News of Note
Morris – Tax Court of Canada finds that s. 18(3.1) does not apply to “general repairs and cosmetic touch-ups"
Email this ContentS. 18(3.1) requires the capitalization of various expenses which are incurred during the period of "construction, renovation or alteration" of a building. Campbell J found that this phrase did not encompass "general repairs and cosmetic touch-ups" such as roof repairs and replacing flooring and closets.
Neal Armstrong. Summaries of Morris v. The Queen, 2014 DTC 1149 [at 3481], 2014 TCC 142 under s. 18(3.1) and s. 18(1)(a) – Start-up and liquidation costs.
Barrasso – Tax Court of Canada is unsympathetic to the problem of a potential phantom capital gain arising from the failure under GAAR of a value-shift transaction
The taxpayer generated capital losses (totalling $65M) by engaging in essentially the same stock-dividend/value shift transactions which had failed in 1207192 and Triad Gestco (i.e., receiving a stock dividend of high-low pref from his Quebec company in order to shift all the value away from his common shares, and then selling those common shares for their now-nominal value to his sons). The scheme was even more aggressive than in the other cases because the company’s only asset was a promissory note which he had issued to it in subscribing (one day earlier) for the common shares.
The taxpayer tried to distinguish the other cases on the basis that they had corporate taxpayers – whereas he as an individual would inevitably realize an offsetting capital gain on his prefs no later than death. Paris J found that this difference did not detract from the contrived nature of the loss, and also noted that the taxpayer had not requested an upward adjustment to the ACB of his prefs (corresponding to the loss on his common shares denied under GAAR) under s. 245(6). The implication may be that the taxpayer should have requested such an adjustment, and could not now use his failure to do so for an argument that it was unfair to deny the capital loss.
As a taxpayer apparently has no ability to make a s. 245(6) adjustment himself (see Copthorne) and in this case it now is too late to request one, the taxpayer or his estate now may face the ultimate realization of a phantom capital gain on his prefs. (The promissory note might not be a "commercial debt obligation," but forgiving it might give rise to a taxable shareholder benefit.)
Neal Armstrong. Summary of Barrasso v. The Queen, 2014 CCI 156 under s. 245(4).
Spruce Credit Union – Federal Court of Appeal confirms that choosing the most tax effective transaction which nonetheless still has a primary non-tax purpose does not render it an avoidance transaction
Trudel JA affirmed an analysis of Boyle J. that where a transaction was engaged in primarily for non-tax reasons (in this case, a dividend paid to credit union shareholders because they needed the cash), then the fact that the particular form of the transaction (a dividend) was more tax effective than some other transaction that would accomplish a similar result (e.g., making the payment in proportion to previous premiums paid by them) does not make the transaction into an avoidance transaction for GAAR purposes.
Neal Armstrong. Summaries of The Queen v. Spruce Credit Union, 2014 FCA 143 under s. 245(3) and under s. 137.1(10)(a).
CRA confirms that payroll for inter-provincial income allocation purposes is not reduced by employee expenses and takes into account payroll of PEs outside Canada
The inter-provincial income allocation formula in Reg. 402(3) gives half weight to the proportion of the total salaries and wages of the corporation which is paid to employees of provincial permanent establishments. Notwithstanding that "salary or wages" is defined in s. 248(1) as income from employment under subdivision a, so that it is reduced by s. 8 expenses, CRA interprets the phrase in the Reg 402(3) as the (gross) amounts paid – but otherwise applies the s. 248(1) definition for Reg 402(3) purposes so that, for example, stock option benefits are included.
CRA interprets the denominator of the Reg 402(3) payroll fraction as including the employment income paid to non-resident employees attached to permanent establishments of the corporation outside Canada.
Neal Armstrong. Summary of 11 March 2014 Memo 2013-0506801I7 under Reg 402(3).
Income Tax Severed Letters 4 June 2014
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Can a transaction have more than one main purpose?
"One of the main reasons," and similar phrases appearing in the Act and treaties, are at odds with ordinary English usage, which indicates that there can only be one main purpose. Nat Boidman suggests that the UK judicial approach, of effectively turning this phrase into a simple "main purpose" test, is preferable to that in Groupe Honco, which effectively dropped the word "main" and converted the phrase into a "one of the purposes" test.
Neal Armstrong. Summary of Nathan Boidman, "One of the Main Purposes Test", Canadian Tax Highlights, Vol. 22, No. 5, May 2014, p. 9, under s. 83(2.1).
HHT Investments - Ontario Superior Court finds that the conversion of a public corporation into a REIT qualifies as a corporate plan of arrangement
Although s. 182 of the OBCA (and similar provisions of the CBCA and various provincial business corporations acts) describe corporate plans of arrangement, a conversion of a public corporation to a REIT should qualify for plan of arrangement treatment on the grounds that it is "any other reorganization or scheme involving the business or affairs of the corporation or of any or all of the holders of its securities" under s. 182(1)(h) of the OBCA.
Summary of Re HHT Investments Inc., 119 OR (3d) 473, 2014 ONSC 1582, under OBCA, s. 182.
A significant percentage increase in the direct share interests of shareholders occurring as a result of a preferred share redemption will engage the exemption-denial rule in s. 55(3)(a)(ii) even if there is no change in their indirect interest in the corporate assets
A and B each directly hold 50% of the common shares of a company (Quebeco 2) and indirectly each hold 50% of the preferred shares of Quebeco 2 "through" an intermediate holding company. If a redemption by Quebeco 2 of its preferred shares results in a "significant increase" in their percentage interest in the shares of Quebeco 2 held by them directly, s. 55(3)(a)(ii) or (v) will not exempt the resulting deemed dividend, notwithstanding that there is no change in their indirect 50/50 corporate ownership of the corporate assets now represented by the redemption proceeds. Further, such application of s. 55(3)(a)(ii) will result in any other deemed dividend occurring as part of the same series also being tainted.
Neal Armstrong. Summary of 25 April 2014 T.I. 2014-0528011E5 F under s. 55(3)(a).
Last – Federal Court of Appeal finds that the principle that CRA cannot appeal its own assessments applies on a source-by-source basis
The principle that the Minister cannot appeal her own reassessment by arguing for an even higher level of tax on appeal to the Tax Court applies on a source-by-source basis.
The taxpayer was successful in Tax Court in establishing additional deductible expenses respecting his rental operation but was also found by the Tax Court to have realized an unrelated gain on income account notwithstanding that the Minister had reassessed on the basis that it instead was a capital gain. In light of the above principle, the taxpayer was in effect allowed to "keep" the additional expense deductions rather than those expenses in effect being netted against the additional income arising from the income-account finding, which related to another source. Dawson JA reasoned that to follow the netting approach advocated by the Crown would be to indirectly allow the Minister to appeal her reassessment on the disposition issue to the extent of the additional expenses.
Neal Armstrong. Summary of The Queen v. Last, 2014 FCA 129 under s. 152(1).
Significant pre-closing transactions on the day of closing of a target acquisition and its amalgamation will result in two deemed taxation year ends
If there is an acquisition of control of Target followed by its amalgamation with Buyco on the same day and no s. 256(9) election is made, the occurrence of transactions by Target out of the normal course of business on the closing date and prior to the closing will "technically" result in there being two deemed taxation year ends. As per 2014-0523251E5 F, the same problem arises if the s. 256(9) election is made.
Neal Armstrong. Summary of 15 April 2014 T.I 2014-0527231E5 F under s. 87(2)(a).