News of Note
Income Tax Severed Letters 25 October 2017
Email this ContentThis morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hutchinson – English Court of Appeal finds that the UK Revenue could change its published policy respecting taxpayers whose only reliance had been to claim unlooked-for losses
HMRC initially published guidance respecting a recent Court of Appeal decision which suggested to the taxpayer that transactions which he had already reported in his returns had generated additional (unlooked for) losses. Accordingly, he claimed the additional losses, which HMRC then denied. HMRC later followed up with revised published guidance indicating that they had changed their mind but that they would not reverse the claims of those who could demonstrate reasonable detrimental reliance on the initial HMRC guidance.
The taxpayer had initial success arguing in the High Court that HMRC could not resile from their previously expressed view in their initial guidance in the circumstances of his case. In allowing HMRC’s appeal, Arden LJ stated:
[T]he respondent has to show conspicuous unfairness. … I consider that this is not shown… . The respondent was returned to the same position as he was in when he committed himself to the transactions which gave rise to the capital losses. Moreover he had been clearly warned by HMRC in the letter of 2 June 2003 that they did not accept his additional Mansworth v Jelley losses.
The well-developed U.K. jurisprudence in this area has not really been tested in Canada as to its portability. This is not about requiring CRA to stick to a view that is clearly wrong, but about being fair about making changes from one reasonable interpretation in its published positions to another - which generally has been its practice.
Neal Armstrong. Summary of Revenue and Customs Commissioners v. Hutchinson [2017] EWCA Civ 1075 under s. 152(1).
CRA indicates that the death of the surviving spouse before she received payment of the testator’s legacy of his RRIF precluded access to the designated benefit rules
On the death of Mr. A, his Will provided a particular legacy of his RRIF to his surviving spouse (Mrs. B), who died half a year later before his estate was administered. CRA indicated that since Mrs. A died before receiving the legacy, the fair market value of the RRIF property was included in the income of Mr. A in his terminal return.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.6 under s. 146.3(1) – designated benefit.
CRA treats an amount paid from a deceased’s RRIF to the RRIF of the surviving spouse who was excluded under the will as qualifying as a designated benefit
A couple separated without proceeding to an official division of their assets. When Monsieur subsequently died, his will excluded Madame. She made a claim against the executor, and they then agreed in writing to transfer the property in the deceased’s RRIF to her for contribution to her RRIF. CRA indicated that the usual rules for a transfer from a deceased’s RRIF to that of his surviving spouse applied so that:
- The rollover for a spousal RRIF-to-RRIF rollover under s. 146.3(14) on the breakdown of a marriage was not available because the transferor annuitant was dead.
- However, if the executor and the surviving spouse made a joint designation on Form T1090, the value of the property in the deceased’s RRIF could qualify as a “designated benefit” and be excluded from the deceased’s income and included in the surviving spouse’s income.
- The surviving spouse, in turn, would be eligible to take a deduction under s. 60(l) for the transfer of an “eligible amount” to her RRIF.
Neal Armstrong. Summaries of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.5 under s. 146.3(14) and s. 146.3(1) – designated benefit.
CRA indicates that a negative ACB gain from a partnership interest that is TCP is not subject to s. 116
Where a partnership has ceased to exist, any negative adjusted cost base to a taxpayer (including a non-resident) of its partnership interest at the end of the fiscal period is deemed to be a capital gain from a disposition of its interest in the partnership – but its partnership interest is not deemed to be disposed of to the partnership (cf. s. 84(9).) Given this gap, the negative ACB gain is not subject to s. 116 even if the partnership interest was taxable Canadian property, so that there is no requirement to make a s. 116 remittance under s. 116(5) failing a s. 116 certificate.
Although not discussed, s. 98(1)(c) also only deems the negative ACB gain to be a factually-immaculate capital gain, and not a capital gain from the disposition of taxable Canadian property for s. 2(3) purposes, and given inter alia the precise timing of its application, appears to operate without being affected by the draft s. 40(3.1)(b) rule even where the interest is of a limited partner.
Neal Armstrong. Summary of 9 August 2017 External T.I. 2017-0709351E5 under s. 98(1)(c).
Findmypast – Inner House of the Court of Session finds that the time of a supply of services was accelerated by prepayment only where the services were precisely identifiable
ETA s. 152(1) provides that GST/HST for a taxable supply becomes payable if the consideration is prepaid. However, ETA s. 168(6) provides that where the value of consideration for a taxable supply is not yet ascertainable, there is a corresponding deferral of the date on which the related GST/HST becomes payable.
