News of Note
1455257 Ontario – Tax Court of Canada finds that a dissolved corporation must be revived before pursuing an appeal
Email this Content242(1)(b) of the OBCA provides that an action may be brought against a dissolved corporation "as if the corporation had not been dissolved." It arguably is implicit that the dissolved corporation also has the right to defend itself – and, in fact, the Federal Court in 460354 and the Federal Court of Appeal in 495187 (a.k.a. Sarraf) found that a dissolved corporation can appeal to the Tax Court.
Lyons J disagreed, and preferred to follow Webb J (as he then was) in GMC in finding that, in order for a dissolved corporation to appeal an assessment, it must be revived. She gave the dissolved corporation, which was (so to speak) before her after filing an appeal, 60 days to revive itself.
Neal Armstrong. Summary of 1455257 Ontario Inc. v. The Queen under Business Corporations Act (Ontario), s. 242.
The requirement to repay an upstream loan, and the effect of a blocking deficit in a top-tier FA, can result in anomalous income inclusions
The only permanent way of eliminating an upstream loan made by FA, the non-resident subsidiary of Canco, is repaying it. Other situations in which it would be appropriate to offset the income inclusion to Canco under s. 90(6) are not addressed, for example:
- Canco sells FA, which has made a loan to Canco’s non-resident parent, to that parent (so that the loan proceeds effectively have been repatriated to Canco on a taxable basis);
- FA sells the loan (without novation) to a Canadian subsidiary of Canco; and
- Canco acquires all the shares of its non-resident sister to which FA had made the loan, so that the loan is now owing between two controlled foreign affiliates of Canco.
The notional deduction for pre-acquisition surplus dividends under s. 90(9)(a)(i)(D) is limited to the adjusted cost base of Canco’s shares in FA, so that there is no ability to create a negative ACB gain under s. 40(3) that can then be eliminated through a s. 93(1) election so as to access exempt surplus of a non-resident subsidiary of FA. Accordingly, a small exempt deficit in FA, the top-tier foreign affiliate, may result in an income inclusion under the upstream loan rules even in situations where a series of dividends could have been paid free of Canadian tax due to large exempt surplus balances lower in the chain. Furthermore, the deficit can have the same blocking effect on multiple upstream loans.
Neal Armstrong. Summaries of Ian Bradley, Marianne Thompson, and Ken J. Buttenham, "Recommended Amendments to the Upstream Loan Rules", Canadian Tax Journal, (2015) 63:1, 245-67 under s. 90(14) and s. 90(9).
CRA substantially revises and expands its Bulletin on deductibility of fines and penalties
New (or differently expressed) points (as compared to IT-104R3) in CRA’s Folio on the deductibility of fines and penalties include:
- CRA generally will follow the characterization of amounts required to be paid under another statute, so that if they are not treated there as a fine or penalty, e.g., the purchase price of carbon offset credits, their deductibility will not be denied under s. 67.6.
- "[A] fine or penalty incurred in relation to a transaction that is outside the scope of a taxpayer’s normal business activities should not be included in the computation of profit from that business for purposes of subsection 9(1)."
- Following CIBC, the morality of a taxpayer’s conduct is not irrelevant to the deductibility of its expenses.
- In addition, it also is irrelevant if the fine or penalty was deliberately incurred, it was incurred as a result of egregious or repulsive conduct or its deduction would be contrary to public policy.
- CRA has carried forward the statements in IT-104R3 that fines or penalties incurred to acquire inventory, depreciable property or eligible capital property can be treated as expenditures on those items, without qualifying these statements by reference to the subsequently-enacted s. 67.6. The implication may be that fines or penalties whose deduction otherwise would be prohibited by s. 67.6 may be indirectly deducted by this route.
- Ss. 18(1)(t) and 67.6 do not prohibit the deduction of interest charges imposed under commodity tax statutes. However, provincial and foreign income taxes are non-deductible under general principles (unless allowed under ss. 20(11) to (12.1).)
- A deduction for a prepayment penalty under s. 18(9.1) for a taxation year ending after the prepayment is limited to the amount of the prepayment that reasonably relates to the value of the interest that otherwise would have been payable in that year as measured at the time of the prepayment. This amount may be determined using a straight line or present value method. (I don’t know whether the lack of a numerical example reflects embarrassment about the oddness of using a straight line method, diffidence about discussing what discount rate to use or sloth.)
Neal Armstrong. Summaries of S4-F2-C1: "Deductibility of Fines and Penalties" under s. 67.6, s. 18(1)(a) – income-producing purpose, s. 18(9.1), s. 13(21) – undepreciated capital cost – A, s. 10(1), s. 14(5) – eligible capital property, s. 18(1)(t).
Hill Fai Investments – Tax Court of Canada decision indicates that the record retention period for tax basis information does not start running until the last claim for that basis is made
Subject to other more specific rules, s. 230(4) requires a taxpayer to keep books and records until the expiration of six years from the end of the last taxation year to which they "relate." The six-year period starts running from the end of the year in which the relevant claim was made rather than from when the relevant cost arose so that, for example, if the taxpayer (as in this case) had claimed a bad debt deduction under s. 50, the six-year period starts running from the end of the year for which the claim is made rather than the year the advance in question was made.
This of course means that documentation supporting tax basis may have to be retained for decades.
Neal Armstrong. Summary of Hill Fai Investments Ltd. v. The Queen, 2015 TCC 167 under s. 230(4).
