News of Note
Income Tax Severed Letters 27 April 2016
Email this ContentThis 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 However, there is an unpublished CRA interpretation indicating that where the registrant added GST to volume discounts paid to its clients by way of credit notes (erroneously failing to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).
CRA confirms that provincial carbon taxes are subject to HST/GST
CRA has published a Memorandum discussing ETA. s. 154. Various provincial taxes can be part of the consideration for a supply either through being deemede to be consideration by s. 154 or on general principles, so that GST or HST effectively is collectible on the amount of the provincial tax. An example is stewardship fees required to be paid by a tire manufacturer to a waste diversion organization under provincial waste diversion legislation both when the tire manufacturer charges the tire retailer for such fees and when the tire retailer breaks out a separate charge for same amounts in its invoice to retail tire purchasers. (See also 18 September 2015 Ruling 168521r.) A second example is a provincial carbon tax charged to a retail purchaser of gasoline.
Neal Armstrong. Summary of GST/HST Memorandum 3.5 “Application of GST/HST to Other Taxes, Duties, and Fees” April 2016 under ETA s. 154(2).
CRA finds that a payment out of a pension plan to a beneficiary of deceased employee was a pension rather than death benefit payment
A U.S. citizen is resident in Canada and was the beneficiary of a deceased U.S resident who had been a retired member of a U.S. public pension plan. CRA would consider a payment received under the plan by the beneficiary to be of a “superannuation or pension benefit” (includible in income under s. 56(1)(a)(i)) rather than of a “death benefit” (generally includible under s. 56(1)(a)(iii) but subject to a $10,000 exclusion from income). Relief from inclusion under s. 56(1)(a)(i) would be provided under Art. XVIII, para. 1of the Canada-U.S. Treaty to the extent of the amount that would be excluded from taxable income in the U.S. if the recipient were a resident thereof (e.g., respecting a deduction under Code s. 691(c)(1) respecting a pro rata portion of U.S. estate tax).
Neal Armstrong. Summaries of 2014-0525681E5 under s. 248(1) - superannuation or pension benefit, Treaties - Art. 18.
CRA applies the two-step approach to entity classification to find that MRPS (Luxembourg hybrid instruments which are “very similar to traditional shares under Canadian business corporations statutes”) are equity
After having treated mandatorily redeemable preferred shares (“MRPS”) as equity in a number of rulings, CRA has now provided a detailed analysis in support of this characterization in an internal technical interpretation, so that the Canadian parent in question was entitled to treat MRPS distributions from two Luxcos as coming out of exempt surplus.
CRA indicated that the two-step approach to entity classification is “often of considerable assistance in characterizing foreign instruments,” stated that “the status of the MRPS under the governing corporate and commercial law is of critical importance to the analysis,” and noted that their “characteristics are very similar to traditional shares under Canadian business corporations statutes,” including that they were governed by articles of incorporation, ranked after debt in a bankruptcy, could only be redeemed from funds available for distribution under Luxembourg law or from the proceeds of a new share issuances and voted on corporate matters such as the election of directors (although being non-voting would not have established that they were not shares). CRA also stated:
The fact that the MRPS must be redeemed on or before a stipulated date does not detract from their character as shares.
CRA also did not profess any concern that the Canadian parent was obligated under a “Keep Well” agreement with one of the Luxcos to subscribe for ordinary shares if the Luxco had insufficient funds to redeem the MRPS at their maturity, and that if the MRPS for the other Luxco could not be redeemed at their full redemption price, the residual portion remained payable and bore interest.
Neal Armstrong Summaries of 2015-0604491I7 under s. 248(1) – share and s. 90(2).