News of Note
Samaroo – B.C. Supreme Court awards taxpayers $1.7 million in damages for malicious prosecution by CRA
Email this ContentA couple who operated a restaurant in B.C. have been awarded $1.7 million in damages (including $750,000 in punitive damages) against CRA for malicious prosecution. In reaching the startling conclusion that the prosecution was initiated by CRA, Punnett J stated that the prosecutors “relied on Mr. Kendal [the principal CRA investigator] and the CRA to gather the evidence, draft the final Information, and essentially, do charge approval.”
In finding CRA malice, he stated that the Mr. Kendall “knowingly misstated evidence essential to the proof of the actus reus despite being aware of its importance, [and] filed a misleading report knowing it would be relied upon to authorize the prosecution.”
In finding that there was no malice of the prosecutor (and, thus, no tort liability for him) Punnett J stated:
He struck me as a lawyer, who, through negligence or otherwise, gave up control of the prosecution to Mr. Kendal and the CRA and in so doing risked a miscarriage of justice. However, a failure to act properly as a result of negligence or a lack of understanding of the issues or a failure to properly exercise prosecutorial discretion does not in itself amount to malice.
He went on to find that, as the taxpayers’ s. 7 Charter rights had also been breached, damages would have been payable under s. 24 of the Charter if their damages had not already been recoverable in tort.
Neal Armstrong. Summaries of Samaroo v. Canada Revenue Agency, 2018 BCSC 324 under General Concepts – Malicious Prosecution and Charter - s. 24(1).
CRA releases its new policy on the computation of aircraft-use benefits
Today, CRA released to various interested parties its policy on the computation of taxable benefits arising from the personal use of aircraft, which will be effective for individual taxation years commencing after 2017 (unless the taxpayer agrees to its earlier application). This policy is generally less favourable than that in (cancelled) IT-160R3 under which, for example, the benefit could be computed based on the cost of a first-class ticket in a wider range of circumstances (and for a “small, inexpensive aircraft,” might be based on an economy class fare) – and there was no mention of an imputed available-for-use benefit based on the aircraft’s cost.
According to CRA, in computing the value of the taxable benefit arising from the personal use of a corporation’s or employer’s aircraft by its shareholders or employees, there are three main scenarios to consider:
- When the shareholders or employees take a flight on the aircraft where there is a business purpose for their presence on the flight, and there is a personal purpose for others taking the flight, the value of the taxable benefit for the latter personal use would be equal to the highest priced ticket available in the marketplace for an equivalent commercial flight.
- When the shareholder or employee takes a flight on the aircraft where there is no business purpose for the flight, the value of the taxable benefit is equal to the price of the charter of an equivalent aircraft for an equivalent flight (with this amount being split between the relevant individuals). However, in the employee case, where “an open market charter is not a viable option based on the unique circumstances of the flight, for example there are demonstrable bona fide security concerns for the employee, the taxable benefit will be computed pursuant to scenario 1 for that particular flight.”
- Where the shareholder or employee uses the aircraft primarily for personal purposes relative to the aircraft’s total use during the calendar year (taking into account use by non-arm’s length persons), the value of the taxable benefit is equal to the personal use portion of the aircraft’s operating costs plus an imputed available-for-use amount. To compute the available-for-use amount for an owned aircraft, you first multiply the aircraft cost by an imputed monthly interest rate (generally, that under Reg. 4301(a).) The operating benefit and the available-for-use amount are then computed by multiplying the respective costs by the personal use portion relative to the total use portion based on the aircraft log book or other evidence.
Neal Armstrong. Summary of AD-18-01: 2018-03-07 Taxable Benefit for the Personal Use of an Aircraft under s. 6(1)(a).
Income Tax Severed Letters 7 March 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Iggillis – Federal Court of Appeal indicates that privilege is not lost when a tax opinion is shared with a party with a “sufficient common interest in the same transactions”
Solicitor-client privilege over a tax-planning memo prepared for the purchaser in a tax-structured purchase transaction by a tax lawyer was not lost when the tax lawyer provided the memo in draft form to the vendors' tax lawyer, whose comments resulted in memo revisions. CRA had taken the position that the sharing of the opinion with a “third party” represented a waiver of its previous confidentiality. Webb JA stated:
[W]hen dealing with complex statutes such as the Income Tax Act, sharing of opinions may well lead to efficiencies in completing the transactions and the clients may well be better served as the application of the Income Tax Act will be of interest to all of the parties to the series of transactions. … [The appellants] had sufficient common interest in the transactions to warrant a finding that … the … memo is protected from disclosure by solicitor-client privilege.
