News of Note
Tax Court of Canada finds that there were no ITCs respecting services of criminal counsel which permitted an individual to resume a business
Email this ContentOperations at an individual’s swimming school were suspended as a result of charges brought against him respecting alleged misconduct with a 15-year old female instructor – and he incurred significant fees in obtaining an acquittal. Although Favreau J accepted that the individual intended to resume the operations of his business when possible, he nonetheless found that, as the legal fees were “incurred to defend the Appellant’s reputation,” the legal services did not qualify as being acquired in the course of commercial activities and for the purpose of making taxable supplies, so that no input tax credits were available.
Neal Armstrong. Summary of Thim… v. The Queen, 2017 TCC 164 under ETA s. 141.01(2).
Repsol – Federal Court of Appeal applies the “integration principle” to find that a jetty was a “processing” asset
Woods JA found that the LNG terminal in St. John qualified as a Class 43 property because it was engaged in "processing" (i.e., a conversion of LNG into gas form, viewed as representing a change in the goods that rendered them more marketable) and because the terminal was not a "distribution" asset (i.e., “distribution” did not commence until at least the delivery of the (converted) gas to the transmission pipeline.)
In finding that the jetty at which the tankers discharged the LNG was part of the terminal asset rather than a separate (Class 3) “jetty” asset, she applied “the judge-made integration principle … that processing includes all activities that are necessary and integral to the processing operation.” This perhaps is similar in effect to the single supply doctrine applied in the GST cases.
Neal Armstrong. Summary of Canada v. Repsol Energy Canada Ltd., 2017 FCA 193 under Sched. II, Class 1(n).
CRA extends the effective date for applying advantage tax, where RRSP or TFSA fees are paid by the annuitant or holder, to 2019
In 29 November 2016 CTF Roundtable Q. 5, 2016-0670801C6, CRA indicated that it now considered the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder to be an “advantage” for Part XI.01 purposes (i.e., giving rise to a tax equal to 100% of the fee amount) but that to give the investment industry time to make the required system changes, it would defer applying this new position until January 1, 2018.
CRA has now announced that it has extended this effective date by one year (to January 1, 2019) to give more time to consider investment-industry submissions.
Neal Armstrong. Summary of 15 September 2017 External T.I. 2017-0722391E5 under s. 207.01(1) – advantage – (b)(i).
Income Tax Severed Letters 27 September 2017
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Finance provides various clarifications on its July 18, 2017 proposals
Comments made by Finance officials at the Roundtable held on Monday afternoon on the July 18, 2017 Consultation Paper and legislative proposals of the Department of Finance include:
Q.4 There is an intent for the passive income proposals not to affect existing investments held in a corporation.
Q.7 If, for example, mother provides start-up capital for her son’s company, Finance accepts that it would be reasonable for her to receive a high return to reflect the high risk.
Q.8 There will not be a complete carve-out for pipelines, but Finance is thinking about some form of relief to avoid the double taxation (first on the deceased, and second on the estate) that could arise, especially where a death occurred before July 18, 2017.
Q.9 Finance is not aware of any plans to increase capital gains rates. Finance is struggling with whether it is possible to provide relief for intergenerational transfers of businesses without generating quite substantial losses of tax revenues.
Q.10 S. 246.1 was developed because the courts were not observing the scheme of the Act to prevent surplus stripping or, at least, the conversion of dividends into capital gains.
Q.11 The surplus stripping changes are intended to focus on non-arm’s length transactions, so that they would not apply, for example, where an arm’s length purchaser uses the assets of the target to pay off acquisition debt. S. 246.1 is not intended merely as a backstop to s. 84.1 so that, for example, it could apply, for example, if there were s. 84(2) avoidance.
Q.12 The passive income discussion in the Consultation Paper was just a “diagnostic,” so that the next stage is to see whether the government is interested in advancing that proposal.
Some of the above points were also made or elaborated on in the morning session of Finance speakers. An additional point made in the morning session is that, although Finance considers that its passive income proposals advance integration, it should be kept in mind that if a self-employed individual earns 46% after-tax on her business earnings and then invests those earnings, her investment return thereon will also be subject to income tax, so that fairness suggests that the total tax borne on reinvested corporate business earnings that are similarly reinvested and ultimately distributed should also ultimately bear tax of well over 50%.
