News of Note
Cameco - Federal Court finds that s. 231.1(1)(d) does not accord CRA an unfettered right to interview taxpayer personnel
Email this ContentCameco appealed transfer-pricing assessments to the Tax Court. CRA then audited subsequent years, where essentially the same issues arose, and applied to the Federal Court for an order compelling Cameco to submit 25 listed employees of it and subsidiaries to CRA interviews.
McVeigh J rejected this application. First, CRA essentially was reading the requirement in s. 231.1(1)(d) - that personnel at the audited premises “answer all proper questions relating to the administration…of this Act” – out of context. S. 231.1(1)(d) was subject to the requirement in the s. 231.1(1) mid-amble that it must relate to the matters (principally respecting the audit of books and records) referenced in s. 231.1(1)(a) and (b).
Second, the Tax Court rules contained various procedural safeguards respecting the examination of the taxpayer’s personnel. In the context of the earlier years being under appeal, CRA’s requested interviews would have represented an end run around the Tax Court rules.
Neal Armstrong. Summary of Cameco Corp. v. Canada (National Revenue), 2017 FC 763 under s. 231.1(1)(d), Tax Court Rules, Rule 95 and Statutory Interpretation - Redundancy.
Seven further full-text translations of CRA technical interpretations/Roundtable items are available
Full-text translations of a further three items from the October 10. 2014 APFF Roundtable, and of three technical interpretation released on December 3, 2014, are listed and briefly described in the table below. In addition, last week CRA released a technical interpretation (2017-0683511E5 F, respecting the use of s. 55(3)(a) to distribute cash otherwise than from safe income likely being abusive) which we published in French and translated form several months ago.
These (and the other translations covering the last 32 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA considers that a trade union under s. 8(1)(i)(iv) need not be certified
S. 8(1)(i)(iv) provides for deductibility from employment income of annual dues paid to maintain membership in a trade union. CRA considers that a trade union is “an association whose primary purpose is to collectively negotiate with an employer to further the working conditions of its members” and that “an association does not have to be certified trade union in order to be considered a trade union” including, in this case, an association where management automatically become members of the association when hired by the employer.
Neal Armstrong. Summary of 5 May 2017 External T.I. 2016-0681161E5 under s. 8(1)(i)(iv).
Grenon – Federal Court of Appeal finds that a refund of tax paid to a taxpayer after reversal of a jeopardy order should bear interest
A taxpayer, who appealed a $200 million reassessment to the Tax Court, then received a jeopardy order requiring him to pay the assessed tax notwithstanding that it was still under appeal. He made a partial payment – but then the jeopardy order was reversed on consent.
Webb JA found that the taxpayer was entitled to interest on the refund to him of the partial payment. He was influenced by the fact that if this amount had not been requested to be repaid and the taxpayer’s appeal was successful, the taxpayer would be entitled to refund interest, whereas if he was unsuccessful, the Crown would collect interest on the partial repayment amount that in fact was made.
Neal Armstrong. Summary of Grenon v. Canada (National Revenue), 2017 FCA 167 under s. 164(1.1).
CRA rules on double German profit transfers (under “PTAs”)
Under an “Organschaft,” a German parent and its German subsidiary can enter into a profit transfer agreement (PTA) in which the subsidiary agrees to annually transfer its entire profit determined in accordance with German (statutory) GAAP to the parent. In 26 May 2016 IFA Roundtable Q. 6, 2016-0642081C6, CRA confirmed that, at least in the simple case of a parent wholly-owning a subsidiary with 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 the German parent.
Last week, CRA released a ruling, that was requested in 2015, and which might have been the provenance of the 2016 IFA announcement. It dealt with double (i.e., back-to-back) PTA transfers from German grandchild to German child to German parent (all of them, CFAs). The ruling letter includes some helpful background on the German PTA regime.
Neal Armstrong. Summaries of 2016 Ruling 2015-0617351R3 under s. 90(2) and s. 87(8.1).
