News of Note

CRA confirms the inability of a top-tier partner to elect to reverse a negative ACB gain

Where a corporation, individual or testamentary trust realizes a capital gain on a limited partnership interest (or passive "specified member" interest) under the negative adjusted cost base rule in s. 40(3.1), the rule in s. 40(3.12) permits that partner to realize a capital loss at the end of the next fiscal period of the partnership to the extent that the adjusted cost base of the partnership interest has become a positive amount.

CRA has confirmed that this loss recognition election is not available where the limited partner (or specifed member) is itself a partnership.  This represents another loss-utilization anomaly of two-tier partnership structures (see also the post below on the limited partnership loss rules).

Neal Armstrong.  Summary of 3 July 2012 T.I 2012-0449701E5 under s. 40(3.12).

Daruwala - Tax Court finds an informal oral occupancy arrangement to be a "licence or similar arrangement"

Woods J. found that an informal arrangement between the corporate builder of a home and its individual shareholder under which the individual and his family were given temporary occupancy pending a sale of the home a number of months later, qualified as a "lease, licence or similar arrangement" of the home as "a place of residence" - so that the GST self-supply rule in s. 191(1)(b)(i) was triggered.  As a result, the appellants are entitled to a rebate of the GST that had been charged to them by the builder - and the builder may now face an unbargained-for GST assessment.

This finding of an oral "licence or similar arrangement" has broader significance, as the quoted phrase appears in a number of other HST/GST provisions.

Neal Armstrong.  Summary of Daruwala v. The Queen, 2012 TCC 257 under ETA, s. 191(1).

CRA supports broad interpretation of the copyright royalty exemption from Part XIII tax

CRA has indicated that it considers the s. 212(1)(d)(vi) exemption from Part XIII withholding tax to encompass any copyright royalties paid in respect of a work (other than film, which is excluded under s. 212(5)).  It appears to be inherent in this view that the words "production or reproduction" in s. 212(1)(d)(vi) have a broader meaning than  their more specialized meaning in copyright law.  As found in ESA v. SOCAN, s. 3(1) of the Copyright Act distinguishes between reproduction and performance rights,  so that copyright royalties paid in respect of performance rights are not considered to be in respect of production or reproduction rights.

Scott Armstrong.  Summary of 3 May 2011 IFA Roundtable 2011-0404511C6 under s. 212(1)(d)(vi).

Blackburn Radio - Tax Court decision casts doubt on whether there is a limitation period for loss years

Woods J. dealt with with an unsuccessful attempt by the Minister to make consequential adjustments to other taxation years after a previous Tax Court decision had found that the Minister's reassessment of the taxpayer's 1999 taxation year was statute-barred.

She noted obiter that there was authority (Interior Savings Credit  and Okalta Oils) that a nil assessment is not an assessment for purposes of the Act.  If this proposition is correct, it indicates (contrary to the CRA position - see 28 February 1991 T.I. 8621-4) that the limitation period (normally three or four years) does not start to run with a nil assessment.

Neal Armstrong.  Summaries of Blackburn Radio v. The Queen, 2012 TCC 255 under s. 152(4.3)152(4) and 171(1).

SRI Homes - Court of Appeal rejects Tax Court "reasons" as being too paltry

The Federal Court of Appeal remitted a decision to be tried with a different judge on the basis that inadequate reasons had been provided.

Dawson J.A. acknowledged that in some circumstances it may be acceptable for the judge to simply say that he or she agrees with the Minister.  However, this will not do where the Minister has made various arguments in the alternative, and it is impossible to know which of these internally inconsistent arguments the judge agrees with.

Scott Armstrong.  Summary of SRI Homes v. The Queen, 2012 FCA 208, under s. 171(1).

CRA provides somewhat more helpful examples on the HST place-of-supply rules

CRA has released in draft a revised and expanded Bulletin on the HST place-of-supply rules.  Although most of the examples are trite or apodictic, some of the examples are of potential interest including:

Example 92: the BC office of a corporation which receives the advice and has meetings with the advisor has a closer connection to the advisor's services than the head office in Ontario which contracted with the advisor and the Alberta accounting office to which the invoice was directed to be sent - so that the supply is in BC;

Example 96: the business address of a mutual fund trust in Ontario has a closer connection to the services of an accounting firm than the address of the fund sponsor or of the trustee - so that the supply is in Ontario;

Example 107: a storage service (viewed as  a single supply) is made in Ontario as that is where 60% of the art collection in question is situated; and

Example 110: the legal service of drafting an asset sale agreement relates to both Alberta tangible personal property and Ontario real estate - accordingly, the situs of the tangible personal property and real property does not govern and the place of supply instead is determined by the Ontario business address provided by the Ontario client.