Neal Armstrong. 25 September 2017 CTF Finance Roundtable on 18 July 2017 proposals and Morning Session on Setting the Stage.
Six further translated technical interpretations are available
Full-text translations of the six technical interpretation released between July 2, 2014 and June 18, 2014, are listed and briefly described in the table below.
These (and the other translations covering the last 39 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for October.
The draft ETA s. 132(6) rule does not appear to be substantially undercut by the expansive PE definition
Draft s. 132(6) provides that, subject to s. 132(2), an investment limited partnership (ILP) is deemed to not be resident in Canada at any time if the total value of all interests in it held by non-resident members (other than prescribed members) is 95% or more of the total value of all interests in it. One of the targeted effects of this rule is to permit a general partner (whose Canadian residence otherwise would “taint” the ILP as a resident partnership), to charge general partner draws or fees to the ILP on a zero-rated basis if the membership of the ILP satisfies the 95% test.
The exclusion in s. 132(2) deems a non-resident person to be resident in Canada in respect of activities carried on by it through a permanent establishment in Canada.
On an expansive interpretation of the ETA definition of a permanent establishment, it could be considered that, in fact, there is no circumstance in which an ILP, which has a Canadian-resident general partner (with personnel or agents exercising its functions qua general partner using a Canadian office of the general partner), will be deemed by s. 132(6) to not be resident in Canada, given that essentially all the activities of the ILP will be considered to be carried on through its general partner and, thus, through the Canadian office of the general partner (viewed as a permanent establishment of the ILP).
However, it is understood that Finance considers that the intent was for the s. 132(2) exclusion to apply only where there is a commercial activity being carried on in Canada that could represent a permanent establishment of the investment limited partnership, for example, the holding of a piece of commercial real estate, and that s. 132(2) would not apply to the Canadian office of the general partner. As discussed in our Commentary, this view is consistent with a partnership being a separate person for GST/HST purposes.
A similar analysis suggests that the s. 132(2) exclusion does not undercut the exemption of a 95%-qualified partnership under draft s. 132(6) from the qualifying consideration rule in ETA s. 218.01.
Neal Armstrong. Commentary on ETA draft s. 132(6).
CRA considers amounts received in settlement of employment grievances to be s. 5 income on general principles
CRA found that lumps sums paid to current and former employees in settlement of a grievance regarding the cancellation of various post-retirement health and insurance benefits likely did not qualify as retiring allowances (since current employees were included) and likely were deemed to be s. 5 employment income under s. 6(3)(b) (i,e., they were provided “to an employee (or former employee) to satisfy an obligation outlined in a written or oral agreement made with his or her employer (or former employer), either immediately before, during, or immediately after employment.” CRA also considered the amounts to be s. 5 employment income on more general principles, stating:
The Canadian courts have consistently viewed amounts received as the result of grievances filed by virtue of a contract of employment (e.g., grievance for violation of a collective agreement) to be taxable as employment income.
Neal Armstrong. Summaries of 28 July 2017 External T.I. 2017-0685961E5 under s. 248(1) – retiring allowance, s. 6(3)(b) and s. 5(1).
Tang – Tax Court of Canada finds that translated documents were admissible as they previously had been identified in the list of documents provided to the Crown
Chinese-language documents, that the taxpayer had arranged to have translated into English, were admissible in evidence under Rule 89 given that the list of documents previously provided to the Crown had identified that these documents were translations.
Neal Armstrong. Summary of Tang v. The Queen, 2017 TCC 168 under Rule 89(1)(b).
Pellerin – Quebec Court of Appeal finds that proof that auditors got bonuses for assessing would not change the burden of proof
The Quebec Court of Appeal rejected a submission that proof that an ARQ auditor would enjoy an increased bonus as a result of assessing the taxpayer would reverse the normal burden of proof on the taxpayer to establish prima facie proof of the incorrectness of the assessment.
Neal Armstrong. Summary of Pellerin v. Agence du revenu du Québec, 2017 QCCA 1339 under General Concepts – Onus.