News of Note

Income Tax Severed Letters 7 May 2014

This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Saturday is a “holiday”

S. 26 of the Interpretation Act extends a statutory deadline otherwise falling on a "holiday," which is defined to include a "non-juridical day."  CRA accepts that Saturday is a "holiday."

Summaries of TPM-05R – Requests for Contemporaneous Documentation  28 March 2014 under s. 247(4), Statutory Interpretation – Interpretation Act s. 26, and s. 28.

Mejhoo v. Harben Barker – English Court of Appeal finds that a “general” accountant was not negligent for failing to send a client to a specialist on non-domiciled tax schemes

A firm of English accountants was found not to be negligent in failing to point out to a UK-resident client who was selling shares of his UK private company that he should consult with a "non-dom" specialist to see if there were any schemes which could exploit his Iranian domicile to avoid UK capital gains tax.  In the context of this sale, there would have been no reason for a "competent general accountant" to realize that there would be any advantage to seeking out such specialized advice.

Neal Armstrong.  Summary of Mehjoo v. Harben Barker, [2014] BTC 17, [2014] EWCA Civ 358 under General Concepts – Negligence and Fiduciary Duty.

CRA finds that a significant number of NPOs are pursuing profit contrary to its guidelines

CRA has completed its three-year review of randomly selected NPOs.  It found that "a significant portion would fall into a higher category of risk, which includes organizations earning profits that were not incidental or not related to their non-profit objectives; organizations with disproportionately large reserves, surpluses, or retained earnings; and organizations where income is payable or made available for the personal benefit of a proprietor, member, or shareholder."  For the time being, CRA it is using targeted outreach and educational activities to advise NPOs of their obligations rather than actively reassessing non-compliant NPOs.

Neal Armstrong.  Summary of Non-Profit Organization Risk Identification Project Report 17 February 2014 under s. 149(1)(l).

Quinco Financial – Federal Court of Appeal confirms that a retroactive amendment to the GST credit note rules is not “for greater certainty”

The Tax Court confirmed that there was a legislative oversight in the wording of the GST credit note rules, so that Quinco Financial received full input tax credits for the GST on its original purchases notwithstanding that it subsequently received credit notes for $2.3M of those ITC claims.  In affirming this decision, Pelletier JA stated that "absent words allowing us to address situations of abuse or windfall, where the provisions are precisely-worded, clear and unambiguous, they must be given their plain effect."

As is its wont, Finance introduced subsequently to the Tax Court dispute a "for greater certainty" amendment to s. 225(3.1) (in Bill C-31, now in second reading) to reverse this approach, retroactive back to 1996.  The outrageous, if continually repeated, becomes routine.

Although its ITCs were claimed after 1996, Quinco Financial may still be sitting pretty following the passage of Bill C-31 as the dispute will be res judicata.

Neal Armstrong.  Summaries of The Queen v. Quinco Financial Inc., 2014 FCA 108, under Statutory Interpretation – Ordinary Meaning and ETA, s. 232.

A capital distribution by Intrepid Mines will be treated similarly for Canadian and Australian purposes

Intrepid Mines, an Australian company listed on the ASX and TSX, is proposing to distribute approximately 87% of its assets in cash as a capital distribution.  It is anticipated that the Australian Taxation Office will publish a "class" ruling on its website indicating that the distribution will be treated as a basis reduction rather than a dividend for Australian purposes for those shareholders who do not hold their shares as revenue assets.  Essentially the same treatment is anticipated for Canadian income tax purposes for most Canadian shareholders based on the distribution’s treatment as a return of capital for Australian corporate purposes.

Neal Armstrong.  Summary of Intrepid Mines Explanatory Memorandum under Spin-Offs & Distributions – Foreign capital distributions.

CRA finds that GAAR should not be applied to a tax-motivated partnership income-sharing arrangement

The Directorate found that an income-splitting arrangement involving a limited partnership, of which a trust for the minor children of a professional was one of the partners, was not caught by the pre-2014 version of the s. 120.4 split-income rules, as the income of the partnership "was not derived from the provision of property or services."  However, the Directorate suggested that the arrangement might be attacked under s. 103(1) (on the basis that income-splitting appeared to be the sole objective of the structure) or s. 103(1.1) (on the basis that the kiddie trust did not effectively bear any of the expenses of the partnership).

The general anti-avoidance rule should not be applied as "subsections 103(1) and (1.1) are of sufficient breadth to override the [agreed] income-sharing terms."

Neal Armstrong.  Summaries of 10 March 2014 Memo 2013-0493971I7 F under s. 120.4(1) – split income – (c), s. 103(1) and s. 103(1.1).

Significant closing agenda items before the acquisition and amalgamation of target will result in it having two deemed taxation year ends

When a target engages in significant transactions described in a plan of arrangement or closing agenda on the closing date but before the closing of its acquisition (at, say, 6:00 p.m.), it is logical for the amalgamation of the target and the acquirer to be considered to occur subsequently to the other transactions (i.e., after 6:00 p.m. rather than effective the beginning of the closing date).  Accordingly, the acquisition of control and amalgamation of the target will give rise to two deemed taxation year ends of the target even if it makes a s. 256(9) election.

Neal Armstrong. Summary of 26 March 2014 2014-0523251E5 F under s. 87(2)(a).

David – Tax Court of Canada finds that there was no downside to claiming credits based on charitable receipts known to be inflated

Woods J found that individuals, who received charitable receipts of $1,000 for every $100 that they "donated" to a registered charity, were entitled to credits based on the 10% amount, as "the issuance of an inflated tax receipt should not usually be considered a benefit that negates a gift" – and also directed that any penalties be deleted.

Neal Armstrong. Summary of David v. The Queen, 2014 TCC 117 under s. 118.1 - total charitable gifts.

Bakorp – Federal Court of Appeal finds that s. 169(2.1) did not permit a large corporation to change arguments on appeal

The taxpayer's Notice of Objection indicated that the Minister had erred in reducing the amount of a deemed dividend from $53 million to $28 million for its 1995 taxation year, but its Notice of Appeal indicated that the deemed dividend for 1995 should have been nil instead. On appeal it emerged that taxpayer’s counsel in fact wanted to argue that the deemed dividend arose in 1993 (when all the shares in question were redeemed) rather than in 1995 (when the balance of the redemption proceeds were received).

The taxpayer, as a large corporation, could only appeal on an issue raised (and properly quantified) in its Notice of Objection. The taxpayer argued that, at both the Notice of Objection and Appeal stages, it was raising the same issue, namely, the quantum of the deemed dividend for 1995. Webb JA found that the Objection did not satisfy "the purpose of allowing the Minister to know the nature and quantum of tax litigation at the earliest possible date." Furthermore, it did not assist the taxpayer to try to obscure the change in its argument by drafting a Notice of Appeal which did not describe the (new) timing issue.

Neal Armstrong. Summary of Bakorp Management Ltd. v. The Queen, 2014 FCA 104 under s. 169(2.1).