Words and Phrases - "directly or indirectly"
Louie v. The Queen, 2018 TCC 225, rev'd in part on "advantage" issue (for subsequent years) 2019 FCA 255
From May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed tax-free savings account (“TFSA”) and her taxable trading account (“CDN”) at TD Waterhouse Discount Brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The TDW policy was to permit a transfer to occur at any price between the high and low trading prices for the day. Accordingly, the transfers were made near the close of trading for the day, and at the high price if she was transferring out of her TFSA, and at the low price where she was transferring in. She ceased directing the swaps on the introduction of specific “swap transaction” rules effective October 17, 2009. However, she was assessed under s. 207.01(2) in amounts equalling 100% of the increase in the fair market value (“FMV”) of her TFSA in 2009, 2010 and 2012 of $200,795, $70,841 and $29,217, respectively (her TFSA having decreased in value in 2011), on the basis that there had been “advantages” described in s. (b)(i) of the s. 207.01(1) definition.
Lamarre ACJ found that the swaps constituted a series of transactions to which the 2009 increase in FMV was attributable, and “that benefiting from the exemption from tax under Part I was one of the Appellant’s main purposes in completing the series of transactions” (para. 37) and that (para. 41) the requirement set out in s. (b)(i)(B) of the “advantage” definition was met as:
The taxpayer must have intended to benefit from a tax-free distribution from her TFSA as opposed to a taxable withdrawal from her RRSP or a taxable gain within her CDN. Otherwise, I cannot see any advantage to transferring the shares between those accounts.
In finding that the test in s. (b)(i)(A) also was satisfied, Lamarre ACJ further found (at para. 45):
If there is a second-by-second market price, the FMV is the price at the second the swaps occur, not a price selected within a bracket of prices.
Furthermore, the swaps were not transactions between persons dealing at arm’s length, as the taxpayer “was the single mind directing all the swap transactions” (para. 55) and “the parties in control of the RRSP and CDN acted in concert without separate interests” (para. 56).
In addition, “all the swap transactions were carried out in such a way as to favour the TFSA to the detriment of the RRSP and CDN” (para. 57). Accordingly, “the series of swap transactions would not have occurred if the parties had been dealing at arm’s length and were acting prudently, knowledgeably and willingly.”
However, Lamarre concluded that none of the increase in FMV in 2010 and 2012 was attributable to the swap transactions, finding (at paras 78, 80-82):
The broad scope of “directly or indirectly” is limited by the reasonableness requirement also present in paragraph (b). In this case, the circumstances that it is reasonable to consider in deciding whether the 2010 and 2012 increases are attributable to the 2009 swaps include the fact that, unlike in 2009, in the 2010 and 2012 taxation years the Appellant was no longer engaging in swap transactions and the account was subject purely to market forces.
…[I]t is reasonable in the circumstances to attribute the 2010 and 2012 increases to the post-2008 financial recovery. …
Justice Woods’ concerns in Garron about the ambiguity inherent in the phrase “directly or indirectly” may perhaps not be entirely appropriate in the context of the transfer of property … [which] has a defined end point, although a circuitous route may be taken to get there. Here there is no easily defined or delineated end point … regarding the length of time during which an increase may still be attributed to an impugned transaction.
A more restrictive interpretation of paragraph (b) … avoids these difficulties.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) | share swap transactions were series notwithstanding that their particulars and end point were not known in advance | 189 |
| Tax Topics - Income Tax Act - Section 207.05 - Subsection 207.05(3) | holder rather than trustee liable for advantage tax | 148 |
| Tax Topics - General Concepts - Fair Market Value - Shares | use of price range for share valuation was inappropriate where there was a second-by-second market | 185 |
Resource Capital Fund IV LP v Commissioner of Taxation, [2018] FCA 41 (Federal Court of Australia), rev'd on various grounds [2019] FCAFC 51
Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. The significant gains realized by RCF IV and RCF V in disposing of these investments consistently with their modus operandi which was (per the oral evidence) to “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit” (para. 32) were realized on income account. In further finding that such gains were income derived from an Australian source, Pagone J first noted (at para. 52) the RCF LPs’ submissions that significant decisions were made outside Australia by the general partner’s investment committee and that the manager was outside Australia, and then stated (at para. 53):
The fact that the business and assets were in Australia might not of itself be sufficient to make Australia the ultimate source of the gain derived upon the disposal of the shares, but the location in Australia of the business and assets, and the nature and extent of the business and assets, occasioned substantial activities in Australia that were an integral part of the investment, its management, and its ultimate profitable disposal. …
An element of the investment strategy of the RCF IV and RCF V partnerships was for members of the RCF Management team to occupy positions on boards of the companies in which RCF invested to guide management and to contribute to an increase in the value of the investments which were intended to be sold at a profit. That function was performed by employees in the Perth office … .
