News of Note
Income Tax Severed Letters 23 August 2023
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Independent Order of Foresters – Tax Court of Canada finds that Foresters could reduce its taxable life insurance income by allocating assets to an exempt insurance business
The taxpayer was a Canadian resident fraternal benefit society and a life insurer providing accident and sickness (“A&S”) benefits, and individual life insurance to its members. Ss. 149(1)(k) and (3) exempted it regarding its taxable income other than from carrying on its life insurance business, and s. 149(4) provided that its taxable income from carrying on a life insurance business was to be computed “on the assumption that it had no income or loss from any other source.”
The taxpayer included the assets and liabilities of its A&S business (viewed as an insurance business other than a life insurance business) in determining its Canadian investment fund (“CIF”) (i.e., the notional fund used as part of the basis for determining how much of its investment income should be allocated to its two Canadian insurance businesses). Furthermore, it made designations under Reg. 2401(2) of a portion of its investment property (and, therefore, the investment income therefrom) to be in respect of its A&S business and, most jarringly to CRA, made a designation under Reg. 2401(2)(d) that investment properties with a $200 million value, which were not specifically required by the balance of Reg. 2401(2) to be allocated to its two insurance business, were to be allocated to its (exempt) A&S business.
Biringer J found that, consistent with its text, s. 149(4) did not go so far as to effectively deem the taxpayer not to have the A&S business, and instead, in effect only exempted the taxpayer from taxation respecting the A&S business. Furthermore, s. 138(2) effectively provided that the specific income-computation rules for life insurers, including the CIF-related computation rules, had paramountcy.
Among other things, this meant that, as the A&S business existed for Reg. 2401(2) purposes, the taxpayer indeed could designate the $200 million of income-producing assets to the insurance business (here, the A&S business) that happened to be exempted from tax.
The “World Surplus Assets” of the taxpayer were investment assets that were determined to be in excess of that needed for its life insurance divisions to have capital that was a comfortable multiple (around 3.1 X) of the minimum needed to be able to satisfy any claims that might be made against them. A further issue was whether the taxpayer was required to include these assets in computing its CIF, which turned on whether they were “used or held in the course of carrying on an insurance business” as per the CIF definition.
Biringer J accepted the testimony of the taxpayer’s expert that indeed the World Surplus Assets represented assets that were in excess of those required to maintain the required margin of safety, so that, under the Ensite test, such assets were not required to be held in the life insurance business to avoid its destabilization. Furthermore, as a factual matter, the World Surplus Assets (which were managed in a separate fund) were not used or held in the life insurance business subject to some exceptions, e.g., where such assets were used at any time in the year to top-up the capital of any life insurance division.
Neal Armstrong. Summaries of The Independent Order of Foresters v. The King, 2023 TCC 123 under Reg. 2401(2)(d) and Reg. 2400(1) – Canadian investment fund – (a)(ii)(B).
Gaudreau – Tax Court of Canada requires the production by a vendor of the tax-planning memo of the purchaser’s accountant
The taxpayer was assessed under s. 84(2) regarding his sale of his interest in an insurance company that was structured as a hybrid sale transaction. The taxpayer took the position that he was not required to produce on discovery a six-page memo that had been prepared by the accounting firm for the purchaser and which had been shared with him (as vendor) and his advisors, on the grounds that it contained nothing but a description of transactions of which the Minister was already aware and matters of “subjective opinion” and that it contained no mention of or discussion of s. 84(2).
After noting the absence of accountant-client privilege, St-Hillaire J found that the memo was potentially relevant and should be produced, indicating in this regard that it had been used as the planning memo and that “the preferred approach to the interpretation of subsection 84(2) involves an examination of the circumstances surrounding the transactions in question.”
Neal Armstrong. Summary of Gaudreau v. The King, 2023 CCI 115 under Rule 82(1) and General Concepts – Solicitor-client privilege.
We have translated 6 more CRA interpretations
We have translated 6 translations of CRA interpretations released in February of 2003. Their descriptors and links appear below.
These are additions to our set of 2,558 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 20 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
632738 Alberta – Tax Court of Canada confirms the refusal of a company to not disclose its reasons for engaging in transactions on grounds of privilege
The taxpayer was assessed under s. 103(1). The individual wholly-owning it refused to answer questions posed on his examination for discovery, that were aimed at eliciting the reason for which various transactions were engaged in by the taxpayer and other group companies, on the grounds that he and the taxpayer did not have any information pertaining to those questions that could be provided without disclosing information that was protected by solicitor-client privilege.
Sommerfeldt J found, in the context of a Crown motion brought for an order for the individual to answer the questions, that the taxpayer had not impliedly waived solicitor-client privilege by disputing the s. 103(1) assessment (which put in issue its principal reason for the transactions) given that in its pleadings and on discovery it had not relied on legal advice as part of its position. He then stated:
Although I will not issue an order that would require the Appellant, in response to any of the Disputed Questions, to disclose information that is subject to solicitor-client privilege, I will note that … unless the Appellant furnishes the information in writing to the Respondent no later than ten days after this Appeal is set down for trial, the Appellant will require leave of the trial judge [under Rule 96(1)], in order to introduce that information at trial.
I suspect that the Appellant is of the view that it can make its case without introducing the privileged information at trial.
It is quite unclear how the trial judge could impose the suggested potential Rule 96(1) “penalty,” for not disclosing its reasons on discovery, if at trial the taxpayer simply advances its reasons for the transactions without referring to any related legal advice.
Neal Armstrong. Summaries of 632738 Alberta Ltd. v. The King, 2023 TCC 117 under General Concepts – Solicitor-client privilege, Purpose/intention.
