News of Note
CRA indicates that the s. 162(7) penalty for late-filing of a T1135 will be imposed automatically
Email this ContentIn 2015-0588971C6, CRA indicated that the proposition that “the late-filing penalty of $2,500 under subsection 162(7) applies automatically… is currently under study.” Having completed that study, CRA is:
still of the opinion that [this penalty] applies automatically where all the conditions of that subsection are satisfied. …
CRA went on to acknowledge the six-year normal reassessment period under s. 152(4)(b.2), and referenced the exception thereto for neglect etc.
There will be circumstances where a taxpayer has a due diligence defence, for example, a reasonable view (albeit mistaken) that the situs of the property in question was in Canada. CRA’s answer appears to indicate that any such defence will be ignored at the initial assessment stage, and does not mention that is can be raised at the Notice of Objection stage.
Neal Armstrong. Summaries of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.14 under s. 162(7) and s. 152(4)(a)(i).
CRA indicates that (in the absence of counter indicators) a statutory declaration of residence is sufficient for s. 116(5)(a) purposes
S. 116(5)(a) (and similarly s. 116(5.3)) indicates that a purchaser is not liable for a failure to withhold under s. 116 on a purchase of taxable Canadian property from a non-resident if “after reasonable inquiry” it “had no reason to believe that the non-resident person was not resident in Canada.” When asked whether this requirement was met if the purchaser obtains a statutory declaration from the vendor that the vendor is not a non-resident of Canada, and the purchaser has no reason to believe this to be false, CRA indicated that “obtaining such declaration would generally qualify as a reasonable inquiry” – and referred to “a known mailing address outside of Canada or any other indication of the vendor’s residence being outside Canada in the transaction documentation” as examples of circumstances that should put the purchaser on notice.
This question is odd as usually there is only a written representation of residency in the sale agreement, and no statutory declaration to that effect.
Neal Armstrong. Summary of 25 August 2017 External T.I. 2017-0703351E5 under s. 116(5)(a).
CRA indicates that a simultaneous absorptive merger of FA3 (held by FA2) and FA2 (held by FA1) into FA1 would result in a disposition of the FA2 shares
Three wholly-owned stacked subsidiaries of Canco (FA1 holding FA2 holding FA3) effect a foreign merger under which FA2 and FA3 simultaneously merge into FA1, with FA1 as the survivor. FA2 and FA3 simultaneously cease to exist on the merger, resulting in the shares of FA2 and FA3 being cancelled.
CRA indicated that para. (n) of the s. 248(1) “disposition” definition (“Paragraph N”) would NOT deem there to be no disposition of the FA2 shares on the merger. The problem was the requirement in s. (iii)(B) of Paragraph N that “the disposing corporation [FA1] receives no consideration for the share [of FA2] other than property that was, immediately before the merger, owned by the issuing corporation [FA2] and that, on the merger, becomes property of the new corporation [FA1].” CRA stated:
[T]he shares of FA2 and FA3 would be cancelled simultaneously and, thus, FA1 would simultaneously receive property of both FA2 and FA3 on the Merger. [Thus] the property of FA3 would be received by FA1 as consideration for the shares of FA2. Since the property of FA3 would not be owned by FA2 immediately before the Merger, Paragraph N would not apply.
Neal Armstrong. Summary of 15 September 2017 External T.I. 2017-0709331E5 under s. 248(1) - disposition - para. (n).
E-Funds – Supreme Court of India indicates that the provision of ancillary services rather than direct customer services does not engage a services PE
Two American companies ran and serviced ATM networks in North America and also provided automated fraud prevention services. 40% of the worldwide staff of the group were employed by an indirect Indian subsidiary, which operated a call centre as well as providing software troubleshooting and testing services. Two key employees were U.S. employees who had been seconded to the Indian subsidiary.
Nariman J applied Formula One to state that “it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business” – and as that was not the case, they had no Indian PE based on a fixed place of business.
Respecting the services PE branch of the PE definition in the India-U.S. Treaty, he drew a distinction between the fact that the U.S. companies’ “customers receive services only in locations outside India” whereas “only auxiliary operations that facilitate such services are carried out in India.” Therefore, there also was no services PE in India.
Neal Armstrong. Summary of Assistant Director of Income Tax-I, New Delhi v. M/s E-Funds IT Solution Inc. Civil Appeal No. 6082 of 2015, 24 October 2017 under Treaties - Articles of Treaties - Art. 5.
CRA declines to give guidance on whether designating a charity as a contingent policyholder generates a charitable credit
An individual provides in his will for a gift of a life insurance policy to a charity, which is then made promptly after his death by his estate. CRA indicated that a charitable credit could be claimed in his terminal return.
