News of Note
Justice Rothstein notes that Backman limits to a certain extent the use of foreign law in Canadian tax cases
Email this ContentObservations of Marshall Rothstein, who retired from the bench on August 31, 2015, on practices in the Supreme Court of Canada include:
- “The Supreme Court has indicated a willingness to depart from its own precedent where a new legal issue has been raised or where there has been a change in the facts that ‘fundamentally shifts the parameters of the debate.’”
- Signing of judgments by “The Court” as “a rule of thumb..is reserved for controversial cases of significant public importance” (e.g., assisted dying, medicinal pot).
- On rare occasions, the Court will order oral argument on leave applications, as was done in Daishowa-Marubeni, where counsel were told they were to focus on two specific issues.
- Reasons for considering foreign judgments in Treaty interpretation cases include looking to “the effects of a particular rule in action in considering the merit of arguments about likely consequences.”
- In Backman:
The Court wrote that if a partnership wants to deduct losses under Canadian law, it must satisfy the elements of a partnership under Canadian law. This precedent limits to a certain extent the use of foreign law in Canadian tax cases.
- “The judges...will not engage in blogging” [or other disreputable conduct].
Neal Armstrong. Summaries of Justice Marshall Rothstein, "An Overview of the Supreme Court of Canada," Bulletin for International Taxation (IBFD), January/February 2016, p. 20 under General Concepts – Stare decisis, Supreme Court Act, s. 40(1), Treaties – General, s. 96, s. 247(2) and s. 248(10).
CRA recognizes that a trust preserved s. 92(1) basis in shares of a CFA when it transitioned from old to new s. 94 trust rules
Where in its pre-2007 years a non-resident discretionary trust recognized FAPI under “old” s. 94(1)(c)(i)(C) from a CFA and then received a dividend from the CFA in 2007 while it was subject to “new” s. 94(3), CRA would recognize that the upward ACB adjustment to the CFA shares that occurred as a result of the FAPI recognized under the old rule could now be considered to be distributed under s. 91(5) notwithstanding the trust’s new status.
Neal Armstrong. Summary of 16 November 2015 Memorandum 2015-0598491I7 under s. 91(5).
Lee – Federal Court of Appeal states that non-judicially authorized requirements made under s. 231.2(1) can be used to obtain documents about third parties
Mandamin J in the Federal Court appears to have interpreted a requirement issued to the individual taxpayer under s. 231.2(1) as potentially asking him to include documentation about assets of corporations of which he was the principal shareholder “that he would only have access to in his capacity as a director or officer of the corporations.” He considered this to be objectionable, perhaps because it looked rather like a disguised third-party demand but without advance judicial authorization (and without the corporations being specifically named, as required by s. 231.2(2)).
Dawson J.A. did not share these concerns, stating:
[T]he scope or breadth of the Requirement is a matter for the Minister, so long as the information requested is required for any purpose related to the administration or enforcement of the Act. Moreover, it is not improper for a requirement to issue that requires information to be provided about a third party.
Neal Armstrong. Summary of MNR v. Lee, 2016 FCA 53 under s. 231.2(1).
Weinberg Family Trust – Tax Court of Canada states that it lacks jurisdiction to reverse a provincial gross negligence penalty
V. Miller, J stated emphatically that the Tax Court did not have the jurisdiction to consider an appeal by a purported Alberta trust which had been assessed by CRA for Ontario income tax (on the basis of being resident in Ontario) as well as for Ontario gross negligence penalties.
This case is unusual in that there was no federal tax or penalty at issue (and the Ontario issues were appealed simultaneously in the appropriate Ontario court). However, it suggests that when taxpayers in agreeing provinces appeal federal penalties, they may have to file protective appeals of any corresponding provincial penalty.
Neal Armstrong. Summary of Weinberg Family Trust v. The Queen, 2016 TCC 37 under Taxation Act, 2007 s. 125(2).
Teranet - Tax Court of Canada orders E&Y to explain why it considered a 9.75% interest rate in the Teranet income fund structure to be reasonable
The conversion of Teranet to an income fund resulted in the operating corporation owing $1.23B of unsecured notes indirectly to the income fund. CRA reassessed to reduce the interest deduction on the notes from 9.75% to 5.45%.
On discovery, the Crown asked various questions - respecting how the interest rate was determined, and the rationale behind the structuring of the particular reorganization steps - of the Teranet CFO, who indicated he could not answer because no one remained at Teranet who had been involved in the reorganization.
V. Miller, J. found that, in these circumstances, it was appropriate to grant the Crown leave to examine a knowledgeable representative of the accounting firm (E&Y) that had prepared a study before the reorganization in support of the reasonableness of the interest rate chosen, and of a second accounting firm (Deloitte) which had been involved in structuring the transactions. She also ordered that “both EY and Deloitte will produce documents in its control which are relevant to the issues in this appeal.”
Neal Armstrong. Summary of Teranet Inc. v. The Queen, 2016 TCC 42 under Tax Court Rules, s. 99(2).
