News of Note
Freedman – Federal Court of Appeal confirms neglect or carelessness where shares transferred 3 weeks prior to filing the IPO preliminary were valued at 5% of the IPO price
Email this ContentOn April 1, 2006, some executives of Gluskin Sheff+Associates Inc. sold a portion of their shares to family trusts at a price that was approximately 4.8% of that at which company shares were sold under an initial public offering that closed on May 26, 2006, following the filing of the preliminary prospectus on April 18, 2006. The pricing for the sale to the trusts applied a valuation formula that had been used in agreements under which they (and other executives) had purchased their shares from the founders a few years previously. The Board had the right to require them at any time to sell their shares back to other executives at an amount determined under the same formula.
Pizzitelli J in the Tax Court (in sub nomine Lauria) had accepted the opinion of the Crown’s expert that it was appropriate to value the shares sold to the trusts at an amount that worked out to the equivalent of a 40% discount to the IPO price, and in this regard Pizzitelli J noted that on the valuation date (April 1, 2006), the prospects for a successful IPO were high (and of the founders requiring the taxpayers to sell their shares back at the formula price, quite fanciful). Thus, their reporting gain based on the lower value was a misrepresentation. Turning to the neglect or carelessness branch of s. 152(4)(a)(i), he stated:
[T]he Appellants did not seek an independent valuation and cannot be said to have thoughtfully, deliberately and carefully considered whether the proposed IPO would affect the share price. In fact, the Appellants just seemed to ignore it, when in my opinion, having regard to their skills in and knowledge of the securities industry from working as executives for a wealth management firm and the multiple other circumstances or red flags that went up … they were clearly aware of the impact of the IPO’s value on their holdings.
In affirming these findings that the CRA assessments were not statute-barred, Boivin JA stated that “[w]e all agree with his conclusions for essentially the same reasons.”
Neal Armstrong. Summary of Freedman v. Canada, 2023 FCA 81 under s. 152(4)(a)(i).
CRA indicates that individuals might recover ITCs for construction work performed prior to the formation of their partnership by claiming a s. 257 rebate on the partnership formation
Three individuals acquired a lot, engaged a contractor to demolish the existing house, subdivided the lot into two, and engaged another contractor to start building two houses, each of which would be used as a primary place of residence of an owner or owners. However, partway through the construction of the houses, they decided that, once the construction was completed, each lot with the finished house would instead be sold. After such decision, the property owners registered a partnership for GST/HST purposes with CRA.
CRA ruled that the partnership, if indeed it had been formed, could not claim ITCs respecting various costs that had been incurred prior to the partnership formation. CRA indicated that if any transfer of beneficial ownership of the land to such a partnership (albeit, with registered title remaining with the individuals) occurred in the course of a business (rather than in the course of an endeavour of constructing personal residences), the transfer would be a taxable supply, so that the individuals (assuming they were not registered) could be entitled to a rebate under ETA s. 257 of the tax previously paid on the construction planning and work.
Neal Armstrong. Summaries of 15 November 2022 GST/HST Ruling 231643 under ETA s. 257(1) and General Concepts - Ownership.
CRA rules that member organizations were recipients of the insurance arranged through their umbrella association
A non-profit umbrella association (the “Association”) of member organizations (the “Organizations”) contracted to acquire directors’ and officers’ liability insurance for those of its members who were interested. Both it and such participating Organizations were named in the policy as the insureds and it was billed global premiums by the insurer which it would then bill out to the member participants based on an allocation worked out by the insurance broker. If a participating member wished to initiate an insurance claim, it would reach out directly to the broker.
In ruling that the Association was not required to charge HST on the reimbursement payments received by it, CRA stated:
[I]t is the Insurer that is making a supply of insurance to the Organization and the Association is making a separate supply of the membership to the Organization.
Such supply by the insurer was an exempted supply of an insurance policy.
Neal Armstrong. Summary of 3 August 2022 GST/HST Ruling 229371 under ETA s. 123(1) – recipient.
CRA rules on a pipeline transaction for a trust realizing a s. 104(4)(b) gain and using a non-controlled Newco
Trust 1, a discretionary inter vivos trust for the family of A, holding preferred shares of a Holdco (which, in turn, wholly-owned Opco) was deemed pursuant to s. 104(4)(b) to have disposed of, and reacquired, all its property including those preferred shares at FMV on its 21st anniversary. The common shares of Holdco were held by a second discretionary inter vivos family trust (Trust 2), which apparently had not reached its 21st anniversary.
