News of Note
Flavor Net – Tax Court of Canada finds that a substantial technical challenge was not sufficient to render a novel product development effort SR&ED
A taxpayer in the energy drink business sought to develop a beverage containing a mixture of 800 milligrams of plant sterols in a two-ounce format. This was more challenging than what Cargill had succeeded in doing, which was to disperse 400 milligrams in an eight-ounce serving. Notwithstanding this challenge (which was not met), the taxpayer’s work did not qualify as SR&ED given that it used only methods and techniques that were available in the industry, and there was no formulation of specific hypotheses related to technological risk or uncertainty. Although D'Auray J did not dwell on this, it also did not help that the research assistant lacked a science background.
Neal Armstrong. Summary of Flavor Net Inc. v. The Queen, 2017 TCC 179 under s. 248(1) – SR&ED.
Six further translated technical interpretations are available
Full-text translations of the six technical interpretation released between June 18, 2014 and June 4, 2014, are listed and briefly described in the table below.
These (and the other translations covering the last 40 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for October.
Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
---|---|---|---|
2014-06-18 | 20 May 2014 External T.I. 2013-0516121E5 F - Debt forgiveness | Income Tax Act - Section 12 - Subsection 12(2.2) | s. 12(1)(x)(iv) inclusion from BIA settlement of GST interest and penalties could be offset against related expense |
Income Tax Act - Section 248 - Subsection 248(26) | unremitted GST and QST were not obligation "issued" by debtor | ||
Income Tax Act - Section 80 - Subsection 80(1) - Commercial Debt Obligation | BIA settlement of unremitted GST interest | ||
Income Tax Act - Section 9 - Forgiveness of Debt | BIA settlement of unremitted GST on sales was on capital account | ||
Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(iv) | BIA settlement of GST interest and penalties included under s. 12(1)(x)(iv) | ||
28 May 2014 External T.I. 2013-0486111E5 F - RRSP, prohibited investment | Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage | no advantage on s. 51 exchange | |
Income Tax Act - Section 207.01 - Subsection 207.01(13) | s. 51 exchange of transitional prohibited property does not trigger s. 207.04(1) tax | ||
Income Tax Act - Section 207.05 - Subsection 207.05(4) | s. 207.05(4) status is preserved following s. 51 exchange | ||
2014-06-04 | 12 May 2014 External T.I. 2013-0503531E5 F - Discretionary Dividends Shares | Income Tax Act - Section 85 - Subsection 85(1.3) | grandchild wholly owned by individual directy and through immediate subsidiary is wholly-owned corporation |
22 May 2014 External T.I. 2014-0519811E5 F - Droit d'usage au Québec pré-1991 | General Concepts - Ownership | usufructuary of duplex unit was de facto owner thereof | |
Income Tax Act - Section 248 - Subsection 248(3) | effective grandfathering of right as usufructuary which arose before 1991 | ||
Income Tax Act - Section 54 - Principal Residence | usufructuary of duplex unit (with her right acquired pre-1991) entitled to claim principal residence exemption on post-1991 disposition | ||
20 May 2014 External T.I. 2014-0517331E5 F - CII - exploitation agricole | Income Tax Act - Section 127 - Subsection 127(9) - Qualified Property - Paragraph (c) | test is of intention on acquisition to use over 50%, during months of likely use during the equipment’s lifetime, on farm in the region | |
Income Tax Act - Section 127 - Subsection 127(27) | no ITC reversal if unanticipated transfer of equipment to a farm outside the region | ||
General Concepts - Ownership | co-owners entitled to pro rata ITCs | ||
14 November 2013 Internal T.I. 2013-0485331I7 F - REÉR et revenu d'un Indien | Other Legislation/Constitution - Federal - Indian Act - Section 87 | RPP benefits exempt if contributions exempt/RRSP withdrawals exempt if contributions not deductible |
Lewski – Full Federal Court of Australia finds that a trust income declaration that was subject to a tax contingency did not result in an income inclusion to the beneficiary
On June 30, 2006, the trustee of an Australian trust declared a distribution to the taxpayer of all its income for the year then ended and at the same time made a further resolution that in the event the Australian taxation authority denied a deduction to the trust, the trust income for that year was instead to be deemed to have been distributed on the same 2006 date to an alternate beneficiary. This contingency in fact materialized, i.e., the ATO denied a loss carryforward by the trust, so that all the income of the trust for that year was now a material amount. The Court accepted that the further resolution made the distribution declaration contingent, so that it did not cause the (now material) income amount to be included in the taxpayer’s hands as an amount to which she was “presently entitled” on that (June 30, 2006) date.
