News of Note

CRA assessed the taxpayers to deny most deductions claimed by them and to impose gross negligence penalties. In addition, the taxpayers were charged with tax evasion. The BC Provincial Court in the criminal proceedings found that (i) the failure of CRA investigators to make notes, and the negligent loss of detailed notes made by another auditor, denied them of the right to a fair trial contrary to s. 11 of the Charter, and (ii) the failure by the CRA investigators to produce a copy of search warrant when asked was a significant breach of s. 8 of the Charter. The BC Court imposed remedies under s. 24 of the Charter in respect of these breaches at several stages of the criminal proceedings and, in the end, stayed the criminal charges on the basis that it would not be possible for the couple to receive a fair trial. The CRA assessments were based principally on bank records which CRA had collected pursuant to its statutory powers in an audit (the “second audit”) conducted by civil auditors but which had been prompted by a suspicion that the taxpayers had engaged in tax fraud.

In this voir dire, Boyle J held that s. 24 of the Charter permitted him to impose remedies for Charter breaches determined by another court for which it had already imposed its own remedy. This extended to breaches of the taxpayer’s rights under ss. 7 and 11 of the Charter, even though they could only be breached in the context of criminal proceedings. Boyle J exercised his discretion under s. 24(2) to determine that the Crown could not, in the context of the Tax Court proceedings, introduce or rely on any evidence that was (i) first collected from the search and seizure at the taxpayer’s home to justify (a) the amount of tax owing, or (b) reassessments after the normal assessment period had expired, and (ii) collected from the second audit of the taxpayers, or first collected from the search and seizure at their home, to support the penalties assessed.

He stated that “this Court [should] clearly impose consequences in the form of section 24 remedies to avoid Canadians losing faith in their Canadian justice system’s commitment and obligation to ensure that our shared tax burden is both lawfully shared by taxpayers, and lawfully administered and collected by our revenue authorities… .”

Neal Armstrong. Summaries of McCartie v. The King, 2024 TCC 16 under Charter s. 24(2) and General Concepts – Onus.

In September, 2007, most of the equity of an insolvent public corporation (“Biomerge”) was acquired by the company (“Nexia”) of two individuals involved in acquiring and selling loss companies, resulting in Nexia holding all of non-voting common shares of Biomerge (representing 80% of its equity) and 45% of its voting common shares. The individuals then identified an income fund (“Total”) which was becoming subject to tax under the “SIFT” rules. In May 2009, a plan of arrangement was implemented under which the Total units were exchanged for new common shares of Biomerge, the existing voting common shares of Biomerge were largely cashed-out, and Total was wound-up into Biomerge (now, “New Total”) pursuant to s. 88.1(2). The former Total unitholders held 99.8% of the New Total equity.

In following Deans Knight in finding that these transactions were an abuse of s. 111(5), Pizzitelli J stated:

[T]he reality of what happened here is that a willing seller in the business of selling tax attributes of failed companies takes the reins of such a company and markets and sells them to a willing unrelated buyer for use against their income. If these are not the type of transactions Parliament sought to stop by the enactment of the loss streaming rules in s.111(5) and parallel provisions, I don’t know what are.

In rejecting the New Total position based on there being no rules, similar to the corporate loss-streaming rules in s. 111(5), relating to the streaming of losses of trusts, he noted inter alia that the transaction entailed the acquisition of a corporate lossco that effectively was merged with the corporate operating subsidiary of Total and that the subsequent introduction of s. 256(7)(c.1) “serves to clarify the policy as well as provide automatic denial of such losses rather than resorting to the GAAR.”

Neal Armstrong. Summaries of Total Energy Services Inc. v. The King, 2024 TCC 12 under s. 245(4) and s. 248(10).

A registered charity (Corporation A) which has been making exempt supplies of accommodation to residents of housing sites and long-term care facilities as well as providing housing management services to the Province and to Corporation B regarding units owned by them has applied to be designated as a municipality for GST/HST purposes.

CRA noted that such change in status (although generating enhanced rebates for non-creditable expenses) would cause some of the supplies made by Corporation A to cease to be exempted by virtue of the exclusion in Sched. V, Pt. VI, s. 2(n), for example, the supplies of its management services, and the optional supplies of laundry and cable services. CRA then stated:

Retroactive determinations will generally not be granted where the retroactive determination would change the tax status of supplies that have already been made. The effects of a municipal determination discussed herein would only apply as of the effective date of the municipal determination.

Neal Armstrong. Summary of 15 June 2023 GST/HST Interpretation 222419 under ETA s. 123(1) – municipality – (b) and Sched. V, Pt. VI, s. 2(n).

We have translated the complete 2 November 2023 APFF Roundtable as released by CRA yesterday in final form (which did not vary significantly from the preliminary version that was provided in November). For your convenience, the table below provides links to the questions, and to the summaries that we prepared in November.