News of Note
Bitton Trust – Quebec Court of Appeal finds that the ARQ did not exceed its Quebec-based audit authority when it issued a s. 231.2 demand to a Calgary bank branch
Email this ContentThe ARQ, which was seeking to establish that the central management and control of an Alberta trust was in Quebec, issued a requirement to a Calgary branch of the Banque Nationale du Canada (“BNC”) for various bank records respecting the trust under the Quebec equivalent of ITA s. 231.2(1). The requirement was sent directly to the branch rather than to the BNC head office because this was required under s. 462(2) of the Bank Act. In finding that the ARQ had not exceeded its territorial competence in making this requirement, Hogue JCA stated:
Here we are not concerned with … a seizure outside of Quebec which, it is true, could require the seizing party to approach an authority of the foreign State with a view to obtaining its collaboration in order to proceed. …
The communication of the requirement to BNC through one of its branches situated outside Quebec is the sole external element that is present here. However, such communication is purely accessory and is insufficient to conclude that the ARQ exercised its powers of taxation or of audit outside of Quebec or exceeded its competence.
Neal Armstrong. Summary of 1068754 Alberta Ltd., trustee of DGGMC Bitton Trust v. ARQ, No. 500-09-025203-159, 8 January 2018 (Queb. CA) under s. 231.2(1).
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for the French technical interpretation released last week and five technical interpretations released in February of 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ¾ years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Dynamic hedging might be on capital account
A dynamic hedge, for example, where a taxpayer has written a call option on a number of shares of X Co, involves the taxpayer continually buying or selling shares of X Co in predictable numbers and at predictable times based on changes over time in the market price of the X Co shares.
[B]ased on George Weston … a compelling argument can be made that gains and losses resulting from a dynamic hedging strategy to hedge a capital asset should also be on capital account despite the fact that there may be numerous transactions. … [T]he relevant issue is the character of the risk that is being hedged (depreciation in value of a foreign-currency-denominated capital asset), not the number of transactions.
The derivative forward arrangement definition was amended in response to concerns that it could apply to conventional currency forwards. However, there are concerns that the new wording does not adequately deal with currency forwards that hedge foreign-currency denominated borrowings (as contrasted to investments).
Under hedge accounting, recognition of income or loss on the hedge of a trading-account item can be deferred until the year of recognition of loss or income on the underlying hedged item. A company,
having chosen hedge accounting, could argue on the basis of Kruger that hedge accounting provided a more accurate picture of income; it matched the results of the hedged item with the results of the hedging item, thus producing a better match of profit and related loss than the realization principle.
Neal Armstrong. Summaries of Nigel P.J. Johnston and Roger E. Taylor, "Taxation of Hedges and Derivatives: Recent Developments," 2016 Conference Report (Canadian Tax Foundation), 13:1-36 under s. 9 - timing, s. 9 – capital gain v. profit – futures/forwards/hedges, and s. 248(1) – derivative forward agreement – s. (b)(iii).
CRA rules that the purchase of an IP royalty gives rise to non-creditable GST/HST to the investor unless there is a specified minimum royalty
A Canadian registrant (Investor) enters into an agreement with a Canadian corporation (Corporation 1) under which it pays lump sums in consideration for the right to receive monthly royalties calculated as a percentage of intellectual property (IP) related revenue streams of Corporation 1. CRA ruled that the lump sums so paid are consideration for the taxable supply to Investor of intangible personal property (the right to the royalty payments). However, CRA ruled that Investor is not making any taxable supply in exchange for the royalty payments when Corporation 1 makes the subsequent royalty payments – so that Investor would not be entitled to claim input tax credits for the GST/HST paid or payable on related inputs. Apparently, this means that the GST/HST charged to it on its lump sum investment is non-creditable. This analysis could be troubling to the companies which invest in Canadian resource or other royalties.
A second agreement with Corporation 2 was similar, except that a minimum monthly royalty was specified. CRA ruled that because the Investor now had a non-contingent right to receive money, the right to the royalties qualified as a “debt security” (defined in ETA s. 123(1) as “a right to be paid money”), so that the purchase of the royalty agreement was now the exempt purchase of a financial instrument. This seems to suggest that the revenue potentially payable under a “debt security” can be highly variable provided that there is a specified minimum.
Neal Armstrong. Summaries of 10 February 2017 Ruling 162056 under ETA s. 123(1) - debt security, s. 169(1) and s. 182(1).
