News of Note
630413NB Inc. – Tax Court of Canada rejects plan for generating ITCs for legal fees
Email this ContentA group of four corporations and their ultimate individual shareholder were unsuccessful in generating input tax credits for GST/HST on legal fees by assigning the rights to the proceeds of the actions to a fifth group company in consideration for that company assuming obligations for the legal fees. Ouimet J found the arrangement to be insufficiently business-like to qualify as a business of the fifth company.
Neal Armstrong. Summary of 630413NB Inc. v. The Queen, 2016 TCC 156 under ETA s. 123(1) – business.
CRA confirms that the s. 207.31 recapture tax on sales of ecological lands applies even if no deduction was claimed
S. 207.31 provides inter alia for the payment by a municipality of a 50% tax on the fair market value of ecologically sensitive land, now disposed of by it without authorization of Environment Canada, which previously had been donated to it under the s. 110.1 or 118.1 ecological gift rules. CRA confirmed that this tax would apply even if the (corporate) donor had not claimed a s. 110(1)(d) deduction for the gift, stating that s. 207.31’s purpose is “to ensure the long term protection of ecologically sensitive land,” i.e., even ignoring the literal words, its purpose is regulatory rather than protecting the fisc.
Neal Armstrong. Summary of 4 April 2016 Memo 2016-0625241I7 Tr under s. 207.31.
CRA indicates that if a contingent amount is included in income under s. 7(1)(b), it cannot subsequently be excluded if not received
On a sale of a corporation, the outstanding employee stock options are surrendered for a price reflecting the sale price for the shares. However, as the sale price depends on the outcome of litigation, part of the agreed amount for the option surrenders is retained until the action is settled.
CRA indicated that if the price expressed to be payable for the surrendered options included the contingent amount, it would be included in the employees’ income arising under s. 7(1)(b), and that if it was not subsequently received, they would not be able to amend their returns for the year of surrender to then exclude the amount from their income.
Neal Armstrong. Summary of 16 June 2016 T.I. 2015-0623031E5 Tr under s. 7(1)(b).
Trimax – Quebec Court of Appeal invalidates a law firm search for failure of the information to demonstrate that there was no alternative for getting the documents
Hilton JCA applied the principle in Lavalee, [2002] 3 S.C.R. 209 - that “before searching a law office, the investigative authorities must satisfy the issuing justice that there exists no other reasonable alternative to the search” - to invalidate a search warrant that had been given to the ARQ to search a Montreal law firm’s premises for documents relating to a client who was suspected of claiming input tax refunds/credits on fictitious inputs (so that the seized documents were ordered to be returned.) The information laid before the issuing judge had not addressed any absence of an alternative solution – and Hilton JCA also chided the ARQ for failure to disclose the “material fact” that the law firm in question was acting for the client in the tax dispute with the ARQ.
Neal Armstrong. Summary of 9162-4676 Québec Inc. (known as Trimax) v. ARQ, 2016 QCCA 962 under s. 231.3(3).
Peach – Federal Court of Appeal finds that s. 67 cannot be applied on a global basis
Trudel JA noted that s. 67 should be applied on an expense-by-expense basis to determine what is the reduction in each expense which would render it reasonable. Accordingly, the Tax Court Judge had erred in instead considering whether, globally, the taxpayer’s business expenses were reasonable.
Neal Armstrong. Summary of Peach v. The Queen, 2016 FCA 173 under s. 67.
Kruger Wayagamack – Federal Court of Appeal affirms Tax Court’s decision without addressing any distinction between operating and strategic control
In the Tax Court, Jorré J found that Kruger Inc. did not have de jure or de facto control of a corporation - notwithstanding that it was the 51% shareholder and was entitled under the unanimous shareholders agreement with the 49% shareholder (SGF) to appoint three of the five directors. – on the basis that such a wide range of decisions were specified in the USA to require unanimous director (or shareholder) approval that Kruger had control only of operating, and not strategic, decisions.
However, he went on to find that the corporation was associated with Kruger under s. 256(1.2)(c) as the Kruger bloc had more that 50% of the fair market value of all the shares. The 49% bloc might have had a greater value to SGF than that of the 51% bloc to Kruger because of a contingent put right accorded to SGF under the USA. However, since this put could not be assigned to any third-party purchaser, it did not affect the shares' FMV.
This decision has now been affirmed in the Federal Court of Appeal, but with the Court only dealing with the valuation issue, and finding that there were no noteworthy errors.