Joint Committee provides its submissions on the proposed VDP revisions
The Joint Committee has provided its submissions to CRA respecting the proposed narrowing of the voluntary disclosure program, including:
- Proposals, such as that large corporations, or those with inappropriate transfer prices, no longer qualify for full VDP relief, may amount to an impermissible fettering of the Minister’s s. 220(3.1) discretion. In any event, errors by large corporations typically are attributable to the number and complexity of the tax-reporting issues faced by them, so that their exclusion would violate fundamental principles of fairness – as does the blanket denial of relief to taxpayers respecting transfer pricing errors.
- Respecting the proposed 2-tier system, the references to large dollar amounts, multiple years of noncompliance and a sophisticated taxpayer should be removed as these factors do not of themselves indicate culpable conduct.
- Elimination of the No-Name disclosure method would create greater uncertainty, thereby reducing the numbers of disclosures.
The Committee also queries carryforwards to the proposed Circular of debatable aspects of the current Circular:
- The “beyond the taxpayer’s control” criterion for accepting a second disclosure should not apply to unrelated issues.
- Eliminating the requirement - that the disclosed information be at least one year past due - would eliminate the inequity of a taxpayer who delays addressing an error being treated more favourably than one who corrects it more quickly –and abuses would be addressed by declining repeated disclosures respecting the same avoidable issue.
Neal Armstrong. Summary of 8 August 2017 Joint Committee Submission to Finance respecting the Voluntary Disclosure Program under s. 220(3.1).
MacDonald – Tax Court of Canada finds that “the law still requires a close linkage between the purported hedging instrument and the underlying asset”
An individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. However, the “storm clouds,” which he had correctly anticipated, blew away more quickly than feared and, approximately eight years later, he closed out the forward at a loss. Consistently with his intentions all along, he continued to hold his BNS stake thereafter.
This loss was fully deductible unless the forward was a hedge of a capital investment (his BNS shares). Lafleur J stated that to be such a hedge, an instrument must be “directly linked (or symmetrical) to the underlying asset that is the subject of the hedge in terms of both quantum and timing.” She found that this test was not satisfied here given inter alia that “the settlements [under the forward] were not based on any anticipated sale of the BNS shares and the sale of BNS shares by Mr. MacDonald did not occur in close proximity to the settlements.”
Neal Armstrong. Summary of MacDonald v. The Queen, 2017 TCC 157 under s. 9 – capital gain v. income – futures/forwards/hedges.
Income Tax Severed Letters 9 August 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Teitelbaum – Cour du Québec finds that that a deceased’s RCA was a right or thing that, due to its tardy distribution, was received free of tax by an estate beneficiary
ITA s. 70(3) provides that a right or thing is taxable to an estate beneficiary if it is distributed to the beneficiary before the time for making a right or thing election under s. 70(2) has passed. In the will of the deceased common law partner (Lewin) of a Quebec taxpayer (Teitelbaum), Lewin designated Teitelbaum as a beneficiary of “all pension plans and any annuities purchased therefrom.”
Both Teitelbaum and the ARQ considered that Lewin’s right to $1.4 million under a retirement compensation arrangement was a right or thing at his death. However, the ARQ considered that this amount had become property of Teitelbaum, and thus had been distributed to Teitelbaum, directly on Lewin’s death by virtue of the quoted designation in Lewin’s will.
Teitelbaum relied on the fact that the $1.4 million, in fact, had not been distributed to her until about two years’ after Lewin’s death (due to a debate between the executors and the RCA trustees as to whether Teitelbaum was an “eligible spouse” under the terms of the RCA), so that the Quebec equivalent of s. 70(3) did not apply to include the amount in her income.
Fournier JCQ agreed with Teitelbaum. Although there were provisions in the Civil Code providing for a beneficiary to become designated directly as an annuitant of a retirement plan (or insurance policy) rather than receiving such property as a distribution to her by the executors, here no annuity had yet been purchased out of the $1.4 million, so that Teitelbaum received her $1.4 million as a legacy out of the estate.
Neal Armstrong. Summary of Teitelbaum v. Agence du revenu du Québec, 2017 QCCQ 8039 under s. 70(3).
Seven further full-text translations of CRA technical interpretations/Roundtable items are available
Full-text translations of the French technical interpretation released last week, of a further five items from the October 10. 2014 APFF Roundtable, and of a technical interpretation released on December 17, 2014, are listed and briefly described in the table below.
These (and the other translations covering the last 32 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for August.