News of Note
CRA considers that a return with substantial deficiencies has not been validly filed for late penalty and statute-barring purposes
Email this ContentWhere a taxpayer files a return that is missing substantial particulars, CRA considers that the return has not been validly filed for late-filing penalty purposes (or, potentially, for purposes of the gross negligence penalty under s. 163(2).) Furthermore, although an initial assessment of such a return would cause the normal reassessment period (of at least three years) to start running, CRA would consider that such deficiencies would permit CRA to reassess that return beyond the normal reassessment period.
Neal Armstrong. Summary of 11 June 2014 Memo 2014-0519701I7 under s. 162(1), s. 163(2) and s. 152(4)(a)(i).
Most Canadian mutual fund trusts are largely off the FATCA hook
CRA has clarified that, under the new Foreign Account Tax Compliance Act rules as they have been legislatively implemented in Canada, a mutual fund trust is not responsible for verifying the FATCA status of its unitholders if the units are held in the name of an investment dealer, so that both the due diligence and CRA reporting responsibilities fall upon the dealer. If the units are registered in the client name (i.e,, the unitholder investor), then generally the dealer has the due diligence responsibilities and reports the results to the mutual fund trust, which sends in the return to CRA – unless the dealer volunteers to do the reporting to CRA even in this situation.
Equity (or debt) interests in a financial institution also are exempted from FATCA reporting if they are "regularly traded on an established securities market," so that (not surprisingly) most exchange-traded funds are exempt. CRA states that an interest is considered "regularly traded" if "there is a meaningful volume of trading on an ongoing basis," and that "further guidance is expected to be provided after the commentary to the Common Reporting Standard is issued by the OECD." The term "established securities market" "includes, but is not limited to, exchanges that are ‘designated stock exchanges’ under the ITA."
Neal Armstrong. Summaries of Guidance on enhanced financial accounts information reporting under various Part XVIII and IGA headings including s. 263(3) and s. 265(8).
Pike – English Court of Appeal rearticulates the three tests of what is “interest”
Before concluding that a loan premium was interest on general principles, the Court of Appeal of England and Wales adopted the following statement of the characteristics of interest: "First, it is calculated by reference to an underlying debt. Second, it is a payment made according to time, by way of compensation for the use of money. Third, the sum payable accrues from day to day or at other periodic intervals" (but, as was the case here, can all be paid at maturity and is not "denatured" as interest because it is paid in one lump sum along with the principal).
Neal Armstrong. Summary of Pike v. Revenue and Customs Commissioners, [2014] BTC 33, [2014] EWCA Civ 824 under s. 12(1)(c).
McLarty – Tax Court of Canada finds that interest equal to 10-times the income generated is deductible
Consistently with Ludco, Favreau J found that interest was deductible on a limited recourse promissory note in years where the revenue generated from the related purchase (seismic data) was only 10% of the accruing interest.
He also stated obiter that participants who, contrary to joint venture terms which required every party to purchase its interest for its own account, acquired their interests in the seismic joint venture through nominees, were not entitled to deduct their expenditures. This is dubious. If their investment had been profitable, would the income have been exempt?
Neal Armstrong. Summaries of McLarty v. The Queen, 2014 DTC 1162 [at 3556], 2014 TCC 30 under s. 20(1)(c), General Concepts - Illegality, s. 67, and General Concepts – Tax Avoidance.
Health Quest - CRA loses in the Tax Court of Canada because Justice pleaded a legal conclusion
After pleading that some of the taxpayer's supplies of footwear were zero-rated as they were specially modified or designed for people with disabilities, the Justice lawyer then simply pleaded an assumption that the sales which CRA had assessed were not zero-rated. As this "assumption" was one of mixed fact and law, its pleading did not shift the burden of proof away from the Crown, so that it lost.
Neal Armstrong. Summaries of Health Quest Inc. v. The Queen, 2014 TCC 211 under General Concepts - Onus and ETA - Sch VI - part II - s. 24.1.
