News of Note
Pelletier – Court of Quebec finds that employer payment of the law society dues of a tribunal member was not a taxable benefit
Email this ContentLapierre JCQ found that the payment of the Quebec Bar dues of a commissioner of the Quebec Employment Injury Board by his employer did not give rise to a taxable benefit. Lapierre JCQ distinguished Tremblay, where the payment by the Quebec government of the bar dues of a Crown employee gave rise to a taxable benefit, on the basis that the Crown attorney would have had to pay his dues personally if they had not been covered by his employer - so that the reimbursement enriched him.
Here the exercise by the commissioner of his adjudicator role did not require him to maintain his membership in the Barreau du Québec. The only reason why his dues were paid for him by his employer was a statutory requirement that he be a member of the bar.
Without this requirement, Mr. Pelletier would have had no need to maintain his professional status in order to exercise his employment. He could have instead, as in the case of judges, ceased to pay the dues, which brought him nothing to the extent that he did not act as a lawyer. … This is especially true given that Mr. Pelletier’s function was not subject to the authority of the Barreau du Québec … nor to the Code of Professional Conduct of Lawyers.
Neal Armstrong. Summary of Pelletier v. Agence du revenu du Québec, 2018 QCCQ 1655 under s. 6(1)(a).
Income Tax Severed Letters 4 April 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Bauer – Federal Court of Appeal finds that CRA could constitutionally issue a s. 231.2 requirement to the taxpayer’s bank during a Special Investigations review
The CRA special investigations division issued s. 231.2 requirements to two banks to get the taxpayer’s bank statements, and used these to assess him for over $5M a year in unreported business income. The taxpayer’s pleadings in the Tax Court included the assertion that, since he was under investigation at the time that the requirements were issued, the information thereby obtained was inadmissible as his s. 8 Charter rights had been infringed.
In confirming that the Tax Court had correctly struck out this pleading, Webb JA stated:
While using requirements under section 231.2 of the ITA to obtain information or documents after an investigation has commenced may result in that information or those documents not being admissible in a proceeding related to the prosecution of offences under section 239 of the ITA, it does not preclude that information or documents from being admissible in a Tax Court of Canada proceeding where the issue is the validity of an assessment issued under the ITA. …
[T]he CRA’s power to issue requirements under section 231.2 of the ITA to obtain information or documents that will be used for the administrative purpose of reassessing a taxpayer is not suspended by the commencement of an investigation.
Neal Armstrong. Summary of Bauer v. Canada, 2018 FCA 62 under s. 231.2(1).
Hébert – Tax Court of Canada finds that a corporation whose only activity was unsuccessful efforts to sell its remaining equipment was carrying on an active business
The market for the business of the taxpayer’s corporation (“Radio Progressive “) of selling and repairing radio telecommunication equipment had virtually disappeared by 2007, so that from that time on, it did not make any sales, and essentially its only activity related to the efforts of the taxpayer (Mr. Hébert) to sell off its remaining stock of equipment. It was dissolved in August 2011.
Ouimet J found that Radio Progressive qualified as a “small business corporation” at some point within the preceding 12 months, so that Mr. Hébert’s loss on its dissolution qualified as a business investment loss. Since the stock of unsold equipment (which was essentially its only asset) related to its previous commercial activity of selling (and repairing) such equipment, Mr. Hébert’s efforts to sell that stock represented the continued carrying-on of that business, notwithstanding that no sales resulted.
Neal Armstrong. Summary of Hébert v. The Queen, 2018 CCI 48 under s. 248(1) – small business corporation.
CRA rules that a terminal loss denied under s. 13(21.1)(a) can be used to bump the land elected amount
Subco has entered into an agreement for the sale to an arm’s length purchaser of a property containing parcels of land with accrued capital gains and buildings thereon with accrued terminal losses. Since its Parent has accrued losses, the property is spun-off to a Newco subsidiary of Parent in reliance on s. 55(3)(a), with Newco then wound-up under s. 88(1) so that the capital gains can be realized in Parent’s hands.
