News of Note

Chen – Tax Court of Canada finds that a protective procedure allegedly carried out on the oral advice of the presiding physician did not qualify as prescribed by a medical practitioner

The taxpayer had stem cells harvested from the umbilical cord when she was delivered of her second son. The harvesting occurred on the alleged verbal advice of the obstetrician that this was advisable due to the father’s Type 1 diabetes. Bocock J found that the taxpayer would have been entitled to a medical expense tax credit under of s. 118.2(2)(o) but for her failure to establish that this procedure occurred as prescribed by a medical practitioner.

No clinical notes were produced of the obstetrician’s recommendation, and all the taxpayer could show was a very brief letter prepared by her family doctor 17 months after the delivery of her child that noted that the stem cells were being stored for future use, and stated “All patients are advised to do this, if possible, from birth." Bocock J stated that this letter was merely “descriptive rather than directive.”

Neal Armstrong. Summary of Chen v. The Queen, 2019 TCC 192 under s. 118.2(2)(o).

Our translated CRA interpretations go back 8 years

We have published a further 7 translations of CRA interpretations released in September, 2011. Their descriptors and links appear below.

These are additions to our set of 969 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2011-09-23 6 September 2011 External T.I. 2010-0389011E5 F - L'interprétation de " est en droit de recevoir" Income Tax Act - Section 13 - Subsection 13(7.1) taxpayer is entitled to receive Quebec M&P credit at end of year in which the eligible expenditures were incurred
12 September 2011 External T.I. 2011-0397731E5 F - Crédit d'impôt pour frais médicaux Income Tax Regulations - Regulation 5700 - Section 5700 - Paragraph 5700(h) "hospital bed" does not extend to all types of adjustable beds
Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(a) aquatherapy classes (or pain management courses) do not qualify if non-qualified payee
16 August 2011 Internal T.I. 2011-0401721I7 F - Loss Utilization Income Tax Act - Section 88 - Subsection 88(1.1) - Paragraph 88(1.1)(e) factors in determining whether investments are held as a business
Income Tax Act - Section 111 - Subsection 111(5) - Paragraph 111(5)(a) holding company whose only sources of income were inter-affiliate loan and subsidiary shares had losses from property rather than business
2011-09-16 6 September 2011 Internal T.I. 2011-0401191I7 F - Automobiles mises à la disposition des employés Income Tax Act - Section 6 - Subsection 6(2) standby not computed for months in which automobiles in storage and unavailable for use
2 September 2011 Internal T.I. 2011-0419111I7 F - Programme de compensation du MESS Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(u) social assistance payments aggregating less than $500 not required to be included in income
31 August 2011 External T.I. 2011-0416541E5 F - Montant admis en déduction - REÉR Income Tax Act - Section 146 - Subsection 146(5) if premium not claimed, deduction amount is nil
2011-09-09 31 August 2011 External T.I. 2011-0415891E5 F - Increase in stated capital, stock dividends -55(2) Income Tax Act - Section 248 - Subsection 248(28) s. 248(28)(a) applied to reduce capital gain on disposition of preferred shares on which a capital gain had been realized under s. 55(2)(b)
Income Tax Act - Section 55 - Subsection 55(2) - Paragraph 55(2)(c) capital gain recognized under s. 55(2)(c) not recognized a second time on sale of the shares

An ECP gain potentially could have been paid out immediately as a winding-up distribution

An increase to the capital dividend account (CDA) arising out of a gain of a CCPC from the disposition of eligible capital property (ECP) did not arise until the end of the year in question, so that immediate declaration and payment of a purported capital dividend generated Part III tax. However, it is suggested that if the distribution in question was described in ss. 88(2)(a) and (b) (i.e., it occurred in the course of a winding-up of the CCPC and was of substantially all the CCPC’s property), then the bump to the CDA occurred immediately before the time of the distribution, so that no Part III tax was exigible.

It is implicitly considered that a winding-up of a corporation for s. 88(2) purposes need not commence with an authorizing resolution, and it is suggested that:

The sale of a business that included cumulative ECP gain should be viewed as a step in the course of a winding-up of the business that was sold.

Neal Armstrong. Summary of Derek T. Dalsin, “ECP-Related CDA Dividend “In the Course of a Winding Up” Pre-2017,” Canadian Tax Highlights, Vol. 27, No. 8, August 2019, p. 1 under s. 88(2)(a).

