News of Note
Imperial Tobacco - Tax Court finds that privilege was lost when emails of an Osler tax lawyer were sent to PWC Australia
Email this ContentD'Arcy J found that solicitor-client privilege was lost when emails of an Osler tax lawyer addressed primarily to an individual at the Canadian taxpayer's UK parent were also sent to PWC Australia. Having regard to the Susan Hosiery principle, the taxpayer was unable to establish "that PWC Australia's role, whatever it was, extended to any function which could be said to be integral to the solicitor-client relationship."
Scott Armstrong. Summary of Imperial Tobacco Canada Ltd. v. The Queen, 2013 TCC 144 under s. 232 - solicitor-client privilege.
Prescient Foundation - Court of Appeal finds that participation of a charitable foundation in tax-planning transactions was inconsistent with having an exclusive charitable purpose
A registered public charitable foundation participated with other charites in transactions which were intended to avoid capital gains tax on the assets of a private company by the charities purchasing its shares, and having the appreciated assets "donated" to the charities, with the charities using the sales proceeds of the assets to pay the share purchase price (or something like that - the actual implementation of the plan was execrable). Mainville JA found that the foundation's participation in these transactions was inconsistent with its obligation to operate only for charitable purposes, so that the proposed revocation of its registration was justified.
Mainville JA also rejected (in dealing with an unsuccessful attempt of CRA to apply a draft amendment) the submission of the Justice lawyer that "to qualify as charitable, a charitable public foundation must…only disburse funds to a qualified donee." This position was inconsistent with CRA's published policy that a charitable foundation can carry on charitable activities, rather than being restricted to writing cheques to qualified donees (see T4063).
Neal Armstrong. Summaries of Prescient Foundation v. The Queen, 2013 FCA 120 under s. 149.1(1) - charitable foundation and related business, and s. 230(2).
CIBC - Federal Court of Appeal severely restricts the doctrine that expenses of "egregious or repulsive" conduct are non-deductible
Iacobucci J stated, obiter, in 65302 that conduct of a taxpayer may be so "egregious or repulsive" as to indicate that resulting fines were not incurred for the purpose of producing income.
Sharlow JA has struck a Crown pleading which stated that alleged conduct of CIBC in aiding Enron in falsifying its financial statements was so "egregious and repulsive" that damages of $3 billion paid by CIBC in settlement of Enron-related suits could not be considered as having been incurred for an income-producing purpose. She stated that "characterization of the morality of CIBC's conduct is not legally relevant to the application of paragraph 18(1)(a)," and that what Iacobucci J was getting at was that "certain conduct may, because of its egregious or repulsive nature, be so disconnected factually from the taxpayer's actual business (or any business) that an expense the taxpayer incurs because of that conduct cannot meet the income earning purpose test." She didn't give examples, but something like expenses of a call girl or hit man would not have any acceptable connection to a legitimate business.
Neal Armstrong. Summary of CIBC v. The Queen, 2013 FCA 122 under s. 18(1)(a) - income-producing purpose.
Application of the fill-in-the-hole rule may necessitate use of the suppression election
Eric Lockwood and Maria Lopes have provided excellent numerical examples of the application of the proposed qualifying liquidation and dissolution (QLAD) rules respecting the winding of a non-resident subsidiary (Foreignco 1) into a Canadian parent (Canco). Canco generally will realize a capital gain on the disposition of its shares of the disposing affiliate (Foreignco 1) – even on an elected QLAD - where the adjusted cost base of Foreignco 1 in the distributed property, i.e., the inside basis, exceeds Canco’s ACB of its Foreignco 1 shares, i.e., the outside basis - unless it makes the "suppression election" under proposed s. 88(3.3).
For example, the suppression election may be required on the liquidation of a foreign affiliate (Foreignco 2), with a "blocking deficit," into Foreignco 1, followed by a liquidation of Foreignco 1 into Canco on an elected QLAD basis, because the application of the fill-the-hole rule in proposed Reg. 5905(7.2) can result in the inside basis being greater than the outside basis – and in fact they "suspect that the suppression election was specifically intended to apply to circumstances such as these."
Neal Armstrong. Summary of Eric Lockwood and Maria Lopes, "Subsection 88(3): Deferring Gains on Liquidation and Dissolution", Canadian Tax Journal (2013) 61:1, 209-28 under Reg. 5905(7.2) and s. 93(1).
