News of Note
Marine Atlantic – Tax Court substantially increases a cost award to the taxpayer to punish for “improper” and “offensive” conduct of Crown counsel
Email this ContentThe Appellant had complete success at trial regarding the ITC methodology it used for its ferry operation. D’Arcy J now made a costs award to the Appellant (of 60% of its counsel’s fees of $1.3 million, plus disbursements and a gross-up for unrecoverable HST) that reflected a substantial enhancement for the improper conduct of Crown counsel.
First, the Crown had resiled from an agreement to follow the decision on two relevant issues in BC Ferries which, when later decided in 2014, favoured the Appellant’s position. The Crown did not agree to be bound by those findings until the eve of trial – and this delay in following BC Ferries caused the Appellant to incur substantial costs.
Second, the Crown had improperly sought to introduce evidence of a CRA auditor through an affidavit rather than through court testimony. Furthermore, the use of the affidavit in this instance had been found by D’Arcy J in his prior decision to be “trial by ambush” and resulted in “trial days being thrown away.”
Third, the Crown submission on costs challenged the above “trial by ambush” finding. D’Arcy J stated:
This is improper; a party should never use cost submissions to question a finding made by the Court in the related appeal.
Further, the Respondent’s submissions indicate that he is prepared to engage in similar offensive behaviour in the future.
Similarly, the Crown submissions improperly and falsely challenged D'Arcy J’s findings that CRA had inappropriately threatened to impose gross negligence penalties on the Appellant.
Neal Armstrong. Summary of Marine Atlantic Inc. v. The King, 2024 TCC 51 under Rule 147(3).
Autonun – Court of Quebec rejects an ARQ request to change the sales tax provision on which its assessment rested
Three weeks before trial, the ARQ auditor concluded that Autonun should have been assessed pursuant to QSTA s. 318 (similar to ETA s. 182, regarding amounts forfeited to a taxable supplier being deemed to be inclusive of tax), rather than pursuant to QSTA s. 92 (similar to ETA s. 168(9), regarding deposits not being taxable consideration until applied as consideration) on which the assessment of Autonun had been based. One week later, the ARQ sought leave of Autonun to amend its pleading to provide that the assessment rested on s. 318 rather than s. 92, which Autonun refused.
Before rejecting the ARQ’s request to make such amendment, Bergeron JCQ first noted that TAA s. 95.2 (similar to ITA s. 152(9) and ETA s. 298(6.1)) on its face gave the ARQ an unfettered right to advance an alternative basis for its assessment. However, he found that where the amendment request was made in the context of a Quebec court proceeding, it was required to satisfy the Quebec Code of Civil Procedure, including section 206 thereof. Section 206 provides that there can be such an amendment “provided doing so does not delay the proceeding and is not contrary to the interests of justice” but that “the amendment of a pleading must not result in an entirely new application having no connection with the original one.”
Bergeron JCQ found that none of the quoted tests were satisfied: there would be significant delays including fresh discovery of the ARQ; the ARQ had failed to explain to Autonun why it had changed the assessment’s basis (so that Autonun would be required to “navigate blindly, in thick fog”; and (regarding the third test) there was indeed a new application given that the auditor had affirmed “that the foundations underlying QSTA sections 92 and 318 are conceptually different and lead to different results”.
Neal Armstrong. Summary of Autonum, Solutions de financement aux consommateurs inc. v. Agence du revenu du Québec, 2024 QCCQ 1195 under ITA s. 152(9).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in January of 2002. Their descriptors and links appear below.
These are additions to our set of 2,819 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Madison Pacific – Tax Court of Canada indicates that the taxpayer’s pursuing a no “avoidance transaction” argument should increase its costs
Madison Pacific (2023 TCC 180) held that there was a GAAR abuse of s. 111(4) when two unrelated companies acted in concert to acquire 46.6% of the voting rights and 92.8% of the taxpayer’s equity (through being issued inter alia Class C non-voting shares) so as to access the taxpayer’s losses.
Graham J now granted the Crown’s request for costs of $408,834, being 35% of its actual legal costs, plus disbursements. Of the factors listed in Rule 147(3), a factor that in particular argued for increased costs was the taxpayer’s failure to concede until oral argument that there was an avoidance purpose for the creation of Class C non-voting shares. Graham J stated:
[W]here the weakness of the evidence in support of an argument are as apparent as they were in this case, it is appropriate to deal with the pursuit of that argument through costs. Significant trial time (in particular, significant time spent preparing for and conducting cross-examinations) could have been saved had the Appellant conceded this issue up front.
Neal Armstrong. Summary of Madison Pacific Properties Inc. v. The King, 2024 TCC 47 under Rule 147(3).
CRA finds it reasonable to impute an inter-spousal gift or loan on spouses’ property purchase based on how the sales proceeds were agreed to be shared
Two Canadian-resident spouses (A and B) acquired a cottage as co-owners for $400,000. The purchase price was funded with a $100,000 cash payment made by A, and as to $300,000 with the proceeds of a mortgage loan for which they were solidarily liable.
