News of Note

CRA indicated that as a result of the legislative change, made in 2021 but effective May 18, 2019, to make “virtual payment instruments,” such as Bitcoin, financial instruments, the change-in-use rules generally would apply on that date to the capital properties of miners, given that prior to that date they would be regarded by CRA as being engaged in commercial activity. Thus, as a substantive matter, they were required to remit GST/HST equal to the properties’ basic tax content (essentially, the GST/HST previously paid on the properties’ purchase).

CRA made this point in a very brief, almost sheepish, manner – so that it may recognize that it may now have legal and practical difficulties in purporting to require those who have already filed their return for the relevant 2019 reporting period, to now refile so as to report an application of the change-in-use rule.

Neal Armstrong. Summaries of GST/HST Notice No. 324, Proposed Amendment Addressing Mining Activities in respect of Cryptoassets, February 2023 under ETA s. 188.2(1) - virtual payment instrument, mining activity, cryptoasset, s. 188.2(2), (4), (5), s. 1123(1) – recipient, s. 141.04(4) and s. 200(2).

US LLC acquired depreciable property in 2015 for use in its active business, and then on January 1, 2022, its shares were acquired by a Canadian taxpayer (Acquireco).

Reg. 5907(1)(a)(iii) generally provide that earnings from an active business of an LLC foreign affiliate of a taxpayer resident in Canada shall be computed as if if the business was carried on in Canada and the LLC was resident in Canada; and Reg. 5907(2.03) generally provides that its income or loss from that business for a particular taxation year shall be computed on the basis that for that year and “any” preceding taxation year ending after August 19, 2011. it claimed the maximum CCA and other deductions in computing its income from the business.

Under the above wording, it might seem that the maximum CCA should be treated under Reg. 5907(2.03) as having been claimed in the prior years, thereby increasing the earnings for 2021 and subsequent years. However, it is suggested that it could be argued that no CCA should be considered to be claimed for the pre-acquisition period, given inter alia that prior to the acquisition, US LLC was not a foreign affiliate of Acquireco and, therefore, never claimed depreciation in computing income with respect to Acquireco.

Neal Armstrong. Summary of Nakul Kohli and Simon Townsend, “Computing UCC for Newly Acquired LLCs,” Canadian Tax Focus, Vol. 13, No. 1, February 2023, p. 9 under Reg. 5907(2.03).

2009-0320311I7 considered that where, following a freeze transaction, a key employee subscribed for new common shares through a TFSA, the requirements of s. (b)(i) of the “advantage” definition in s. 207.01(1) were satisfied (namely, that such transaction “would not have occurred in an open market where parties deal with each other at arm’s length”), so that the advantage tax would apply to any increase in the total FMV of those shares.

An observed more-recent application of this approach occurred where the shareholders of a widely held private company exchanged their common shares for fixed-value preferred shares and numerous employees (all dealing with each other and the company at arm’s length) then subscribed for new common shares at a low subscription price. The “CRA’s position was that the new common shares were available for purchase solely due to the subscribers’ employment status, and thus the advantage tax was payable by each employee-shareholder who acquired new common shares through their TFSA.”

Neal Armstrong. Summary of Tyler Berg, “Registered Plan Taxes: Recent Experiences,” Canadian Tax Focus, Vol. 13, No. 1, February 2023, p. 3 under s. 207.01(1) – advantage – (b)(i).

After depositing his entire savings with an online poker site in 2007, the taxpayer began playing poker (online around 95% of the time, and in-person for the balance) and between 2008 and 2010 took part in around 20 poker tournaments in various international locations. His poker activities were his only source of income from 2008 to 2011.

CRA reassessed his 2008 year to include $1.6 million of net poker winnings in his income, but his appeal for this year was later allowed by consent. At issue were further reassessed inclusions in the taxpayer’s income for the 2009, 2010, and 2011 of $884,323, $454,867, and $231,208, respectively.

Before confirming these income inclusions subject to some agreed downward adjustments, Favreau J dismissed the taxpayer’s arguments that poker was not a source of income to him, for essentially the same reasons as in D'Auteuil (which was released on the same day). He stated:

[T]he appellant spent almost all of his time playing poker. …

Despite his unusual lifestyle and his propensity to ridicule his opponents, the appellant was a serious businessman. … The appellant adopted objective standards of risk management and minimization. He played multiple tables at once in an effort to maximize his winning potential in the shortest amount of time.

At this level of winnings by the appellant over such a long period of time, I am satisfied that the appellant had a reasonable expectation of being able to make a living at playing poker … .

Neal Armstrong. Summary of Bérubé v. The King, 2023 CCI 12 under s. 3(a) – business source.