News of Note

A supplier (NWorks) charged GST, but failed to charge QST, on a number of supplies of services to the recipient thereof. When it was assessed by the ARQ for this failure, it promptly issued a revised invoice to the recipient for the previous transactions that showed the QST owing, which the recipient refused to pay.

Sirois JCQ strongly sided with the jurisprudence (including Occo) that indicated that the documentary requirements of the Quebec equivalent of ETA s. 223 (i.e., QSTA s. 425) could be satisfied by issuing a revised invoice (in good form) for the tax well after the time of making the supply so that, under the Quebec equivalent of ETA s. 224, NWorks could recover the QST from the recipient. She also stated that two decisions to the contrary “added the non-existent words ‘at the time of invoicing’ to the text of QSTA section 425.”

Neal Armstrong. Summary of NWorks Management Corp. (Globotech Communications) v. Lincourt, 2018 QCCQ 1021 under ETA s. 223.

Federal Court Rule 317 provides that “A party may request material relevant to an application that is in the possession of a tribunal [e.g., CRA] whose order is the subject of the application….” In denying further documents to a Rule 317 applicant, who had already received a tribunal record of more than 1500 pages, as well as 1907 pages under an Access to Information Act request, Webb JA stated:

…[A] bald assertion of bias is not sufficient and cannot support an order for production of documents to allow the appellant to go on a fishing expedition to see if something can be found to support the allegation of bias.

…Counsel for the appellant was unable to identify any document in the voluminous motion record that could support the allegation of bias. It, therefore, seems clear that the appellant was on a fishing expedition. ­­­­­­­­­­­­­­­­­­­

Neal Armstrong. Summary of Humane Society of Canada Foundation v. Canada (National Revenue), 2018 FCA 66 under Federal Court Rules, Rule 317.

A Canadian corporation (ADC), which had issued voting common shares (representing voting control) for a modest amount to three Canadian employees, was found to be subject to the de facto control (as defined in s. 256(5.1) - and before its expansion by s. 256(5.11)) of a U.S. corporation (Seawind) and its controlling shareholder (Mr Silva), so that it did not qualify for refundable SR&ED investment tax credits. Gleason JA noted that McGillivray “determined that operational control is insufficient to constitute de facto control under subsection 256(5.1) … [and] that, instead, there must be some legally-enforceable arrangement or arrangements that give rise to such control.” Such control under a legal agreement was found to be present in a cost-plus development agreement with Seawind for work on a particular development project that was the sole source of revenue of ADC and accorded a lot of levers to Seawind.

There is a carve-out from s. 256(5.1) for a supply agreement between the mooted CCPC and a person with whom it deals at arm’s length. Gleason JA accepted that the development agreement was a supply agreement (i.e., it did not matter that the supplier was the mooted CCPC rather than the non-resident), but found that there was a non-arm’s length relationship, stating:

[I]n light of ADC’s near-total economic dependence on Seawind Corp., the fact that the owner of the latter company dictated (and was able to dictate) the terms of the relationship between the two companies is a very relevant factor in determining whether the two were dealing at arm’s length. Even more telling was Mr. Silva’s ability to make the two companies disregard the terms of the development agreement – as he decided to do when he unilaterally decided that the 5% mark-up [under the development agreement] would not be paid to ADC.

Neal Armstrong. Summary of Aeronautic Development Corporation v. Canada, 2018 FCA 67 under s. 256(5.1).

Australian Family Court orders, that were made by consent between Mr and Ms Ellison, required a corporation (“Sandini” - that was controlled by Mr Ellison) in its capacity of trustee of the Ellison family trust to forthwith transfer 2.1M shares of a public company to Ms Ellison. However, Ms Ellison instead got Sandini to transfer those shares to a company controlled by her. This busted rollover relief to Mr Ellison unless it could be considered that the beneficial ownership of those shares had already been transferred to her because of the consent orders.

Jagot J (speaking for the majority) found for the Commissioner (i.e., no rollover relief to Mr Ellison) partly on the basis of her doubts that there had been such a prior transfer (concluding that “the orders vested statutory rights and a beneficial interest of some kind in Ms Ellison but … I do not consider that interest can be characterised as beneficial ownership.”)

She started with the proposition that “if the original owner continues to enjoy rights to deal with the asset, including rights of disposal, then it could not be said that another entity is the beneficial owner of the asset, even if the other entity may have a beneficial interest in the asset.” The difficulty in this regard was that (subject to a glitch discussed below) Sandini held a total of 35M shares of the public company, so that it might be considered that even after the order it had the right to decide which out of that larger pool was the block of 2.1M shares to be transferred to Ms Ellison (or, as it turned out, to her company).

She made a guarded finding that a person could have a proprietary interest in a specified portion of a larger pool of fungible assets, stating:

[T]he weight of authority is that there can be a valid trust over a fungible pool of assets provided the assets and relevant proportions for the different beneficiaries are identified with sufficient certainty. … If, given the terms of the declaration and the nature of the property, the trustee is constituted as nothing more than a bare trustee on behalf of the beneficiary in respect of the beneficiary’s proportional interest, it may well be that there has been a change of ownership … . For this to be the case, however, the rights vested in the beneficiary must be capable of supporting the grant of equitable remedies the equivalent of ownership, including preventing the trustee from dealing in the relevant proportion of the asset pool other than in accordance with the beneficiary’s directions.

However, she went on to doubt that the 35M shares in issue were fungible, given that different shares could have different tax basis and in light of the alluring proposition that:

If all shares in the company are of the same class, there is but a single asset, being the issued share capital … [which] single asset cannot give rise to the capacity for selection which defines a fungible asset.

In Canada, it would seem backwards to consider that the nature of a property interest is determined by its tax treatment (see, e.g., ARTV) and CRA likely accepts that shares (as contrasted with partnership units) are distinct properties. Accordingly, it may be appropriate to skip over her fungibility doubts.

Now for the glitch. The relevant consent order was botched. Sandini, in fact, was not the trustee of the Ellison family trust. It was the trustee of a unit trust holding the 35M shares and of which the Ellison family trust (with a different corporate trustee) was the sole unitholder. Jagot J found that, given that the consent “orders are to be construed on their own terms without reference to extrinsic material” she had no equitable discretion to fix this, so that “on their own terns, the orders have no operation and cannot be enforced.” Thus, on this more emphatic ground, the order also did not effect any transfer of beneficial ownership to Ms Ellison.

Neal Armstrong. Summary of Ellison v Sandini Pty Ltd [2018] FCAFC 44 under General Concepts – Ownership, s. 248(1) – disposition, s. 73(1)(b) and General Concepts – Evidence.