News of Note

Gaz Métro – Cour du Québec finds that a “mirror debt” arrangement did not result in a legal release of debt for GAAP and capital tax purposes

Gaz Métro issued debt in the public markets and then on-lent the money on the same terms to a limited partnership of which it was a 70% limited partner, so that it was the limited partnership which serviced the debt through its “mirror” debt. Gaz Métro considered that, under generally-accepted accounting principles, this arrangement qualified as one in which (as per the relevant accounting pronouncements) it had been “legally released” from its debt, thereby reducing its capital for Quebec capital tax purposes.

Fournier JCQ considered that, notwithstanding that the partnership had effectively assumed the debt, there had been no legal release given that there had been no novation.

Federally, ss. 181(3) and 190(2) indicate that Part VI capital (other than of OSFI-supervised institutions) is determined under GAAP.

Neal Armstrong. Summary of Gaz Métro inc. c. Agence du revenu du Québec, 2017 QCCQ 3664 under s. 181(3).

Four further full-text translations of Technical Interpretations are available

Full-text translations of four French technical interpretations that were released between March 11, 2015 and March 4, 2015 are listed and briefly described in the table below.

These (and the other translations covering the last 26 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2015-03-11 28 November 2014 Internal T.I. 2014-0531221I7 F - Montants forfaitaires accordés aux témoins Income Tax Act - Section 3 witness protection payments not income if for protection
2015-03-04 12 December 2014 External T.I. 2013-0511391E5 F - Deemed disposition of capital interest in personal trust Income Tax Act - 101-110 - Section 107 - Subsection 107(2) full step-up of properties distributed in satisfaction of an estate's capital interest in an inter vivos personal trust
Income Tax Act - Section 70 - Subsection 70(5) push-down onto property distributed by inter vivos personal trust of s. 70(5)(b) cost of indefeasibly vested capital interest in the trust
4 December 2014 Internal T.I. 2014-0526451I7 F - Assessment beyond the normal reassessment period Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) taxpayer failure to file was a "misrepresentation"
27 October 2014 Internal T.I. 2014-0534981I7 F - Subsection 40(3.4) Income Tax Act - Section 40 - Subsection 40(3.4) capital loss on partnership interest continues suspended following partnership dissolution

R & S Industries – Tax Court of Canada finds that a taxpayer is not bound by the statement of boot set out in its s. 97(2) election form

R & S Industries was unsuccessful in a motion to have the Federal Court direct CRA to reconsider its decision to not permit R & S Industries to file an amended s. 97(2) election form so as to change the agreed amounts. R & S then appealed to the Tax Court with a view to convincing the Court that the allocation of consideration between partnership-interest and non-partnership interest consideration set out on the (T2059) election form did not reflect the actual agreed allocation. CRA viewed this as an attempted end-run around R & S’s inability to amend its election, and sought to have the appeal dismissed on jurisdictional grounds.

Graham J considered that there was a crucial distinction between the T2059’s agreed amounts, which could not be altered by the Minister, and the allocation of the consideration, which was a purely factual matter which was merely recorded on the T2059, and which either CRA or the taxpayer were free to challenge in the Tax Court as not according with the actual facts. Accordingly, the Crown’s jurisdictional challenge was dismissed.

This case likely suggests that the CRA practice, of requiring that corrections to s. 85 etc. election forms be made through the filing of amended election forms accompanied by a late-filing penalty, is wrong to the extent that the changes relate to information other than the elected amounts.

Neal Armstrong. Summary of R & S Industries Inc. v. The Queen, 2017 TCC 75 under s. 97(2).

Post-Anson, CRA maintains its position of no foreign tax credit for U.S. taxes paid by a Canadian member on undistributed LLC income

Notwithstanding Anson, CRA considers that where a Canadian-resident member’s share of LLC income is subject to U.S. tax but the income is not distributed, no Canadian foreign tax credit will be available in the year the income is earned – nor in a subsequent year given that s. 126(1) does not permit the carryforward of the foreign tax.

CRA also considers that this result is consistent with Canada’s Treaty obligations. In particular, after noting that the OECD Commentary on Art. 23B of the Model Convention “expressly contemplates that states may impose timing restrictions on claiming foreign tax credits,” and that where this is so “these countries…would be expected to seek other ways…to relieve the double taxation which might otherwise arise in [such] cases,” CRA stated:

In the case of Canada, such “other ways … to relieve the double taxation” include deductions allowed under subsections 20(11) and 20(12) of the Act. As such, in our view, the limits imposed by subsection 126(1) of the Act on claiming a foreign tax credit are in accordance with the OECD guidelines and do not affect the general principle of Article XXIV of the Treaty.

