News of Note
ONEnergy – Tax Court of Canada states obiter that services acquired long after the cessation of commercial activity may give rise to ITCs
Email this ContentA company (“Look”) sold all the assets of its business and then successfully sued its executives for having paid themselves inflated bonuses and option termination payments out of the sales proceeds. In finding that Look was not entitled to input tax credits for the GST on its related legal fees and, in particular, that the lawsuit was not brought “in connection with the…termination of a commercial activity” as per ETA s. 141.1(3)(a), C Miller J stated:
“[I]n connection with”… is a broad expression but does not…, even on a textual reading allow for the remotest of links, such as a link only arising by way of the “but for” test. …
[T]he cost of legal services to chase after directors, who the Appellant claims have absconded with its money, is a need that would have been fulfilled regardless of where the funds emanated from. …
He added this helpful (likely obiter) comment:
[T]his is not an issue of timing. For example, had the Board discovered two years after the [asset] sale that a competitor had wronged Look…and the Board commenced a lawsuit, I would see no difficulty in finding such litigation activity was connected with commercial activity, notwithstanding some considerable time had passed since the termination of the business. Similarly, if Look had to sue the purchaser of [its assets] long after the completion of the sale for breach of a confidentiality provision, again timing would not preclude a finding of a connection.
Neal Armstrong. Summary of ONEnergy Inc. v. The Queen, 2016 TCC 230 under ETA s. 141.1(3)(a).
Ingenious Media – UK Supreme Court finds that statutory exceptions to taxpayer confidentiality should be construed narrowly in light of the common law of confidentiality
A senior British tax official disclosed, in an “off the record” interview with some journalists, that the schemes of a particular promoter of film tax shelters had been generating large losses to the fisc, and they published this and other confidential information. HMRC argued that this disclosure was justified by a statutory provision which authorized a “disclosure … made for the purposes of a function” of HMRC, noting their “general desire to foster good relations with the media or to publicise HMRC’s views about elaborate tax avoidance schemes,” as well as to the possibility of getting tips from the journalists.
In rejecting HMRC’s position, Lord Toulson noted that under “the common law of confidentiality:”
where information of a personal or confidential nature is obtained or received in the exercise of a legal power or in furtherance of a public duty, the recipient will in general owe a duty to the person from whom it was received or to whom it relates not to use it for other purposes.
Under the “principle of legality,” this “fundamental right…cannot be overridden by general or ambiguous words,” as HMRC was trying to do here.
The same restrictive interpretive approach likely would be applied to ITA s. 241(4)(a), which authorizes the provision to any person of “information that can reasonably be regarded as necessary for the purposes of the administration or enforcement of this Act.”
Neal Armstrong. Summaries of Ingenious Media Holdings plc & Anor, R (on the application of) v Commissioners for HMRC [2016] UKSC 54 under s. 241(4)(a) and Statutory Intepretation - Principle of Legality.
The Tax Interpretations paywall is changing
Currently, non-generic content on the site is paywalled four days a week. Effective Monday morning, this will change so that the same content will be paywalled five days a week (Monday to Friday, including statutory holidays) except for the first full work week in each month. Thus, the site will be “open” for approximately one additional day each month, and potential subscribers will have a full week each month (plus weekends) to test-drive the site.
CRA effectively confirms that s. 119 does not provide relief from double taxation re non-TCP shares
S. 119 applies to the withholding tax on dividends on shares subject to the stop-loss rules in subsection 40(3.7) and provides a credit against the tax that was payable under s. 128.1(4) by virtue of the taxpayer’s departure from Canada. (See Shew.) CRA read the clear words of s. 119 and confirmed that, for it to apply, the shares (which were deemed to be disposed of) must have been taxable Canadian property continuously from the time of emigration.
Accordingly, double taxation can occur.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.18 under s. 119.
CRA confirms that there generally is no domestic secondary adjustment doctrine
The secondary adjustment doctrine in the transfer pricing area indicates, for example, that if it is found that Canco has been understating its income by undercharging for sales to its non-resident parent, then not only should there be a transfer-pricing adjustment to increase its income accordingly, but there also is a taxable benefit (subject to Part XIII tax) conferred on its parent if it does not promptly charge for the additional amount (see, e.g., TPM-02).
There is no comparable general doctrine lurking within the domestic attribution rules (e.g., s. 74.1 et seq.) or reallocation or imputed benefit rules (e.g., s. 103, 69 or 56(2)) so that, for example, if Partner B from a s. 103 perspective should rightfully have received 40% rather than 10% of the income of the partnership, there is no imputed obligation of Partner A to repay its excess draws to the partnership or Partner B.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.19 under s. 103(1) and s. 74.1(1).
Income Tax Severed Letters 26 October 2016
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA accepts Poulin distinction between accommodation parties and tax advantaged arm’s length dealings
In the Poulin decision, D’Auray found that s. 84.1 applied to the sale by an individual of his shares of a CCPC to the holding company of an unrelated employee (“Hélie Holdco”), given that Hélie Holdco was essentially just acting as an accommodation party (i.e., the sale was not an arm’s length transaction)– but also found that s. 84.1 did not apply to a purchase of shares in the same CCPC under a similarly structured transaction from the other major shareholder, as they each were advancing their own interests (arranging an exit on advantageous terms, and acquiring control of the CCPC, respectively) – so that it was an arm’s length transaction.