Gwartz - Tax Court finds that circumvention of the "kiddie tax" was not abusive
As a result of a surplus strip of a dentist's management corporation, the receipt of surplus was reported as capital gains by the dentist's two minor children, who were beneficiaries of a family trust. Because this amount was a capital gain rather than taxable dividends, s. 120.4 - the "kiddie tax" provision - did not apply.
Hogan J. found that the series of transactions did not abuse s. 120.4, and therefore was not caught by the general anti-avoidance rule. He reasoned that, in drafting s. 120.4, "Parliament preferred simplicity over complexity," and was surely aware that capital gains could be generated using surplus-stripping techniques, yet it did not include any capital gains in the s. 120.4 income-splitting rules (although it changed its mind after the years in question).
Scott Armstrong. Summary of Gwartz v. The Queen, 2013 TCC 86, under s. 245(4) (with diagram).
Income Tax Severed Letters 8 May 2013
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Spin-off by Resverlogix is structured so that the Spinco bears the full burden of Part VI.1 tax on a “royalty” preferred share of Resverlogix
Resverlogix is proposing to spin-off a "Newco" subsidiary holding RVX Therapeutics to its shareholders. The mechanics (which look vaguely like a butterfly reorganization, although this is not a butterfly) are somewhat more complicated than the usual (s. 86 exchange – then spin-off through redemption of new shares) plumbing because it is also part of the deal that Newco will hold "Royalty" preferred shares of Resverlogix which will participate in a portion of any revenues which are generated by Resverlogix from one of the pharmaceutical products in its development pipeline. The dividends on these Royalty shares are reduced so that Newco effectively bears the full burden of the 40% Part VI.1 tax payable by Resverlogix on any such dividends: Resverlogix does not have to "pay" anything for the Part I deductions generated to it from the Part VI.1 tax.
Newco will not be listed, so that some precise footwork will be required to ensure that it has elected to be a public corporation at the time RRSPs and the like receive its shares.
Neal Armstrong. Summary of Resverlogix Circular under Spin-Offs – S. 86 reorganization spin-offs.
Resource Capital Fund – Australian decision suggests that many or most Canadian mining company shares may not be taxable Canadian property
The Australian Federal Court found that even if a sale of shares of an Australian gold mining company had not been Treaty-exempt (as discussed in the post below), the company should not be considered to have more than 50% of its assets as Australian real property (i.e., its mining rights), so that the gain also would not have been taxable under the Australian equivalent of the taxable Canadian property rules.
This rested on a finding that one of the quite valuable non-real estate assets of the company was its "mining information." The logic was that if a purchaser acquired only the mining rights and not the drilling results and mining model, it would have to spend a huge sum on exploration in order to be able to commence production approximately four years later.
This case suggests that many or most Canadian mining company shares may not be taxable Canadian property – as well as not being real property under many or most of the applicable Treaties.
Neal Armstrong. Summary of Resource Capital Fund III LP v. Commissioner of Taxation, [2013] FCA 363 (Fed. Ct. of Austr.) under Treaties – Art. 13.
Resource Capital Fund – Australian Federal Court decision respects the flow-through character of a reverse hybrid
A Caymans LP with US-resident partners, which was treated for Australian purposes as a corporation and for US purposes as fiscally transparent, was assessed on a gain under the Australian equivalent of the taxable Canadian property rules. In nullifying the assessment, Edmonds J quoted comments in the OECD commentary that the source jurisdiction (Australia) should apply the provisions of the applicable (Australia-US) Treaty "as if the partners had earned the income directly," so that assessments instead should have been made of the (numerous) US-resident partners.
Neal Armstrong. Summary of Resource Capital Fund III LP v. Commissioner of Taxation, [2013] FCA 363 under Treaties – Art. 4.
MacDonald - Federal Court of Appeal affirms breadth of "in any manner whatever" in s. 84(2) anti-stripping rule
In a surplus-stripping transaction, a New Brunswick doctor sold a cash-rich corporation to his brother-in-law for a promissory note, with his resulting capital gain sheltered by unrelated capital losses - and with his brother-in-law extracting the corporate funds following a transfer of the corporation to a Newco he owned, and then paying off the promissory note.
Reversing the trial judge, Near JA found that s. 84(2) applied to treat the amounts the doctor received as a taxable dividend rather than a capital gain, notwithstanding that he was no longer a shareholder at the time he received the funds - and that this broad construction of the words "in any manner whatever" in s. 84(2) accorded with Merritt, Smythe, and RMM.
Scott Armstrong. Summary of MacDonald v. The Queen, 2013 FCA 110 under s. 84(2).