Neal Armstrong. Summaries of 13 April 2017 External T.I. 2015-0601781E5 under s. 126(1) and Treaties – Art. 24.

No T4A for rent

Reg. 200(1) contemplates the filing of T4A forms for a fee, commission or other amount for “services.” CRA indicated that there was no T4A reporting requirement for an amount paid as rent.

Neal Armstrong. Summary of 31 March 2017 External T.I. 2016-0675221E5 under Reg. 200(1).

Ploughman – Tax Court of Canada indicates that a defence under s. 163.2(6) of “good faith” reliance on information is unavailable where the reliance was unreasonable

In Guindon, a family lawyer and president of a charity was liable for penalties under s. 163.2(4) for issuing charitable receipts to 134 different investors in a charitable donation scheme after falsely representing in a tax opinion that that she had looked at the implementing documents (which did not exist). Sommerfeldt J has now found that the individual (Mr. Ploughman) who, despite his protestations to the contrary, was found to be a creator or promoter of the charitable donation scheme at issue in Guindon, was also liable for s. 163.2 penalties.

The particular act which Sommerfeldt J focused on was that, shortly before the April 30 filing deadline, Mr. Ploughman sent a letter to the donors recommending that they submit their (false) charitable receipts to CRA. At that time, he was aware that the timeshare units which had purportedly been donated in the previous year had not yet been created, and was also aware that the trust which purportedly had distributed those units to the donors had not yet been settled (or was indifferent as to whether this was the case). Thus, Mr. Ploughman “participated in, assented to or acquiesced in the making of” the false donor statements.

Sommerfeldt J rejected Mr. Ploughman’s submission that he had relied in good faith on the opinion letter of Ms. Guindon. First, the s. 163.2(6) safe harbour for good-faith reliance applied only to information provided by or on behalf of the donors, which was not the case here. Second, he noted that although the phrase “good faith” has been interpreted as referring to the “’actual, existing state of the mind, whether so from ignorance, skepticism, sophistry, delusion, fanaticism, or imbecility’,” he preferred the standard applied in a BC Court of Appeal decision of:

Honesty of intention, and freedom from knowledge of circumstances which ought to put the holder on inquiry.

Mr. Ploughman was not free of knowledge that should have put him on inquiry.

Neal Armstrong. Summaries of Ploughman v. The Queen, 2017 TCC 64 under s. 163.2(4) and s. 163.2(6).

Armour Group – Tax Court of Canada finds that structuring to deduct most of the cost of land (or a ground leasehold interest therein) was unsuccessful

An investment company (“Armour”), which was the lessee under a long-term ground lease from the Province of Nova Scotia, had constructed a building on the property and leased the building back to the Province. The Province then breached terms of the building lease and, in the subsequent settlement agreement, the parties agreed that the Province owed $2.4 million to Armour and that Armour, in consideration for $2.4 million to be paid by way of set-off, would be granted an irrevocable option to acquire the Province’s freehold interest (with the ground lease being terminated). There was no stated exercise price for this “option,” so that effectively this appeared to be an agreement that in consideration for $2.4 million, Armour could acquire the ownership of the freehold at a time of its choosing (and, by the way, when this occurred, the ground lease would terminate.)

At that point, Armour calculated that the present value of the remaining ground lease rentals was $2.24 million which, given that the settlement agreement agreed that the value of the whole property was $2.4 million, meant that the reversionary freehold interest of the Province had an FMV of $0.16 million. Armour then assigned the option to a wholly-owned subsidiary (“ADL”) along with the right to $0.16 million of the $2.4 million owing by the Province, with ADL agreeing as a condition of the assignment that it would provide a long-term ground lease of the property to Armour for nominal rents. Thus, at closing, Armour and ADL paid $2.24 million and $0.16 million, respectively, to the Province by way of set-off against the same amounts owing to them by the Province.

Armour took the position that the $2.24 million paid by it was fully deductible as consideration for the ground lease termination. Paris J instead found that what should be considered to have occurred was that Armour used all of the $2.4 million credit owing to it by the Province (which was not allocated under any of the agreements with the Province) to acquire the fee simple interest to the property on behalf of ADL and that, in exchange for that $2.4 million, Armour acquired the new (nominal-rent long-term) leasehold interest in the property from ADL Thus, the $2.4 million was a capital expenditure to acquire a capital asset (being such leasehold interest – which presumably would not be treated by CRA as a Class 13 asset).