Respecting the rule that the situs of litigation "under the jurisdiction of a court or other tribunal established under the laws of a province" is that province, CRA implies that the Tax Court of Canada and the Competition Tribunal are such provincial tribunals, which has got to be wrong. Verification of some of the relevant guidelines would entail a waiver of privilege.

Neal Armstrong.  Summaries of June 2012 Draft GST/HST Technical Information Bulletin B-103 under New Harmonized Value-Added Tax System Regulations: section 8, subsection 13(1), section 14, section 15, section 27, and section 28.

Schofield - English Court of Appeal applies Ramsay doctrine (which is irrelevant in Canada, eh?)

The UK taxpayer acquired or wrote four options on the FTSE (both calls and puts) which were designed to produce a capital loss for UK purposes (irrespective of what happened to the index) even though the taxpayer was completely hedged as an economic matter.  The England and Wales Court of Appeal applied the Ramsay doctrine (pre-ordained self-cancelling transactions) to deny the loss.

The Ramsay doctrine (see also Furniss v. Dawson, Craven v. White) has not gained any traction in Canada.  This may be because vacuous transactions of this type should be a quick meal under the general anti-avoidance rule (see Mathew, para. 62; Collins & Aikman (TCC) at para. 109 ("none of these [transactions] involved the degree of artificiality, boldness, vacuity or audacity to rise to the level of being ... abusive tax avoidance using the language of...the GAAR").  Although not as extreme as some of the litigated British schemes, honourary mention might be accorded to the Canadian stock-dividend value-shift schemes (1207192, Triad Gestco, per contra Global Equity).

Neal Armstrong.  Summary of Schofield v. R & C Commrs., [2012] EWCA Civ 927 (CA) under Tax Avoidance.

Malo - Tax Court finds an oral tax shelter

The taxpayer's purchases over three years of 750 tree seedlings at a Costa Rican tree plantation were found to be a "tax shelter" on the basis of a statement made to the taxpayer in his home by his brother-in-law (who was trying to promote the project) that the taxpayer's expenditures would be fully deductible business expenses.  This statement likely was incorrect as the tree seedlings were inventory which would not be sold until they matured.

If this case is correct, it illustrates that for purposes of the tax shelter definition an informal oral statement can be the equivalent of a tax savings projection appearing in an offering memorandum or marketing brochure.

Scott Armstrong.  Summaries of Malo v. The Queen, 2012 TCC 75 (Informal Procedure) under s. 237.1 - tax shelters. 3(a) - general, and s. 248(1) - inventory.

CRA states that voluntary disclosure expenses are non-deductible

CRA has stated that "legal expenses incurred with respect to a voluntary disclosure are not incurred to earn income from a business or property."

This statement is too crisp.  Such expenses might potentially so qualify if, for example, they were incurred in relation to an HST voluntary disclosure, or with a view to satisfying conditions for a a business merger or the financing or re-financing of the business, or in order to remedy a default under current loans (although, depending on the circumstances, deductions might only be available under special rules such as the cumulative eligible capital rules.)

Neal Armstrong.  Summary of 5 June 2012 T.I. 2012-0437831E5 under s. 18(1)(a) - income-producing purpose and s. 60(o).

Sommerer - Federal Court of Appeal finds that the exemption in the Canada-Austrian treaty for gains realized by an Austrian alienator prevents the attribution of those gains to Canada

In the Sommerer case referred to below, Sharlow JA also found obiter that the gains exemption article in the Canada-Austrian treaty would have precluded the application of  a Canadian domestic gains attribution rule (s. 75(2)) to the Canadian taxpayer in that case even though the person invoking the exemption was that Canadian resident rather than the Austrian alienator (i.e., an Austrian foundation) of the Canadian shares giving rise to the attributed gain.  She found that preventing "economic" double taxation as in this situation was within the intended general purview of the treaty.

Neal Armstrong.  Summary of Sommerer v. The Queen, 2012 FCA 207 under Treaties - Article 13 and Treaties- General.