News of Note
Kute Knit - Court of Quebec requires time sheets or other concrete evidence to support supervisory SR&ED salary claims under Reg. 2900(2)(b)
Email this ContentKute Knit, which was acknowledged by the ARQ to be engaged in SR&ED, had claimed percentages (ranging from 15% to 75%) of the salaries incurred during its 2011 and 2012 taxation years for 13 management and supervisory employees as being the times that they were directly supervising the prosecution of SR&ED within the meaning of the Quebec equivalent of Reg. 2900(2)(b). These same percentages had been used for the managers and supervisors since 2006.
Alcindor JCQ confirmed the full denial by the ARQ of such management and supervisor salary claims in the absence of any documentary evidence (such as time sheets) or other concrete evidence (such as testimony from the employees themselves as to what they did on each project) as to the nature and extent of the alleged supervisory SR&ED work performed by those employees.
Neal Armstrong. Summary of Manufacture Kute Knit Inc. v Agence du revenu du Québec, 2022 QCCQ 3480 under Reg. 2900(2)(b).
CRA indicates that a life insurance policy’s sale to an employee for less than FMV could produce a s. 6(1)(a) benefit even where the employer’s payment of premiums had been taxable
An employer (Opco) acquires a term life insurance policy on the life of an arm’s-length key employee, whose estate or spouse is designated as beneficiary. The annual premium is paid by the corporation and included in the employee’s income as a taxable benefit. Upon its renewal, the policy is transferred to the employee for no consideration under s. 148(7), whereupon the employee starts paying the annual premiums.
Given that the key employee has been including the annual premium in income as a s. 6(1)(a) benefit, does a further benefit arise on such transfer of the policy to the individual for no consideration?
CRA indicated that s. 6(1) “may apply to include in the income of the individual the amount by which the fair market value of the policy exceeds any actual consideration paid by the individual for the policy.”
CRA went on to indicate that where “the person on whom the benefit has been conferred is both a shareholder and an employee … a determination will have to be made … as to whether the benefit was conferred by the corporation on the person as a shareholder or as an employee.”
Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q. 8, 2022-0928871C6 under s. 6(1)(a).
CRA suggests that s. 15(1) might apply where a corporation pays the premiums on a segregated fund insurance policy under which its shareholder or spouse is the beneficiary
A CCPC owns a segregated fund insurance policy under which its sole shareholder is the life insured and his spouse has been named as a revocable beneficiary under the policy. As the policyholder, the corporation receives the annual income and capital gains under the policy.
CRA noted its longstanding position that there is a s. 15(1) benefit when a corporation pays the life insurance premiums on a policy under which its shareholder or a related person is the beneficiary, and that the amount of the annual benefit is “usually” equal to the annual amount of the insurance premiums paid by the corporation.
It then indicated that since a segregated fund policy is a type of life insurance policy, it could not confirm that no s. 15(1) benefit could arise in this situation, but that the question of whether there was such a benefit conferred “is generally one of fact to be determined on a case-by-case basis.”
Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q.6, 2022-0928841C6 under s. 15(1).
CRA indicates that excess s. 60 deductions disappear
CRA indicated that where deductions under s. 60 (e.g., the deduction under s. 60(s) arising on repayment of a policy loan to the extent of previous-policy loan inclusions) exceed the taxpayer’s income for the year, “such excess amount cannot be deducted by the taxpayer in any other taxation year,” e.g., as a non-capital loss. There is no non-capital loss as defined in s. 111(8) given that s. 60 deductions (per s. 4(3)) do not give rise to losses from a source and given that s. 60 deductions cannot give rise to a negative amount under s. 3(c).
Neal Armstrong. Summaries of 3 May 2022 CALU Roundtable Q. 5, 2022-0928831C6 under s. 60(s) and s. 111(8) – non-capital loss – A.
Income Tax Severed Letterss 27 July 2022
This morning's release of three severed letter from the Income Tax Rulings Directorate is now available for your viewing.
Iris Technologies – Federal Court of Appeal finds that seeking review of an improper exercise of CRA discretion in assessing represented a futile collateral attack on those assessments
Rennie JA struck out a Federal Court application of Iris Technologies Inc., which sought a declaration that Iris was denied procedural fairness in the audit and assessment process, that the resulting assessments were made without an evidentiary foundation and that they were issued for the improper purpose of depriving the Federal Court of jurisdiction to hear its administrative law grievances. He stated inter alia that the application was “in essence, a collateral challenge to the validity of the assessments issued under the ETA, a matter within the exclusive jurisdiction of the Tax Court.”
In also applying the proposition that the Court should not exercise its discretion by making a declaration that will not “have any real or practical effect,” he stated:
The assessment remains valid and binding until vacated by the Tax Court. Issuing a declaration that does not quash or vacate the assessments would serve little or no purpose …
Neal Armstrong. Summaries of Canada (Attorney General) v. Iris Technologies Inc., 2022 FCA 101 under Federal Courts Act, s. 18.5.
