News of Note
Paypal - Federal Court grants an authorization for CRA to demand transaction summaries for the PayPal business account users
Email this ContentGascon J granted an authorization for CRA to issue a requirement under ITA s. 231.2 and ETA s. 289 on Paypal Canada to disclose the names and addresses (etc.) of corporations and individuals holding a business account with PayPal that had used PayPal's online payment platform in the course of their commercial activities during the period from January 2014 to date, and to provide the total number and value of payments received and made for those years. He stated that "the expectation of privacy with respect to business records … is very low" and that "the information sought … is required in the context of verification activities undertaken … to determine whether the Unnamed Persons have filed their required tax returns."
Neal Armstrong. Summary of MNR v. Paypal Canada Co., Docket T-564-17 (FCTD), 10 November 2017 under s. 232.2(3).
LLPs and LLLPs have various partnership attributes
CRA’s position, that Delaware and Florida LLPs and LLLPs are corporations, is being questioned.
Their partnership attributes include that they are created and dissolved by contract (rather than statute), the partners (unlike shareholders) have mutual agency and can only assign their economic interest (as contrasted to full partner status) and they owe each other and the partnership a duty of loyalty. As for their separate legal personality (like corporations, but also like Scottish partnerships), s. 35 of the Interpretation Act provides that the word "corporation" "does not include a partnership that is considered to be separate legal entity under provincial law."
There is a strong argument that the IA definition applies for greater certainty to ensure that LLLPs and LLPs are not treated as corporations. Further, the phrase "a partnership which is considered to be a separate legal entity under provincial law" does not necessarily limit the application of the IA definition to partnerships governed by provincial law.
Although the Delaware and Florida statutes provide “full shield” protection, limited liability nonetheless is less absolute than for corporations. For example, if a general partner of an LLLP is culpable of tortious conduct toward third parties in the execution of its duties as the manager of the LLLP's business, it is not protected by the LLLP shield. Furthermore, the failure to make filings may result in the loss of limited liability, whereas corporate limited liability is intrinsic to a corporation.
Neal Armstrong. Summaries of Angelo Discepola and Robert Nearing, "A Reply to the CRA's Classification of Florida and Delaware LLLPs and LLPs as Corporations," 2016 Conference Report (Canadian Tax Foundation), 24:1-39 under s. 96 and s. 248(1) – corporation.
There is additional significance respecting the effective dates of dividends for 2017
For 2017, there may be additional significance as to whether a dividend was paid in that year or 2018 given that 2017 was the last year that dividends could be "sprinkled" freely to adult family members, and given that the U.S. "Transitional Tax" on most accumulated earnings and profits may cause Americans to wish dividends to be considered to have been paid to them in 2017 by their Canadian companies in order to generate Canadian tax to offset the Transitional Tax.
CRA recognizes that a transaction may be "papered" after the fact, but backdating is improper where it is tantamount to a retroactive characterization or alteration of reality.
The authors recommend:
an express CRA policy permitting the crystallization of compensation and dividends in an owner-managed business to occur, for example, up to 60 days after fiscal year end (to match the due date for T5 slip filing). This administrative concession would codify the CRA's existing practice.
They also note that a formulaic approach to drafting resolutions before year end respecting the determination of the salary/loan repayment/dividend mix may be legally effective.
Neal Armstrong. Summary of Kevyn Nightingale and John Sorensen, "Backdating of Dividends," Tax Topics (Wolters Kluwer), No. 2392, January 11, 2018, p. 1 under General Concepts – Effective Date.
Translations of CRA technical interpretations/Roundtables now go back 4 years
The table below provides descriptors and links for the French technical interpretation released last week and six technical interpretations released in January of 2014, as fully translated by us.
These (and the other full-text translations covering the last 4 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Engelberg – Court of Quebec finds that an agreement to transfer a to-be-constructed condo unit to a shareholder did not generate a shareholder benefit until the year of transfer
A corporation, which had not yet started work on a condominium project on lands that it owned, agreed to sell a project condominium unit to its individual shareholder (Engelberg) at a price that was less than the current fair market value of such a unit. Financing was confirmed, and construction commenced later that year, construction was completed a year later (in 2007) and the transfer occurred in 2008 at the agreed price.
Lareau J rejected Engelberg’s argument that the ARQ should have assessed him for a taxable shareholder benefit in 2006 or 2007 (both now statute-barred) rather than for his 2008 taxation year. Lareau J distinguished Boulet on the grounds that that case involved an already-existing property rather than a “future” property.
This does not explain why he did not consider the shareholder benefit to arise in 2007, when the condo unit was completed. However, he noted that the amount of the hypothec that was assumed by Engelberg in 2008 was different than the amount contemplated in the 2006 agreement and that this was “a change to the conditions of sale which could have an effect on the quantification of the benefit which was conferred on the shareholder.” This case implicitly seems to consider that recognition of income should be deferred until it can be accurately quantified (cf. West Kootenay).
Given this emphasis on precise benefit quantification, it is somewhat ironic that Lareau J also indicated that the ARQ was clearly in error to have assessed the 2008 shareholder benefit based on the 2006 rather than the somewhat higher 2008 value of the unit - but, as he could not increase the ARQ assessment under appeal, this did not matter.
Neal Armstrong. Summary of Engelberg v. Agence du revenu du Québec, 2017 QCCQ 14819 under s. 15(1).
