News of Note
Income Tax Severed Letters 1 March 2017
Email this ContentThis morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Associated Newspapers – Court of Appeal of England and Wales finds that purchases made for promotional free on-supplies were part of the VAT-creditable overheads of a taxable business
A UK newspaper (ANL) paid VAT on its purchase of vouchers from Marks & Spencer and an intermediary, which it then provided free to those readers subscribing to its Sunday editions for the promotional period. HMRC argued that ANL was not entitled to recover any input tax on the vouchers because it had acquired the vouchers for on-supply at no consideration. Patten LJ found that there had been a sea change in the European VAT jurisprudence and that, now, the right way of looking at it was that the vouchers were part of the cost of promoting the taxable supply of ANL newspapers, so that any input tax was recoverable. He stated:
[I]n economic terms, the cost of purchasing the vouchers was…part of ANL's overall expenditure in the production and sale of its newspapers which the vouchers were intended to promote. The fact that the vouchers were provided free to buyers of the newspapers merely serves to confirm that they were cost components of the business rather than the onward supply of the vouchers.
The ETA has a specific regime dealing with gift certificates and vouchers (as well as with “free supplies.”) This case instead might be most relevant as shedding additional doubt on the CRA approach of emphasizing the “first order supply” for which an input has been acquired.
Neal Armstrong. Summary of Associated Newspapers Ltd v HM Revenue & Customs [2017] EWCA Civ 54 under ETA s. 141.02(1) – procurative extent.
Six full-text translations of French severed letters from August 2015 are now available
Full-text translations of six technical interpretations released in French on August 5 and 12, 2015 are now available - and are listed and briefly described in the table below.
These (and the other translations covering the last 19 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the "open" week for March.
Uber B.V. – Federal Court of Australia finds that an uberX driver was a taxi driver for GST purposes
The Australian GST Act requires that all enterprises supplying “taxi travel” (defined as “travel that involves transporting passengers, by taxi or limousine, for fares”) are required to register, even if they otherwise would qualify as being small suppliers (under $75,000 in annual turnover). Griffiths J found that an uberX driver was operating a “taxi” in the ordinary sense of the word and, thus, was required to register.
Although this issue has not been addressed by the Tax Court of Canada, the Quebec Superior Court was receptive to arguments that the small supplier exemption also is not available to Uber drivers in Quebec.
Neal Armstrong. Summary of Uber B.V. v Commissioner of Taxation [2017] FCA 110 under ETA s. 240(1.1).
Picard v. Lagotte Succession – Quebec Superior Court orders that a transfer of estate property to a beneficiary “occurred, for tax purposes, at an amount equal to its adjusted cost base”
In Quebec, as in the other provinces, the devisee or legatee of a specific bequest or devise generally receives the property without having to assume the tax liabilities of the estate (ignoring s. 160). A surviving spouse (Picard – who was not one of the residuary beneficiaries of the estate of his wife) argued that it thus was improper for the executor of the estate to choose for the devise to him pursuant to her will of an apartment building with a low tax basis to occur on a rollover basis under s. 70(6), as this foisted the property’s accrued tax liability on him. In rejecting this submission, Bisson JCS noted that the will specifically accorded the executor with the discretion to make tax elections for the benefit of any one or more legatees or for that of the general estate – so that the executor clearly was within his rights in not making a s. 70(6.2) election.
He also rejected a specious argument of Picard that a standard 30-day survivor clause in the will meant that the indefeasible vesting requirement in s. 70(6) was not satisfied, so that the rollover was busted.
The most interesting aspect is the concluding sentence in his s. 70(6) analysis:
The Court thus orders that the transfer of the 4790 Property occurred, for tax purposes, at an amount equal to its adjusted cost base [sic, cost amount], being $385,679.
Was this within his jurisdiction?
Neal Armstrong. Summary of Picard v. Lagotte Succession, 2017 QCCS 330 under s. 70(6.2).
CRA announces that it will tighten the VDP criteria and review its guidelines for negotiated audit settlements
CRA has released the formal response of the federal government dated February 22, 2017 to the 14 recommendations of the House Standing Committee on Finance made on October 26, 2016. Although to some extent this was an exercise in deftly matching platitude with platitude (although even these may be valuable markers of an underlying shift in attitudes), some more specific comments include:
- Finance will consider whether the current reportable transactions legislation should be expanded.
- CRA’s review of the voluntary disclosures program, to be completed by March 31, 2017, “will result in some changes to tighten the criteria for acceptance into the program.”