CRA finds that on-call maintenance staff who drove intraday in their employer’s pickup truck between home and the maintenance site received no taxable benefit

An employer with apartment buildings and townhouse complexes at various locations in the city expected its maintenance staff to return to their homes with the employer-provided and equipped pickup truck (which was not an “automobile” as defined in s. 248(1)) until their next maintenance call. CRA stated:

[I]t appears that the primary reason for employees returning home in between calls during a standby shift is due to [the employer’s] policy of not paying Staff for down time. … [I]t is likely that the employer is the primary beneficiary of an employee’s travel to and from home in between the first and last call out of a standby shift. As such, no taxable benefit should result from this travel.

CRA also indicated that a taxable (carpooling) benefit generally would occur where two staff were required for a call and the first picked up (or dropped off) the second at their home for the first (or last) call of the day, stating that “a reduction in the value of the travel benefit may be warranted based on loss of privacy or quiet enjoyment, additional travel time, etc.” and then stated (deadpan) that “Employees and employers should keep records on employee travel in support of the particular position taken.”

Neal Armstrong. Summary of 31 July 2019 External T.I. 2019-0798361E5 under s. 6(1)(a).

SPE Valeur – Tax Court of Canada finds that criminally seized documents could be used in a subsequent civil reassessment under s. 163(2)

The Criminal Investigations Directorate seized records of taxpayers in connection with its investigation, but ultimately returned the file to the audit branch based on a cost-benefit analysis. As it happened, the individual responsible for the criminal investigation was transferred to the audit branch at the same time, and while now working for the audit branch, he used copies of the seized records in reassessing the taxpayers, including for a gross negligence penalty.

In finding that there had been no infringement of the taxpayer’s s. 8 Charter rights, so that the seized documents were admissible and not excluded under s. 24(2) of the Charter, D’Auray J noted that “Brown [2013 FCA 111] … determined that documents seized in a criminal search could be admitted into evidence on the appeal of an assessment,” and that the taxpayers had no reasonable expectation of privacy respecting the seized documents.

The seized records included emails on the company server that had been received from a third party and that concerned the transactions at issue in the reassessments. D’Auray J also rejected the taxpayers’ submission that because the seized emails were not records required to be maintained by ITA s. 230, therefore they should have their confidential character preserved,

Neal Armstrong. Summaries of SPE Valeur Assurable Inc. v. The Queen, 2019 CCI 174 under Charter s. 24(2), s. 8 and s. 7.

Investment limited partnerships (and other DIPs) should send out requests for investor percentages to their larger unitholders by October 15

Investment limited partnerships (ILPs) with unitholders in HST-participating and non-participating provinces have now become selected listed financial institutions (SLFIs) and distributed investment plans (DIPs). The ILP must compute its final provincial HST (or QST) liability for a year, which is based on the imputed provinces of residence of its unitholders, so that, for example, if half of its investors were resident in western Canada (with a 0% provincial HST rate) and half in Ontario (an 8% rate), the actual provincial HST that it paid during the year is refunded or upwardly assessed pursuant to the special attribution amount (SAM) formula so as to result in a final blended provincial HST rate of 4%.

All this requires the ILP to determine the “investor percentages” for its units, i.e., its deemed percentage ownership by ultimate stakeholders in each province (or abroad). There effectively is a deadline for requesting the investor percentage information from most of the larger ($10M or over) unitholders by October 15, 2019. If the requests are not made by then, the relevant formula (e.g., in SLFI Regs. s. 30(1)(b)A4 -C(ii)) generally operates to produce less favourable investor percentages (i.e., more allocation to high-rate provinces).

In order for the investor percentages for the ILP’s 2019 year to be based on investor percentages as at September 30, 2019 rather than September 30, 2018, the ILP should make a reconciliation election under SLFI Regs. s. 50 (assuming that it did not obtain the investor percentages a year previously).

Some of the unitholders may not be prepared for these notices from the ILP. For example, a registered charity or a NPO must compute its investor percentage - related information based on how its income would have been allocated between provinces under Pt IV of the ITA Regs for its preceding taxation year had it been taxable.