Thinaddictives – Court of Quebec finds that a contribution of capital by a US shareholder was incorrectly recorded as debt, and reversed thin cap assessments
The Canadian taxpayer (“Thinaddictives”), which was initially formed by its US parent (“Nonni”) with nominal issued share capital, received approximately $19 million from Nonni to fund the cash portion of the purchase price for an asset acquisition. $10 million of this was clearly interest-bearing debt, but the balance of around $9 million did not have any resolution or other legal documentation establishing its character. Dortélus JCQ accepted testimony that it had been erroneously reported in the financial statements and tax return of Thinaddictives as being non-interest-bearing debt rather than a contribution of capital.
He quoted with approval the statement of Bowman J in Weisdorf that:
Accounting entries do not create reality. Their function is to reflect it.
Accordingly, assessments of the ARQ applying the Quebec thin cap rules were reversed.
Neal Armstrong. Summary of Thinaddictives Inc. v. Agence du revenu du Québec, 2022 QCCQ 3029 under s. 18(5) – equity amount – (a)(ii).
CRA interprets a reference to an ITA paragraph as referring to a subparagraph thereof
S. 144.1(2)(e)(i) requires that an employee life and health trust (ELHT) established by an employer must have one class of beneficiaries whose members represent at least 25% of all the beneficiaries of the participating employer under the trust, with at least 75% of the members of the class not being key employees.
S. 144.1(2)(e) was amended (through the addition of s. 144.1(2)(e)(ii)) to provide, as an alternative to satisfying the “Beneficiary Condition” in s. 144.1(2)(e)(i), that a trusteed plan can qualify as an ELHT where key employees are included as beneficiaries under the plan if the total cost of private health services plan benefits (PHSP benefits) provided to each key employee (and specified related persons) in respect of the year does not exceed $2,500
CRA indicated that the requirement of s. 144.1(2)(f) (dating from before the introduction of the s. 144.1(2)(e)(i) condition) – that the rights under the trust of each key employee are not more advantageous than the rights of a class of beneficiaries described in s. 144.1(2)(e) - applies only where the s. 144.1(2)(e)(i) condition is relied upon (so that where s. 144.1(2)(e)(ii) is met, the plan is not required to satisfy s. 144.1(2)(f).
Neal Armstrong. Summary of 3 May 2022 CALU Roundtable, Q.4, 2022-0928801C6 under s. 144.1(2)(f).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations mostly released in August of 2004. Their descriptors and links appear below.
These are additions to our set of 2,151 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 17 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
PC Bank – Tax Court finds that loyalty points were redeemed by a credit card issuer in the course of its financial services business so that no ITCs were available
The PC Bank case, which was released with the CIBC case, addressed two additional issues.
The first issue dealt with loyalty points that PC Bank essentially was paid by Loblaw to issue to PC Bank credit cardholders (based on their purchases at Loblaws’ stores), with PC Bank then being obligated to redeem those points in the hands of Loblaws when the points were used by the cardholders at Loblaws’ stores. Hogan J found that PC Bank could not claim input tax credits based on the amount of points redemption payments made by it to Loblaws, because it did not satisfy the requirement in ETA s. 181(5) that such amounts be paid “in the course of a commercial activity” of PC Bank. Hogan J (who was dismissive of the relevance of some taxable amounts charged by PC Bank to Loblaws in connection with the redemptions) stated:
PC Bank issued the PCB Points to generate revenue from its PC MasterCard portfolio. PC Bank earned significant revenue from interchange fees that pales in comparison to the minimal revenue it received from Loblaws. …
There is a direct link between the PCB Points that are issued in conjunction with an exempt financial service supplied by PC Bank to Cardholders and an expense that is paid when the PCB Points are redeemed by Cardholders.
Second, Hogan J characterized supplies made to PC Bank by a supplier and its successor as follows:
The main service offered by FDR/TSYS was the automated management and authorization of credit in real time, on behalf of PC Bank, based on the parameters and protocols established by PC Bank. These protocols included measures designed to detect credit fraud and to ensure that the terms and conditions under which PC Bank wishes to grant a credit card loan to a Cardholder are satisfied. All of this is done to avoid loan losses for PC Bank.
In finding that such supplies were excluded from being financial services by para. (r.3) of the financial services definition, Hogan J stated (at paras. 141):
The language of paragraph (r.3) indicates that “managing credit” is broader in scope than what may be commonly understood by that expression. …
Neal Armstrong. Summaries of President's Choice Bank v. The Queen, 2022 TCC 84 under ETA, s. 181(5), and s. 123(1) financial service – para. (r.3) and para. (t).