- CRA will review its guidelines for negotiated audit settlements (which already require settlement “on a principled basis in accordance with legislation”).
- CRA is auditing 60 of the taxpayers identified through the Panama Papers.
- The 2017 Budget will include an update on Finance’s review of “tax expenditures” – and no, there was no mention of the ½ capital gains inclusion rate.
- The authors forgot to respond to the Committee’s recommendation that the federal government “expeditiously implement initiatives aimed at simplifying the income tax system.”
Neal Armstrong. Summary of 22 February 2017 Government Response to the Sixth Report of the Standing Committee on Finance entitled: The Canada Revenue Agency, Tax Avoidance and Tax Evasion: Recommended Actions under s. 220(3.1).
An application of CRA’s transfer-pricing penalty policies should be evaluated rigorously
Comments on the transfer-pricing penalty rules include:
- It appears unlikely that merely satisfying the documentary requirements in s. 247(4)(a) will provide a safe harbour from the imposition of penalties under s. 247(3).
- “Regardless whether profit allocations can be used under subsection 247(2) in circumstances where they do not permit the determination of specific terms and conditions in respect of a transaction, it is clear that they can be used as a defence against the application of transfer-pricing penalties.”
- There is some judicial support for the proposition that where CRA has made s. 247(4) requests for documentation and has expressed no concern with it, this should be a defence against a penalty being imposed in the future on the basis that the same type of documentation is inadequate.
- TPM-09 to some extent goes beyond what the corresponding OECD Guidelines suggest would be appropriate.
- Where a taxpayer has made reasonable efforts to determine and use an arm’s length price or allocation in respect of the actual transactions it engaged in, there should be no s. 247(3) penalty if its transactions are deemed to be something different under s. 247(2)(d) recharacterization.
Summaries of comments of Richard Tremblay contained in Brian Mustard, Sam Maruca, Charles Thériault, and Richard Tremblay, "Transfer Pricing: What Are 'Reasonable Efforts,' and When should Penalties Apply?" Canadian Tax Foundation, 2015 Conference Report, 32:1-33 under s. 247(3) and s. 247(4)(a).
Canadian Forest Navigation – Federal Court of Appeal finds that the Tax Court is entitled to give weight to foreign rectification orders
After receiving dividends from Barbados and Cyprus subsidiaries, a Quebec company obtained rectification orders from the applicable Barbados and Cyprus courts declaring that the amounts instead were loans to it. In answer to a Rule 58 question as to whether the Minister was now bound to treat these transfers as loans, Lamarre ACJ had found that the orders did not bind the Minister because they had not been homologated by a Quebec court.
In the Court of Appeal, Boivin JA indicated that the lack of homologation was irrelevant, and then stated:
…[B]oth orders from Barbados and Cyprus are proof that the corporate resolutions have been rectified to authorize the dividend payments and to transform them into indebtedness, no more, no less. …
I cannot agree … that…these foreign orders are dispositive and that the Minister has no choice… but to accept the dividends are actually loans because the orders from Barbados and Cyprus say so.
…[W]hat remains to be determined is the foreign orders’ effect vis-à-vis the Minister…and the weight ascribed to the foreign orders as facts…. These determinations are for the Tax Court judge to make, with a full evidentiary record at his or her disposal. …
On this basis, he concluded that Lamarre ACJ should not have answered the Rule 58 question, and set aside her judgment and dismissed the Rule 58 motion before the Tax Court.
He did not mention Fairmont, which is unsurprising as the issue was the weight to be given to the (foreign) rectification orders rather than whether rectification was available.
Neal Armstrong. Summary of Canadian Forest Navigation Co. Ltd. v. The Queen, 2017 FCA 39 under General Concepts – Rectification.
CRA rules that drilling from an abandoned mine qualified as para. (f) CEE
CRA ruled that expenses of drilling from an abandoned mine to delineate a deposit at the pre-feasibility study phase qualified under para. (f) of the Canadian exploration expense definition. Although the ruling letter is heavily redacted, more details are provided in a ruling (2014-0534121R3) on the project at an earlier stage. The two ruling letters, when read together, may imply that CRA accepted that work conducted between the first and second rulings, which consisted mostly of analyzing data from drill holes that were drilled by previous owners of the mine and from drill core assays left by them, in order to arrive at an inferred or indicated resource, qualified as CEE.
Neal Armstrong. Summary of 2016 Ruling 2016-0639671R3 under s. 66.1(6) - Canadian exploration expense – para. (f).
Income Tax Severed Letters 22 February 2017
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.