Neal Armstrong. Summaries of PwC Tax Insights: GST/HST and QST alert: Investment plans are required to obtain investor percentages – action required by October 15, 2019, September 03, 2019, Issue 2019-31 under SLFI Regs. s. 52(10), 52(4) and s. 48(1)(b)A6

Income Tax Severed Letters 18 September 2019

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Family trusts may impose difficulties in avoiding Part VI.1 tax

Opco redeems freeze preferred shares held by a family trust and the trust distributes the resulting large deemed dividend out to Holdco (who in addition to being a beneficiary, is also an Opco shareholder). Unfortunately, the s. 104(19) designation made on the dividend does not deem it to have not been received by the trust. Accordingly, to avoid Part VI.1 tax on Opco, both Holdco and the trust must have a substantial interest in Opco.

Although this could be a challenge for Holdco, there may be even greater difficulties for the trust, e.g., where it has independent trustees, or where unrelated trusts are beneficiaries.

Neal Armstrong. Summary of Austin del Rio, “Part VI.1 Tax on Dividend Paid Through Family Trust,” Tax for the Owner-Manager, Vol. 19, No. 3, July 2019, p. 9 under s. 191.1(2).

5 more translated CRA interpretations are available

We have published a further 5 translations of CRA interpretations released in October and September, 2011. Their descriptors and links appear below.

These are additions to our set of 962 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 7 3/4 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2011-10-28 30 September 2011 Internal T.I. 2011-0393171I7 F - Representation or other special allowances Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(iii) foreign service premium received by armed forces member so qualified
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) no benefit for excess of rent allowance over cost of comparable Cdn location or where higher class of accommodation is for security reasons
2011-10-21 22 September 2011 External T.I. 2011-0403991E5 F - Crédit d'impôt pour études Income Tax Act - Section 118.6 - Subsection 118.6(1) - Qualifying Educational Program program means program of study, not individual course
2011-09-30 22 September 2011 External T.I. 2011-0394961E5 F - Droits ou biens Income Tax Act - Section 70 - Subsection 70(3) s. 70(3) cannot apply iteratively to artist’s inventory
21 September 2011 External T.I. 2010-0375361E5 F - Liquidation d'une coopérative agricole Income Tax Act - Section 84 - Subsection 84(2) s. 84(2) applied to winding-up of cooperartive
19 September 2011 External T.I. 2011-0410411E5 F - Attribution - Transfers to Corporations Income Tax Act - Section 74.4 - Subsection 74.4(2) s. 74.4(2) did not apply to the creation of a corporate asset protection structure

Development Securities – U.K. Upper Tribunal finds that the for-hire directors of a Jersey sub exercised central management and control there

A U.K. tax avoidance scheme, entailed Jersey subsidiaries acquiring assets from their UK parent (DS Plc) or its U.K. subsidiaries at prices corresponding to the assets’ historical cost plus an inflation-indexation adjustment and then, after the Jersey-resident directors had resigned, selling those assets back to the DS group at their much lower fair market value, thereby triggering a tax loss that could be used in the DS group. The scheme depended on considering that such subsidiaries had their central management and control (CMC) in Jersey at the time of the acquisitions. The subsidiaries’ directors consisted of three Jersey-resident “professional directors” (working for a Jersey firm associated with a Jersey law firm) and the UK-resident company secretary of DS Plc (Mr Lanes). This board met five times to address the transactions in detail, before the resignations occurred.

Before reversing the finding below that the Jersey subsidiaries were not resident in Jersey prior to the resignations, the Tribunal stated:

The mere fact that a 100% owned subsidiary carries out the purpose for which it was set up, in accordance with the intentions, desires and even instructions of its parent does not mean that central management and control vests in the parent.

… Where a parent company merely “influences” the subsidiary, CMC remains with the board of the subsidiary. It is only where the parent company “controls” the subsidiary, i.e. by taking the decisions which should properly be taken by the subsidiary’s board of directors, that CMC vests in the parent. …

[W]hatever the position as regards Mr Lanes (who may have been prepared to carry out the transactions no matter what), the Jersey directors (i) knew exactly what they were being asked to decide; (ii) did so understanding their duties; and (iii) complied with those duties.

Neal Armstrong. Summary of Development Securities PLC and Others v The Commissioners for HM Revenue and Customs (Tax) [2019] UKUT 169 (Tax and Chancery Chamber) under s. 2(1).

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