Respecting the statutory reference to income derived “directly or indirectly,” he stated (at para. 51):
The Commissioner submitted that the phrase directs attention “not merely to the proximate origin of the income, but also to those acts or matters which constitute contributory causes to the generation of income”, however, the adverbial phrase quantifies the word “derived” in the section rather than the word “source”. It can be accepted that non-proximate contributory causes may be relevant to ascertain the source of derivation but the adverbial phrase does not lessen or reduce the need to find that that which was derived was from an Australian source.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares | private equity fund LP with 5-year holding objective realized share gain on income account | 175 |
| Tax Topics - Treaties - Income Tax Conventions - Article 3 | each U.S.-resident partner of a Caymans PE LP carried on a U.S. “enterprise” | 234 |
| Tax Topics - Treaties - Income Tax Conventions - Article 13 | exclusion in Art. 13 of Aust.-U.S. Treaty for real property dispositions extended to shares of Australian holding company holding mining leases through grandchild | 420 |
| Tax Topics - General Concepts - Stare Decisis | lower court not bound by a point of law that was assumed rather than examined by a higher court | 292 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) | assessment of partnership was assessment of partners | 89 |
| Tax Topics - Treaties - Income Tax Conventions - Article 6 | Art. 6 extends common law meaning of real property | 198 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) | shares of lithium mining and processing company were derived principally from the processing rather than mining operation and, thus, were not taxable Australian real property | 514 |
| Tax Topics - Income Tax Act - Section 218.3 - Subsection 218.3(1) - Canadian Property Mutual Fund Investment | shares of Australian mining company were primarily attributable to the processing rather than mining operations | 142 |
| Tax Topics - General Concepts - Fair Market Value - Other | processing assets of mining company were more valuable than its mining assets | 238 |
Joint Committee, "Small Business Deduction Rules under Section 125 of the Income Tax Act - Follow-Up to Our Meeting with Canada Revenue Agency", 2 June 2017 Joint Committee Submission to Finance respecting the Small Business Deduction, appending Submission to Randy Hewlett of the Income Tax Rulings Directorate dated 14 February 2017
Issues with cooperatives (p. 2)
Every farming or fishing Canadian-controlled private corporation (“CCPC”) selling substantially all of its products to a co-operative in which it holds an interest will be ineligible for the small business deduction (“SBD”), and a similar issue arises if they pool resources to form a processing company. (The subsequent letter to Finance acknowledged May 2017 draft legislation on farming and fishing co-operatives and stated that “co-operatives operate in sectors beyond farming and fishing.”)
Unclear meaning of “direct or indirect interest” (pp. 7, 2 and 5)
It is unclear whether “income” means “net income,” and the meanings of “direct or indirect” and “interest” also are unclear.
A small business that banks at a local credit union could lose the SBD on services-contract income (e.g., IT services) earned from the credit union.
Mr. Smith has units in the iShares Dow Jones Fund, which holds Ford Motors which, in turn, holds Ford Canada. This may indicate that an auto parts manufacturer of which he is a shareholder loses the SBD on its income from Ford Canada.
Inadequacy of 10% cap/”any” related shareholder test (p. 3)
In rural areas with fewer customers to draw on, non-arm’s length customers could account for more than 10% of a CCPC’s active business income. For example, a shareholder of a major contractor might be related to a shareholder of a local building supply store, thereby denying SBC access to the latter.
A small contractor could lose SBD access on income from a significant contract with a large private corporation having a very small employee-shareholder who was related.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified partnership income - Paragraph (c) | 62 |