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Monsell – Tax Court of Canada finds that CRA had the onus of substantiating assessments underlying s. 160 assessments where it had superior records access

The taxpayers (a husband and wife) received payments from a corporation that had been reassessed for its 2005 to 2007 taxation years and had not objected thereto. Their only ground of appeal to s. 160 assessments was that these “underlying” reassessments were incorrect.

D’Auray J quoted the principle in Mignardi that

where the facts concerning the underlying reassessments are exclusively or peculiarly within the knowledge of the Minister, the onus will shift to the Minister to show the correctness of the underlying reassessments

before finding that the onus was on the Minister to demonstrate the correctness of the underlying reassessments for the 2005 and 2006 years. This was so because the taxpayers did not have access to the corporate records for those years, whereas CRA had been given such documents and then lost them. The Minister failed to discharge this onus.

However, for the 2007 year, no audit was performed and the Minister reassessed solely on the basis of the information contained in the corporate tax returns. Thus, the onus instead was on the taxpayers to demonstrate that this reassessment was incorrect, which they failed to do.

Since the amount of this underlying reassessment for 2007 was greater than the amount of the two payments made to the taxpayers, their s. 160 assessments were upheld.

Neal Armstrong. Summaries of Monsell v. The Queen, 2019 TCC 5 under s. 160(1) and s. 125(3)(b).

CRA indicates that coverage for employee's U.S. medical expenses would qualify if they were substantially METC-type expenses

CRA indicated that premiums paid by an employer under a Blue Cross plan, that would reimburse an employee for certain medical and health care costs incurred while in the U.S., would not be a taxable benefit (based on the exemption for private health services plans) provided that “‘all or substantially all’ of the premiums paid under the plan relate to medical expenses that are eligible for the medical expense tax credit (METC).” CRA further indicated that such “eligible medical expenses are not restricted to those paid in Canada or for medical services provided in Canada” – and that the insurer of the plan should determine whether this test in fact was being met.

Neal Armstrong. Summary of 12 December 2018 External T.I. 2017-0718661E5 under s. 248(1) - private health services plan.

CRA finds that monthly payments to cover employed bus driver costs were taxable since no receipts required

CRA found that fixed monthly payments to school bus drivers to cover such employees’ cost of the use of a personal cellular phone, bus washing (e.g., at a car wash), and electricity consumption (to cover the cost for plugging in the employer’s school bus at the employees’ residence to ensure that the bus would start in the morning) should be included in the employees’ income under s. 6(1)(b) given that the employees were not required to submit receipts.

Neal Armstrong. Summary of 13 April 2018 External T.I. 2017-0682891E5 under s. 6(1)(b).

Xia – Tax Court of Canada finds that a gross negligence penalty applied for failure to check out an exempt receipt theory re tips

A well-educated slot attendant at a casino, who doubled his income through the receipt of his share of tips, was subject to a gross negligence penalty for failure to report the tip income given inter alia his failure to consult with anyone respecting his position that the tips were non-taxable as being a share of exempt lottery winnings.

Neal Armstrong. Summaries of Xia v. The Queen, 2019 TCC 30 under s. 5(1) and s. 163(2).

CRA rules on a pipeline with different promissory-note mechanics

In 2018, CRA issued rulings under ss. 84(2), 84.1 and 245(2) on a straightforward but mildly unusual pipeline transaction. The estate transferred its stepped-up preferred shares of an investments holding company (Holdco) to a Newco in consideration for shares of Newco – then one year after this, Newco will effect a reduction in the paid-up capital of such shares through the issuance of 8 promissory notes payable to the estate. They will each be payable in the 1st, 2nd, 3rd (etc. through to the 8th) quarter thereafter. Such notes will thereafter be paid in accordance with their terms and (after the passing of at least XX months) Holdco and Newco also will amalgamate.

Neal Armstrong. Summary of 2018 Ruling 2018-0777441R3 F under s. 84(2).

6 further translations of CRA interpretations are available

We have published a further 6 translations of interpretations released in October and September 2012. Their descriptors and links appear below.

These are additions to our set of 771 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ½ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for February.