The European VAT rules have a similar rule to ETA s. 152(1), which effectively has been restrictively interpreted by the European Court of Justice so as to only apply where there is “precise identification of the goods and services that are to be supplied.” Lord Drummond Young found that this test was not satisfied for a genealogical site, where customers would purchase credits which could be applied during specified time periods to download historical records (e.g., birth and death records) whose number was determined in accordance with parameters that were subject to change by the site – and with a significant number of the credits never being redeemed.
Since the prepayment rule did not apply, there was only a taxable supply of services when the credits were applied by downloading particular records - rather than at the time of the prior purchase of the credits.
Neal Armstrong. Summary of Revenue and Customs Commissioners v. Findmypast Ltd., [2017] CSIH 59 under ETA s. 152(1) and s. 123(1) – service.
Ahmad – Tax Court of Canada finds that CRA was required to determine, when assessing, whether the taxpayer had an unclaimed GST/HST rebate
CRA correctly assessed an individual (Ahmad) so as to deny the new housing HST rebate (because, due to a change in plans, the first use of the new home was its rental to a third party), and advised him that he might consider applying for the New Residential Rental Property Rebate (NRRPR). Ahmad instead appealed the denial of the new housing rebate, and did not apply for the NRRPR until the two-year deadline for doing so (under ETA s. 256.2(7)(a)) had passed – and also failed to file a Notice of Objection to the CRA assessment denying his NRRPR claim.
As one would expect, Russell J found that Ahmad could not appeal the assessment denying him the NRRPR. However, Russell J found that CRA, in assessing Ahmad for the HST that was payable given the absence of the new housing rebate, had been required under s. 296(2.1) to in fact determine whether that assessment was reduced by another allowable rebate, namely, the NRRPR. Russell J referred this assessment back to CRA for the required determination under s. 296(2.1) as to whether Ahmad was entitled to an allowable rebate for the NRRPR.
CRA would not like the notion that, when assessing GST/HST, it is required to consider whether a rebate is available to a taxpayer even before it is claimed, and presumably will not do so (see 183783). This case suggests that the taxpayer may have a remedy where there is such a failure.
Neal Armstrong. Summary of Ahmad v. The Queen, 2017 TCC 195 under s. 296(2.1).
Vrantsidis – Tax Court denies an ADHD-based disability tax credit claim
Favreau J found that the effects of a teenage son’s ADHD were not severe enough to meet the meaning of “markedly restricted” in s. 118.4(1) so as to qualify a parent for the disability tax credit.
Walkowiak instead dealt with an unsuccessful claim based on the ADHD of the taxpayer herself.
Neal Armstrong. Summary of Vrantsidis v. The Queen, 2017 TCC 204 under s. 118.4(1).
CRA indicates that the s. 146(8.2) deduction for withdrawing excess contributions can be available even where Pt X.1 tax is not applicable
S. 146(8.2) allows a taxpayer to claim an offsetting deduct for a payment received out of an RRSP where it relates to undeducted premiums. Although it permits a taxpayer to reduce an RRSP cumulative excess amount to which Part X.1 tax applies. However, CRA notes that:
This provision can apply whether or not the annuitant is subject to Part X.1 tax at the time the payment is withdrawn from the RRSP.
For example, where an individual makes an RRSP contribution not exceeding the RRSP deduction limit for the year but, later in the year, the individual wishes to withdraw the contribution and to not claim a deduction (for example, because of cash flow issues, or deciding that a TFSA contribution was preferable), the deduction under 146(8.2) generally would be available except that, as per s. 146(8.2)(e), the deduction would be denied if, at the time of the contribution, “the taxpayer did not reasonably expect that the full amount of the premiums would be deductible in the taxation year in which the premiums were paid.”
Although this quoted test would appear to be satisfied in this example, CRA then paraphrased this test much more restrictively as referencing a situation where the “excess contribution was in fact made inadvertently.”
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.4 under s. 146(8.2).
CRA is willing to treat the deemed s. 146(8.8) RRSP benefit on death as a withdrawal of an excess RRSP contribution
An individual, who made an excess RRSP contribution in 2015, dies in 2016. CRA noted that technically, in order for the executor to claim a s. 146(8.2) deduction in the terminal return for the excess contribution, there was required to be “a payment from the RRSP in respect of undeducted premiums of the taxpayer … received by the taxpayer in the year,” but then stated:
[T]he CRA generally accepts that an amount deemed to be received by a deceased annuitant under subsection 146(8.8) and included in the annuitant’s income for the year of death under subsection 146(8) … should be treated as a payment received by the annuitant for the purposes of subsection 146(8.2).
Thus, the deduction generally would be available (which was to be claimed directly in the terminal return without using a Form T746.)
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.2 under s. 146(8.2) and s. 146(8.8).