News of Note
Mont-Bruno – Tax Court of Canada strikes out the Minister’s Reply as not containing sufficiently cogent factual allegations to justify assessing a statute-barred return
Email this ContentA non-profit organization operating a golf course was assessed well beyond the normal reassessment period on the basis that a gain realized by it on selling some wooded land adjacent to its golf course (but on the other side of the road and with a different zoning) was not exempted under s. 149(5)(e)(ii) as being used directly and exclusively in the course of providing its sporting facilities. After striking two allegations of mixed fact and law in the Minister’s Reply, including one that merely paraphrased the s. 149(5)(e)(ii) test rather than containing only factual allegations, Paris J found that the remaining factual allegations in the Reply, if proven, would have been insufficient to establish that there had been a misrepresentation attributable to neglect etc. Accordingly, the Minister’s Reply was struck as disclosing no reasonable cause of action.
However, as it was possible that the Minister would be able to draft an amended Reply to support the late assessment, the Minister was given 60 days to file an amended Reply.
This case suggests that there is a significant burden on the Minister to establish misrepresentation attributable to neglect etc.
Neal Armstrong. Summary of Mont-Bruno C.C. Inc. v. The Queen, 2016-1152(IT)G, 21 March 2017 under s. 152(4)(a)(i).
CRA states that s. 95(2)(a)(ii) (if applicable) can recharacterize a profit transfer payment that is not deemed a dividend under s. 90(2)
Under an “Organschaft,” a German parent (“Parentco”) and its German subsidiary (“Subco”) can enter into a profit transfer agreement (PTA) which Subco agrees to annually transfer its entire profit determined in accordance with German (statutory) GAAP to Parentco. In 26 May 2016 IFA Roundtable Q. 6, 2016-0642081C6, CRA confirmed that, at least in the simple case where Parentco wholly-owns Subco through ownership of a single class of shares, the annual profit transfers will be deemed to be dividends under s. 90(2) and, thus, not foreign accrual property income to the direct or indirect Canadian parent of Parentco – and then indicated that this supplanted an earlier position (e.g., (e.g., 2001-0093903) that a profit transfer payment made by Subco to Parentco could be re-characterized as income from an active business of Parentco under s. 95(2)(a)(ii) to the extent that Subco had earnings from an active business before taking into account the profit transfer payment – so that this previous position will only apply to profit transfer payments made before 2017.
A questioner pointed out that there are PTA mechanisms in other jurisdictions as well, and that there are still situations where s. 90(2) does not apply, e.g., where a profitable operating subsidiary in Finland or Sweden makes PTA payments to a grand-parent). CRA stated:
[T]he proposal to limit the application of the [s. 95(2)(a)(ii)] General Approach to PTA payments made before 2017 was only meant to apply to situations where the PTA payment is deemed under subsection 90(2) to be a dividend. For any other PTA situations…the CRA will continue to apply the General Approach.
Neal Armstrong. Summary of 2 March 2017 External T.I. 2017-0682291E5 under s. 95(2)(a)(ii).
Income Tax Severed Letters 22 March 2017
This morning's release of nine severed letteres from the Income Tax Rulings Directorate is now available for your viewing.
Full-text translations of the 2017 Quebec CPA Roundtable items are available
Full-text translations of all the eight of 2017 Quebec CPA Roundtable questions and answers that were released last Wednesday (including those referred to in previous posts) are now available, and are listed and briefly described in the table below.
These (and the other translations covering the last 21 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA states that a gross negligence penalty can be imposed even where no return is filed
Similarly to ITA s. 163(2), the ETA gross negligence penalty provision (s. 285) references the making of “a false statement or omission in a return…statement…or answer” knowingly or in circumstances amounting to gross negligence. CRA asserted that “the gross negligence penalty is potentially applicable even where no GST/HST return has been filed,” and cited Kion, where “natural persons,” who had made false statements to have their profitable business partnership deregistered for GST purposes and had not filed GST returns, were subjected to gross negligence penalties.
Neal Armstrong. Summary of 25 February 2016 CBA Roundtable, Q. 9 under ETA s. 285.
CRA indicates that it has the “flexibility” to accommodate a requested assessment of a prior GST/HST return to allow an unclaimed s. 232 rebate credit
In P-149R, CRA states that it generally will not assess a prior GST/HST return at the request of the registrant to the extent this will result in a reduction in net tax, so that the registrant should instead carry forward unclaimed input tax credits for claiming in its current return. However, this does not work for a credit arising under ETA s. 232 (re rebating consideration and related GST/HST for a previous reporting period) where the registrant missed claiming the s. 232 credit for the reporting period in which the adjustment was made, as that credit (unlike an ITC) cannot be carried forward to a subsequent return.
