News of Note
CRA confirms that previously having incurred trivial ECE may generate better ECP transitional results
Email this ContentThe elective transitional rule in s. 13(8)(d) applies to a corporation that disposed of eligible capital property in calendar 2016, where the gain was included in a taxation year that straddled January 1, 2017. The taxpayer may elect under s. 13(38)(d)(iii) to maintain the effect of the s. 14(1)(b) inclusion. One of the conditions is that the taxpayer has incurred an eligible capital expenditure respecting a business before January 1, 2017.
At the 2016 CTF Annual Conference, Q13, CRA indicated that this transitional rule is unavailable where a taxpayer’s only intangible asset was internally-generated goodwill with no cost – so that the taxpayer could not be said to have made or incurred an ECE in respect of the business, thereby ousting the election.
CRA has now confirmed the flip side of the coin: even a trivial previous ECE expenditure respecting the business, such as incorporation expense, will eliminate this particular issue.
Neal Armstrong. Summary of 27 March 2017 External T.I. 2016-0680141E5 under s. 13(38)(d)(iii).
Melman – Federal Court of Appeal confirms a finding of gross negligence for failure of an executive to review a tax return with an unexpectedly low amount payable
An executive with financial acumen received a $15M dividend, deposited the estimated tax thereon of $4.7M to mature on the filing due date, did not review his return (which omitted the dividend) before signing and filing it, and promptly redeployed the $4.7M. Before confirming Bocock J's finding of wilful blindness as grounds for the s. 163(2) penalty, Dawson JA indicated that Bocock J had “articulated the correct legal test for establishing gross negligence: neglect beyond a failure to use reasonable care.”
Neal Armstrong. Summary of Melman v. Canada, 2017 FCA 83 under s. 163(2).
CRA applies a factual FIFO approach to determining which upstream loans have been repaid first
CRA considers that, in the absence of specific designations, repayments of upstream advances made by a foreign affiliate to its Canadian parent will be treated as being applied to the oldest advance first. This approach is applied without regard to whether the upstream-loan transitional rules deemed an old advance to instead have been advanced on August 20, 2014, so that the repayment under CRA’s factual “FIFO” approach might be applied first to such loan even though there was, say, a 2012 advance that should have been repaid first in order to avoid an income inclusion.
Taxpayers should designate how a repayment is to be applied if they don’t like the results of the default FIFO approach of CRA. At common law, such a designation can be made well after the time of the repayment including, perhaps, even “in the witness-box,” e.g., in any Tax Court trial of how the repayment was applied – see Chitty on Contracts.
Neal Armstrong. Summary of 3 March 2017 Internal T.I. 2016-0673661I7 under s. 90(8)(a).
AG Shield – Tax Court of Canada allows individual shareholders to allocate all of their non-dividend earnings to SR&ED wages
The two 50% shareholders of a small business corporation, that followed the proxy method for SR&ED purposes, decided at year end that their draws during the year would be treated as wages to the extent of the number of hours (multiplied by an hourly rate of $30) spent by them on SR&ED, and that the balance of their draws represented dividends. CRA reassessed on the basis that a pro rata portion of the wages should be treated as having been paid for non-SR&ED activities based on the percentage (of well over 50%) of their aggregate hours which was not spent on SR&ED.
In allowing the corporation’s appeal, D’Arcy J stated:
[T]he Respondent argued that… [they] did not receive any compensation for the significant time they spent “performing director or management activities”.... As the controlling shareholders and managing directors of the Appellant, they chose to receive dividends in lieu of salary and/or bonuses. This was their choice and did not require a formal agreement.
Neal Armstrong. Summary of AG Shield Canada Ltd. v. The Queen, 2017 TCC 68 under Reg. 2900(2)(b).
Income Tax Severed Letters 10 May 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Rio Tinto Alcan – Tax Court of Canada confirms the validity of a reassessment made without a proper audit in order to beat statute-barring
When the normal reassessment period for one of the taxation years of Rio Tinto Alcan (RTA) was about to expire, CRA had not received any waiver from RTA in connection with the items under review (SR&ED expenditures incurred through a joint venture, whose manager was uncooperative with CRA) because the form of waiver demanded by CRA was unreasonable. CRA then reassessed within the deadline by denying recognition of all the expenditures. RTA did not object in time, but argued that the reassessment was invalid because it had been made before any audit of the items to be reviewed had really commenced and the reassessment had simply denied all the items. In rejecting this submission, D'Auray J agreed with a statement of C. Miller J that “there is no law…to the effect that a protective assessment is invalid if issued for the sole purpose of leaving the door open to conduct or continue an audit.”
