News of Note

Although the family income for purposes of computing an individual’s entitlement to the Canada child benefit (CCB) is computed on a lagged basis, s. 122.62(5)(b) provides relief by stipulating that effective almost immediately after the death of the individual’s spouse, that family income is computed based only on the individual’s income for the relevant pre-death period, i.e., the income of the deceased spouse during that period is excluded.

Thus, when the taxpayer’s husband died, she rightfully expected that her family income for the relevant pre-death period would not include her husband’s income under the Ontario Disability Support Program (the ODSP payments). Unfortunately, s. 56(1)(u)(ii) deemed the ODSP payments to be the income of the higher-income spouse (herself) – so that on a literal reading of the combined effect of s. 122.62(5)(b) and s. 56(1)(u)(ii), her family income included not only her actual income but also the income attributed to her under s. 56(1)(u)(ii).

Russell J found that the Explanatory Notes suggested that this result was unintended and quoted from Villa Ste-Rose in stating:

Analogously [to that case], in the present case there is “a literal interpretation which may produce illogical or absurd results [and so] must be set aside”.

CRA was ordered to recompute her CCB on the basis of excluding the deemed s. 56(1)(u)(ii) income from her income.

Neal Armstrong. Summary of O'Brien v. The King, 2023 TCC 132 under s. 122.62(5)(b).

CRA ruled on transactions for the transfer of losses by Lossco to Profitco (a Canadian sister) by using standard triangular transactions - through Lossco subscribing for interest-bearing debt of (its new subsidiary) Newco 2, which subscribes for cumulative preferred shares of its sister, Newco 1, which makes a non-interest-bearing loan to Lossco, which at year end funds the dividend obligation of Newco 1 through a capital contribution – with the transactions then being unwound and with Newco 2 then being sold to Profitco so that Profitco can access the Newco 2 losses through winding-it up pursuant to s. 88(1.1). Essentially the same transactions would be repeated (using further Newcos) in subsequent years until the Lossco losses were used up.

Profitco had made a functional currency election. The rulings included a ruling as to the application of s. 261(16)(a) to the wind-up of Newco into Profitco, including regarding Newco 2 being deemed to have elected Profitco’s tax reporting currency for its second short taxation year (of less than one day ending with its dissolution) and regarding the non-application of the avoidance rule in s. 261(18) and the stop-loss rule in s. 262(21).

The ruling letter also included a representation that proposed s. 18.2(4) will not apply to limit the deductibility of the interest on the interest-bearing debt used in the triangular transactions as Lossco and Newco 2 were eligible group corporations in respect of one another and will elect to treat the interest payment under such debt as excluded interest.

Neal Armstrong. Summary of 2023 Ruling 2022-0949841R3 under s. 111(1)(a).

The taxpayer, during the taxation years at issue, suspended the operation of its golf course to backfill two artificial lakes in its driving range and to replace its clubhouse and garage – as well as to partially construct (but never complete) a mini-golf course. The ARQ denied the various expenses incurred during such taxation years, such as insurance, interest, licence and consulting fees, property taxes, and utilities, on the basis of applying the Quebec equivalent of ITA s. 18(3.1).

Bourgeois JCQ found that the wording of the s. 18(3.1) equivalent “cannot apply to work done on the driving range, golf course maintenance or the various tasks involved in building a mini-golf course,” since the costs thereof did not relate to the types of land referred to in the provision, e.g., contiguous land, such as a “yard” or “garden,” necessary for the use of the buildings.

He then exercised his “judicial power” to find that that the denial under the provision applied only to 50% of the above expenses incurred during the building-construction period, so that the balance of the expenses were allowed.

Neal Armstrong. Summaries of 9127-6287 Québec Inc. v. Agence du revenu du Québec, 2023 QCCQ 4688 under s. 18(3.1) and s. 3(a) – business source.

A Sobeys subsidiary (“LBL”) sold $98 million of tobacco products during the 14 months starting in January 1999 to a status Indian (Roberta MacNaughton) operating a variety store on an Indian reserve. As soon as LBL delivered the products to the store vicinity, and it received the cash consideration, the products were loaded onto the waiting trucks of customers, in turn, of Roberta MacNaughton. The Minister’s position was that LBL sold the tobacco products to such third-party customers who were not status Indians, with MacNaughton being compensated for her involvement in this scheme through volume rebates – so that such sales were not exempted under s. 87 of the Indian Act.

Visser J found that MacNaughton was the “recipient” of such sales as defined in ETA s. 123(1), i.e., there was an oral agreement between her and LBL to purchase the products and she was liable under that agreement to pay LBL therefor. He further stated (at para. 142):

I also note that the sale of the Tobacco Products from [LBL] to Roberta MacNaughton often resulted in a resale to her customers almost simultaneously. They were in essence flash sales, which are common types of sales.

Neal Armstrong. Summary of LBL Holdings Limited v. The King, 2023 TCC 130 under ETA s. 123(1) – recipient.