News of Note
Le – Tax Court of Canada finds that an individual whose designation as a first director was defective, and who did not perform a director’s role, was not liable qua director
Email this ContentThe taxpayer had intended to form a partnership with another party, who was under the misapprehension that a corporation was required in order to form a partnership, and drafted documents for her to sign that reflected this confusion. Russell J found that the taxpayer was not a de jure director of the corporation, notwithstanding that she had been named in the notice of articles as a first director. She had not provided a written consent to be a director and she also was not an “incorporator,” whose definition in the B.C. Business Corporations Act referenced her signing an “incorporation agreement.” The only relevant agreement that she had signed was found by Russell J to instead be a partnership agreement.
She also was not a de facto director, Russell J stated:
Jurisprudence reflects that the concept of de facto director should be limited to persons who hold themselves out as directors.
The taxpayer in fact “engaged in no acts of management … let alone any actions specific to a director.”
Accordingly, she was not liable for assessments under the ITA and ETA director’s liability sections.
Neal Armstrong. Summary of Le v. The Queen, 2018 TCC 65 under ITA s. 227.1(1).
Income Tax Severed Letters 18 April 2018
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA cross-border butterfly ruling letter contemplates two successive permitted exchanges and comments on property-type issues
A recently-released 2016 ruling letter - respecting the spin-off by a foreign public company (Foreign Pubco) of a newly-formed non-resident subsidiary (Foreign Spinco) – describes the butterflying of the Canadian spin business of Canadian DC (which is a direct sub of “Forco 2” and indirect sub of Foreign Pubco) to Canadian TC (which is the child of Foreign DC and a grandchild of Forco 2.) Immediately before this butterfly transfer, Canadian TC acquires its special shares in Canadian DC through a three-party exchange arrangement between Canadian TC, Forco 2 and Foreign DC, although it is not done this way for ITA reasons.
Foreign DC is then distributed up the chain to Foreign Pubco. Foreign Pubco then drops Foreign DC into a new subsidiary (Foreign TC) of a newly-formed LLC subsidiary of Foreign Pubco (New LLC – to which other significant foreign assets already have been contributed) pursuant to a three-party exchange agreement under which Foreign Pubco transfers Foreign DC directly to Foreign TC, Foreign TC issues shares to New LLC, and New LLC issue units to Foreign Pubco. Both this triangular exchange and the previous one are expressed to occur as “permitted exchanges” in accordance with the formula in (b)(iii) of the s. 55(1) definition.
The ruling letter includes detailed guidance respecting the classification of the transferred and retained property of Canadian DC amongst the three types of property (cash and near cash, investment and business property) and the identification of liabilities to be netted against them, including:
- Positive and negative balances under cash pooling arrangements are to be determined on a net basis and treated as cash or near cash.
- 100% of properties rented by Canadian DC that are majority-used in its Canadian businesses are treated as business assets notwithstanding that portions of the properties are subleased to third parties at a loss.
- Canadian DC and Canadian TC can decide between themselves as to what portion of a term loan receivable by Canadian DC from another Canadian affiliate (that is to be included in the property transferred to Canadian TC) is to be treated as a cash and near cash asset, as contrasted to an investment asset – and there also is flexibility to balance out the property-type mix respecting the allocation of liabilities to net receivable balances.
- Deferred revenue obligations or liabilities under supplemental retirement plans will not be treated as liabilities, and net pension plan assets will not be considered as property; whereas net pension plan liabilities will be treated as liabilities.
Neal Armstrong. Summary of 2016 Ruling 2015-0616291R3 under s. 55(1) – distribution.
10 further full-text translations of CRA interpretations are available
The table below provides descriptors and links for five of the October 2017 APFF Roundtable questions released last week ,and for five French Technical Interpretations released in October 2013, as fully translated by us.
Translations of the full text of the answers of CRA to all of the questions posed at the October 2017 “regular” APFF Roundtable and the October 2017 APFF Financial Strategies and Instruments Roundtable, along with our summaries of those questions, have been available to you for the last six months. The only extra that you are getting now is translations of the full text of the questions posed rather than just summaries of them. We will provide full-text translations of the balance of the October 2017 APFF questions over the next week or so.
These (and the other full-text translations covering the last 4 1/2 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Construction S.Y.L. Tremblay - Quebec Court of Appeal finds that an attempt to relitigate an adverse TCC decision in the Court of Quebec was an abuse of process
In the federal Construction S.Y.L. Tremblay case, Bédard J found that house-repair invoices, that did not give the house address or describe the precise nature of the work performed (and that were rendered in the name of entities that did not remit the GST), failed to satisfy the requirements of s. 3 of the Input Tax Credit Information (GST/HST) Regulations, so that the appellant’s related input tax credit claims were properly denied – and also found that “the appellant did not truly acquire the supplies for which it claimed ITCs.”
The appellant then sought to establish its eligibility for input tax refunds for the QST on the same invoices in a Court of Quebec action with the assistance of 19 witnesses (perhaps in order to get at the point quoted above). Thibault JCA agreed with the finding of the Court of Quebec below that allowing this action to proceed would be an abuse of process, given that the new evidence would not solve the defective nature of the invoices that the appellant had received.
However, before so concluding, she noted that the Supreme Court in the CUPE decision (2003 SCC 63) had indicated that “There are many circumstances in which the bar against relitigation, either through the doctrine of res judicata or that of abuse of process, would create unfairness,” so that there are circumstances (not established here) in which relitigation will be permitted.
Congiu reached essentially the same result going in the opposite direction (deference to prior Quebec decision).
Neal Armstrong. Summaries of Construction S.Y.L. Tremblay Inc. v. Agence du revenu du Québec, 2018 QCCA 552 under General Concepts - Abuse of Process, Stare Decisis and Input Tax Credit Information (GST/HST) Regulations, s. 3(c).