CRA provided the usual rulings on a pipeline transaction pursuant to which:
- A company controlled by A (Newco 1) will incorporate Newco 2 and subscribe for special voting shares.
- Trust 2 will transfer its Holdco common shares to Newco 2 on a s. 85(1) rollover basis for non-voting common shares, and Trust 1 will transfer its Holdco preferred shares to Newco 2 in consideration for non-voting preferred shares of Newco 2 whose PUC will equal the ACB of the transferred shares.
- One year later, Newco 2 will start making phased reductions of the PUC of its preferred shares, which will be distributed in part by Trust 1 to its beneficiaries.
Neal Armstrong. Summary of 2022 Ruling 2022-0933261R3 F under s. 84(2).
Quintal – Court of Quebec finds that amounts paid to a client to induce him to purchase a life insurance policy were income under s. 12(1)(x)
Quintal and other clients of an insurance broker (Chabot) participated in a scheme of Chabot to defraud life insurance companies, whose math depended on the commissions generated to Chabot from the sale of whole life policies substantially exceeding the premiums payable under those policies during the first two years of their term (beyond which, they could be cancelled without Chabot being required to repay his commissions). Chabot sold a large policy to Quintal, and Chabot’s company (Élan) paid Quintal in amounts equaling the premiums initially payable by him, with the policy subsequently being cancelled by the insurer after Quintal had ceased paying the premiums.
The principal (unsuccessful) argument of Quintal that the payments received by him from Élan were not includible in his income pursuant to the equivalent of s. 12(1)(x) was that those amounts were not received by him “in the course of earning income from … property.” However, Gosselin JCQ found that “even though the cash surrender value could not be cashed out by Mr. Quintal in the short term,” the cash surrender value of the policy started increasing immediately, and this was sufficient to satisfy the quoted requirement in s. 12(1)(x)(i)(A). Regarding the “inducement” requirement under the equivalent of s. 12(1)(x)(iii), she stated that the “advances paid to Mr. Quintal by Élan were inducement payments since without them … he would never have purchased such an insurance policy at such a cost.”
Neal Armstrong. Summary of Quintal v. Agence du revenu du Québec, 2023 QCCQ 37 under s. 12(1)(x).
We have translated 6 more CRA interpretations
We have a further 6 translations of CRA interpretations released in June of 2003. Their descriptors and links appear below.
These are additions to our set of 2,451 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 ¾ 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 |
|---|---|---|---|
| 2003-06-27 | 19 June 2003 Internal T.I. 2003-0021297 F - LOI SUR L'ACCISE PENALITES INTERETS
Also released under document number 2003-00212970.
|
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | GST/HST interest deductible if incurred re deductible expenditure/ penalties may also be deductible |
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(t) | GST/HST interest and penalties are deductible based on application of ordinary principles | ||
| 2003-06-20 | 13 June 2003 External T.I. 2003-0184285 F - ALLOCATION DE RETRAITE
Also released under document number 2003-01842850.
|
Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | if no guarantee or offer of new employment, the individual has retired |
| 10 June 2003 External T.I. 2003-0017065 F - Disp. of Property owned on Dec 31, 71
Also released under document number 2003-00170650.
|
Income Tax Act - Section 85 - Subsection 85(5) | the capital cost is not reduced by s. 85(5) for non-CCA/recapture purposes | |
| Income Tax Application Rules - Subsection 20(1) | 2 detailed examples of the application of ITAR 20(1) | ||
| 10 June 2003 External T.I. 2003-0018915 F - Attribution - Transfers & Loans to Corp.
Also released under document number 2003-00189150.
|
Income Tax Act - Section 74.5 - Subsection 74.5(6) | s. 74.5(6) applied to an estate-freeze exchange by individual’s Holdco of Opco common shares for preferred shares so that family trust could subscribe for Opco common shares | |
| 12 June 2003 External T.I. 2003-0019725 F - Sale of Holding' Shares to OPCO
Also released under document number 2003-00197250.
|
Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | 3 unrelated individuals likely acting in concert where they act without separate interests to achieve a basis step-up re transactions that are irrelevant to the business of the other party (Opco) | |
| Income Tax Act - Section 84.1 - Subsection 84.1(1) | s. 84.1 likely applicable re transaction in which 3 unrelated individuals act in concert to step up shares in Opco | ||
| 16 June 2003 External T.I. 2003-0020895 F - Association/Convertible Property
Also released under document number 2003-00208950.