Neal Armstrong. Summary of Iggillis Holdings Inc. and Ian Gillis v. The Queen, 2018 FCA 51 under s. 232(1) – solicitor-client privilege.
Rowntree – Federal Court of Australia indicates that a loan or other contract can only be achieved explicitly or by being evinced by conduct
If a shareholder is the sole director of his company, then it should follow that an advance made to him by his company was a loan if that was his intent, right? Rares J disagreed, quoting previous judicial statements that:
Corporate decisions and acts can only be achieved in explicit ways… . Coincidence of the identity of the sole director, the sole shareholder and the person by whom services are provided does not mean that the corporate decision to enter into a service contract and the actual formation of the contract can take place wholly within the individual’s head and be revealed, if at all, only when it suits him or her to reveal it.
and that:
The question … is whether the conduct of the parties viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract.
Neal Armstrong. Summary of Rowntree v Commissioner of Taxation, [2018] FCA 182 under s. 15(1).
Five further translated Technical Interpretations are available
The table below provides descriptors and links for four technical interpretations released in December 2013 as fully translated by us, along with our translation of a question and answer from the October 2013 APFF Roundtable.
These (and the other full-text translations covering the last 4 ¼ years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for March.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-12-11 | 10 July 2013 Internal T.I. 2013-0475501I7 F - Amounts returned to trustee/beneficiary | Income Tax Act - 101-110 - Section 104 - Subsection 104(13) | family trust income distributed to children but repaid as reimbursement to father for family expenses was income to him, not them |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(24) | distributions to children immediately paid to father | ||
| Income Tax Act - 101-110 - Section 104 - Subsection 104(6) | distributions to children immediately paid to father were deductible even though received by children as his agents | ||
| Income Tax Act - 101-110 - Section 105 - Subsection 105(1) | payment of income distributions by children to father not a benefit under the trust | ||
| Income Tax Act - Section 56 - Subsection 56(4) | payment of distributed family trust income by children to father did not engage s. 56(4) as it was only potential income to him | ||
| 18 November 2013 Internal T.I. 2011-0399581I7 F - Application of section 212(1)(d) ITA | Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(i) | seriatim benchmark lump sums, although not royalties, came within s. 212(1)(d) | |
| Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(viii) | cost-sharing agreement with catch-up payment provisions qualified | ||
| Treaties - Income Tax Conventions - Article 12 | contingent payments came within broad Treaty definition of royalty | ||
| 11 October 2013 APFF Roundtable, 2013-0495851C6 F - Safe income adjustments | Income Tax Act - Section 54 - Adjusted Cost Base | downward adjustment under price adjustment clause reduces shares' ACB | |
| Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | CRA post-closing reassessment of Target's pre-closing income changes its SIOH | ||
| 2013-12-04 | 19 November 2013 External T.I. 2011-0414201E5 F - Coop, ristournes, société de personne | Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(a) | customers of LP rather than of members |
| Income Tax Act - Section 135 - Subsection 135(1) | a Coop dealing with an LP of which it is a partner has the LP as its customer, and not the LP customers | ||
| 19 November 2013 External T.I. 2012-0455731E5 F - Interprovincial income allocation | Income Tax Regulations - Regulation 402 - Subsection 402(3) | where franchisor takes over Ontario franchisee's operations, its royalties from other Ontario franchisees are not assimilated to the Ontario PE |
VLN – Tax Court of Canada finds that work performed for 3rd parties did not qualify as the taxpayer’s own SR&ED
Lyons J found that work that the taxpayer performed for third parties using high tech equipment (the “System”) that it had purchased did not qualify as its SR&ED activities. It was insufficient that doing so provided it with valuable experience. An example was work performed for the University of Ottawa:
…[T]he fact that UO personnel collaborated with the appellant on tasks involving the System and the appellant’s ability to utilize data and findings, does not alter the fact that the research represented the activities of UO researchers on its projects. I find these activities do not amount to the System being used for the appellant’s SRED.