Smith – Tax Court of Canada references the principle that income is to be computed on a “sub-source” basis
Graham J found that a status Indian, who earned exempt income from employment and non-exempt investment income, could only deduct a registered pension plan contribution in computing his employment income (and not from his income generally), so that the deduction effectively was denied. Before so concluding, Graham J referred with approval to the statement in the dissenting reasons of Iacobucci J in Hickman Motors (also picked up in FLSmidth) that there was a “requirement to segregate income according to various sub-sources” (e.g., to distinguish the income arising from each business, property or employment of a taxpayer).
Neal Armstrong. Summaries of Smith v. The Queen, 2018 TCC 61 under s. 147.2(4) and Statutory Interpretation – Headings.
CRA considers that a dietary supplement is not zero-rated
Subject to a long list of exclusions, the ETA zero-rates “supplies of food or beverages for human consumption (including … ingredients to be mixed with or used in the preparation of such food or beverages).” CRA considers that dietary supplements which are consumed for their therapeutic or preventative effects do not so qualify, so that a liquid product along such lines which was to be mixed with water and ingested was not zero-rated.
Neal Armstrong. Summary of 29 March 2017 Ruling 183173 under ETA Sched. VI, Pt II, s. 1.
Rennie Produce – Full Federal Court of Australia finds that third-party documents obtained in commercial judicial proceedings were producible under a requirement issued by the tax authority
The obligation in Harman v Secretary of State for Home Department [1983] 1 AC 280 has been described as follows:
Where one party to litigation is compelled, either by reason of a rule of court, or by reason of a specific order of the court, or otherwise, to disclose documents or information, the party obtaining the disclosure cannot, without the leave of the court, use it for any purpose other than that for which it was given unless it is received into evidence.
The Court held that the Harman obligation did not impede a taxpayer, who had documents in its possession which it had obtained from a third party pursuant to a summons, from providing those documents pursuant to a requirement for information issued to it by the Commissioner of Taxation. The same conclusion respecting the primacy of the Canadian requirement provision (s. 231.2) might obtain in Canada.
Neal Armstrong. Summary of Deputy Commissioner of Taxation v Rennie Produce (Aust) Pty Ltd (in liq) [2018] FCAFC 38 under s. 231.2(1).
Stamatopoulos – Quebec Court of Appeal finds that the ARQ failed to establish that a named supplier to the taxpayer did not act as a supplier or intermediary
A taxpayer (Stamatopoulos) serviced clothing manufacturers by securing sewing services for clothes that then were delivered to the manufacturer. He checked the GST and QST registration numbers of the subcontractors and paid the invoices delivered in their name to him once he, in turn, had been paid by the manufacturer. The QST paid by him was not remitted by the subcontractors, and the ARQ position was that he was not entitled to input tax refunds because the persons in whose names the invoices were issued were not the persons who had actually rendered the sewing services to him.
In confirming the position below that the invoices received by Stamatopoulos satisfied the documentary requirements for claiming ITRs, Marcotte JCA proceeded on the basis that:
[W]here the taxpayer has discharged the taxpayer’s initial burden of proving that the invoices in fact were issued by a person with whom the taxpayer dealt directly in a genuine commercial transaction, it then falls on the tax authorities to prove, on the balance of probabilities, that the person with whom the taxpayer dealt directly did not act as a “supplier” or as an “intermediary.”
The ARQ had not met this onus.
She also noted that it did not matter whether the subcontractors with whom Stamatopoulos had dealt had in fact provided the sewing services, because the Quebec equivalent of the Input Tax Credit Information (GST/HST) Regulations provided that a good invoice could also be issued by an intermediary. In other words, once Stamatopoulos established (as he did) that he had had business dealings with the subcontractors in whose names the invoices were issued, the onus shifted back to the ARQ even if it was clear that they were not the suppliers (but they might instead have been intermediaries).
Neal Armstrong. Summary of Agence du revenu du Québec v. Stamatopoulos, 2018 QCCA 474 under Input Tax Credit Information (GST/HST) Regulations, s. 2 – intermediary.
Satoma Trust – Federal Court of Appeal finds that using ss. 75(2) and 112(1) to pay tax-free dividends to a family trust thwarted s. 112(1)’s expectation of ultimate taxation of those earnings
A tax plan turned upon dividends that in fact were paid to a family trust (Satoma Trust) being attributed under s. 75(2) to a corporation (“9134”) that was connected to the dividend payer, so that the dividends deemed to be paid to 9134 were eligible for the intercorporate dividend deduction. Before turning to the application of s. 245(2), Noël CJ first found that such application of s. 75(2) to 9134 effectively precluded the dividends’ inclusion in the hands of Satoma Trust, stating:
[T]he subjecting to tax under the Act of a “taxpayer,” applies in the singular (section 3). Nothing permits the belief that the legislator intended that the same income would be taxable in the hands of more the one taxpayer… .
In confirming CRA’s application of GAAR to include the dividends in the hands of Satoma Trust, notwithstanding that those dividends had not yet been distributed by it, he stated:
Even where the application of [s. 75(2)] by itself has the desired effect, its utilization in combination with subsection 112(1) goes counter to the object and spirit of the latter provision [citing Lipson]. In this regard, the object and spirit of subsection 112(1) consists in permitting the transfer, free of tax, of dividends within certain groups of corporations, subject to their eventual taxation when the dividends are paid to their ultimate recipients. This object was thwarted, as the dividends can now be transferred to the beneficiaries without tax.
Neal Armstrong. Summaries of Fiducie Financière Satoma v. Canada, 2018 CAF 74 under s. 245(1) – tax benefit, s. 245(4) and s. 3.