News of Note
CRA continues to apply advantage tax where employee registered plans subscribe for post-freeze common shares of the employer
Email this Content2009-0320311I7 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).
Michaluk – Tax Court of Canada finds that a train-operator employee could not deduct his costs of staying in Oshawa, as he reported to work at the Oshawa train station
The taxpayer, who was a Bombardier commuter train operator, usually started and finished work at the Oshawa Go Train Station, which was 160 kilometres from his home in Picton. The taxpayer claimed, pursuant to s. 8(1)(g), the costs of his stays on workdays at the Travelodge Oshawa or in rental apartments, and of related meals (for which his employer provided a form T2200). Given that the taxpayer reported to work in Oshawa, Favreau J unsurprisingly found that these costs incurred in Oshawa did not satisfy the test under s. 8(1)(g) of being incurred outside the metropolitan area where he reported to work.
Neal Armstrong. Summary of Michaluk v. The King, 2023 TCC 15 under s. 8(1)(g).
Bérubé – Tax Court of Canada finds that, as shown by his winnings over a protracted period, a full-time poker player had a reasonable expectation of making a living at it
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.
D'Auteuil – Tax Court of Canada finds that poker, which the taxpayer successfully engaged in on a full-time basis using skill and risk-minimization techniques, was a source of income
The taxpayer was assessed for unreported net earnings from his activities as an online poker player participating in games of the type “Texas Hold’em without limit” for his 2008 to 2011 taxation years (including net earnings of $1.4 million and $1.9 million for 2010 and 2011), and also was allowed the deduction of a net loss for 2012.
In finding that the taxpayer’s gambling activities were a source of income and in dismissing the taxpayer’s appeal, Favreau J noted that these activities were his main source of income during the years in dispute, that he devoted himself on essentially a full-time basis to them, and that “[d]espite his unusual lifestyle and his propensity for always wanting to play at the high-stakes tables, the appellant was a serious businessman” as evidenced, for instance, by various risk-management techniques that he utilized.
Neal Armstrong. Summary of D'Auteuil v. The King, 2023 CCI 3 under s. 3(a) – business source.
We have translated 7 more CRA severed letters
We have published a translation of a CRA ruling released last week, and a further 6 translations of CRA interpretations released in October of 2003. Their descriptors and links appear below.
These are additions to our set of 2,363 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 19 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2023-01-25 | 2022 Ruling 2020-0858451R3 F - Trust to trust transfer | Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Trust - Paragraph (g) | deemed disposition under s. 104(4) avoided through irrevocable vesting of interests in successor trust |
| Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (f) | no disposition on transfer of assets of Trust 1 to Trust 2 with essentially the same terms other than a clause facilitating irrevocable-vesting designations | ||
| 2003-10-31 | 23 October 2003 External T.I. 2003-0017935 F - BIEN AGRICOLE ADMISSIBLE
Also released under document number 2003-00179350.
|
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Farm or Fishing Property | rebate of municipal taxes reduces the farming expense rather than constituting gross revenue from farming |
| Income Tax Act - Section 248 - Subsection 248(1) - Gross Revenue | rebate of municipal taxes reduced that business expense rather than constituting gross revenue | ||
| Income Tax Act - Section 9 - Expense Reimbursement | reimbursement of business expense reduces the expense rather than being included in gross revenue | ||
| 15 October 2003 External T.I. 2003-0030905 F - Associated Corporations and 129(6)
Also released under document number 2003-00309050.
|
Income Tax Act - Section 256 - Subsection 256(2) | s. 256(2) election does not affect the operation of s. 129(6) | |
| 29 October 2003 External T.I. 2003-0006505 F - REGIME D'ASSURANCE SALAIRE
Also released under document number 2003-00065050.
|
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | criteria for determining whether there are separate plans | |
| 20 October 2001 External T.I. 2003-0007015 F - RESSOURCE INTERMEDIAIRE
Also released under document number 2003-00070150.
|
Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(h) | amounts received for accommodating disabled individuals in the taxpayer’s home were exempted | |
| Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c) | amounts received for accommodating disabled individuals in the taxpayer’s home would not engage s. 45(1)(c) if they were exempted under s. 81(1)(h) | ||
| 2003-10-24 | 20 October 2003 External T.I. 2003-0014615 F - allocation non-imposable
Also released under document number 2003-00146150.
|
Income Tax Act - Section 6 - Subsection 6(16) - Paragraph 6(16)(a) | per-kilometre rates published by Finance could be used for reasonableness purposes |
| 16 October 2003 External T.I. 2003-0038315 F - CONVENTION DE RETRAITE
Also released under document number 2003-00383150.
|
Income Tax Act - Section 248 - Subsection 248(1) - Retirement Compensation Arrangement | loan back to employer may negate RCA status | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | reasonableness of interest rate determined re market interest rates |
CRA rules that a gift certificate need not have a stated monetary value
By virtue of ETA s. 181.2, the use of a gift certificate to pay for a supply is treated in the same manner as a money payment, and issuances and sales of gift certificates are deemed not to be supplies. In CIBC, the majority pointedly declined to comment on the finding in the Tax Court below “that in order to qualify as a gift certificate, the property must have attributes similar to money.”