CRA cannot make a consequential reassessment where the Tax Court orders the vacating of an assessment
Following Blackburn Radio, CRA acknowledges that it does not have the authority to issue a reassessment to give effect to a Tax Court order to vacate or vary an assessment.
Neal Armstrong. Summaries of 3 June 2014 Memo 2013-0489471I7 under s. 171(1) and s. 169(1).
CRA state that nominal ($1) consideration taints a non-compete covenant and that a Canadian executor taints purely non-resident trusts receiving estate property
Some highlights from CRA’s responses to Questions 9 to 19 posed at the 16 June 2014 STEP Conference:
- Q. 9 For the time being, CRA is continuing not to charge interest where inter vivos trusts have not made instalments.
- Q. 11 When a non-resident individual becomes resident partway through a year, his or her immigrant trust will retroactively become resident from the beginning of the year (see also Q. 10).
- Q. 12 Where the only beneficiaries of an estate which is administered by a Canadian executor are non-resident trusts with no Canadian beneficiaries or trustees, those trusts will be tainted as s. 94 trusts (presumably during the existence of the estate) on the grounds that they received property from a Canadian trust, namely, the estate.
- Q. 13 CRA now is applying Bozzer (re interest and penalties relief).
- Q. 15 The exemption in s. 56.4(6) or (7) from imputed proceeds for a restrictive covenant – which depends inter alia on no proceeds being received or receivable for the covenant – will not be available where a non-compete agreement provides for the payment of nominal ($1) consideration to the covenanter. (It’s not clear whether CRA understands that the $1 is not actually paid.)
We also have expanded our summaries of CRA’s responses to the first eight questions (especially Q. 3 respecting deemed share classes for an LLC and Q. 5 respecting Brent Kern style trusts) based on a more complete record of what CRA said.
Neal Armstrong. Summaries of 2014 STEP Conference under CRA Roundtables.
Income Tax Severed Letters 9 July 2014
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Debt forgiveness rules did not apply to forgiveness of a guarantee
CRA found that the debt forgiveness rules did not apply to the forgiveness of the obligations of an insolvent corporation (Canco) arising from its guarantee of the obligations of its non-resident subsidiary (Forco). This guarantee obligation was not a "commercial debt obligation" as it (i) was not for borrowed money and (ii) was not payable to acquire property for the purpose of producing income.
Respecting the second point, Canco apparently would not have acquired through subrogation the debt owing by Forco even if it had paid on its guarantee and, in any event, debt owing by an insolvent company might not have satisfied the income-producing purpose test in s. 20(1)(c)(ii) (see Cal-Gas, cf. Lewisport).
Neal Armstrong. Summary of 9 April 2014 Memo 2014-0519231I7 under s. 80(1) – commercial debt obligation.
An LLC manager with a carry holds two classes of shares, coopered-up Brent Kern schemes do not work, and s. 55(5)(f) designations are optional
Stephanie Dewey has summarized the first eight CRA responses at the 2014 STEP CRA Roundtable (with the other 10 still to come). Some highlights:
- Q. 3 Where a subsidiary LLC has a 3rd-party manager whose equity interest has a carry and an entitlement to a 2% "income allocation" amount, with all other distributions being split between Canco and the manager on a pro rata basis, in applying draft s. 93.3 CRA likely would consider that the manager has a special deemed class of shares to which the carry and quasi-fee interest are attached, and that there is a second ordinary deemed class which is held on a pro rata basis by Canco and the manager.
- Q. 5 CRA does not consider that a Brent Kern (or Pallen) style scheme to strip corporate surplus by exploiting the s. 75(2) attribution rule will work even if the Sommerer problem with the scheme is fixed.
- Q. 7 In light inter alia of Nassau Walnut, CRA’s practice is to only apply s. 55(2) to the excess of a dividend over safe income on hand, so that a s. 55(5)(f) designation appears to be optional.
Summaries of Stephanie Dewey, "2014 STEP Canada Roundtable – Part 1," Tax Topics (Wolters Kluwer CCH), No. 2208, July 3, 2014, pp. 1-6 under 2014 STEP Conference.