News of Note
Humane Society – Federal Court of Appeal confirms revocation of registration of a charity whose recorded expenses included substantial personal expenditures
Email this ContentRyer JA found that "the obligation of a charitable organization to maintain adequate books and records is foundational" so that the mixing of substantial personal expenses of an officer into the recorded expenses of the organization was a reasonable basis for a decision to revoke its registration.
Neal Armstrong. Summaries of Humane Society of Canada for the Protection of Animals and the Environment v. M.N.R., 2015 FCA 178 under s. 168(1)(e), s. 172(3)(a.1) and s. 189(7).
Remtilla – Tax Court of Canada finds that a T1 adjustment request was a waiver keeping the year in question open
When the taxpayer realized a large loss from options trading in 2008, he decided to report it on income account and filed a T1 adjustment request for his smaller 2005 loss and 2006 and 2007 gains from option trading (previously reported on capital account) to be adjusted to income account. After negotiations, CRA assessed all the years as on income account. The taxpayer objected to the assessments of 2006 and 2007 as being statute-barred notwithstanding his agreement to this treatment in the settlement agreement with CRA.
V. Miller J. dislikes sharp practice. She found that the T1 adjustment request was itself a waiver that kept the 2006 and 2007 years open given that it together with the accompanying letter contained all the necessary information and that "a reasonable person observing Mr. Remtilla’s interactions with the CRA in 2009 and in 2012 would infer that he always intended the T1 Adjustment Requests to be acted upon."
Neal Armstrong. Summary of Remtilla v. The Queen, 2015 TCC 200, under s. 152(4)(a)(ii).
C.J. McCarty Inc. – Tax Curt of Canada finds that a CCPC providing the services of its engineer shareholder at an hourly rate to a single client over the course of a large project did not have a personal services business
A CCPC providing the engineering services of its principal employee to a single client at an hourly rate during the course of three successive consulting contracts with that client was found by Lyons J not to be carrying on a personal services business. Hourly rates were the norm in the industry, the client had very little control over how the engineer went about managing the project, in these instances he spent all his time for the one client because it was a big project, and he had risks (e.g., being sued).
This case will be welcomed in the oil patch (see Virji, Muirhead, see also Dynamic).
Neal Armstrong. Summary of C.J. McCarty Inc. v. The Queen, 2015 TCC 201 under s. 125(7) – personal services business.
CRA confirms that a subsequent spin-off by the “profitco” in a loss-shifting transaction will not prejudices the loss shifting rulings given
The mechanics described in a ruling letter for spinning off various business divisions of an indirect subsidiary of a public corporation to newly-incorporated sisters entail the ACB of the shares in the capital of spinner being split pro-rata with that of the spinees – rather than full ACB being generated in the shares of the spinees (see Hanneman). There is a representation that these transactions will not have any "material effect" on the trading price of the parent’s shares (as well as not being disclosed to any shareholder), which is a bit like saying the transactions are somewhat of a waste of time (or at least that the resulting business benefits will not be visible for quite some time).
The spinner was also the "profitco" in a loss shifting transaction for which a 2012 ruling letter was received. Those transactions are described as already having been completed (i.e., the set-up transactions but not the unwind?) CRA confirmed that the transactions described in the second ruling letter would not cause the 2012 rulings to cease to be binding, given that the subsequent transactions of spinner/profitco would occur on a tax-deferred basis and would not create new business activities.
Neal Armstrong. Summaries of 2015 Ruling 2014-0559181R3 under s. 55(3)(a) and s. 111(1)(a).
CRA indicates that a gain from a trust disposition of QSBC shares can be allocated to a subsequently-added beneficiary
Where a discretionary family trust realizes a capital gain from the disposition of qualified small business corporation shares, there is nothing to stop it from allocating that gain under ss. 104(21) and (21.1) to a beneficiary (e.g., a "new" spouse) who is not added as beneficiary until later in the year (or, it would seem, in a subsequent year if there is an earnout so that recognition of the gain is deferred).
Neal Armstrong. Summary of 23 June 2015 T.I. 2015-0571801E5 F under s. 104(21.2).
CRA will not allow a late PAS election even where the surplus balances in question change through reassessment
A Reg. 5901(2)(b) election, to have a dividend treated as paid out of pre-acquisition surplus, must be made by the filing-due date for the taxation year in question. But what if CRA subsequently assesses the year in question so as to change the relevant surplus balances? The answer is the same:
[C]onsidering…that…[Reg.] 600…provide[s] no discretion to the Minister to extend the time for making an election under paragraph 5901(2)(b)… there is no… statutory or administrative discretion available to the CRA… to allow the taxpayer to late-file any required election… .
