News of Note
568864 B.C. [Woodtone] – Tax Court of Canada decision confirms that a loan loss that is converted to an accrued terminal loss under s. 79.1(6) potentially can be deducted when realized
Email this ContentThe taxpayer, a board producer, lent $3.5 million to a supplier secured by a security interest on patents held by the supplier's shareholder. On bankruptcy of the supplier and its shareholder, the trustee in bankruptcy assigned the beneficial (but not registered) ownership of the patents to the taxpayer, so that the taxpayer was deemed by s. 79.1(6) to have acquired them at a cost of $3.9 million (including legals) notwithstanding that their fair market value could have been much less.
Rip J found that the taxpayer realized a $3.9 million terminal loss two years later when it sold the beneficial interest in the patents to a related corporation for $1. Unsuccessful attempts to find a joint venture party to exploit the patents were sufficient corroboration that the patents had been acquired for an income-producing purpose. The effect was that the taxpayer deducted its loan loss on income account.
Neal Armstrong. Summaries of 568864 B.C. Ltd. v. The Queen, 2014 TCC 373 under s. 79.1(2) and Reg. 1102(1)(c).
Szymczyk – Tax Court of Canada finds that CRA is entitled to apply provisions with “latitude” rather than strictly
General Motors of Canada received an authorization from the Revenue Canada Collections Division in 1982 to use a simplified rule-of-thumb method for computing the employment benefit arising from the provision of new vehicles for personal and business use of management employees and its payment of the operating expenses. This helped address the difficulty of accounting for the benefits based on the large number of participating employees, the rapid turnover of vehicles (they got a replacement vehicle every 5,000 kilometers) and pooled business use of the vehicles (they could use each other’s vehicle).
Woods J found that the Minister was not estopped in reassessing the returns of the taxpayer (one of the employees) for 2008 and 2009 contrary to the 1982 authorization as the circumstances had materially changed (i.e., the 1993 enactment of s. 6(1)(k), and slower turnover of the vehicles). However, her reasons may imply that she would have accepted the taxpayer’s argument that "estoppel by convention" would have applied if there instead had been no material change in circumstances. This of course may imply that rulings are binding on CRA if the material facts are correctly stated and there is no change in law (see also Preston and MFK). Her comments also imply that the Cohen and Galway doctrine does not preclude the application by CRA of provisions of the Act using a rule-of-thumb approach, or otherwise applying them to complex or murky facts with "latitude."
Neal Armstrong. Summaries of Szymczyk v. The Queen, 2014 TCC 380 under General Concepts – Estoppel, s. 6(2), s. 6(1)(k), and General Concepts – Onus.
Income Tax Severed Letters 7 January 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kingspan uses asset sale by target (Vicwest) to fund all of the purchase price for Vicwest shares
A Canadian "Buyco" subsidiary of a UK parent (Kingspan) will effectively use the proceeds of sale of one of the businesses of its Canadian target (Vicwest) to fund its purchase of all the Vicwest shares. This will be accomplished by:
- Vicwest dropping such business under s. 85(1) into a Newco
- the prospective 3rd-party purchaser of the business (the Westeel Purchaser) lending essentially the full purchase price of that business to the Canadian Buyco for it to acquire all the Vicwest shares under the Plan of Arrangement for approx. $225M
- the shares of Newco being bumped under s. 88(1)(d) on the amalgamation of Buyco and Vicwest
- the Newco shares being transferred by Amalco to the 3rd party purchaser in repayment of the loan
The 11% shareholder of Vicwest has agreed not to acquire substituted property for the Newco shares (see s. 88(1)(c.3)) within one year of the Plan of Arrangement. Shareholders whose Vicwest shares are capital property "will" receive capital gains or loss treatment for their shares, i.e., the transaction will not be considered to be a surplus strip.
Neal Armstrong. Summary of Vicwest Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Asset sale funding purchase.
Failure to deduct income tax source deductions generally does not generate a liability for that tax
Where an employer has failed to withhold income tax source deductions from payroll of a resident employee, it is liable only for penalties and related interest and not for the income tax itself.
