News of Note

CRA considered that a lump sum payment received from a major supplier for signing a 15-year “supplier loyalty agreement” would be includible in income when received under s. 56.4(2) on the grounds that the loyalty covenant was intended to restrict the way in which the taxpayer made its purchases (i.e., it was in respect of a “restrictive covenant”) – or, failing that, it would be included in the taxpayer’s income as an inducement under s. 12(1)(x). Either way, CRA considered that spreading the income inclusion over the 15-year term consistently with the accounting treatment “would be inconsistent with the provisions of the Act” (and added an inexplicable reference to this being prohibited by s. 18(1)(e), presumably for some reason other than basic confusion as to the difference between the issues of income and expense recognition).

CRA did not discuss Doteasy, which confirmed that Ellis Vision had found that "the paragraph 20(1)(m) reserve was available even though the amount might be included in income under [another section] so long as it was described in paragraph 12(1)(a)." Thus, provided the agreement to be loyal for the average length of a marriage is considered to be on account of future services, the s. 20(1)(m) reserve should be available even if the consideration is considered to be included in income under s. 56.4(2).

Neal Armstrong. Summaries of 2015-0618601E5 under s. 56.4(2), s. 12(1)(x) and s. 20(1)(m).

The position that a Canadian individual residing outside Quebec could generate a credit for at least the cash portion of his “donations” made as part of a leveraged donation tax shelter was buttressed in his pleadings by advancing the proposition that Parliament did not intend for split gifts to receive significantly different treatment in the rest of Canada as contrasted to Quebec (where split gifts were accepted in the Civil Code) even before the introduction of the split gift rules in the Act effective after 2002.

In accepting a submission that these pleadings should not be struck, Noël JA stated that “it cannot be said with certainty that the meaning of ‘gift’ prior to the [December 31] 2002 amendments excluded the notion of split gift in the common law provinces,” and that “it would have been open to Parliament to attribute to the word gift a meaning which coincides with the civil law and...it is arguable that this is what Parliament intended.” In other instances where there are apparent differences in the common law and civil law concepts, it may also be appropriate to consider that Parliament would likely not have intended differing tax results based on which provincial law applies.

Neal Armstrong. Summary of French v. The Queen, 2016 FCA 64 under s. 118.1(1) - Total Charitable Gifts and Interpretation Act, s. 8.1.

In order to avoid most of the B.C. capital gains tax otherwise applicable to a share sale which closed in July 2002, the B.C. shareholders rolled their shares into a Newco (“Veracity”), which had a taxation year ending on August 31, 2002 for Quebec taxation purposes, and a taxation year ending on June 30, 2003 for federal and B.C. purposes. In order that 100% of the taxable capital gain would be allocated to B.C. for Quebec purposes, small directors’ fees were paid to B.C. directors in July 2002 (i.e., before the August 31, 2002 Quebec year end). In order that 90% of the taxable capital gain would be allocated to Quebec for B.C. purposes, Veracity purchased units of a listed limited partnership with a September 30 year end, so that as at September 30, 2002 (i.e., after the Quebec year end) a pro rata portion of the gross revenues and salary expense of the LP would be allocated to Veracity qua unitholder.

In affirming CRA’s assessment to apply the B.C. GAAR to allocate 100% of the taxable capital gain to B.C., Macintosh J found that although the LP units purchased were “a reasonable, stand-alone investment,” the targeted tax savings were five-times the investment return on the LP units, and the units were purchased primarily for the purposes of these “Quebec Year-end shuffle” transactions. The transactions also were “abusive of the inter-provincial income allocation provisions,” whose allocation formula is “designed to prevent both the over-taxation and the under-taxation of income earned by a corporation which is active in more than one province.”

Quite interestingly, he also found that the choice of differing year ends represented additional avoidance “transactions,” and that the transfer of the shares under s. 85(1) into Veracity was an abuse of s. 85(1) as this “allowed for the absolute avoidance of B.C. tax, not simply a deferral under s. 85.”

Neal Armstrong. Summaries of Veracity Capital Corporation v. M.N.R., 2015 BCSC 2278 under s. 245(3), s. 245(4).

The operation of the source deduction rules can be affected by whether an employee is considered to “report for work” at an actual establishment of the employer as per Reg. 102(1), or whether the employee is deemed by 100(4) to report for work at the establishment of the employer from which the remuneration is paid. In this regard, CRA considers that:

Generally… a presence on a weekly basis at the establishment of the employer, for a duration of the equivalent of a typical day’s work of the employee in fulfilling the employee’s normal workload, is sufficient to lead to a conclusion that the employee reports to work there.

Conversely “a telecommuter with a home office would not be considered to be reporting to work at an establishment of the employer when exercising his or her functions.”

Neal Armstrong. Summary of 4 February 2016 Memorandum 2015-0620821I7 F under Reg. 102(1).