Neal Armstrong. Summaries of Kruger Wayagamack Inc. v. The Queen, 2015 TCC 90, aff’d 2016 FCA 192 under s. 256(1.2)(c) and s. 256(1)(a).
Income Tax Severed Letters 29 June 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Intrawest – Tax Court of Canada finds that time share fees charged to Canadian and U.S. residents respecting resort condos located throughout North America were 100% GST-taxable
A Canadian-resident non-share corporation, most of whose members had time share points which entitled them to book stays at Canadian, U.S. and Mexican resort condos beneficially owned by the corporation, was found to be receiving its annual fees from them as consideration for a single supply of a service, namely, funding the operating costs of the time share program. This gave rise to a conundrum, as ss. 142(1)(d) and 142(2)(d) respectively deem a supply of a service in relation to real property inside Canada or outside Canada to be made in Canada or outside Canada – so that the single supply here which related to both was deemed to be made both inside and outside Canada.
D’Arcy J resolved this quandary by using the following interpretive approach:
[P]aragraphs 142(1)(d) and 142(2)(d)…only apply if the single supply of a service relates solely to real property. The paragraphs do not apply if only a portion of the single supply of the service relates to real property. In such a situation, the supply is subject to the general deeming rules set out in paragraphs 142(1)(g) and 142(2)(g).
The latter general rule deems a supply of a service that is to be performed in whole or in part in Canada to be made in Canada. This produced the tidy result that 100% of the fees was subject to GST - even though many of the members were U.S. residents who were using non-Canadian resort condos. This was also a harsher approach than that of CRA, which was to treat each fee as being taxable only to the extent of 68.5% thereof, being “the ratio of total resort points issued in respect of properties located in Canada to the total resort points issued in respect of all properties."
Neal Armstrong. Summaries of Club Intrawest v. The Queen, 2016 TCC 149 under ETA s. 142(1)(d), ETA s. 306.1(1), General Concepts – Agency.
CRA indicates that the concepts of capital property and eligible capital property do not overlap
Following some amendments to jettison the "mirror image rule" (see Toronto Refiners), the distinction between a capital property (a property giving rise to a capital gain) and an eligible capital property (a property giving rise to an eligible capital amount) is completely circular: under ss. 14(1) and 14(5) - CEC-(E), an eligible capital amount is 1/2 of an amount receivable on capital account in respect of a business that is not included in computing a capital gain; and under s. 39(1)(a)(i), a capital gain does not include gain from the disposition of an eligible capital property.
When asked whether a capital property includes an eligible capital property, CRA did not directly discuss this circularity issue, and simply stated:
By virtue of subparagraph 39(1)(a)(i)…the gain from the disposition of an “eligible capital property” is excluded from the meaning of a taxpayer's “capital gain.”
Neal Armstrong. Summary of 13 June 2016 T.I. 2016-0637031E5 under s. 98(5).
Poulin – Tax Court of Canada finds that a sale to the special-purpose Holdco of an independent employee was essentially a surplus-stripping transaction rather than an arm’s length sale
CRA successfully applied s. 84.1 to a transaction in which one of the two major shareholders of a Quebec CCPC (Mr. Turgeon) agreed to sell some preferred shares of the CCPC to a newly formed Holdco of its comptroller (“Hélie Holdco”) in consideration for a promissory note bearing interest at 4% and which was to be repaid over a number of years out of dividends or redemption proceeds received by Hélie Holdco from the CCPC. D’Auray J noted that this employee had no risk, and Hélie Holdco had no upside as its only assets and liabilities were the prefs and the note, both with frozen values – so that Hélie Holdco essentially was just an accommodation party. She stated:
Hélie Holdco served only to participate in the transaction for the benefit of Mr. Turgeon, thereby permitting him to strip the surplus of [the CCPC] free of tax by virtue of utilizing the capital gains deduction.
At the same time as Mr. Turgeon was arranging this “sale” to Hélie Holdco, he formed a new Holdco to purchase preferred shares of the other major shareholder. D’Auray J found this to be an arm’s length transaction (so that s. 84.1 did not apply) even though it occurred on quite similar terms (under advice from a common tax advisor) as the sale to Hélie Holdco, as they each were advancing their own interests (arranging an exit on advantageous terms, and acquiring control of the CCPC, respectively.)
Neal Armstrong. Summary of Poulin v. The Queen, 2016 CCI 154 under s. 251(1)(c).