CRA was then asked about a variant of this under which the charity is currently designated as contingent policyholder, so that on his death there will be an automatic transfer of the policy to it. CRA declined to give any comfort on this alternative, stating whether and when this constituted a gift was a “private law matter.”
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.9 under s.148(7) and s. 118.1 – total charitable gift – (c)(i)(A) and (c)(i)(C).
Income Tax Severed Letters 25 October 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hutchinson – English Court of Appeal finds that the UK Revenue could change its published policy respecting taxpayers whose only reliance had been to claim unlooked-for losses
HMRC initially published guidance respecting a recent Court of Appeal decision which suggested to the taxpayer that transactions which he had already reported in his returns had generated additional (unlooked for) losses. Accordingly, he claimed the additional losses, which HMRC then denied. HMRC later followed up with revised published guidance indicating that they had changed their mind but that they would not reverse the claims of those who could demonstrate reasonable detrimental reliance on the initial HMRC guidance.
The taxpayer had initial success arguing in the High Court that HMRC could not resile from their previously expressed view in their initial guidance in the circumstances of his case. In allowing HMRC’s appeal, Arden LJ stated:
[T]he respondent has to show conspicuous unfairness. … I consider that this is not shown… . The respondent was returned to the same position as he was in when he committed himself to the transactions which gave rise to the capital losses. Moreover he had been clearly warned by HMRC in the letter of 2 June 2003 that they did not accept his additional Mansworth v Jelley losses.
The well-developed U.K. jurisprudence in this area has not really been tested in Canada as to its portability. This is not about requiring CRA to stick to a view that is clearly wrong, but about being fair about making changes from one reasonable interpretation in its published positions to another - which generally has been its practice.
Neal Armstrong. Summary of Revenue and Customs Commissioners v. Hutchinson [2017] EWCA Civ 1075 under s. 152(1).
CRA indicates that the death of the surviving spouse before she received payment of the testator’s legacy of his RRIF precluded access to the designated benefit rules
On the death of Mr. A, his Will provided a particular legacy of his RRIF to his surviving spouse (Mrs. B), who died half a year later before his estate was administered. CRA indicated that since Mrs. A died before receiving the legacy, the fair market value of the RRIF property was included in the income of Mr. A in his terminal return.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.6 under s. 146.3(1) – designated benefit.
CRA treats an amount paid from a deceased’s RRIF to the RRIF of the surviving spouse who was excluded under the will as qualifying as a designated benefit
A couple separated without proceeding to an official division of their assets. When Monsieur subsequently died, his will excluded Madame. She made a claim against the executor, and they then agreed in writing to transfer the property in the deceased’s RRIF to her for contribution to her RRIF. CRA indicated that the usual rules for a transfer from a deceased’s RRIF to that of his surviving spouse applied so that:
- The rollover for a spousal RRIF-to-RRIF rollover under s. 146.3(14) on the breakdown of a marriage was not available because the transferor annuitant was dead.
- However, if the executor and the surviving spouse made a joint designation on Form T1090, the value of the property in the deceased’s RRIF could qualify as a “designated benefit” and be excluded from the deceased’s income and included in the surviving spouse’s income.
- The surviving spouse, in turn, would be eligible to take a deduction under s. 60(l) for the transfer of an “eligible amount” to her RRIF.
Neal Armstrong. Summaries of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.5 under s. 146.3(14) and s. 146.3(1) – designated benefit.
CRA indicates that a negative ACB gain from a partnership interest that is TCP is not subject to s. 116
Where a partnership has ceased to exist, any negative adjusted cost base to a taxpayer (including a non-resident) of its partnership interest at the end of the fiscal period is deemed to be a capital gain from a disposition of its interest in the partnership – but its partnership interest is not deemed to be disposed of to the partnership (cf. s. 84(9).) Given this gap, the negative ACB gain is not subject to s. 116 even if the partnership interest was taxable Canadian property, so that there is no requirement to make a s. 116 remittance under s. 116(5) failing a s. 116 certificate.
Although not discussed, s. 98(1)(c) also only deems the negative ACB gain to be a factually-immaculate capital gain, and not a capital gain from the disposition of taxable Canadian property for s. 2(3) purposes, and given inter alia the precise timing of its application, appears to operate without being affected by the draft s. 40(3.1)(b) rule even where the interest is of a limited partner.
Neal Armstrong. Summary of 9 August 2017 External T.I. 2017-0709351E5 under s. 98(1)(c).