Bundle Date Translated severed letter Summaries under Summary descriptor
2012-10-10 6 July 2012 Internal T.I. 2012-0453461I7 F - rental losses Canada-France Treaty Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit no requirement to establish reasonable expectation of profit re deducting loss from French rental property if no personal element
Treaties - Income Tax Conventions - Article 24 s. 126(1) FTC re French income tax on rental income
2012-10-03 17 July 2012 Internal T.I. 2012-0454701I7 F - Arrière-arrière-grand-père Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Share of the Capital Stock of a Family Farm or Fishing Corporation - Paragraph (a) - Subparagraph (a)(iii) farm use by great-great-grandparent did not qualify the property, cf. great-grandparent
Income Tax Act - Section 252 - Subsection 252(2) - Paragraph 252(2)(a) parent in s. 110.6 context includes great-grandparent but not great-great-grandparent
2012-09-14 4 July 2012 External T.I. 2011-0429601E5 F - Roulement et société de personnes Income Tax Act - Section 98 - Subsection 98(3) two partnerships potentially could be merged by using s. 97(2) followed by s. 98(3), or the reverse
Income Tax Act - Section 97 - Subsection 97(2) partnership is taxpayer for purposes of s. 97(2), which might be used with s. 98(3)
30 July 2012 External T.I. 2011-0421801E5 F - Choix aux paragraphes 70(2) et 70(3) Income Tax Act - Section 70 - Subsection 70(2) if desire for s. 70(3) to apply, a timely revocation of s. 70(2) election can be made
Income Tax Act - Section 70 - Subsection 70(3) application of s. 70(3) re deceased’s share of partnership WIP is at estate’s choice
2012-08-31 14 August 2012 External T.I. 2012-0450041E5 F - subsection 55(4) Income Tax Act - Section 55 - Subsection 55(4) s. 55(4) not engaged where transactions eliminate shareholdings but not unrelated status of unrelated person
Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) s. 55(3)(a)(ii) exclusion avoided by distributing shares out of unrelated-person trust
15 August 2012 External T.I. 2012-0444461E5 F - Pompiers volontaires Income Tax Act - Section 118.06 - Subsection 118.06(1) not a “volunteer” if paid more than a minimal amount or minimum hours are required
Income Tax Act - Section 81 - Subsection 81(4) “volunteer firefighter” has the same meaning as in s. 118.96(1)

Madison Pacific – Federal Court of Appeal indicates that a CRA memo to Finance requesting action on an "abuse" likely would be inadmissible in a GAAR case on that abuse

Predecessors of the taxpayers had been acquired for their losses in transactions where less than 50% of their voting shares, but more than 90% of their non-voting participating shares, had been acquired. The Minister had reassessed to deny the acquired losses primarily on the basis that there had been an acquisition of control, but secondarily through applying the general anti-avoidance rule.

V. Miller J had required the Minister to disclose two documents that had been placed in the audit file: a draft proposal letter; and a memo from the Income Tax Rulings Directorate to Finance requesting an amendment to cut off this type of transaction. Gleason JA found no reversible error in requiring production of this memo - nor in the decision of V. Miller J that a request for all correspondence between the Directorate and Finance respecting the legislative scheme dealing with transfer of corporate losses was an impermissible “fishing expedition of vague and far-reaching scope.” However, she stated:

[T]he documents in issue are of limited relevance and likely inadmissible at trial as, under the GAAR analysis, the question of the policy in the ITA that the taxpayer is alleged to have avoided is ultimately a question of law. … Thus, while it may well be incumbent on the Minister to set out the disputed policy in the Minister’s pleadings as a matter of fairness … it does not follow that evidence on the policy will be admissible at trial as matters of law are for a court to determine.

Neal Armstrong. Summary of Madison Pacific Properties Inc. v. Canada, 2019 FCA 19 under s. 245(4), aff’g sub nomine MP Western Properties Inc. v. The Queen, 2017 TCC 82 under Tax Court Rules, Rule 95.