Pendragon - UK Supreme Court finds that a scheme, which exploited a VAT rule intended to avoid double-taxation so as to avoid a single level of tax, was abusive
The Pendragon Group used a scheme, which KPMG had designed to exploit a special VAT "margin" rule applicable to sales of second-hand goods, so that VAT was only applicable to its profit margin over the cars’ cost when it resold demonstrator cars, rather than on the full sale price.
Halifax plc v CEC, [2006] EUECJ C-255/02 had established that under the VAT abuse-of-law doctrine, an abuse can be found if "the transactions concerned, notwithstanding formal application of the [detailed provisions]…result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions," and it is "apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage."
After noting that the VAT "broad principle is that tax on the ultimate value of the product is levied only once," Lord Sumption found that "the effect of the KPMG scheme was to enable the Pendragon Group to sell demonstrator cars second-hand under the margin scheme in circumstances where VAT had not only been previously charged but fully recovered…[so that a] system designed to prevent double taxation on the consideration for goods has been exploited so as to prevent any taxation on the consideration at all." The scheme failed.
Given the significance accorded in both Halifax, and across the ocean in Canada Trust, Lipson and Copthorne, to the purpose of the legislative provisions which have allegedly been abused, and the potential persuasiveness of an argument that the scheme of the GST legislation, like that of the VAT, is to impose a single level of tax from lumberjack to bed frame sale, Pendragon potentially may provide support for considering that transactions of Canadian registrants, which are crafted to result in net GST being imposed (at whatever stage) on less than all of the commercially-added value respecting a good or service which ultimately is consumed, are abusive under GAAR.
Neal Armstrong. Summary of HMRC v Pendragon plc, [2015] UKSC 37 under ETA, s. 274(4).
CRA confirms that the amended TFSA “advantage” definition still does not accommodate estate-freeze style transactions
In 2009-0320311I7 and ITTN, No. 44, CRA concluded that where common shares of a company are issued to a TFSA of a key employee as part of a freeze, it will consider subsequent increases in those shares’ fair market value to be an "advantage" as defined in s. 207.01(1), so that there will be taxable benefits to the employee. CRA has now confirmed that an amendment effective March 23, 2011, which narrowed this definition somewhat by replacing a reference to "open market" with "normal commercial or investment context," has not changed this position.
Neal Armstrong. Summary of 28 May 2015 T.I. 2015-0574481E5 under s. 207.01(1) – Advantage.
CRA considers that s. 7 can apply to a bona fide sale to an employee of a share investment in a subsidiary
CRA considers that where Holdco sells a portion of its investment in the shares of Opco to an Opco employee at a sale price that is intended to represent fair market value, the s. 7 rules will apply, so that if CRA treats the fair market value as being higher, it will compute a s. 7 benefit.
Neal Armstrong. Summary of 1 June 2015 T.I. 2015-0581311E5 under s. 7(1)(a).
CRA appears to imply that a “bad” (offside s. 7(1.4)) option exchange merely accelerates tax rather than resulting in double taxation [corrected]
To use illustrative numbers that were not provided in the question posed or CRA response, s. 7 stock options of an employee on Target shares with an in-the-money value of $100,000 are exchanged for options on Buyer’s shares with an in-the-money value of $101,000 (rather than $100,000) so that the continuity rule in s. 7(1.4) does not apply. If the employee subsequently surrenders her new options to Buyer for $110,000, is her s. 7(1)(b) benefit $110,000 – or is it $10,000 on the basis that the $100,000 value of the exchanged old options qualifies as "the amount…paid by the employee to acquire those [surrendered] rights"?
CRA appears not to have answered this question directly, but instead indicated that there is a s. 7(1)(b) benefit realized on the "exchange" of the old options for the new options– which is not reduced by their value at the time of the exchange. (A previous version of this post, where I thought the CRA answer was in response to the question which likely was posed, may be misleading.) However, CRA finishes with a cryptic statement that "the new options acquired as a result of the exchange will have a cost equal to the value of the exchanged options at the time of the exchange." This could be interpreted as an affirmative response to the above question.
Accordingly, to return to the illustrative numbers, the employee would realize a $101,000 s. 7(1)(b) benefit on the bad stock option exchange (even though in fact the old options likely were surrendered to Target for nil consideration), and might realize a further benefit of $10,000 rather than $110,000 on the subsequent surrender of her new options – on the basis that her "cost" of $100,000 reduces her second s. 7(1)(b) benefit, as suggested in the question posed. If there is no such reduction, there is double taxation, and the cryptic reference to cost makes no sense.
Neal Armstrong. Summary of 13 May 2015 T.I. 2015-0570801E5 under s. 7(1)(b).
CRA confirms that the shareholder of a s. 149(1)(o.2) corporation can be a trust with a single pension plan beneficiary
The permissible shareholders of a s. 149(1)(o.2) (exempt) corporation are described in s. 149(1)(o.2)(iv) and Reg. 4802. For example, s. 149(1)(o.2)(iv)(B) refers to "one or more trusts all the beneficiaries of which are registered pension plans." In light of s. 33(2) of the Interpretation Act (words in the plural include the singular), CRA considers that s. 149(1)(o.2)(iv)(B) will be satisfied where the shareholder is a trust with a single registered pension plan beneficiary. CRA also takes the same approach to other branches of the s. 149(1)(o.2)(iv) rule, where essentially the same point arises.
Neal Armstrong. Summary of 28 May 2015 T.I 2015-0582901E5 under s. 149(1)(o.2)(iv).
Income Tax Severed Letters 8 July 2015
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.