Although there are uncertainties as to how to deal with the carryback to an earlier year of a foreign accrual capital loss that was realized in 2011 (i.e, a year ending after the effective date of the introduction of the FACL rules), "it is the CRA's current practice to generally not challenge FACL carrybacks that straddle August 19, 2011, provided there is no double use of any such loss."
Neal Armstrong. Summaries of 21 April 2015 Memo 2014-0560811I7 under Reg. 5901(2)(b), Reg. 5903.1(1) and Reg. 5907(1) – net earnings.
CRA finds that a foreign affiliate which earns deemed active business income under s. 95(2)(a) does not also carry on an active business
A U.S.-dollar liability owing to Canco by its foreign subsidiary ("FA") arose as a result of a capital reduction on the FA shares (i.e., the capital reduction was owed to Canco) – with that debt later settled at a loss to Canco and a gain to FA in terms of Canadian dollars. CRA found that s. 95(2)(i) did not apply to the settlement of the debt (to avoid FAPI to FA) on the ground that there were no "proceeds" to FA when the debt arose. It further noted that although essentially all the assets of FA gave rise to (deemed) active business income under s. 95(2)(a), FA did not satisfy the further requirement in s. 95(2)(i)(B) that it in fact be "carrying on" an active business.
Neal Armstrong. Summary of 27 April 2015 Memo 2014-0546641I7 under s. 95(2)(i).
CRA confirms that the FAPI of a widely-held non-resident unit trust which is majority-owned by an investment dealer or other FI generally must be computed under the mark-to-market rules
Where s. 94.2(2) deems a non-resident unit trust whose units are majority-owned by an investment dealer, or other taxpayer subject to the mark-to-market (or specified debt obligation) rules ("FI"), to be a controlled foreign affiliate of FI, then the CFA will itself generally be deemed to be a FI, so that in computing the foreign accrual property income of the CFA, the mark-to-market and SDO rules would apply. In commenting on this situation where the FI lacked the data to do this computation properly in Canadian dollars, CRA refused to provide any comfort that it would permit the use of a (rough and ready) "proxy" method.
Neal Armstrong. Summaries of 9 July 2015 T.I. 2013-0475421E5 under s. 142.2(1) – financial institution, s. 95(2)(f.14).
Coast Capital Savings Credit Union – Tax Court of Canada finds that “sham” is only a sword for CRA, not a shield for the taxpayer
The trustee of RRSPs was duped into purchasing shares of Canadian companies from offshore entities at a price substantially in excess of their value, so that funds of the RRSPs effectively were stripped to offshore accounts. The trustee sought to amend its Notice of Appeal, from an assessment for failure to withhold under s. 116(5), by adding an assertion that the purchase transactions were shams.
In denying this request, V. Miller J stated: "in a tax case, a court will make a finding of ‘sham’, only when it is the Minister who is deceived."
Neal Armstrong. Summaries of Coast Capital Savings Credit Union v. The Queen, 2015 TCC 195 under General Concepts – Sham and s. 116(5).
New s. 55(3)(a) requires that there be an outside basis reduction for a spinning-off corporation
The exemption under the proposed version of s. 55(3)(a) requires that the exempted dividends arise under s. 84(3) (or (2).) Accordingly, where an intermediate holding company (Holdco) wishes to have its subsidiary (Opco) spin off a business to another Holdco subsidiary (Newco), so that Opco starts off by selling that business to Newco for preferred shares and retracting those prefs for a note, it no longer is possible (even ignoring CRA’s traditional unfavourable policy) to complete the spin-off through Opco dividending the note to Holdco (so that there is no reduction in the ACB of the Opco shareholding) and Holdco contributing the note back to Newco in consideration for shares. Instead, in order to generate a s. 84(3) dividend, Opco can distribute the note to Holdco as redemption proceeds for a portion of the Opco shareholding, before that note is contributed to Newco. This will result in a pro rata reduction in the ACB of that shareholding in Opco. However, Holdco will have full basis for its shareholding in Newco (i.e., a cost equal to the net fair market value of the business transferred to Newco).
On the other hand, if butterfly-style mechanics instead were used to spin-off the business to Newco, the resulting ACB of Holdco’s Newco shareholding would be equal to a pro-rata portion of its previous ACB in the Opco shareholding. Accordingly, the first (note distribution and contribution) mechanics generally produce a better result.
Neal Armstrong. Summary of Carla Hanneman, "Reorganization Strategies for Proposed Paragraph 55(3)(a)", Canadian Tax Focus, Vol. 5, No. 3, August 2015, p.8 under s. 55(3)(a).