|
Income Tax Act - Section 256 - Subsection 256(1.4) - Paragraph 256(1.4)(a) | where multiple debenture holders hold convertible debentures, s. 256(1.4)(a) is to be applied as if all the debentures were exercised (so that each debenture holder is diluted by the others) | |
| Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) | where multiple debenture holders hold convertible debentures, s. 256(1.4)(a) is to be applied as if all the debentures were exercised simultaneously |
CRA indicates that zero-rating under ETA Sched. VI, Pt. V, s. 2(a) for supplies to an airline relates to connected property or services, but not to the aircraft itself
ETA Sched. VI, Pt. V, s. 2(a) refers to a non-resident person who is not registered under the general (Subdivision d) registration provisions and who carries on a business of transporting passengers or property to or from Canada or between places outside Canada by inter alia aircraft, and zero-rates a supply of property or a service made to such a person “in the course of so transporting passengers or property.” Would an aircraft that is being leased or purchased for consumption and use by the airline in transporting passengers qualify for zero-rating?
CRA indicated that the quoted words indicated that “the consumption, use or supply of the property or service by the person must be connected with or arise from the provision of the service of transporting the passengers or property” and then indicated that it was not aware of any situation where the aircraft itself was to be considered as “the actual property being supplied under the provision.”
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.14 under ETA Sched. VI, Pt. V, s. 2(a).
CRA indicates that a Notice of Intent under the E-Commerce GST/HST rules is a CRA, not a taxpayer, tool
ETA s. 211.12(5) provides that where CRA has reason to believe that a non-resident has failed to register under the “simplified regime” provided under the E-Commerce subdivision, it may send a “notice of intent” to the non-resident signifying its intention to require that person’s registration, but providing a brief opportunity to make representations. In response to an inquiry as to whether a non-resident could request a notice of intent in order to get registered under the simplified regime on a prospective basis and avoid the risk of CRA investigating and making the registration effective to the effective date of the new regime, CRA indicated that this was misconstruing the purpose of the notice of intent. It stated:
[T]he Notice of Intent … is a compliance tool to be used at the disposal of the CRA; it is not taxpayer-initiated. Subsection 211.12(5) permits the Minister to send written notice (Notice of Intent) to any person who the Minister believes is required to be registered, but has failed to register as and when required. A person who is required to be registered and receives a Notice of Intent is required to register under subsection 211.12(3).
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.13 under s. 211.12(5).
CRA rules that cash extracted from an estate subsidiary can be rendered substituted property for s. 118.1(5.1)(b) purposes by having such cash paid as redemption proceeds
S. 118.1(5.1)(b) requires that in order for a gift to be deemed to be one made by the deceased rather than the estate, it must be a gift of "property that was acquired by the estate on and as a consequence of the death" or "property that was substituted for that property." 2015-0578551C6 indicated that where an individual, on a post- 2015 death, held "Holdco" owning marketable securities, which Holdco sold and paid to the estate as a cash dividend so that the estate could make a cash donation to a qualified donee, such cash would not be considered to be substituted property (the estate still held its Holdco shares rather than those shares having been replaced by the cash).
CRA has now ruled on transactions which were intended as a workaround.
The estate held all the common shares of Aco which, as a result of quite a number of reorganization transactions, were replacements of shares which the deceased either held on death or was entitled at that time to receive from the spousal trust of the deceased’s mother. Aco then paid a stock dividend on its common shares consisting of newly created preferred shares, redeemed those shares for cash, and made a s. 83(2) election for the resulting deemed dividend to be treated as a capital dividend. The estate then donated the cash to a qualified donee.
CRA ruled that such cash satisfied the substituted property requirement under s. 118.1(5.1)(b). S. 248(5)(b) deems shares received as a stock dividend on shares to be substituted for those shares.
Neal Armstrong. Summary of 2023 Ruling 2020-0862441R3 under s. 118.1(5.1)(b).
CRA has offered 9% over 3 years to its employees
CRA announced that it has presented to the Public Service Alliance of Canada – Union of Taxation Employees (PSAC-UTE) “a fair, competitive offer for wage increases,” namely “a 9% wage increase over three years.”
The PSAC-UTE doubtless is concerned that elevated inflation may prove to be more sticky than this offer implies. John Hussman in “Fabricated Fairy Tales and Section 2A” today expressed the view that the universal “understanding” that increases in the unemployment rate and recessions reduce the inflation rate is a “fairy tale” without empirical support.
CRA News Release, Canada Revenue Agency’s update on negotiations with the Public Service Alliance of Canada – Union of Taxation Employees, 21 April 2023.