News of Note

In 2013, s. 174 was expanded so that it could be used to request a determination by the Tax Court on questions involving a large group of unrelated taxpayers who entered into similar transactions with a third party. CRA sought to have the Tax Court make a determination as to the validity of Canadian development expense claims by 81 different taxpayers respecting their purchase of rights from a resource company.

D’Arcy J first excluded about half of the named taxpayers on the grounds that the Minister had failed to establish that they had filed valid notices of objection to denials of CDE for the indicated taxation years. This still left 42 taxpayers as to whom D’Arcy J determined that directing a hearing of the s. 174 question would be “significantly more expensive and time-consuming than proceedings that would otherwise occur under the Court’s Lead Case Rules” given the large number of participants, the likely confusion for the self-represented litigants and the effective requirement for them to travel to Winnipeg for a hearing rather than having any appeal held close to home. He also found that the attempted use of s. 174 by CRA was an abuse of process, in part, because it effectively amounted to an attempted end run around jurisprudence limiting the scope of Rule 58 applications.

It appears to be contemplated that the main issue will be largely decided later through the two lead taxpayers going before the Tax Court.

Neal Armstrong. Summary of Boguski v. The Queen, 2018 TCC 236 under s. 174(3).

In 2017-0730761I7, the Rulings Directorate indicated that, given the wording of Regs. 209(3) and (4), financial institutions cannot provide their clients with electronic copies of information slips (e.g., T3s, T5s or NR4s) on a secure website without the written or electronic consent of the clients, even where the T3s etc. have also been provided in written form (subject to a limited exception permitting the provision of T4s in electronic form).

In response to a follow-up query on this, the Directorate stated the required “consent can be granted by the Client on the website itself” and that:

where a Client signs up for online access to a secure website and downloads their tax information from the site, the express consent requirement in subsections 209(3) and (4) would be met provided the Client is duly informed and acknowledges that they are consenting to receive their information slips electronically.

This does not sound any more onerous than acknowledging that you are 19 when you buy wine online.

Neal Armstrong. Summary of 18 October 2018 External T.I. 2018-0768931E5 under Reg. 209(3).

As a result of its indirect 30% interest in the Trans Mountain pipeline system, Kinder Morgan realized $1.2 billion on the sale of the system to the federal government for $4.5 billion. Kinder Morgan will distribute that sum to its shareholders as a stated capital (and paid-up capital) distribution. The exclusion from deemed dividend treatment under s. 84(4.1) for a one-off distribution of recently-received sales proceeds is being relied upon.

Quite unusually, the stated capital reduction (of $1.45 billion) exceeds the $1.2 billion stated capital distribution amount, so that the stated capital of the shares will be reduced to approximately $0.33 billion. This is being done in order to not be subject to potential solvency test restrictions under ABCA in declaring dividends. Public company PUC is useless – except when it is useful.

Neal Armstrong. Summary of Kinder Morgan Canada Circular under Spin-offs & Distributions – ss. 84(4.1)(a) and (b) distributions of proceeds.

Four non-resident LPs with the same non-resident corporate general partner (GP Co) collectively control Canco through their majority ownership of its shares and have also made unsecured interest-bearing loans to Canco. The limited partners are unrelated investors who deal at arm’s length with each other and with GP Co as a factual matter, and include both Canadian residents and residents of the U.K. for purposes of the Canada-U.K Treaty (in each case holding a relatively small limited partnership interest).

CRA ruled that Canco was not required to withhold on the U.K. partners’ share of each interest payment since each such share was exempted under Art. 11(3)(c) of the Canada-U.K Treaty, which referenced interest arising in one contracting state and paid to a beneficial owner in the other contracting state who dealt at arm’s length with the payer.

This ruling effectively accepted that each U.K. limited partner dealt at arm’s length with Canco notwithstanding that it was part of a grouping that might be regarded as collectively dealing in concert (through a common general partner) with Canco. The domestic arm’s length exemption in s. 212(1)(b)(i) was not discussed. CRA might have considered the domestic exemption not to be available because a partnership is treated as a person for such purposes under s. 212(13.1)(c), and the four partnerships likely dealt in concert respecting their joint Canco investment.

Neal Armstrong. Summary of 2017 Ruling 2017-0712731R3 under Treaties – Income Tax Conventions – Art. 11.