Before concluding that, for example, a gift card available in digital form and without a stated cash value, that could be applied for an online time-limited subscription to use software, qualified as a gift certificate, CRA ruled:
- A gift certificate can be in physical or digital format (e.g., a digital code) to qualify
- The CIBC decision has not affected CRA’s current policy in P-202.
- “The CRA will continue to accept that a stated monetary value is not required on a gift certificate where it can be easily determined by the parties involved in the transaction or where the gift certificate is for a supply of a specified product or service identified on the certificate as per P-202.” – which is a question of fact.
- A gift card that entitles a person to redeem the card for a particular product or service, or that is redeemable for a time-limited (e.g., 6 months) subscription service will still qualify as a gift certificate where all the attributes listed in P-202 are met.
Neal Armstrong. Summary of 11 August 2022 GST/HST Ruling 210068r under ETA s. 181.2.
Gordon – Federal Court of Appeal indicates that a CRA investigation had not breached CRA’s duty of care to the taxpayers
After a criminal prosecution of the appellants, in connection with allegedly fraudulent SR&ED claims, was stayed, the appellants brought an action in the Federal Court against the Crown for damages based on multiple grounds including a negligent investigation by CRA of their claims.
Boivin JA noted that:
“The Judge recognized that the CRA investigators owed the appellants a duty of care … but found that the investigation was not carried out in a manner that could be characterized as negligent and was not motivated by malice or any other improper purpose”.
Regarding the appellants’ contention “that the procedures set out in the Taxation Operations Manual (TOM) 11 for CRA investigations were not properly followed … the Judge rightly noted that the TOM 11 ‘is a set of guidelines that have no binding legal effect and their breach is not evidence per se of a wrongful prosecution or negligence’”.
Boivin JA found “no reason to disturb the Judge’s findings” – their appeal was dismissed.
Neal Armstrong. Summary of Gordon v. The King, 2023 FCA 12 under General Concepts – Negligence & Fault.
GST/HST Severed Letters October 2022
This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their October 2022 release) is now available for your viewing.
CRA indicates that a deemed disposition under s. 104(4) could be avoided through irrevocable vesting of interests in a transferee trust to the current trust
Mr. X did not wish his four children - who along with his wife and a family company were the beneficiaries of an inter vivos trust (“Trust 1”) holding shares of family companies – to be distributed the assets of Trust 1 (such shares) immediately before the 21st anniversary of the settling of Trust 1. Accordingly, it was proposed that the assets of Trust 1 be transferred to a newly-settled second trust (“Trust 2”), which would have the same beneficiaries and essentially the same terms as Trust 1, except that it would contain a clause authorizing the trustees to effect the irrevocable vesting of shares of the Trust 2 assets in beneficiaries pursuant to a written instrument.
Before the 21st anniversary of Trust 1, Trust 2 would distribute a portion of its assets to Mr. X’s spouse in satisfaction of her capital interest in that trust, and the trustees (again before that anniversary) would make the written designation causing the irrevocable vesting of equal shares of the trust assets in the children beneficiaries who were then alive.
CRA ruled that the trust-to-trust transfer would be deemed not to be a disposition pursuant to para. (f) of the definition of “disposition.” In this regard, it stated in its summary:
The new trust is identical to the original trust, except that the new trust permits indefeasible vesting. In this particular situation, the beneficiaries' respective rights are not affected by the trust-to-trust transfer and hence, the trust-to-trust transfer does not result in a change in beneficial ownership.
It further ruled that the trust-to-trust transfer would not entail a disposition of interests in the trust.
It also provided an opinion that the subsequent causing of irrevocable vesting to occur would avoid a deemed disposition under s. 104(4) (provided that the usual conditions in ss. (g)(iii), (iv) and (vi) of the definition of "trust" in s. 108(1) were satisfied).
Neal Armstrong. Summary of 2022 Ruling 2020-0858451R3 F under s. 108(1) – trust – (g).
CRA has officially released the 2022 APFF Financial Strategies and Instruments Roundtable
This morning, CRA released its official version of the questions and answers at the 7 October 2022 APFF Financial Strategies and Instruments Roundtable. (Its official version of the (regular) 7 October 2022 Roundtable was released last week.) We translated the full text of the preliminary answers, and summarized the questions posed, in October.
The table below provides links to our translations of the full text of both questions posed and answers given to the official version of the Financial Strategies and Instruments Roundtable, as well as links to our summaries. We did not notice any changes, other than very minor changes (e.g., Q.2 eliminated a likely-redundant paragraph referring to the safe harbour in s. 246(2) from the application of s. 246(1).)