The taxpayer had delegated the handling of all her affairs to her husband, and did not find out about the purported income distribution until over seven years later, at which point she promptly executed a disclaimer of any interest in the distribution. The Court found that she should be imputed with the knowledge of her agent (her husband), so that she had not promptly disclaimed - so that if (contrary to the finding above) the income distribution to her had otherwise been valid, her purported disclaimer thereof would have been ineffective.
Neal Armstrong. Summaries of Lewski v Commissioner of Taxation, [2017] FCAFC 145 under s. 104(24), s. 248(8)(b) and s. 18(1)(a) – incurring of expense.
Evolve Bitcoin ETF will track the results of continually rolling CBOE-traded futures
Evolve Bitcoin ETF, an Ontario unit trust that has applied to be TSX-listed, proposes to have exclusive exposure to the most current month of Bitcoin futures, except that it will be necessary, as the contract approaches maturity each month, to sell it and purchase the next month’s contract. As the Bitcoin futures trade in Chicago, the Trust will take the position that it will not use the futures or any other property in the course of carrying on a business in Canada and, therefore, will not be a "SIFT trust."
Having said that, it will realize gains on income account each month if the futures keep appreciating (unless it elects under draft ss. 10.1(1) and (4) respecting its “eligible derivatives” to annually recognize income on a mark-to-market basis under s. 142.5(2)). Since it will not make any regular cash distributions, it will need to push out its income in late December of each year (in cash or in units) to the extent of income that has not been allocated on unit redemptions. To facilitate this, it will elect under s. 132.11(1) to have a December 15 year-end (so that income distributions made in the following stub period are back-dated to December 15.) Perhaps this will lead to increased trading surrounding that date.
Units are redeemable at any time at NAV provided that they are tendered in multiples of a specified minimum number (a “PNU”) – but to provide greater certainty on open-ended (s. 108(2)(a)) unit trust status, units in smaller quantities are redeemable at any time at 95% of their trading price. The tax disclosure assumes that the units are capital property to individuals.
Neal Armstrong. Summary of Evolve Bitcoin ETF preliminary prospectus under Offerings – Commodity Funds – Cryptocurrency Funds.
CRA rules that drilling on an existing, currently uneconomic, mine site would qualify as CEE
A mine ceased production quite some time ago as a result of the grade of the production being too low to justify continued production. The underground workings were allowed to flood and other historic shafts were sealed. The existing tracks would be unusable without significant work.
The new owner will conduct an exploration program, much of it focused on the existing mine site, in order to expand the “mineralization” (with any reserve identification being much further down the road). CRA ruled, subject to its detailed provisoes, that the expenses of this work would qualify as exploration (under s. 66.1(6) – Canadian exploration expense - para. (f).)
Neal Armstrong. Summary of 2017 Ruling 2016-0635341R3 under s. 66.1(6) – CEE - para. (f).
CRA’s view of what is mandate is coloured too much by the common law of agency
P-182R sets out CRA’s views on determining whether a relationship of agency or mandate is present. It is suggested that in some respects, the CRA position is insufficiently responsive to the differences between the two (common law v. civil law) concepts. In particular:
The CRA's third essential criterion of control by the mandator, as well as the additional indicators relating to fiduciary relationship, remuneration, and best efforts, to name a few, are elements that are exclusive to the common law notion of agency and should not fall under the Quebec civil law concept of mandate.
Neal Armstrong. Summary of Emmanuel Sala and Judith Lemieux, “The Impact of Quebec Civil Law on the Recognition of Mandator-Mandatary Relationships by Quebec and Canadian Tax Authorities,” Tax Topics (Wolters Kluwer), No. 2375, 14 November 2017, p. 1 under General Concepts - Agency.
Offshore clients are putting their funds into U.S. trusts in order to avoid CRS reporting
Various clients are establishing trusts in the U.S. (which has not agreed to exchange information under the Common Reporting Standard) in order to avoid reporting under the CRS.
The motivation of these individuals is the privacy and protection of their families who are resident in the home countries to which CRS reporting will be provided. For countries whose controls on disclosure of financial information are easily subverted, CRS reporting is particularly problematic. Disclosures regarding the foreign assets of these individuals invite extortion, and in some cases kidnapping. Where these concerns are not present, often political risk is.
Neal Armstrong. Summaries of Robert E. Ward, "The Common Reporting Standard Comes to Canada", Tax Management International Journal, 2017, p. 538 under s. 270(1) – reportable jurisdiction person and s. 271(1).
Tax Court of Canada finds that there were no ITCs respecting services of criminal counsel which permitted an individual to resume a business
Operations 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).