A better result might have been achieved if most of the $2.4 million had been paid to ADL as prepaid rent.

Neal Armstrong. Summary of Armour Group Ltd. v. The Queen, 2017 TCC 65 under s. 18(1)(b) - capital expenditure v. expense.

CRA indicates that the GST gross negligence penalty can be levied on amounts that are not attributable to gross negligence

Although the ETA gross negligence penalty has essentially the same precondition – referencing “knowingly, or under circumstances amounting to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return [etc.]” – as ITA s. 163(2), the mechanics of computing the penalty (of 25% rather than 50%) differ.

First, understatements of net tax, understatements of tax payable and overstatements of rebate claims are computed separately (in ss. 285(a), (b) and (c), respectively). “Net tax” is essentially the positive or negative difference between tax collectible (or collected) in the reporting period and input tax credits claimed, as adjusted for specific adjustments such as bad debt credits or rebate credits under ss. 231 and 232. In a recent Interpretation, CRA appears to contemplate that s. 285(b) refers (and perhaps only refers) to situations where there was tax that was required to be self-assessed (or otherwise paid directly to the government in the registrant’s capacity of purchaser or importer rather than of collection agent) but was not, e.g., in relation to imported taxable supplies, or real estate purchases. It thus would appear to be likely that CRA does not contemplate that there can be any double-counting as between ss. 285(a) and (b), which is what one would expect.

Second, in this Interpretation, CRA states that, in contrast to ITA s. 163(2):

paragraph 285(a) does not refer to the portion of the understated net tax amount that is attributable to the false statement or omission for the reporting period for calculating the penalty. Rather, it provides that if there has been a false statement or omission relevant to the determination of the net tax of the person, then the amount of the difference between the actual net tax and the amount that would be the net tax for the reporting period (no apportionment) based on the information provided in the return will be subject to the 25% calculation.

Thus, for example, if in its monthly return a registrant overstated ITCs by $10,000 in circumstances amounting to gross negligence and made an honest mistake that $100,000 was not collectible on what it thought was an exempt supply, the 25% penalty would be exigible on $110,000.

Neal Armstrong. Summary of 31 October 2016 Interpretation 164696 under ETA s. 285.

CRA will exclude contingent-fee WIP from professionals’ post-Budget income

The 2017 Budget proposed that professional accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors no longer be permitted to use billed-basis accounting for taxation years beginning after March 21, 2017, subject to a 50% phase-in rule for the first such taxation year. CRA has now announced that the old rule (respecting no requirement to include work-in-progress in income) will continue to apply to WIP relating to a “contingency fee arrangement,” which it defines as follows:

Under the terms of a contingency fee arrangement, all or a portion of a designated professional’s fees may only become known and billable at some time after the taxation year in which the professional provided services under the arrangement (e.g., where, under the terms of a written contingency fee agreement between a personal injury lawyer and a client, legal fees are only billable by the lawyer on a periodic basis as amounts are received by the client under a negotiated settlement or a court judgment). Until such time, there is often no liability on the professional’s client to pay any fee; consequently, no amount is receivable by the professional until the right to collect the amount is established.

There can be arrangements under which the fees of professionals respecting an acquisition or sale, financing, or reorganization contingent on lenders' or shareholders' approval, cannot be rendered until the closing, with an indeterminate "haircut" to be negotiated for a failed transaction. These may be contingency fee arrangements.

Neal Armstrong. Summary of Billed-basis Accounting (28 April 2017) under s. 10(5)(a).

CRA confirms that previously having incurred trivial ECE may generate better ECP transitional results

The elective transitional rule in s. 13(8)(d) applies to a corporation that disposed of eligible capital property in calendar 2016, where the gain was included in a taxation year that straddled January 1, 2017. The taxpayer may elect under s. 13(38)(d)(iii) to maintain the effect of the s. 14(1)(b) inclusion. One of the conditions is that the taxpayer has incurred an eligible capital expenditure respecting a business before January 1, 2017.

At the 2016 CTF Annual Conference, Q13, CRA indicated that this transitional rule is unavailable where a taxpayer’s only intangible asset was internally-generated goodwill with no cost – so that the taxpayer could not be said to have made or incurred an ECE in respect of the business, thereby ousting the election.

CRA has now confirmed the flip side of the coin: even a trivial previous ECE expenditure respecting the business, such as incorporation expense, will eliminate this particular issue.

Neal Armstrong. Summary of 27 March 2017 External T.I. 2016-0680141E5 under s. 13(38)(d)(iii).

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