Income Tax Severed Letters 24 February 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Canadian Forest Navigation – Tax Court finds that foreign rectification orders are not binding on the Tax Court (but can be given weight)
After receiving dividends from Barbados and Cyprus subsidiaries, a Quebec company responded to reassessments of the dividends by obtaining rectification orders from the applicable Barbados and Cyprus courts declaring that the amounts instead were loans to it. In response to a question to this effect posed under Rule 58, Lamarre ACJ found that the federal Crown “is not bound by the foreign judgments since they have not been recognized in Canada by a court of competent jurisdiction, and therefore [the Crown] is not precluded from taking the position at trial that the [taxpayer] received dividends, rather than…loans.”
She also stated that “it will be up to the presiding judge to determine the weight to be given to the Foreign Judgments when ruling on the correctness or incorrectness of the assessments being appealed.”
Neal Armstrong. Summary of Canadian Forest Navigation Co. Ltd. v. The Queen, 2016 TCC 43 under General Concepts – Rectification.
CRA indicates that it will not double-count shares in applying the s. 256(1.3) share re-attribution rule to shares deemed to be owned by minor trust beneficiaries
Father and Mother each hold 80 shares of Newco and Opco, respectively, and two discretionary trusts, with their three minor children as beneficiaries, hold 20 shares, respectively, of Newco and Opco. S. 256(1.2)(f)(ii) would deem, say, the eldest child to own the 20 share bloc in each corporation and that bloc of shares would then be re-attributed to a parent under s. 256(1.3), so that Newco would be deemed to be owned as to 80 and 20 shares by Father and Mother, respectively, and Opco would be deemed to be owned as to 80 and 20 shares by Mother and Father, respectively.
If the same process were repeated for the other two children, the deemed cross-shareholdings would be increased to 60 shares for each corporation. However, CRA will not do this, stating that the shares “would not be counted two or more times.” Consequently, as the cross-shareholdings would be under 25%, Newco and Opco would not be associated.
Neal Armstrong. Summary of 8 December 2015 T.I. 2015-0608781E5 F under s. 256(1.2)(f)(ii).
CRA considers that a pipeline transaction can be coupled with a butterfly split-up
CRA favourably addressed whether the application of deemed dividend treatment under s. 84(2) would still be avoided if, during the second year of conventional pipeline transactions, the Newco was split between the estate beneficiaries under a butterfly reorg. CRA considered these transactions:
- The shares of the opco (“Corporation 1”), whose ACB was stepped up on death, are sold by the estate to its newly-incorporated “Corporation 2” for high-PUC prefs (rather than the more usual note);
- after the wind-up of Corporation 2 into Corporation 1 a year later under s. 88(1), the shares (both common and pref) of Corporation 1 are distributed to the two beneficiaries;
- two months later, there is a split-up butterfly of Corporation 2 between the two newcos (Corporations 3 and 4) of the two beneficiaries, so that Corporations 3 and 4 between them continue to carry on the business which previously was carried on by Corporations 1 and 2. In the meantime during the year following the winding up of Corporation 1, there is no bulk redemption (“rachat massif”) of the prefs of Corporation 2 or the successor prefs of Corporations 3 and 4.
CRA concluded:
[W]e could accept, in such a case, that the beneficiaries of the estate would not receive the property or funds of Corporation 1, in any manner whatever, on the winding-up, discontinuance or reorganization of the business of Corporation 1 and that what they received came instead from Corporation 2, or Corporations 3 or 4. In such circumstances, subsection 84(2) would not apply.
CRA considered that there was nothing inherent in these bare-bone transactions that would necessarily preclude the butterfly exemption from being potentially available. In particular, there was nothing especially problematic about both Corporations 1 and 2 being distributing corporations for purposes of s. 55(3.1)(b). (Only Corporation 2 would be a distributing corporation for purposes of ss. 55(3.1)(a) , (c) and (d).)
Neal Armstrong. Summaries of 22 January 2016 T.I. 2015-0617601E5 F under s. 84(2), s. 55(3.1)(b).
CRA considers that an Opco dividend to Holdco whose sole purpose is creditor-proofing is subject to s. 55(2)
CRA was asked whether the draft s. 55(2) rules would apply, where in order to “shelter” the assets of a construction company, the company dividends its retained earnings to its holding company shareholder with the money being lent back to it. This was different from a similar question posed two times previously (2015 APFF RT, Q. 12 and 2015 CTF RT, Q. 6(e)), as there was a more emphatic assumption that the sole purpose of the dividend was creditor-proofing.
No matter. After questioning, then accepting for discussion purposes, a dubious assumption that the shares in the oeprating company had no safe income on hand, CRA indicated that the amount of the dividend would be deemed to be a capital gain, as it considered that the purpose of the transactions was “to secure those [construction business] assets by diminishing the total value of the operating corporation and augmenting the value of its shareholder (the holding company).”
Neal Armstrong. Summary of 21 December 2015 T.I. 2015-0617731E5 F under s. 55(2.1)(b).