The reassessment in question was followed by a further reassessment (made within the extended-by-three-years period for transactions with foreign affiliates) to reassess RTA for foreign accrual property income for the same taxation year, so that the further reassessment reflected the additional FAPI but otherwise did not change the previous reassessment. It was agreed by all that the further reassessment replaced the previous reassessment rather than being an additional assessment. D'Auray J rejected a submission of RTA that the effect of s. 152(4.01) was that the Minster could only reassess in the further reassessment for FAPI and was precluded from maintaining the effect of the previous denial of the SR&ED expenditures.
Neal Armstrong. Summaries of Rio Tinto Alcan Inc. v. The Queen, 2017 CCI 67 under s. 152(1), s. 166 and s. 152(4.01).
Six further full-text translations of Technical Interpretations are available
Full-text translations of the six French technical interpretations that were released between April 1, 2015 and March 11, 2015 are listed and briefly described in the table below.
These (and the other translations covering the last 26 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA rules that the Alberta carbon tax is subject to GST
CRA has ruled that a natural gas distributor is required to include the Alberta carbon-tax levy (which it is required to collect from its customers) in the value of the consideration for such natural gas supplies for GST purposes – so that effectively the Canadian government is imposing GST on the Alberta carbon tax. Ruling 168521r (re imposing HST on the Ontario tire recycling levies) is somewhat similar.
Neal Armstrong. Summary of 9 February 2017 Ruling 181234 under ETA s. 154(2)(b).
TD Bank – BC Court of Appeal finds that the B.C. Commissioner improperly restricted herself to applying only the published guidelines on extending a return-filing deadline
TD made an unsuccessful submission that because a taxation year ends on the very last instant of the year's last day, a B.C. provision requiring TD to file a return “within 18 months after the end of [its] taxation year” ending on October 31, 2012 was satisfied by delivering its return on May 1, 2014 rather than the previous day. (ITA s. 37(11), for instance, and the relevant federal Interpretation Act provision (respecting excluding the first day, and counting the last day, in a period) have equivalent wording to the relevant B.C. provisions.)
The B.C. authorities had refused TD’s request for a retroactive one-day extension of the filing deadline on the basis (set out in a somewhat related policy statement) that there were no “extraordinary circumstances that [were] beyond the claimant’s control, such as fire, flood, earthquake or a serious illness.” Applying Stemijon, Frankel JA stated, before remitting the extension application for reconsideration:
While it was open to the Commissioner to have regard to Ministry of Finance policy statements, she erred in treating them as the only relevant consideration. … By doing so, she fettered the broad [statutory] discretion given to her…and her decision is, therefore, unreasonable.
Neal Armstrong. Summary of Toronto Dominion Bank v. B.C. (Commissioner of Income Tax), 2017 BCCA 159 under Interpretation Act, s. 27(4) and ITA s. 220(3.2) and s. 37(11).
Finance confirms that the intention of the s. 15(2.17) rule is to limit the imputation of a shareholder loan to Canco to the amount of Canco’s advance
USCo and Canco deposit $100 and $50, respectively, into a cross-border third–party notional cash pool structure under which two affiliated non-residents (LuxCo and UKCo) each have a $60 overdraft. Each of Luxco and UKCo, as the intended borrowers, would be considered to have received a loan from Canco of $50, so that there is a deemed shareholder loan of $100 under s. 15(2.17) even though Canco only advanced $50.
Finance indicated that in these circumstances, the intention of the back-to-back shareholder loan rules is to limit the aggregate amount of loans that Canco is deemed to make under those rules, to the amount that Canco has lent to the immediate funder. This is consistent with the general policy of the rules, which is to ensure that the shareholder loan rules are not avoided to the extent that a Canadian corporation provides debt-funding to its shareholders indirectly through one or more intermediaries.
Neal Armstrong. Summary of 26 April 2017 IFA Finance Roundtable, Q.13 under s. 15(2.17).