News of Note
CRA has published its Communiqué on “Obtaining Information for Audit Purposes” including tax accrual working papers and CRA’s interpretation of BP.
It was drafted before the Cameco decision was affirmed in the FCA. CRA states that “Pending a final decision in this case, CRA officials can continue to … request that individuals be interviewed.”
CRA considers that tax accrual working papers, “particularly the list of uncertain tax positions,” can be requested “where CRA officials determine there is a higher risk of non-compliance” – and the Communiqué states that “A taxpayer with large unexplained tax reserves may be considered to be at a higher risk of non-compliance.”
CRA also states:
The taxpayer’s list of uncertain tax positions that relates to the tax reserve in their financial statements is not a privileged document. …
Provided all the relevant facts of the transactions are disclosed, including the taxpayer's purpose or purposes in undertaking a transaction or series of transactions, exclusions of their advisors’ analysis of the legal and tax effects of the transactions may be accommodated.
The CRA’s position is that taxpayers are required to disclose sufficient detail regarding their business and tax transactions for the CRA to fulfill its mandate of assessing taxes owing. Where the criteria outlined in the communiqué are met, the CRA considers that it retains the right to request tax accrual working papers, including a list of uncertain tax positions. A request for the taxpayer’s list of uncertain tax positions in these circumstances is not a request that the taxpayer self-audit.
Neal Armstrong. Summary of AD-19-02 Obtaining Information for Audit Purposes 2019-03-21 under s. 231.1(1)(a).
CRA has published a table indicating the classification of various categories of pre-mining expenditures as Canadian exploration expense, Canadian development expense, deductible expense under s. 9, Class 41 or 41.2 (or other) depreciable property, or “eligible capital expenditure” (i.e., Class 14.1 property).
In addition to the most obvious items, CEE includes:
- environmental studies and community consultation
- sampling - generally only up to decision to bring the mine into production, but also where done to expand the mineral resource (but not where done for technical feasibility purposes)
- bulk sampling (in reasonable sizes)
- mineralogical analysis and laboratory testing of drilling cores
- resource estimation and deposit delineation
- deposit modelling and determination of cut-off grade
- testing of host rock stability, and testing of ore dilution and breakability
- metallurgical testing if for determining whether separation of pay metals is feasible (but not for determining the optimal method of separation)
Rio Tinto found that expenditures incurred determining whether to proceed with an acquisition on capital account are currently deductible. Although not framed in those terms, CRA has essentially applied the Rio Tinto approach to finding that the costs of mine design and development studies (including those of evaluation of different technically feasible options for processing the ore) are currently deductible under s. 9 (but not as CEE) to the extent that they are incurred before the decision is made to bring the mine into production. (See also 2014-0520941E5 F.)
Neal Armstrong. Summary of 21 February 2019 Internal T.I. 2019-0796791I7 under s. 66.1(6) – CEE – para. (f).
CRA finds that a subsequent year’s payment of a pension benefit to a previously-unidentified beneficiary is only income in that year under s. 56(1)(a)(i) as an “in lieu of” pension amount
A survivor benefit under a registered pension plan (“RPP”) is paid in a taxation year to the Quebec Unclaimed Property Directorate pursuant to the Quebec Unclaimed Property Act because the person entitled thereto (the “right-holder”) has not been determined. That person, when subsequently identified, receives from the Directorate the net amount that the Directorate, in turn, had received from the RPP (i.e., the survivor benefit payable under the RPP (as reduced by income tax source deductions) is paid by the Directorate to the right-holder, as further reduced by its administration fee.
CRA indicated that the amount to be included under s. 56(1)(a)(i) in the right-holder’s income is the gross amount of the survivor benefit payable under the RPP, as indicated in the T4A slip issued by the RPP administrator, which should be included for the taxation year in which the Directorate transferred that amount to the right-holder. Its reasoning was that the amount could not be considered to be “received” as a pension benefit in the year of payment by the RPP administrator to the Directorate because the right-holder had not yet been identified – whereas in the subsequent year of payment over by the Directorate to the right-holder, that right-holder is receiving that amount under s. 56(1)(a)(i) as being “in lieu of” a superannuation or pension benefit.
CRA also indicated that where the right-holder is an estate, it should include the survivor benefit under s. 56(1)(a)(i) in computing its income for the year of receipt – but with a deduction to it and an inclusion to its beneficiaries being applicable where those amounts are distributed in accordance with the usual ss. 104(6), (13) and (24) rules. However, where the administration of the estate has been completed prior to the Directorate being in a position to pay the amount, CRA accepts that an estate beneficiary directly includes the amount under subparagraph 56(1)(a)(i) in computing his or her income.
Samaroo – malicious prosecution claim against CRA founders in B.C. Court of Appeal for failure to establish absence of “reasonable and probable cause”
The Samaroos were acquitted in 2011 on all counts of tax evasion respecting their having allegedly skimmed $1.7 million in cash from the restaurant operations of their corporation. In 2018, they were awarded damages (including $750,000 in punitive damages) by the B.C. Supreme Court in an action brought by them against CRA for malicious prosecution and breaching their s. 7 Charter rights.
This decision has now been reversed by the B.C. Court of Appeal. One of the requirements for finding malicious prosecution was that “the prosecution was undertaken without reasonable and probable cause.” Although CRA had suspected that the Samaroos had failed to provide the “till tapes” for one of the daily shifts to the corporate bookkeeper, Harris JA indicated that the trial judge had erred in considering “proof of the till tape theory, a particular scheme, as essential to proving the actus reus” of the alleged s. 239(1)(d) offence - whereas, in fact:
[T]he actus reus of the offence does not depend on proof of any particular method by which taxable income is not reported. What matters is the fact that taxable income is intentionally not reported. The existence of unreported taxable income does not necessarily require proof of how it is hidden or disguised.