CRA finds that a corp. held 50-50 by two 100% grandchildren of A was closely related for ETA purposes to A and to another 100% grandchild of A
One of the requirements for the ETA s. 156 nil consideration election is that the parties be closely related. The basic building block for the closely-related definition is the concept of a “qualifying subsidiary,” which references the holding of 90% or more of the value and number of the issued and outstanding shares, having full voting rights under all circumstances, of the mooted subsidiary. There is a somewhat ambiguous reference in ETA s. 128(1)(a)(v) to the 90% closely-related test being satisfied by a “combination” of corporations.
This did not give CRA pause, and it found that a corporation which was held on a 50-50 basis by two wholly-owned grandchildren of A was closely related to A as well as to another wholly-owned grandchild of A held through another chain.
Neal Armstrong. Summary of 11 October 2017 Interpretation 181628 under ETA s. 128(1)(a)(v).
Lichtman – Tax Court of Canada finds that religious instructors at a Hebrew academy did not qualify for the clergy residence deduction
Campbell J found that ordained rabbis who taught Judaic studies curriculum to children attending the Vancouver Hebrew Academy were ineligible for the s. 8(1)(c) clergy residence deduction given that teaching (although a component of ministering) is not itself “ministering,” and the students at a school meeting the provincial educational standards were not a “congregation.”
Neal Armstrong. Summary of Lichtman v. The Queen, 2017 TCC 252 under s. 8(1)(c) and Statutory Interpretation - noscitur a sociis.
Mac & Mac – Tax Court of Canada denies SR&ED claims because of inadequate notes of the work done
Mac & Mac was approached by a potential client to use its expertise in hydrodemolition to develop a technique to remove the worn inner linings from pipelines, so that the necessity of replacing them would be eliminated. Mac & Mac used numerous different approaches to applying high-pressure water to this end. In denying Mac & Mac’s SR&ED claims, Graham J stated:
Mac & Mac’s claims … do not meet the last test [in Northwest Hydraulic which] … requires Mac & Mac to have kept detailed records of hypotheses, tests and results as the work progressed.
… There is simply no way that someone, even someone very experienced in the industry, could hope to replicate or confirm Mac & Mac’s results from [its] notes.
Neal Armstrong. Summary of Mac & Mac Hydrodemolition Services Inc. v. The Queen, 2017 TCC 256 under s. 248(1) - SR&ED.
Zhang – Tax Court of Canada finds that “may deduct” means “is permitted to deduct” rather than “chooses to deduct”
The formula for an individual’s unused tuition, textbook and education tax credits states that it is reduced each year by “the amount that the individual may deduct” for that year. Graham J found that this was referring to “the amount that the individual is permitted to deduct” for the year, irrespective whether or not she wants to do so, rather than to “the amount that the individual chooses to deduct” for the year. The effect of this was that the taxpayer could not defer claiming the credits until a later year when they were of more use to her.
Neal Armstrong. Summary of Zhang v. The Queen, 2017 TCC 258 under s. 118.61(1).
Huntly Investments – Tax Court of Canada finds that associated-corp equivalent services can be added to the actual full time employees under the SIB definition
Paris J clarified that the over-five full time employee exclusion from a specified investment business involves a two-step test:
[I]t is first necessary to know how many full-time employees the [corporation] in fact employed in the years in issue.
The next step is to determine how many full-time employees would be required in respect of the services performed by … associated corporations [had those services not been provided].
A private corporation with a smallish portfolio of rental apartments in Vancouver fell well short of the mark. Under the first step, its building managers were mostly couples who split a full-time position, so that neither qualified as a full-time employee.
In the course of rejecting various taxpayer submissions on the second step relating to services provided by two associated corporations, he stated:
The Appellant’s contention that it would have required a full‑time CEO, executive assistant, accountant or CFO and accounting clerk is in large part predicated on the proposition that it was actively pursuing a redevelopment proposal in respect of its Stadacona site during its 2010 to 2012 taxation years. ...[T]he evidence does not support [such] a finding… .
Neal Armstrong. Summary of Huntly Investments Limited v. The Queen, 2017 TCC 255 under s. 125(7) – specified investment business.
CRA indicates that a late s. 83(3) election causes a retroactive increase to the CDA of the corporate recipient of the dividend
CRA indicated that a late but valid capital dividend election retroactively validates the dividend, so that the recipient of the dividend thereby has an addition to its capital dividend account at the time of the receipt of the dividend.
Neal Armstrong. Summary of 30 August 2017 External T.I. 2017-0718311E5 F under s. 83(3).