This CRA position appears clearly correct given that s. 227(8.4) specifically deems the employer to be liable for the undeducted income tax only where the employee was a non-resident.
Neal Armstrong. Summary of 6 November 2014 T.I. 2014-0530991E5 under s. 153(1).
A s. 75(2) trust rather than its contributor is the relevant taxpayer for s. 40(3.6)(b) basis adjustment purposes
If a capital loss on the redemption of trust shares which otherwise would be attributed to a contributor to the trust under s. 75(2) is instead denied under s. 40(3.6) on their redemption, the denied loss will be added to the adjusted cost base of the remaining shares of the corporation in question held by the trust rather than being added to the ACB of any shares of the corporation held by the contributor.
Neal Armstrong. Summaries of 10 October 2014 APFF Roundtable, Q. 5, 2014-0538241C6 F under s. 40(3.6) and s. 146(1) – earned income.
Olympia Trust – Tax Court of Canada finds that trustee for self-directed RRSPs was liable for failure to withhold under s. 116
A Canadian trust company, which was the trustee for self-directed RRSPs that had purchased shares from non-residents without withholding or receiving s. 116 certificates, was found by Bocock J to be the "purchaser" for s. 116(5) purposes rather than the annuitants, i.e., it was on the hook as the shares were taxable Canadian property.
Neal Armstrong. Summary of Olympia Trust Company v. The Queen, 2014 TCC 372 under s. 116(5).
Invesco Canada – Tax Court of Canada finds that GST was not payable on special MFT fee-reduction trust distributions to large investors
A mutual fund trust manager initially charged full management fees to the trusts and paid rebates to large unitholders equal to a portion of the fees. However, when in 1994 CRA indicated (in 9332265) that these refunds would be treated as "inducement payments," to be included in the trusts' incomes under s. 12(2.1) (thereby resulting in double taxation), the arrangements were restructured (in accordance with ATR-65 – see also 2012-0448351E5): the manager reduced the fees which it charged to the trusts; and the declarations of trust were amended to provide that trust distributions equal to those fee reductions would be paid as special distributions on the large investors’ units.
Campbell J rejected CRA's position that GST continued to be collectible on the "gross" fee amounts, i.e., she rejected the proposition that the obligation of the trusts to make the special distributions was part of the consideration received by the manager. The legal form was reasonably good (the obligation to make the special distributions was mostly in the trust deeds), and the parties’ intention was to implement an ATR-65 structure, which required that they be trust distributions.
Neal Armstrong. Summaries of Invesco Canada Ltd. v. The Queen, 2014 TCC 375 under ETA – s. 153(1) and General Concepts – Evidence.
CRA does not accept average FX rates for capital gains computations
CRA does not accept using average exchange rates (e.g. an annual average) for computing capital gains or losses and requires using the respective spot rates on the days when the costs and disposition expenses were incurred and the proceeds arose.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 9, 2014-0538631C6 F under s. 261(1) – relevant spot rate.
CRA finds that an interest in a corporation includes an interest held through another corporation
Although s. 74.4(2) may cause the income attribution rules to apply to an estate freeze effected on a corporation (other than a small business corporation) in favour of a trust with designated beneficiaries (e.g., minor children of the freezor), there is a safe harbour in s. 74.4(4) where inter alia "the only interest that the designated person has in the corporation is a beneficial interest in shares of the corporation held by a trust" and designated person(s) are prohibited from receiving any trust distributions.
CRA interprets "holding" as referring to direct holding (see also 2012-0451411E5 F) whereas it appears to consider that an interest in a corporation includes an interest held through another corporation. For example, if a trust with designated person beneficiaries holds common shares of Opco 1 and 2 directly, the safe harbour can be satisfied – except that if Opco 1 then subscribes for preferred shares of Opco 2, the safe harbour will no longer be available for the trust’s interest in Opco 2 because that interest will be held partly "through" Opco 1.
Neal Armstrong. Summary of 7 November 2014 T.I. 2014-0549571E5 F under s. 74.4(4).