As the “Samaroos failed to prove an absence of reasonable and probable cause to initiate and continue the prosecution,” their appeal was dismissed.
Neal Armstrong. Summary of Samaroo v. Canada Revenue Agency, 2019 BCCA 113 under General Concepts – Malicious Prosecution.
ETA s. 141.02 provides somewhat detailed guidance on the need for financial institutions to consistently apply acceptable methodologies for determining their entitlement to input tax credits for GST/HST on their inputs. Comments of CRA included that:
- Most inputs are likely to be allocable as “exclusive” or “direct” inputs rather than being “non-attributable” inputs.
- Direct tracking of inputs should be used where possible rather than “causal allocation,” i.e., using a systematic methodology to approximate the use of inputs.
- Generally, the categorization and allocation of business inputs must be done on an input-by-input basis and not based on “cost pools” of business inputs. The latter “are only appropriate where the use of grouping or pooling of business inputs results in the same ITC allocation result as would be arrived at if each business input was allocated without the use of pooling.”.
Neal Armstrong. Summary of 26 September 2018 Interpretation 167875 under s. 141.02(12).
An engineering firm engaged in a project to develop its web‑based system using algorithms and GPS data to provide accurate real‑time data for predicting the arrival time of public transit buses.
In the course of finding that the firm satisfied the five-factor test in Northwest Hydraulic as to what was SR&ED, Smith J noted that the hypothesis that was tested was whether “autonomous distributed computing systems based on general purposes computing units [can] be effectively deployed in order to provide accurate real‑time status information … in a real world transit system,” and stated:
There is necessarily a fine line between a “technological advancement” or “incremental improvements” to existing materials, devices, products or processes. This suggests that the Appellant need not prove that its activities were novel, but rather that there were incremental improvements to existing technology.
Neal Armstrong. Summary of CRL Engineering Ltd. v. The Queen, 2019 TCC 65 under s. 248(1) - SR&ED.
Vinet – Quebec Court of Appeal affirms that the activities of an individual were as president of the general partner rather than on behalf of the LP for s. 96(2.4)(a) purposes
An individual, who was the sole limited partner of a Quebec limited partnership (“SEC”) that owned and operated multiple farms, and the president of its general partner, argued that he was not a limited partner under the Quebec equivalent of ITA s. 96(2.4)(a), so that he could deduct his share of a substantial loss of the LP. He relied in this regard on s. 2244 of the Civil Code, which provided that a limited partner “may not negotiate any business on behalf of the partnership or act as mandatary or agent for the partnership,” and pointed to his involvement in the business of the LP including negotiating with suppliers and making various purchases.
The Court of Appeal found no error in the findings of Breault JCQ below in connection with confirming the ARQ’s application of the s. 96(2.4)(a) equivalent, including that the identified activities of the individual in relation to SEC were “more linked to his role as mandatary or representative of the general partner” rather than of SEC, so that he had limited liability.
Neal Armstrong Summary of Vinet v. Agence du revenu du Québec, 2019 QCCA 574 under s. 96(2.4)(a).
Sunshine Coach – Tax Court of Canada finds that Alberta bus tours were separate from international flights for ETA zero-rating purposes
ETA Sched. VI., Pt. VII, s. 3 provides for zero-rating of transportation services where the services are part of a “continuous journey” that includes air transportation, and either the origin or termination of the journey or a stopover respecting that journey are outside Canada and, in a subset of situations, also outside North America. In finding that the Canadian transportation services of a Calgary-based tour operator were not part of a “continuous journey” that included internationalflights, so that s. 3 zero-rating was not available, Campbell J noted that the bus tickets issued by the Appellant did not include the airline tickets that international passengers used to travel into and out of Canada, nor did booking companies through which some passengers arranged travel act as agents of the bus operator.
Savics – Tax Court of Canada infers that a settlement agreement referring to partnership loss allocations included partnership gains allocations
The taxpayer was allocated losses for the initial years of his membership of three LPs and income-account gains for a subsequent year. CRA initially reassessed to deny both the taxpayer’s allocated losses and to reverse the subsequent year’s gains allocation on the basis that the LPs did not exist (i.e., on the basis that the partners were not carrying on business in common with a view to profit). A subsequent settlement agreement provided for the reinstatement of much of the losses but was silent on the treatment of the gains (although it did reference an ability of CRA to reassess to make “consequential” adjustments).
In agreeing to the settlement, the taxpayer provided a waiver of any right of appeal of an implementing assessment. Sommerfeldt J indicated that “if a settlement-implementing reassessment is not in keeping with the agreement that the taxpayer and the fiscal authority have reached, a waiver of the right to appeal will not preclude the taxpayer from appealing in respect of the aspect of the reassessment that does not coincide with the settlement agreement.”
However, he went on to find that it accorded with the settlement agreement for CRA, in its reassessments to implement the agreement, to reinclude the subsequent year’s gains in the taxpayer’s income. The settlement agreement was based on the premise that the LPs existed after all, and the gains inclusions reassessed by CRA were “consequential” on this premise. Furthermore, implementing a settlement agreement that was based on the proposition that a partner was to be allocated his share of the LP losses, but not gains, would have violated the Galway principle, which “precludes a taxpayer and the Crown from arriving at a settlement that has no basis in the ITA.”
Neal Armstrong. Summary of Savics v. The Queen, 2019 TCC 71 under s. 169(3).