However, CRA has indicated that in its policy under P-149R, it has the “flexibility” to allow assessing the prior return “where the adjustment relates to an amount that may not be reported or accounted for in a subsequent period,” which appears to be a very guarded “yes,” that it generally would be receptive to opening up the return to allow the s. 232 credit.
Neal Armstrong. Summary of 2016 CBA Roundtable, Q.8 under ETA s. 296(1).
Aeronautic Development – Tax Court of Canada finds that a situation of extreme economic dependence gave rise to de facto control
A Canadian corporation (ADC), which had issued voting common shares for a modest amount to three Canadian employees, was found to be subject to the de facto control (as defined in s. 256(5.1)) of a U.S. corporation and its controlling shareholder (Mr Silva), so that it did not qualify for refundable SR&ED investment tax credits. Hogan J noted that “McGillivray confirms that the influence [referenced in s. 256(5.1)] must be exercisable, directly or indirectly, against the voting shareholders of the corporation.” He nonetheless found that this narrow test was satisfied on the basis inter alia that the sole source of revenue of ADC was (and likely could only be) a cost-plus contract with the U.S. corporation for work on a particular project and, that, accordingly:
[I]t is hard to conceive that the Canadian Resident Shareholders would have exercised their voting rights independently of Mr. Silva’s wishes. The fact that the Canadian Resident Shareholders were either employees of the Appellant or entities wholly owned by employees of the Appellant reinforces this conclusion.
Neal Armstrong. Summary of Aeronautic Development Corp. v. The Queen, 2017 TCC 39 under s. 256(5.1).
The new CRA telephone service for those with complex technical tax issues will initially be limited to Ontario and Quebec CPAs
The Dedicated Telephone Service ("DTS") for tax service providers with “more complex technical tax issues“ than those that can be handled by the CRA general inquiry line, which will launch in July 2017 as a pilot project, will initially be limited to Ontario and Quebec CPAs. CRA states:
The DTS will be a technical resource for tax service providers rather than a problem solving line. …[T]he DTS is not intended for specialized tax professionals whose services are focused on complex tax planning. They should continue to direct their tax queries through requests for technical interpretations, advance rulings, or pre-decision consultations.
Neal Armstrong. Summary of 2 February 2017 Quebec CPA Individual Taxation Roundtable, 2017-0682711C6 Tr under s. 152(1).
CRA confirms that if a vehicle allowance is too low, the employee can include the allowance and deduct the vehicle expenses
S. 6(1)(b)(xi) provides that if any of an employee’s vehicle expenses are reimbursed by her employer, the full amount of any vehicle allowance received by her will be included in her employment income. However, where the employee receives a vehicle allowance that is less than the maximum which could be received as a tax-free vehicle allowance, CRA considers that where the:
employee elects to include in income the amount of a non-taxable motor vehicle allowance, the employee can deduct the expenses for that vehicle which were actually incurred and which are otherwise deductible on condition that the employee can demonstrate that such expenses are in excess of the allowance in question.
Neal Armstrong. Summaries of 2 February 2017 Quebec CPA Individual Taxation Roundtable, Q.1.7, 2016-0674811C6 Tr under s. 8(1)(h.1) and Reg. 200(3).
CRA accepts that a couple under the same roof can be living separate and apart
The eligibility of an individual for the Canada child tax benefit or the GST/HST credit under s. 122.5 may turn on whether the individual has a “cohabiting spouse or common-law partner,” whose definition turns, in part, on whether they are living “separate and apart.” CRA accepts the family law jurisprudence that they can potentially qualify as living separate and apart even if they are living under the same roof (e.g., pending sale of the house), and cited the criteria in M. v. H, [1999] 2 SCR 3 of “shared shelter, sexual and personal behaviour, services rendered between them, social activities and relations, economic support and children, as well as the societal perception of the couple.”
Without hint of self-consciousness, CRA then provided a list of documents that could satisfy an auditor that these criteria are met.
Neal Armstrong. Summary of 2 February 2017 Quebec CPA Individual Taxation Roundtable, Q.1.3, 2016-0674821C6 Tr under s. 122.6 – cohabiting spouse or common-law partner.