CRA requires that there be no basis step-up in FA shares above their relevant cost base and net surplus

A Canadian-resident corporation (ACo) wished to transfer its shares of a foreign subsidiary (FA1) to a Canadian subsidiary of ACo (BCo). This was to be accomplished by ACo transferring its FA1 shares on a s. 85.1(3) rollover basis to a newly-formed non-resident subsidiary (New FA), with New FA then transferring its FA1 shares to BCo for a note – which then was to be repaid in cash out of share subscription proceeds from ACo, and with FA1 then distributing such cash to ACo (with a Reg. 5901(2)(b) designation being made).

CRA wished to restrict the cost to BCo of the FA1 shares (which were excluded property) to the sum of their relevant cost base and the net surplus (being exempt surplus) of FA1 – rather than letting such cost be stepped up to the shares’ higher fair market value. Accordingly, it required that the note equal such sum. S. 69(1)(c) deemed the proceeds to New FA to be the higher FMV, but apparently this did not matter, as the disposition of the FA1 shares did not give rise to FAPI, their exempt surplus was levitated under s. 93(1.11)(a) to New FA, and the note repayment proceeds were received by ACo out of pre-acquisition surplus and (to the extent of any amount that otherwise would be a negative ACB gain) out of New FA’s exempt surplus pursuant to s. 93(1.11)(b) and Reg. 5902(6).

These transactions in their essential features were the same as transactions implemented by the same corporate group in 2016-0630761R3f. One difference from the earlier ruling letter is that a ruling was requested and given that s. 69(11)(b) would not apply to deem ACo’s proceeds of disposition on the s. 85.1(3) drop-down of FA1 Shares to New FA to be equal to the FMV of the FA1 Shares. Although it clearly would have been contemplated that the transferee (New FA) would “obtain the benefit of an exemption available to” it for excluded shares, CRA concluded (as per its summary) that the “one of the main purposes” test in s. 69(11) was not satisfied.

Neal Armstrong. Summaries of 2017-0693751R3 under s. 69(11)(b), s. 9 – capital gain v. profit – shares and s. 93(1.11).

Kaul – Tax Court of Canada finds that art work was donated at a FMV equal to its cost rather than appraised value

The taxpayers bought sets of artists’ prints (each set consisting of 11 prints) at a purchase price that might be 7 or 10 times the vendor’s cost, and then immediately donated 10 out of the 11 prints in each set to registered charities at appraised values (reflected in the charitable receipts issued) around 3 times their purchase price. In confirming assessments that found the FMV of the donated art was the taxpayers’ purchase price, Rossiter CJ essentially applied the statement of Bowman ACJ in Klotz that:

Why chase the will o' the wisp of an elusive and largely hypothetical fmv through the trendy up scale art galleries of New York and ignore the best evidence that is right there before your very nose? The problem with the claim here, whereby property is acquired for $5 to $50, sold to the appellant for $300 and claimed to have a fmv two days later of $1,000, is that it is devoid of common sense and out of touch with ordinary commercial reality.

Rossiter CJ commented scathingly on the appraisals.

Neal Armstrong. Summary of Kaul v. The Queen, 2019 TCC 17 under General Concepts – FMV – Other.

Therrien – Court of Quebec finds that the adult daughter of the taxpayer’s ex-common law partner was the taxpayer’s “child”

When the handicapped daughter (“V”) of the taxpayer’s ex-common law partner was 22, she started living with the taxpayer. Whether the taxpayer (Therrien) was able to claim medical tax credits for expenses associated with V turned on whether V was a “child” of the taxpayer. The relevant part of the Quebec Taxation Act definition of “child” (which was essentially the same as ITA s. 252(1)(b)) referred to:

a person who is wholly dependent on the taxpayer for support and of whom the taxpayer has, or immediately before such person attained the age of 19 years did have, in law or in fact, the custody and control

This reference to “custody and control … in law or in fact” might have, but did not, give Massol JCQ difficulty given that V was an adult who was with him purely as a matter of choice. He simply stated:

The evidence establishes that in 2011 and 2012, V was wholly dependent on Richard Therrien and that he had custody and control of her in fact.

Accordingly, the taxpayer got the credits.

Neal Armstrong. Summary of Therrien v. Agence du revenu du Québec, 2019 QCCQ 28 under s. 252(1)(b).