News of Note
Urquhart – Federal Court of Appeal finds an implied obligation to incur costs to earn enhanced commissions under an oral employment contract of a salesman
Email this ContentRennie JA found that on an objective appreciation of the arrangements (not reduced to writing) between a Ford dealership and a salesman, including reasonable inferences from the commission arrangements, the salesman was required to bear some costs of vehicle transport and of vehicle accessories, so that such costs were deductible by him under s. 8(1)(f)(i). The disallowance of deductions for such costs by the Tax Court was reversed.
Neal Armstrong. Summary of Urquhart v. The Queen, 2016 FCA 76 under s. 8(1)(f).
Ivan Cassell Ltd. – Tax Court of Canada finds that a company with ancillary rental operations providing CEO services out of a home office to a single corporation had a PSB
A corporation (ICL) providing the services of CEO to another corporation (WPNL), that indirectly was owned as to 50% by the CEO and his family, was found to be carrying on a personal services business. The facts that ICL carried on an ancillary rental operation, that the individual was not (as de facto CEO) subject to significant supervision and that he spent a lot of his time working out of his home (and in fact only had a “make-shift space available to him as the need arose” at the WPNL premises), did not tip the balance. It also hurt ICL’s case that it did not even bother to invoice WPNL and that no attempt was made to depart from the typical remuneration package for a CEO (fixed monthly remuneration plus a year-end bonus).
Neal Armstrong. Summary of Ivan Cassell Ltd. v. The Queen, 2016 TCC 53 under s. 125(7) – personal services business.
Crooks – Tax Court applies the “ultimate liability” doctrine to trump the bad form of the taxpayer’s agreements so that for HST purposes she was the sole recipient of a supply
An agreement for the purchase of a new condo by the taxpayer was amended shortly before closing at the insistence of the mortgage lender to add her friend as a co-purchaser (with the friend receiving a 1% ownership interest in the condo at closing). If Hershfield J had followed Al-Hossain (where the taxpayer position should have been stronger because the co-purchaser had signed a declaration of trust), he would have denied the new housing rebate to the taxpayer given that the combined effect of ETA ss. 254(2) and 262(3) was to deny the rebate if any interest (even a 1% interest) in the condo was supplied to any person who was not related to a person acquiring the condo as a primary residence.
He characterized the amended purchase agreement as instead entailing, at most, a supply of a 1% interest in the property by the taxpayer to her friend in consideration for her friend’s guarantee – and as not resulting in any interest in the condo also being supplied by the builder to the friend. In this regard, he stated:
The amended agreement did nothing of substance. Indeed, if such an agreement had been entered into to gain an unintended tax advantage, it might be seen as a wholly artificial transaction – a sham.
He didn’t stop there. He applied the “ultimate liability” Bondfield doctrine to find that because the taxpayer “accepted ultimate liability for payment to the builder in the unlikely event the builder was able to make a case against [her friend],” the taxpayer was the sole “recipient” of the supply by the builder, so that the ETA s. 123 “recipient” definition deemed the builder to supply the condo solely to the taxpayer.
Although Hershfield J provided stellar assistance to an unrepresented taxpayer, this approach of emphasizing the true intention of the parties rather than the documentary form would generate uncertainties in other contexts.
Neal Armstrong. Summaries of Crooks v. The Queen, 2016 TCC 52 under ETA s. 254(2)(a), s. 123(1) - recipient, General Concepts - Substance, and Statutory Interpretation - Benefits-Conferral Legislation.
Bakorp – Federal Court of Appeal finds that an overpayment of Part IV tax for a subsequent year did not cut off interest for an underpayment in the previous year, before application of the overpayment by CRA
Bakorp was found by CRA to have underpaid its Part IV tax for its 1993 taxation year, and overpaid Part IV tax for its 1995 taxation year. When CRA reassessed in February 2000, it applied the 1995 overpayment to the 1993 year and assessed interest from the 1993 underpayment date up to February 2000.
Bakorp unsuccessfully argued that interest should be computed as if the overpayment for its 1995 year had been retroactively applied at the time it paid its initially-computed Part IV tax liability for 1995 (i.e., shortly after its 1995 taxation year end rather than in February 2000) to the underpayment for its 1993 year, so that much of the interest that otherwise would have accrued on its underpayment for its 1993 taxation year was eliminated. Webb JA noted that this argument implied that Bakorp effectively would have been entitled to a double-interest benefit from the application of its overpayment for its 1995 taxation year – as that application would not only retroactively cut off interest on its underpayment for its 1993 taxation year but also generate refund interest respecting its overpayment for its 1995 year. This obviously could not have been intended.
Neal Armstrong. Summaries of Bakorp Management Ltd. v. MNR, 2016 FCA 74 under s. 187(2) and s. 248(28).
CRA indicates that auditors will ask for the accounting firm’s working papers where there is an absence of direct information and a high risk issue
Points made by Gord Parr, Director, Large Business Audit Division, International and Large Business Directorate, Compliance Programs Branch include:
- Effective April 1, 2016, the Compliance Programs Branch will be split into two branches: one dealing with international aggressive tax planning, large business audits, criminal investigations and the off-shore program; and the other with small-medium enterprise income tax, GST/HST programs, and SR&ED.