Neal Armstrong. Summary of VLN Advanced Technologies Inc. v. The Queen under s. 37(8)(a).
Jayco – Tax Court of Canada finds that, under the UCC, goods were delivered by a U.S. manufacturer outside Canada
A U.S. manufacturer of recreational vehicles (Jayco) was found by D’Auray J to have delivered or made available the RVs to its Canadian dealers at its facility in Indiana, so that their supply occurred outside Canada and was not subject to GST/HST. Notwithstanding a statement in the Dealership Sale Service Agreements that neither party was “the agent … of the other for any reason,” she found that, in fact, Jayco arranged for the carrier (a Jayco subsidiary) to ship the RVs to Canada on behalf of the dealers rather than of it. Given that the relevant Uniform Commercial Code provisions were broadly similar to those of the Sale of Goods Act, she quoted as apropos an Ontario judicial statement that:
[I]f certain conditions are present, there may be a symbolical delivery which divests the seller’s possession … . The transfer to the buyer of a bill of lading, as representing the goods, forms a good delivery in performance of the contract.
In contrast, the documents suggested that parts sold by Jayco to the Canadian dealers were delivered on its behalf, so that their supply was made in Canada and subject to GST/HST.
Neal Armstrong. Summary of Jayco, Inc. v. The Queen, 2018 TCC 34 under ETA s. 142(1)(a) and s. 306.1(1)(a).
Formula One decision departs from jurisprudential and OECD standards of what is a PE
A UK corporation, which held the worldwide rights to commercially exploit the Formula One World (car-racing) Championships, was held by the Supreme Court of India in Formula One to have a permanent establishment in India respecting annual three-day Grand Prix races held there given its alleged degree of operational control (not really explained in the decision) over the event. It is suggested that this decision was incorrect:
1. The Supreme Court of India improperly considered the activities of all affiliated entities globally in concluding that a business was being carried on in India by FOWC. No foundation was laid for such an approach in the treaty (even under article 5(4.1) of the 2017 Model Treaty Commentary).
2. The Court focused entirely on control without regard to whose business was actually being carried on in India and without sufficient factual analysis to support its conclusion.
3. The Court's acceptance that a presence of three weeks per year in India, in respect of a commercial venture that operated for only three days per year, suffices to give rise to a permanent establishment is not supported by the Model Treaty and the overwhelming weight of case law, and does violence to the policy behind the existence of this threshold to domestic taxation.
Neal Armstrong. Summary of Richard Tremblay and Ilana Ludwin, "Indian Supreme Court Diverges from OECD Guidelines, Relies on Questionable Canadian Precedent, in Deciding PE Issue in Formula One," Tax Management International Journal, 2018, p. 125 under Treaties – Income Tax Conventions - Art. 5.
The proposed restructuring of Banro entails its effective emigration to the Caymans
Banro is a CBCA holding company with two mines in the Democratic Republic of Congo held though indirect DRC subsidiaries. It, along with its direct and indirect Barbados subsidiaries, filed for protection under the CCAA on December 22, 2017 and was then delisted from the TSX and NYSE American. The secured debt (of U.S.$233M) to be compromised is owed at the level of a Barbados subsidiary held directly by Banro (BGB). This will permit Banro to effectively emigrate to the Cayman Islands as part of the proposed Plan of Compromise and Reorganization.
In particular, Banro’s shares of BGB will be cancelled, BGB will issue shares to a newly-formed Caymans company (Newco) for nominal consideration, and the secured creditors will receive shares of Newco in satisfaction of their secured claims against BGB – except that 25% of their claims will instead be treated as unsecured claims. The unsecured creditors will receive nothing other than sharing pro rata in a nominal sum ($10,000), and the Banro shareholders will receive nothing at all.
Not all secured creditors are equal. The DIP lenders will receive 74% of the equity of Newco and all the voting rights, and the other secured creditors will receive 26% of that equity in the form of non-voting shares, subject to dilution by warrants.
The U.S. tax characterization of the reorganization is stated to be unclear.
Neal Armstrong. Summary of Banro Circular under Public Transactions – Other - Recapitalizations – Debt into common equity.