News of Note
Fowler v. HMRC Commissioners - First-Tier Tribunal finds that “treatment is the meaning:” employment income deemed by U.K. domestic legislation to be from carrying on a “trade” was therefore deemed by Art. 3(2) to be “business profits” for Treaty purposes
Email this ContentA U.K. domestic income tax provision (“s. 15 ITTOIA”) deemed the diving activities of a South African resident in the North Sea to be the carrying on of a U.K trade, notwithstanding that in fact he was an employee. The diver successfully argued that this meant that Art. 3(2) of the U.K-South Africa Treaty (which, in the standard OECD form, provided that any term not defined in the Treaty “shall, unless the context otherwise requires, have the meaning that it has …under the law of [the U.K.]”), deemed his earnings to be business profits for purposes of Art. 7 of the Treaty, so that they escaped U.K. taxation (as he had no permanent establishment in the U.K.) Brannan J stated:
It is the clear purpose of section 15 ITTOIA to re-characterise what would otherwise be the exercise of employment duties as the carrying on of a trade. In so doing, in my view, section 15 ITTOIA has the meaning that the activities of an employed diver in the UK Continental Shelf constitute trading activities and that the income therefrom must be trading income and, consequently, business profits within Article 7 – the treatment is the meaning.
Thus, Art. 3(2) applied notwithstanding that the domestic provision in question was blatantly a deeming provision rather than a definition and merely deemed the underlying activity to be a trading activity rather than explicitly deeming the resulting income to be “profits” of an enterprise.
Brannan J also stated:
If a Contracting State changes its domestic law after the conclusion of a double tax treaty in such a way as to reallocate income from one article to another...that could contravene the requirements of good faith imposed by Article 31(1) of the Vienna Convention... .
That issue did not arise here as the domestic deeming provision was enacted well in advance of the Treaty in order to give a break (through greater deductions) to divers, whose activities were dangerous.
Neal Armstrong. Summary of Fowler v. HMRC Commissioners, [2016] UKFT 0234 (TC) under Treaties – Art. 3.
CRA confirms that gifts made by will of the deceased can no longer be treated as gifts by a surviving spouse
Until recently, there was a CRA administrative practice to accept the allocation of gifts made under the will of a deceased to the return of a surviving spouse. As a result of the recent amendments respecting estate gifts (including the proposed January 15, 2016 amendments) this policy will not apply where the death occurred after 2015.
Neal Armstrong. Summary of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 8, 2016-0624851C6 Tr under s. 118.1(1) - “total charitable gifts.”
CRA considers that professional fees incurred after acceptance of a voluntary disclosure commence to be deductible
S. 60(o) accords a deduction for fees incurred “in preparing, instituting or prosecuting” an income tax objection (or appeal). CRA considers that this does not provide a deduction for fees incurred in making a voluntary disclosure. However, from the moment the voluntary disclosure is accepted, further fees incurred in defending the taxpayer’s position vis-à-vis CRA qualify under s. 60(o).
Neal Armstrong. Summaries of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 7, 2016-0625731C6 Tr under s. 60(o) and s. 20(1)(cc).
The traditional CRA policy on s. 31 is still reflective of its position post-Craig
CRA essentially considers that the post-Craig version of s. 31 essentially codifies its views as to how the provision worked before that case was decided. Respecting the situation where an individual who had carried on a farming business, but with a full-time job as his main source of income, then retired (so that he received full pension income), CRA stated that in light of its positions that a multi-factor test should be applied, the fact that he now devoted most of his time to operating the farm could not be treated as conclusive that he was not subject to the s. 31 loss restriction rule.
Neal Armstrong. Summary of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 7, 2016-0625131C6 Tr under s. 31(1).
CRA strictly interprets the s. 6(1)(a)(iv) safe harbour for counselling
S. 6(1)(a)(iv) provides a safe harbour from an employee taxable benefit for counselling services respecting the mental or physical health of the employee or the employee’s re-employment or retirement. CRA considers that this exception “does not include a service that entails more than simply advice, or is preventive or curative treatment.”
If there is a taxable benefit on general principles (which might occur where the service is not principally for the employer’s benefit and is not provided under a private health services plan), CRA considers that it should be valued at what the “employee would have to pay for this service if the employee assistance program did not exist.”
Neal Armstrong. Summary of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 12, 2016-0624811C6 Tr under s. 6(1)(a)(iv).
CRA considers that the related occupant of a principal residence can be charged FMV rent
CRA 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).