News of Note
CRA considers that the related occupant of a principal residence can be charged FMV rent
Email this ContentCRA considers that a house unit can qualify as a principal residence of a taxpayer even where the child of the taxpayer, who is the one residing at the house, is being charged a fair market value rent by the taxpayer (in order to help fund the seniors’ residence fees of the taxpayer).
Neal Armstrong. Summary of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 10, 2016-0625161C6 Tr under s. 54 - principal residence - (a).
CRA confirms that the MIC shareholding tests apply cannot be satisfied through a parent
S. 130.1(6)(d) requires that a mortgage investment corporation have at 20 shareholders, with no shareholder holding, directly or indirectly, more than 25% of the shares of any class. These tests apply to shareholdings in the corporation itself, so that the tests could not be satisfied by the wholly-owned subsidiary of a publicly-traded corporation.
Neal Armstrong. Summary of 26 October 2015 T.I. 2015-0599021E5 under s. 130.1(6)(d).
Agnico-Eagle – Federal Court of Appeal finds that conversion of a U.S.-dollar convertible debenture resulted in no capital gain based on the appreciation in the underlying shares’ value
Agnico-Eagle issued US$143M of convertible debentures (the equivalent of Cdn.$230M) and they were mostly converted into shares at a time their principal was the equivalent of Cdn.$170M, so that in CRA’s view Agnico-Eagle made a s. 39(2) gain of Cdn.$60M. According to a verbal formula provided by Ryer JA at the end of his judgement, the s. 39(2) gain was to be computed by comparing the fair market value of the shares when issued (using their current market price) of around Cdn.$280M, with the Cdn.$230M issuance amount, so that on this math Agnico-Eagle would have sustained a s. 39(2) loss of around Cdn.$50M. However, earlier in the judgment he stated that his decision was limited to whether there was any s. 39(2) gain, so that there was no direct finding that Agnico-Eagle sustained a s. 39(2) loss - but only that the appreciation of its shares had the effect of eliminating what otherwise would have been a s. 39(2) gain.
Neal Armstrong. Summary of The Queen v. Agnico-Eagle Mines Ltd., 2016 FCA 130 under s. 39(2).
Income Tax Severed Letters 27 April 2016
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Schnier – Ontario Court of Appeal indicates that an assessment under appeal is not an “amount payable” as defined in ITA s. 223
S. 172.1 of the Bankruptcy and Insolvency Act provided more onerous conditions for the discharge of an individual from bankruptcy where a substantial portion of the individual’s total unsecured proven claims is in the form of “amounts payable” within the meaning of ITA s. 223(1).
Brown JA has found that assessments under appeal are not amounts payable for these purposes. In response to the Attorney General’s argument that ITA s. 152(8) deems an assessment to be “valid and binding,” he stated:
Both ss. 152(8) and 248(2) indicate that until the objection or appeal process is concluded, the amount of tax the Minister can compel a taxpayer to pay cannot be known. The assessed amount can change from time to time by virtue of judicial decisions or new assessments: Terra Nova Properties… [1967] 2 Ex. C.R. 46… .
He also noted that “the existence of the outstanding appeal entitles the trustee to classify the claim based on the unpaid assessed amounts as a contingent, unprovable one.” Although it is unlikely that this case will reverse the accepted view (e.g., under s. 160) that tax liabilities can arise even before they are assessed, this latter point, that a tax appeal can render an assessment an unprovable claim, appears to be important.
Neal Armstrong. Summaries of Schnier v. Canada (Attorney General), 128 O.R. (3d) 537, 2016 ONCA 5 under Bankruptcy and Insolvency Act, s. 172.1(8), ITA s. 152(8), s. 223(1).
CRA considers that GST erroneously paid on a volume rebate is not tax paid in error so that a credit therefor on assessment is not available
On audit, CRA is required by ETA s. 296(2.1) to apply an unclaimed rebate for tax paid in error against the net tax otherwise assessed. However, there is an unpublished CRA interpretation indicating that where the registrant added GST to volume discounts paid to its clients by way of credit notes (erroneously failing to recognize that the original sales had been zero-rated so that there was no GST to rebate), CRA will not consider such tax to be tax paid in error, so that a credit under s. 296(2.1) is not available.
Neal Armstrong. Summary of Robert Demers, "Indirect Tax considerations in M&A Due Diligence," draft 2015 CTF Annual Conference paper under ETA s. 296(2.1).
The standard of review of CRA interest or penalty relief decisions is almost invariably that of reasonableness rather than correctness
In general, the standard of review for a CRA decision under s. 220(3.1) or (3.2) is reasonableness, i.e., is the decision justified, transparent, and intelligible and within a range of possible, acceptable outcomes which are defensible in respect of the facts and the law. The Supreme Court in Dunsmuir, 2008 SCC 9 confirmed that the application of a correctness standard of review is limited to jurisdictional and some other questions of law including of natural justice or bias. In the area of taxpayer relief, there are only two post-Dunsmuir cases where a correctness standard of review was applied (Bozzer and, to a limited extent, Cayer).
Instances of unreasonable decisions have, in broad terms, been restricted to fettering of discretion (e.g., following the Information Circular slavishly), failure to consider relevant facts or arguments, and failure to observe other principles of procedural fairness or natural justice.
In allowing an application for judicial review, the Federal Court cannot mandate an outcome where more than one is possible.
Neal Armstrong. Summary of Brooke Sittler, "Review of Penalty and Interest Relief Requests Under the Income Tax Act", draft 2015 CTF Annual Conference paper under s. 220(3.1).
Wesdome Gold Mines – Cour du Québec finds that assessments of an already-dissolved corporation were invalid
The immediately preceding post notes that Wesdome successfully appealed an assessment by ARQ of its 2005 year denying CEE deductions. In a 2014 decision, which we did not notice until now, the same judge found that assessments by ARQ of the 2006 and 2007 years (also denying CEE deductions) were invalid because Wesdome had been dissolved one day prior to the dates of the assessments in connection with completing its winding-up into its wholly-owning parent corporation.
Godbout J noted that, under s. 313 of the Quebec Business Corporations Act, the parent became liable for the obligations (including tax obligations) of the dissolved subsidiary, and found that the assessments instead should have been issued against the parent.
Neal Armstrong. Summary of Wesdome Gold Mines Ltd. v. ARQ, 2014 QCCQ 8444 under s. 152(1).
Wesdome Gold Mines – Cour du Québec finds that a mine on care and maintenance was a closed mine for CEE purposes
A company (”Wesdome”) acquired the Kiena mine in Quebec, which had been put on care and maintenance when its reserves had been exhausted over a year earlier, in order that it could extend an existing mine shaft to go under a lake and drill gold targets on its own exploration property to the north. This was a success, and the purchased Kiena mining facilities started processing ore from the new finds several years later.
ARQ denied CEE deductions under the Quebec equivalent of ITA, s. 66.1(6) – Canadian exploration expense – (c)(vi), which applied to “any expense that may reasonably be related to a mine…that has come into production in reasonable commercial quantities or to an actual or potential extension of such a mine.”
In allowing the deductions, Godbout J found that when the operation had ceased to be economic, it thereupon “became a closed mine, pure and simple.” This suggests that a mine which has been put on care and maintenance because its reserves have been exhausted has ceased to be an “existing” mine for CEE purposes. Accordingly, notwithstanding that the existing shaft was used for the exploration and the existing processing facilities subsequently were put back into production, the exclusion did not apply because this work and production related to a closed rather than existing mine.
Neal Armstrong. Summary of Wesdome Gold Mines Ltd. v. ARQ, 2016 QCCQ 1504 under s. 66.1(6) – Canadian exploration expense – (c).
Zhu – Federal Court of Appeal indicates that s. 253(b) should be interpreted restrictively in light of its purpose
S. 253(b) deems a non-resident person who “solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada” to thereby be carrying on business in Canada. Dawson JA has found that selling shares on a U.S. exchange through a U.S. broker does not engage s. 253(b) notwithstanding that the purchasers could be Canadian residents, stating that:
The contrary conclusion would be inconsistent with the purpose of section 253…“to subject non-resident persons to Canadian tax provided they carry out a minimum amount of commercial activity within Canada’s borders” (Maya Forestales…).
Neal Armstrong. Summary of Zhu v. The Queen, 2016 FCA 113 under s. 253(b).