On the spin-off of the property by Subco to Newco, CRA indicated that the s. 13(21.1)(a) rule for denying a terminal loss was to be applied after applying s. 85(1) without regard to s. 13(21.1)(a). For example, suppose that a parcel of land had an ACB and FMV of $200 and $400, and that the accrued terminal loss on the building thereon was $50. Subco and Newco would designate an s. 85(1) agreed amount for the parcel of $250. S. 13(21.1)(a) then kicks in to deny the $50 terminal loss but also to reduce the deemed proceeds to Subco from $250 to $200. Insofar as Newco is concerned, the agreed amount is still $250, so that in effect the terminal loss is used to bump the land ACB to Newco (and ultimately to Parent) by $50.
The loss suspension rule in s. 13(21.2) would be irrelevant because the sale to the purchaser would occur shortly thereafter.
Another interesting feature is that a preliminary s. 86 reorg was effected through an exchange of the “old” common shares of Subco for newly created common shares (having more votes per shares) and preferred shares pursuant to a share exchange agreement rather than by virtue of articles of amendment changing the old shares into the new shares. In other words, a “dirty” s. 85 exchange mechanic was used, but no s. 85 election was made so that s. 86 applied instead.
Neal Armstrong. Summaries of 2016 Ruling 2016-0635101R3 under s. 13(21.1)(a), s. 55(3)(a) and s. 86(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for a French Technical Interpretation released in November 2013 and for five questions from the October 2013 APFF Roundtables, as fully translated by us.
These (and the other full-text translations covering the last 4 1/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for April.
Choice Properties is proposing to acquire CREIT with a choice of cash, or Choice units issued on a s. 132.2 merger
The proposed acquisition of CREIT (which is a closed-end REIT holding most of its properties directly or through subsidiary LPs) by Choice Properties - which is an Ontario open-end REIT holding a partial interest in a property-holding LP (Choice Properties LP) - would occur for aggregate consideration of approximately $1.7B in cash and Choice Properties units valued at around $2.1B. REIT unitholders would have a choice between receiving cash or Choice Properties units, subject to proration. Those unitholders whose election for units was accepted would participate in a s. 132.2 merger of CREIT into Choice Properties.
Resident CREIT unitholders whose units will be redeemed for cash by CREIT (funded with a loan from Choice Properties LP) will be indifferent to the quantum of capital gains distributions allocated to their cash redemption proceeds. Accordingly, CREIT will engage in transactions at the commencement of the Plan of Arrangement to deliberately trigger gains on units in subsidiary partnerships or perhaps land, in order to achieve a basis step-up. As with other such merger transactions, CREIT is seeking CRA permission to have short fiscal periods for its subsidiary LPs, so that those pre-merger gains realized at lower levels can still effectively be allocated to the cash-redeemed unitholders.
Another preliminary step is to amend the CREIT declaration of trust to make its units redeemable, having regard to the subsequent redemptions of its units for cash and on the s. 132.2 merger.
Neal Armstrong. Summary of Circular of Canadian REIT under Mergers & Acquisitions - REIT/Income Fund/LP Acquisitions – REIT Mergers.
Wesdome - Quebec Court of Appeal finds that exploration from an uneconomic mine permitting it to recommence processing qualified as “f” CEE - and that a reassessment of a wound-up and dissolved sub binds its parent
A company (“Wesdome”) acquired the Kiena mine in Quebec, which had been put on care and maintenance when its reserves had been exhausted over a year earlier, in order that it could extend an existing mine shaft to go under a lake and drill gold targets on its own exploration property to the north. This was a success, and the purchased Kiena mining facilities started processing ore from the new finds several years later. The ARQ had denied CEE deductions under the Quebec equivalent of ITA, s. 66.1(6) – Canadian exploration expense – (f)(vi), which applied to “any expense that may reasonably be related to a mine…that has come into production in reasonable commercial quantities or to an actual or potential extension of such a mine.”
Levesque JCA affirmed the finding below that this exclusion did not apply, so that the CEE deductions were available, but on the basis of a narrower interpretation of the exclusion (stating that “the fact that the mine was open, closed or on care and maintenance does not form part of the criteria provided in T.A. paragraph 395(c) for determining if exploration expenses are eligible for credit.” The correct test apparently was this:
[I]n order for the exclusion in T.A. paragraph 395(c) to apply, there must be a concurrence between the time when the exploration expenses were incurred and the reaching of production in reasonable commercial quantities from the mine.
It therefore should be concluded that if a mine had already reached a level of commercial production in the past, but at the time when the expenses were incurred that level was no longer being achieved, the expenses would be eligible for the tax credit.
For two of the four taxation years in question, Godbout J below had also found that the assessment for each of the two years was invalid “as the Agency had not addressed such Notice of Assessment to the right legal entity,” given that the Notice was issued in the name of Wesdome shortly after its dissolution in voluntary dissolution proceedings for its winding-up into its sole parent. Levesque JCA found that such assessments were not void on this ground (although, as noted above, they were nonetheless to be reversed on the substantive CEE grounds). S. 313 of the Business Corporations Act (Quebec) (which is to somewhat similar effect as s. 226(2) of the CBCA) provided that “As of the dissolution of the corporation, its rights and obligations become those of the shareholder, and the shareholder becomes a party to any judicial or administrative proceeding to which the corporation was a party.” He stated:
The dissolution of Wesdome was effected on March 14, 2011. This did not have the effect of obliterating the tax debt of Wesdome and of annulling the debt. That debt was assumed in conformity with B.C.A. section 313 by the respondent, the sole shareholder of the corporation that had ceased to exist.
This did not directly answer the point of Godbout J that the assessments had been issued in the name of the wrong entity (the dissolved sub rather than the parent). However, Levesque JCA had earlier stated that “the judge had concluded that an audit procedure was in progress at the time of its dissolution” (his emphasis), so that his point might have been that these assessments were to be viewed as part and parcel of the administrative proceedings that, on dissolution, were deemed to be proceedings against the parent.
Neal Armstrong. Summaries of ARQ v. Wesdome Gold Mines Ltd., 28 March 2018, No. 200-09-009254-167 (Queb. C.A.) under s. 66.1(6) - CEE - (f)(vi), s. 152(1), and Canada Business Corporations Act, s. 226(2).
CRA confirms that the intergenerational transfer of a farming business or corporation can occur where one individual worked on more than one farm
The transfers of Canadian farming property or of shares of a family farm or fishing corporation or an interest in a family farm or fishing partnership by a Canadian taxpayer on a rollover basis under s. 70(9.01), 70(9.21), 73(3.1) or 73(4.1) to a child reference a requirement that the taxpayer have been “"actively engaged on a regular and continuous basis" in the farming (or fishing) business. CRA has confirmed that the fact that the individual owns multiple farm properties and farm corporations, would not, in and of itself, limit his ability to transfer the properties or shares on a rollover basis pursuant to these provisions, nor would the fact that he works on more than one farm, by itself, indicate that he was not actively engaged on a "regular and continuous basis" on any of the farms.
Neal Armstrong. Summaries of 8 February 2018 External T.I. 2016-0670841E5 under s. 70(9) and s. 73(4).
Tozer – Tax Court of Canada confirms that bankruptcy does not start the two year director’s assessment period running
Smith J confirmed that the appointment of a receiver upon a corporation’s bankruptcy did not cause the taxpayer to cease to be a director, so that the two-year time limitation for assessing director’s liability for unremitted corporate GST did not start running at that point. As to the due diligence defence, the taxpayer was required to take active efforts to pursue the timely remittance of the GST rather than relying on his CFO once he became aware of the corporation’s financial difficulty, which did not occur in this case.
The relevant ITA directors' liability provisions are essentially the same.
Neal Armstrong. Summaries of Tozer v. The Queen, 2018 TCC 56 under ETA s. 323(5) and s. 323(3).