CRA accepts both aspects of the decision. It accepts the finding in Poulin that the structuring of a sale transaction so that the vendor secured a tax advantage (the capital gains deduction) “does not mean that the parties acted in concert without separate interests.” Respecting the accommodation party aspect, it stated:
Hélie Holdco… incurred no economic risk in participating in the transaction, did not derive any benefit from the purchase of shares, had no interest other than to allow the employee/shareholder to realize a capital gain and benefit from the deduction, and had no function independent of the employee/shareholder or the operating corporation - and, in short, it only participated in the transaction as an accommodation for the benefit of the employee/shareholder.
Neal Armstrong. Summary of 7 October APFF Roundtable, Q. 20 under s. 251(1)(c).
CRA considers that s. 7 can govern bonuses paid in shares where discretion ceases prior to the issuance
A magnanimous reader provided copies of CRA’s written answers to the 2016 APFF Roundtable questions. We will be uploading translations thereof (together with brief summaries of the questions) over the next week. We are starting with Q.21 and working our way backwards.
CRA considers that where a Canadian-controlled private corporation has agreed in writing “to award a bonus based on the employee reaching certain measurable performance objectives and the employer agrees to pay this bonus in shares” equal in value to the bonus amount, then the value of the shares generally will not be included in the employee’s income when issued by virtue of ss. 7(3)(a) and 7(1.1). In addition, although an arrangement in which the employer has full discretion as to whether to award the bonus or as to the mode of payment will not come within the s. 7 rules, such a discretionary arrangement could become a qualifying one if, for example, “after the first year, the employer exercises its discretion and sets the amount of the bonus at [say] 75 shares, which is payable in shares at the end of the year if the employee is still employed by the employer.” The right of the employee to elect to be paid in cash does not detract from this analysis if that right is not exercised.
The paid-up capital of the shares issued generally could be equal to their value.
Neal Armstrong. Summaries of 7 October APFF Roundtable, Q. 21 under s. 7(3)(a) and s. 84(1)(b).
Yamana Gold is proposing a taxable dividend of options to acquire shares of a Yamana gold subsidiary
Yamana Gold is proposing to distribute a part interest in a gold-mining subsidiary (Brio Gold) to its shareholders through a dividend-in-kind of rights to purchase common shares of Brio Gold from Yamana for a specified per-share price. These purchase rights will trade on the TSX. Yamana will be providing its shareholders with its estimate of the value of this dividend.
Neal Armstrong. Summary of Brio Gold preliminary prospectus under Public Transactions - Spin-offs and Distributions - Taxable rights offerings.
To date, only brief notes of CRA remarks at the 2016 APFF Roundtable are available
We have summarized questions posed at the October 7, 2016 APFF Roundtable for which we have brief written notes of the oral response, together with a summary of those notes. Points covered include:
- Q.1B: After studying the issue, CRA has determined that it will not be providing relief from the requirement to issue T4As for fees paid for services.
- Q.1C: Where there is an acquisition of control of a corporation with a calendar year end, thereby resulting in two taxation years ending in that year, CRA will permit the filing of a T106 to cover both taxation years.
- Q.3: Where a purchaser defaults on its purchase of a rental property, CRA considers that the damages paid by the purchaser to the vendor cannot be recognized as a capital loss given that there has been no disposition of property by it.
- Q.4: A right which otherwise might be taxable under the salary deferral arrangement rules is excluded from the SDA definition if it is a right to a bonus for services rendered in Year 1 which is paid within three years following the end of Year 1 (i.e., by the end of Year 4). CRA will not extend this deadline by a few months to permit performance-based criteria for Year 4 (which affect the amount of the ultimate payout) to be measured based on year-end results for Year 4.
- Q.7: Ss. 256(1.4) and 251(5)(b) reference a right (including a contingent right) to shares and a right to cause a corporation to redeem shares. There is not considered to be such a right where the shareholders’ agreement for a corporation carrying on a franchised operation (“Franchisee”) specifies that in the event that the individual manager of Franchisee (who holds 50% of Franchisee’s commons shares) departs, the other 50% common shareholder (the Franchisor) has the mandate to find a third party to purchase the manager’s shares – or that, in such event, the manager’s shares are to be automatically redeemed by Franchisee.
- Q.20: CRA accepts the finding in Poulin that the structuring of a sale transaction so that the vendor secured a tax advantage (the capital gains deduction) “does not mean that the parties acted in concert without separate interests.” However, if the only reason for the existence of a Buyco is a tax benefit to the vendor, then there is an accommodation, so that the transaction is not an arm’s length one.
- Q.21: Where a Canadian-controlled private corporation has agreed in writing to pay specified bonuses in its shares, the value of the shares will not be included in the employee’s income when issued, and their paid-up capital can be equal to that value.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable.