the suspended loss rules (perhaps by way of explanation for why the textual part of its "textual, contextual and purposive" analysis was forced), including a statement that:
[T]he purpose of the stop-loss rules in subsections 40(3.3), 40(3.4) and 40(3.5) is to defer the recognition of losses incurred in an affiliated-party. Such purpose becomes especially evident or useful in circumstances that reveal there to be no true economic loss incurred by the transferor or by the affiliated group as a whole.
Neal Armstrong. Summary of 26 January 2018 Internal T.I. 2017-0735771I7 under s. 40(3.5)(c)(i).
CRA indicates that parental leave need not detract from satisfying the regular, “continuous” and substantial TOSI test
A specified individual will be deemed under paragraph 120.4(1.1)(a) to have been actively engaged on a regular, continuous and substantial basis in the activities of a business in a taxation year of the individual if the individual works in the business at least an average of 20 hours per week during the portion of the year in which the business operates. Finance’s Explanatory Notes state:
An average work commitment of less than 20 hours per week could qualify as regular, continuous and substantial where, for example, an individual works 30 hours per week in a year-round business up to the start of July, after which they are unable to continue working throughout the remainder of the year (e.g., because of injury, illness or the birth or adoption of a child).
CRA essentially adopted this statement and stated:
[T]here are certain situations where the average work commitment could be considered as being “regular, continuous and substantial” even if the bright-line deeming rule is not met. Accordingly, the fact that an individual was unable to work for a portion of a year in which the business operated due solely to the adoption or birth of a child would not, in and by itself, mean that the individual was not otherwise considered to meet the regular, continuous and substantial requirement for that year.
Neal Armstrong. Summary of 26 September 2018 External T.I. 2018-0770911E5 under s. 120.4(1.1)(a).
Chao – Tax Court of Canada finds that a judgment issued based on a legally unsupportable concession of Crown counsel could not be varied
The taxpayer appealed the denial of employment expenses and a GST rebate. Crown counsel, on the basis that the taxpayer had now provided a properly completed GST rebate form, indicated to the Court that the rebate issue was no longer in issue. In reliance on this concession, Jorré DJ dismissed the appeal respecting the employment expenses but allowed the GST rebate amount. However, if the employment expenses were nil, it was a legal impossibility for there to be a GST rebate, and the Crown applied for the judgment to be varied to dismiss the appeal in its entirety.
Jorré DJ refused, stating:
The reasons and the judgment both deal with the rebate issue. Clearly the rebate issue has not been overlooked and has been adjudicated.
Neal Armstrong. Summary of Chao v. The Queen, 2018 TCC 202 under Tax Court Rules, s. 168.
Atlas Tube – Federal Court finds that CRA could compel disclosure of an EY tax due diligence report discussing uncertain tax filing positions of a target
The U.S. parent (JMC) of the Canadian taxpayer (Atlas) acquired another Canadian company (LSI), following which some of the pieces of LSI ended up in Atlas’ hands in a post-closing reorganization. CRA requested, pursuant to s. 231.1, a copy of a tax due diligence report - that EY had prepared on LSI in advance of the LSI acquisition - on the grounds that it might be relevant to its audit of Atlas.
The EY report included an analysis of the tax filing positions taken by LSI and their risk of successful challenge by CRA. Atlas argued that compelling disclosure of the report was contrary to BP, which found that tax accrual working papers setting out uncertain tax positions were protected. In rejecting this argument, Southcott J stated:
BP is to be read as precluding general and unrestricted access to TAWPs on a prospective basis, outside the context of an audit of particular issues. …
… Unlike in BP, the Minister’s request for access to the Report in the present case is made in the context of an active audit of particular issues. …[T]he information in the Report sought by the Minister meets the applicable threshold of relevance in that context. I therefore find that compelling Atlas to provide the Report would not offend the principle described in BP that a taxpayer is not required to self-audit.
He also found that, as the report’s “dominant purpose when commissioned and generated was to inform the decision whether to proceed with the transaction and at what price” rather than to assist Stikeman in structuring the acquisition, it was not protected by solicitor-client privilege.
Neal Armstrong. Summaries of Canada (National Revenue) v. Atlas Tube Canada ULC, 2018 FC 1086 under s. 231.1(1) and s. 232(1) – solicitor-client privilege.
Income Tax Severed Letters 7 November 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA has been applying s. 15(2) in its audits of cross-border cash pooling arrangements
In its audits of cross-border cash pooling arrangements, CRA has taken the position that:
- amounts received by a related non-resident head account holder in a cash pool from a Canadian entity member of the cash pool (as part of a cash pooling arrangement) are subject to the shareholder loan rules in subsection 15(2) of the Act
- the ordinary business and bona fide arrangement exception [in s. 15(2.3)} is generally not met because:
- there is a lack of evidence that a Canadian entity loans money to either arm’s length parties or other members in the corporate group …
- the terms of cash pooling deposit agreements do not generally include a fixed or specific date for the foreign company to repay the loan … [indicating no] bona fide arrangement for repayment
- the repayments exception [in s. 15(2.6)] is generally not met because the automatic daily cash sweeps are considered to form part of a series of loans or other transactions and repayments
- …each loan requires a separate [PLOI] election, so if the election is filed late, there can be multiple late filing penalties
- there will be no refund [under s. 227(6.1)] of the withholding tax paid on the amount of a loan deemed to be a dividend when the loan is repaid if the repayment is part of a series of loans and repayments
Neal Armstrong. Summary of PwC, Tax Insights: Cross-border cash pooling arrangements ─ Recent developments, Issue 2018-41, 2 November 2018 under s. 15(2.6).
CRA indicates that a charity gets a better GST/HST result if it exchanges cash with volunteers who donate their expenses
Some of the volunteers at a registered charity are reimbursed for their expenses, or receive an allowance – but then donate those payments to the charity for a donation receipt. CRA stated:
The payment of the reimbursement or the allowance by the Charity and the later donation of all or part of this amount back to the Charity are two separate transactions for GST/HST purposes.
Accordingly, the expenses claimed by the charity for public service body (PSB) rebate purposes include the expenses recognized under ETA s. 175 or 174 as a result of its having paid the reimbursements or allowances – notwithstanding that those expenses in effect are donated back to it.
This contrasts with the situation where no cash is exchanged and the volunteer simply incurs the expenses as a gift-in-kind to the charity and is issued a receipt for the value of this in-kind donation. CRA stated that since “the Charity does not actually pay an amount to the volunteer,” ETA s. 175 and, therefore, the PSB rebate, is unavailable.
Neal Armstrong. Summary of 18 May 2018 Interpretation 183321 under ETA s. 175(1).
Structuring RSUs and DSUs requires careful attention to the SDA and constructive receipt rules
Observations on restricted and deferred share units plans (RSUs and DSUs) and other executive compensation arrangements include:
- Given the CRA view that receipt under ss. 5 and 6(1)(a) includes constructive receipt, a cash bonus plan should only be converted into RSU entitlements prior to the payable date for the bonus. Similarly, the decision to take cash, or compensation in the form of DSUs, should be made prior to the date that the annual bonus or the director fees become payable.
- An RSU plan that provides for payment to be made on the third anniversary of the award date (as opposed to the service year) can fall outside the three year period permitted under para. (k) of the salary deferral arrangement definition where the service year pre-dates the award date.
The CRA is attuned to these distinctions. As a practical matter, some companies view the RSU as a bonus in respect of services rendered in the prior year, while others take the view that the RSU is granted in respect of services rendered in the year in which the grant occurs and the public company disclosure may support either position.
- The supposed 3-year limitation under para. (k) can be busted if the RSU is structured to come within the s. 7 rules, i.e., satisfying the RSUs only by issuing treasury shares.
- Some corporations will match the amounts contributed by their employees through payroll deductions. Where the employer matching contributions are used to acquire shares from treasury, deductibility to the corporate employer likely will be denied pursuant to s. 7(3)(b), whereas if the shares are acquired on the market, the employer should generally be entitled to claim a deduction in respect of its cash contributions to the plan.
Neal Armstrong. Summaries of Dov Begun “Equity Based Compensation and Stock Options,” 2017 Annual CTF Conference draft paper under s. 5(1), s. 248(1) – salary deferral arrangement, para. (k), s. 7(3)(b) and s. 110(1.8).
Akanda – Federal Court of Appeal grants an extension to seek reversal of a default judgment notwithstanding the absence of a reasonable explanation for the delay
After the taxpayer (Akanda) had missed a lot of deadlines for providing a list of documents and completing discovery examinations, and shortly after its counsel had resigned, its appeals respecting the denial of over $6M and $1.5M in SR&ED and ITC claims, respectively, were dismissed without an appearance by the taxpayer. Akanda then appointed new counsel, who was unsuccessful in a motion for extending the time limit for applying to have this default judgment set aside (the application to set aside having been brought three months’ late).
Webb JA reversed this decision. He noted that Akanda had satisfied three of the usual criteria for such an extension (having a continuing intention to pursue the application to set aside the default judgment, having some merit to its application and there being no demonstrated prejudice to the Crown in the three month delay) but not the fourth criterion (having a reasonable explanation for the delay) – but stated:
Since the findings with respect to three of the four factors favour Akanda and since the amounts involved are significant, the interests of justice support a finding that the application for an extension of time should be granted.
Neal Armstrong. Summary of Akanda Innovation Inc. v. The Queen, 2018 FCA 200 under Tax Court of Canada Rules, s. 140(2).