CRA indicates that s. 56(1)(r)(i) rather than s. 5(1) applies to inducement payments made by the government directly to a prospective hospital employee
CRA indicated that where a provincial government sponsors a program that is designed to deliver incentive payments or earnings supplements directly to eligible nurses, such amounts are included in their income under s. 56(1)(r)(i) (“earnings supplements provided under a [government-sponsored] project … to encourage individuals to obtain or keep employment”) whereas if it sponsors a program designed to have employers deliver the payments directly to them, such amounts are included in their employment income under s. 5(1). This distinction is significant, in part, because in the first case, no source deductions are required for Canada pension plan or employment insurance premiums.
CRA noted that the Ontario Community Commitment Program for Nurses (CCPN) (which paid $25,000 to nurses to induce them back into practice) fell into the second (s. 5(1)) category.
Incentive amounts to someone who already is an employee paid by someone other than the employer generally still constitute employment income to the employee (see, e.g., Philp). However, s. 6(3)(b) apparently assimilates to employment income only inducement payments made by the employer to a prospective employee rather than by a third party. The above interpretation may be more aligned with s. 6(3)(b) having a limited scope rather than being an application of the interpretive principle that the more specific provision, if it applies, supplants the more general provision (see, e.g., Onenergy).
Neal Armstrong. Summary of 23 March 2023 External T.I. 2023-0967391E5 under s. 56(1)(r)(i).
Bonnybrook – Federal Court of Appeal finds no reviewable error in CRA’s decision that failure to file returns for 13 years was not justified by major health problems
For its 2003 to 2015 taxation years, Bonnybrook did not file corporate tax returns and, consequently, was not entitled to receive dividend refunds. The Minister’s denial of Bonnybrook’s initial application in May 2016 for relief (based on the serious health issues for many years of its sole director) was found at 2018 FCA 136 to be based on the incorrect view that s. 220(3) does not accord the Minister the discretion to extend the limitation in s. 129(1) in order to obtain the dividend refunds. The FCA directed the Minister to reconsider. The Minister then requested and received details of the director’s health problems. In her reconsideration decision, the Minister acknowledged that the health issues were serious but concluded that taxpayer relief was not warranted because the director was capable of arranging for assistance in filing the returns and should have done so.
In finding that there were no reasonable grounds for interfering with this decision, Woods JA applied the Vavilov principle that in order for the Minister’s decision to be reasonable “the outcome should be considered in light of the underlying rationale to ensure that the decision as a whole is transparent, intelligible and justified” - and concluded that the decision satisfied those requirements. She also stated:
The fact that the Minister did not discuss the harshness of the tax result does not mean that it was not considered and does not render the decision unreasonable.
Neal Armstrong. Summary of Bonnybrook Park Industrial Development Co. Ltd. v. Canada (National Revenue), 2023 FCA 145 under s. 220(3).
It may be desirable to deliberately taint a non-resident estate (through a small bequest to a distant Canadian relative) as a s. 94(3) trust so as to access s. 164(6)
CRA has considered (e.g., in 2010-0384531E5) that a non-resident estate of a deceased resident may only use s. 164(6) to reduce or offset the deceased’s gain under s. 70(5), by carrying back a capital loss realized by it on shares, where such shares are taxable Canadian property (TCP).
This issue might be addressed by drafting the will such that the non-resident estate will have a “resident contributor,” so that the estate will be deemed by s. 94(3) to be resident, thereby permitting (per 2012-0437211I7) the estate to elect under s. 164(6) even if the shares are not TCP.
Given that the deceased likely would qualify as a “resident contributor” and that the definition of “beneficiary” in s. 94(1) includes those who are “beneficially interested” in the estate (as expansively defined in s. 248(25)), a minor or contingent bequest to a distant resident beneficiary should result in there being a “resident beneficiary” so as to engage deemed residency for the estate.
Neal Armstrong. Summary of H. Michael Dolson, Balaji (Bal) Katlai, and Leanne Rodrigo, “Will Planning, Subsection 164(6), and Non-Resident Trusts,” International Tax Highlights, Vol. 2, No. 3, August 2023, p. 15 under s. 164(6).
Income Tax Severed Letters 16 August 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Rules referencing OECD guidelines may expand somewhat the OECD influence on ITA interpretive questions
Current or draft ITA rules referencing OECD guidelines now include:
- s. 270(2), which specifies that the provisions in Pt. XIX are to be interpreted consistently with the common reporting standard rules published by the OECD, unless the context otherwise requires
- similar provisions in the anti-hybrid mismatch rules, the draft reporting rules on digital platform operators and the Pillar 2 implementation legislation.
Although this by itself would not have much impact (Canada’s tax treaties are interpreted in light of the OECD commentaries where relevant, without a specific provision to that effect), what is more significant is that these rules refer to the relevant OECD recommendations “as amended from time to time” – which raises the possibility of an interpretive expansions of the rules in the Act through OECD later-in-time materials.
Somewhat conversely, s. 247(2.03) of the draft transfer-pricing rules refer to them being “applied” (not “interpreted”) so as to achieve consistency with the 2022 OECD transfer pricing rules. This seems to direct “the CRA to use a particular vintage of the OECD transfer-pricing guidelines in the application of Canada’s transfer-pricing rules.”
Given the exception in s. 247(2.03) for where “the context otherwise requires,” Canadian courts may not confirm such application where, for instance, they consider that it departs from the arm’s-length principle.
Neal Armstrong. Summary of Michael Kandev, “Interpretation or Delegation: The Increasing Prevalence of Formal References to OECD Materials,” International Tax Highlights, Vol. 2, No. 3, August 2023, p. 9 under ITA s. 247(2.03).