Murji – Tax Court of Canada finds that the cash portion of a donation made to a charity was reduced by the fees paid by it to the tax shelter promoter
Taxpayers participated in a purported gifting tax shelter in which, in addition to making cash donations to participating charities, they were to receive a donation of shares from a non-resident philanthropist (later discovered to be fictitious) and then donated those shares (which the evidence indicated were worthless but which were treated by the promoter as having a value of up to 12 times that of the cash donation) to the charity. Typically, 90% of their cash donations were paid by the charities to the promoter as fees. Under pressure from CRA, the charities issued revised charitable receipts which showed only the net cash actually retained by the charities as the donation amounts (i.e., the receipt amounts were reduced by almost 99%), and CRA assessed to only allow the revised receipt amounts for charitable credit purposes.
Favreau J dismissed the taxpayers’ appeals from these assessments on various grounds, including that they “had no donative intent as they did not intend to impoverish themselves,” but instead acted as “investors” based on the projected tax credits, and that the arrangement was not registered as a tax shelter. Of perhaps greatest interest, he affirmed that the cash donation amount of the taxpayer was only the net amount (e.g., in the case of Mr. Murji, $1,800 rather than $18,000) on the basis that after Mr. Murji deposited $18,000 with the promoter (“as consideration for participating in the gifting arrangement”), the promoter then “transferred only $1,800 to On Guard [the charity] by depositing $18,000 in On Guard’s bank account and invoicing On Guard for $16,200.”
Neal Armstrong. Summary of Murji v. The Queen, 2018 TCC 7 under s. 118.1(1) – total charitable gifts, Reg. 3501(1)(h) and s. 237.1(1) – tax shelter.
Archibald – Federal Court of Appeal confirms that taxpayers cannot rely on favourable CRA treatment of similarly-situated taxpayers
In the course of dismissing the taxpayer’s appeal of an assessment made on the basis that tuition fees paid to the University of Liverpool for an on-line MBA program did not qualify for the tuition tax credit, Woods J.A. stated that it is “well settled that a taxpayer does not become entitled to relief simply because another taxpayer similarly situated was assessed differently.”
Neal Armstrong. Summaries of Archibald v. Canada, 2018 FCA 2 under s. 118.5(1)(b) and s. 152(1).
CRA opines that s. 129(1.2) denies a dividend refund on the wind-up of a private company bequeathed (but not gifted) to a private foundation
The estate of B gifts her shares of a portfolio holding company (“Holdco”) to a private foundation, with Holdco thereafter using its liquid assets to redeem the common shares held by the private foundation. CRA ruled that, notwithstanding the status of the gifted shares as non-qualifying securities, the gift will be recognized under s. 118.1(13)(c) once the gifted shares are disposed of by virtue of their redemption - and that such gift will be deemed under s. 118.1(15) to have been made by B in her terminal year (so that her s. 70(5) gain on the shares can be sheltered). It also ruled that s. 129(1.2) would not deny a dividend refund to Holdco on the deemed dividend arising on the redemption. In giving the latter ruling, it was influenced by the fact that B's death occurred before 2016, so that the gift was not deemed by s. 118.1(5) to be made by B's estate. So far, these effectively are rulings that the transactions are more tax-efficient than if Holdco instead had been wound-up under s. 88(2) first, before the underlying assets were gifted to the Foundation.
The balance of the Holdco shares were held before B’s death in a spousal trust, whose terms in the wills of B’s deceased husband (A) provided that the residue (including such shares) was to be transferred to the Foundation on B’s death. CRA opined that this transfer to the Foundation was not a gift by the spousal trust (i.e., the Foundation received the residue qua beneficiary). More oddly, it also opined that s. 129(1.2) would apply to deny a dividend refund to Holdco on its redemption of the former-residue shares. In other words, notwithstanding the charitable intent of A when he crafted his wills and the obligation of his trustees to carry out his instructions, “one of the main purposes” of the transactions was generating a dividend refund.
Neal Armstrong. Summaries of 2017 Ruling 2016-0628181R3 under s. 118.1(13)(c), s. 129(1.2) and s. 118.1(1) - total charitable gifts.
CRA indicates that a requirement for unanimous decisions by trustees including the settlor did not by itself engage s. 75(2)
The Directorate essentially confirmed an earlier position that a requirement in a trust indenture for all decisions to be made unanimously by the trustees, who include the settlor, will not by itself necessarily engage s. 75(2). However, in the file under review, the settlor had the power to amend the terms of the trust indenture, and this in combination with the unanimous voting requirement was enough to cause s. 75(2) to apply.
Neal Armstrong. Summary of 16 February 2017 Internal T.I. 2016-0669881I7 under s. 75(2).
CRA rules that a partner’s election to have its LP units redesignated as units of a different class will not entail their disposition
A limited partnership, which invests in securities chosen by its manager of a discretionary basis, is continuously offering two classes of its LP units to investors: Class A units (which bear a management fee) to taxable investors; and Class T units (which do not bear a management fee) to RRSPs. It will add two new classes of units, with the same terms as the Class As except for bearing a different management fee and there being a longer notice period for retracting units (in order to permit a longer-term focus in the underlying investing). It will also provide current partners with the option to re-designate their current units as new units.
CRA ruled that the creation of the new units would not, by itself, result in a disposition of any existing units and that the redesignation would not by itself result in a disposition of such units. Compare 2011-0429611R3, where CRA gave a preliminary view that redesignating one class of REIT preferred units to a second would entail their disposition.
Neal Armstrong. Summary of 2017 Ruling 2017-0687061R3 under s. 248(1) – disposition.