In Situation 1, their co-ownership agreement did not specify their respective co-ownership interests, so that each was presumed under the Civil Code to own 50% of the cottage. On a subsequent sale of the cottage for $700,000, they shared those proceeds equally. CRA indicated that it was reasonable to assume that the $100,000 initial payment was a gift by A to B as to $50,000. The ACB of the interest of each in the cottage would be $200,000. On the subsequent sale, s. 74.2(1) would apply to attribute ¼ (i.e., $50,000/$200,000) of B’s taxable capital gain to A.
Situation 2 was the same, except that the co-ownership agreement specified that the first $100,000 of any sales proceeds plus a predetermined return was to be paid to A, with the balance split on a 50-50 basis. Here, CRA assumed that the initial payment by A represented a loan to B as to ½ and that the specified return represented interest on that loan. Again, s. 74.2(1) generally would apply to attribute ¼ of B’s taxable capital gain to A, given that the requirements of s. 74.5(2)(c) for timely payment of interest on that loan would not have been satisfied.
Neal Armstrong. Summary of 7 October 2021 Roundtable, 2021-0908201C6 F under s. 74.2(1).
CRA confirms its historical position on the meaning of “credited”
In response to brief questions as to how a Canadian corporation may recover Part XIII tax that it has withheld on a dividend cheque issued to a US resident that then is returned, CRA responded that this was a question that could be specifically addressed with more complete facts, and confirmed its position in IC 77-16R4, May 11, 1992 (Archived), on “credited”:
5. The words "credits" and "credited" cover any situation where a resident of Canada or, in certain cases, a non-resident (see 8 below) has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident such as where (a) a tenant or agent deposits rents in a bank account on behalf of a non-resident landlord; (b) a bank credits interest to the savings account of a non-resident; (c) an insurance or trust company deposits a pension or annuity payment in the bank account of a non-resident; or (d) the amount due is applied by the resident (or deemed resident) against an amount owing by the non-resident. …
Neal Armstrong. Summary of 19 November 2019 Roundtable, 2019-0829611C6 under s. 212(2).
Income Tax Severed Letters 24 April 2024
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Anomalous results may arise under the revised hybrid mismatch rules
Some of the concerns expressed regarding the hybrid mismatch rules contained in Bill C-59, are summarized below:
The inclusion in foreign accrual property income (FAPI) of a foreign affiliate (FA) by virtue of A(b) of the FAPI definition of a dividend paid to it by another FA that is deductible under foreign tax laws tends to produce double taxation given that the there is no deduction in the FAPI of the payer FA for the amount of the dividend included in the recipient’s FAPI.
Where the hybrid mismatch rules include a payment in an FA’s FAPI or taxable surplus, the foreign tax credit generator rules (in ss. 91(4.1) to (4.7) and Regs. 5907(1.03) to (1.07)) will often deny relief for foreign tax on that payment. This is so even where relief would be provided in a comparable scenario involving a Canadian recipient (for instance, that of a Canadian corporation which is denied an s. 113 deduction under s. 113(5) for a dividend from an FA because the dividend was deductible under foreign tax law except that it receives a deduction under s. 113(6) for a (relevant tax factor) multiple of any foreign withholding tax on the dividend.)
Where a payment is included in the Canadian taxpayer’s income under the hybrid mismatch rule, but this mismatch is later resolved, the Explanatory Notes suggest that ss. 12(3) and 248(28) should generally prevent a timing mismatch from producing a double income inclusion. However, these provisions may not be effective in some situations, for instance, where the future income inclusion arises to a different Canadian taxpayer, or under foreign tax laws.
Neal Armstrong. Summaries of Ian Bradley and Seth Lim, “The Updated Hybrid Mismatch Rules,” International Tax Highlights (Canadian Tax Foundation and IFA Canada), Vol. 3, No. 1, February 2024. p. 2 under s. 95(1) – FAPI - A(b) and s. 227(6.3).
CRA indicates that worker’s compensation received by an estate was includible in its income
CRA indicated that since s. 56(1)(v) requires an income inclusion for "compensation received under an employees’ or workers’ compensation law … of a province in respect of an injury,” compensation received by the estate of an injured (and then deceased) worker pursuant to the Ontario Workplace Safety and Insurance Act was includible in its income (although there was a deduction in computing taxable income pursuant to s. 110(1)(f)(ii).) However, CRA noted:
[A]s compensation payments are not considered salary, wages, or other remuneration, they are not subject to the withholding of income tax, Canada Pension Plan contributions, and Employment Insurance premiums, irrespective of the recipient.
Neal Armstrong. Summaries of 11 March 2024 External T.I. 2022-0939331E5 under s. 56(1)(v) and s. 153(1)(a).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in January of 2002. Their descriptors and links appear below.
These are additions to our set of 2,812 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).