- CRA generally will disclose to taxpayers which of the three risk categories they fall into and what are the overall risk factors on the file.
- In order to facilitate an integrated approach to large business compliance, senior auditors from domestic, international and ATP will be put into integrated teams reporting to a large file case-manager.
- Large case managers now will be rotated every four, rather than every six, years.
- Under CRA’s “audit currency” policy, when it starts an audit it generally will look only at the most recent taxation year that has been assessed and the immediately preceding year. However, “if there are recurring issues, if the taxpayer is considered high risk, if the taxpayer has been less than transparent and cooperative with the CRA, then we will consider going back into earlier years to address those high-risk issues.”
- As announced at the 2015 Annual CTF conference, if information that was requested by Audit is not provided until the Appeals stage, there is a mandatory referral of the file back to Audit.
- Respecting BP Canada:
[A]uditors should attempt to collect the information from the most direct source, and in the least intrusive manner. So if the source documentation is available in the taxpayer's books and records, and there's open and transparent disclosure of the uncertain tax positions, there's a level of cooperation and mutual trust, and the CRA is getting the information it needs to determine whether taxable income is understated or the tax balance is overstated…then generally we wouldn't request access to the taxpayer's or the accountants' working papers. But, where we can't get that direct information, in those situations where there is a high risk issue we will request that information. The request has to be relevant to the outstanding issues… .
- BEPS has not yet had any effect on CRA’s transfer-pricing policies.
- Very few competent authority files end up in binding arbitration.
Neal Armstrong. 23 February 2016 Toronto Centre Tax Professionals Seminar.
R & S Industries – Federal Court appears to interpret a s. 97(2) drop-down agreement as preventing a re-allocation of boot to avoid gain
An agreement for the drop-down under s. 97(2) of assets by the taxpayer (R & S) to a subsidiary LP specified that the elected amounts in a joint s. 97(2) election, and the respective portions of the Purchase Price allocated to the transferred assets, would be the minimum agreed amounts permitted under the Act, “provided …that in respect of the Goodwill, the elected amount shall, unless otherwise agreed be equal to $2,502,600.” The reasons for judgment are unclear, but CRA apparently reassessed on the basis that the election form effectively allocated excess boot to the non-goodwill assets, so that gain was required to be recognized under the excess boot rules. R&S then sought to amend the election, apparently (although again this is unclear) to re-allocate this excess boot to the goodwill (which might have produced a better result as the stipulated $2.5M agreed amount presumably was above the goodwill’s cost amount).
When CRA rejected the request for an amended election, 15 months passed before R & S sought judicial review of this decision in the Federal Court. One of the grounds for refusing an extension of the normal 30-day deadline for this application was that the application lacked substantive merit. Diner J appears to have interpreted the above clause, which fixes the elected amount for the goodwill at $2.5M “unless otherwise agreed,” as preventing the boot from being reallocated to the goodwill.
Neal Armstrong. Summaries of R & S Industries Inc. v. MNR, 2016 FC 275 under Federal Court Act, s. 18.1(2) and ITA s. 97(2).
CRA indicates that Amalco (successor to Buyco) is free to allocate assumed debt to retained rather than distributed Target assets for interest-deductibility purposes
After Buyco acquires Target (funded in part through the assumption of debt of the vendor – in this case, a non-arm’s length vendor), Buyco amalgamates with Target and then immediately makes a paid-up capital distribution of a portion of the acquired assets (being shares of FA) to its parent. CRA stated:
[T]aking into consideration the flexible tracing approach mandated… in Ludco…Amalco would be entitled to allocate the entire amount of the Assumed Debt to its assets other than the FA shares. Thus, the interest payable by Amalco on the Assumed Debt would be deductible under subparagraph 20(1)(c)(ii) after the distribution of the FA shares to the extent that the remaining assets are capable of producing income from property or from a business.
Neal Armstrong. Summary of 5 February 2016 Memo 2014-0555291I7 under s. 20(1)(c).
Income Tax Severed Letters 9 March 2016
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA requires detailed property listings on the ETA s. 167 election form
The ETA s. 167 election form requests a listing of all the types of property acquired. A generic description such as “substantially all the property” is not acceptable. CRA states:
[A] detailed list of all property acquired should be provided in order for CRA to make a determination that all or substantially all of the business has been acquired.
Neal Armstrong. Summary of May 2015 CPA Roundtable, GST Q.4 under ETA s. 167(1).
The ITRD and LAS respectively interpret the ITA and assist in applying those interpretations to the audit facts
The Legislative Application Section (LAS) “provides technical assistance to large case auditors in the application of the ITA to specific facts and issues identified in the context of an income tax audit,” whereas the Income Tax Rulings Directorate “focuses on interpretive issues” - but the two consult frequently.
The LAS issues its memoranda directly to the auditor with that memo being distributed at the discretion of the auditor. However, the taxpayer may formally request a severed copy of the memo under the Access to Information procedure or (preferably) informally request a copy.
Neal Armstrong. Summary of May 2015 CPA Roundtable, Plenary Q.2 under s. 152(1).