Words and Phrases - "reasonable"
Pinnacle International Realty Group II Inc. v. The King, 2023 TCC 161
The taxpayer and another wholly-owned subsidiary (“Taylor”) of the same corporation (“PIRG”) were the 5% and 95% partners, respectively, of a partnership, with an October 31 year end, which was engaged in developing a Vancouver condominium project. In October 2006, after virtually all of the profits from the development had been realized, PIRG transferred the shares of Taylor to a “Lossco” with which it dealt at arm’s length (“Meston”), with Taylor then being wound-up into Meston. For the taxation year of the partnership ending on October 31, 2006, 95% and 5% of the partnership income was allocated to Meston and the taxpayer, respectively.
D’Arcy J noted that the taxpayer accepted that s. 103(1) applied because the allocation to Meston “was principally motivated by tax” (para. 55). In applying s. 103(1) to confirm the assessment by the Minister which allocated 95% of the partnership profit for that year (minus the amount of a “deal fee” paid to Meston) to the taxpayer, D’Arcy J found:
- What was a “reasonable” allocation in accordance with s. 103(1) was a question of fact.
- As Meston became a partner after over 99% of the partnership profits had been earned, so that it would be unreasonable to allocate 95% of those profits to Meston, the question then became as to how the 95% of the profits should be allocated as between Taylor and the taxpayer.
- Taylor was a “shell corporation” with “no physical assets, employees, or bank accounts,” whose “only asset was its interest in the Partnership” and which had not made “any significant financial contributions to the Partnership” (paras. 90-91).
- The taxpayer “unlike Taylor [was] a corporation of substance” with “between 21 and 32 employees,” some of whom managed the development (para. 76).
- The taxpayer also helped finance the development and guaranteed (along with other group members, but not Taylor) project bank loans.
- Although the individual shareholder of PIRG testified that he provided his services on behalf of Taylor, he was paid millions in salary by the taxpayer, and nothing by Taylor.
Connolly v. Canada (National Revenue), 2019 FCA 161
The taxpayer did not file income tax returns for the 1988 to 2003 taxation years on the basis that as he owed no tax, this was unnecessary. Thus, when he made RRSP contributions in 2003 and 2004, he had not received any recent Notices of Assessment and, thus, no details of his unused RRSP contribution room – which, in fact, had been reduced to near zero as a result of his and his employer’s contributions to a registered pension plan.
In 2007, the CRA sent the taxpayer a letter explaining that he might have over-contributed to his RRSPs from 2003 to 2005, thereby giving rise to an obligation to file over-contribution (T1-OVP) returns and pay penalty tax - but that if he withdrew the excess contributions within the statutorily prescribed timeframe, this could be done without withholding tax by filing a T3012A form. The taxpayer directed his accountant to prepare the forms. Although the accountant apparently sent the forms more than a year later (without any follow-up by the taxpayer), CRA had no record of having received them, and arbitrarily assessed the taxpayer on January 5, 2009 for tax on the over-contributions, penalties and interest. On January 21, 2009, his accountant filed T1-OVP returns for 2003 to 2007 and T3012A forms for 2003 and 2004. On February 26, 2010, the taxpayer withdrew the requisite RRSP funds, included the withdrawals in his income and claimed a corresponding deduction.
The Minister reassessed and denied the deduction. The Tax Court of Canada concluded that the taxpayer met the statutory requirements to claim the deduction for the 2004 over-contributions, but not the 2003 over-contributions. In obiter dicta, the Tax Court suggested that the taxpayer seek a ministerial waiver for the tax on the over-contributions, penalties and interest, which he did. In 2016, the Minister denied the taxpayer’s requests for relief from the tax on the over-contributions and for waiver of penalties and interest for the years still in issue. The delegate applied internal CRA guidelines that stated that “Reasonable error means that the taxpayer did not intend to over contribute to their RRSP/PRPP and that it happened because of extraordinary circumstances beyond their control,” and that “reasonable steps” allowed the taxpayer “two months from the date of the Agency’s letter to withdraw funds and submit proof.” The subsequent judicial review before the Federal Court was the subject of the taxpayer’s appeal.
In dismissing the taxpayer’s appeal from a Federal Court decision denying relief judicial review of this decision, and in finding that the delegate’s interpretation of s. 204.1(4) was unreasonable, Gleason JA stated (at paras 59, 61, 67, 68):
… [T]here is no way to equate the provision’s requirement of a reasonable error with a requirement that the error result from extraordinary circumstances. Nor is it reasonable to exclude from consideration all errors flowing from a mistake about the quantum of available contribution room or all errors caused by bad advice received from a third party. Similarly, it is unreasonable to interpret the taking of reasonable steps to withdraw an over-contribution from an RRSP to mean that a taxpayer must withdraw the over-contributions as soon as possible or within the two-month timeframe mentioned in CRA’s internal “Guidelines for waiving tax – 19(23)7.23”.
…[S]ubsection 204.1(4)… requires only that the error that led to the over-contribution and steps taken to remedy it be reasonable.
The delegate’s interpretation of subsection 204.1(4) of the ITA (as well as the interpretation set out in the internal CRA guideline, on which the delegate relied) thwarts the subsection’s remedial purpose as it virtually extinguishes the Minister’s discretion … . Nearly every error a taxpayer might make in over-contributing to his or her RRSP (other than a simple arithmetical error) will be caused by a misunderstanding of the applicable limits – an error of law. … Similarly, the fact that the error might have been made by a third party advisor or as a result of erroneous advice given by such advisor does not automatically mean that the error cannot be reasonable.
…[T]he requirements to take reasonable steps to withdraw an RRSP over-contribution cannot be equated with immediacy or with the two-month timeframe mentioned in CRA’s internal “Guidelines for waiving tax – 19(23)7.23”.
However, in going on to dismiss his appeal, she stated (at paras, 77-78):
… Mr. Connolly appears to have been aware that there was a limit on RRSP contributions and that one’s contribution room bore a relationship with one’s income. But… Mr. Connolly does not appear to have made any inquiries … to confirm his contribution room. His error therefore likely cannot be said to have been a reasonable one.
Even if Mr. Connolly could be said to have made a reasonable error in these circumstances, the steps Mr. Connolly took to correct the mistake cannot in any way be characterized as reasonable.
Sun Life Assurance Company of Canada v. The Queen, 2015 TCC 37
The appellant ("Sun Life"), whose principal business was the sale of financial products, subleased space in its various office buildings to independent contractors who also sold Sun Life financial products, at rents that also were intended to capture costs of the building common areas. The floor space of a building set aside for use of such "advisers" (including unoccupied space that was allocated for future recruits) was grossed up for a pro rata share of common areas (principally, jointly used spaces such as meeting rooms, internal corridors and hallways, and building common areas attributed to Sun Life by the building owner), and the total so allocated to the advisers was divided by the total area under lease to determine the proportion of the rents paid by Sun Life on which it claimed ITCs.
Owen J allowed Sun Life's ITC claims in full, finding its allocation method to be fair and reasonable (noting, at para. 40, that "there may be more than one method that is fair and reasonable.") The Minister argued that, even to the extent that the common spaces (such as meeting rooms) were being used by the advisers, they were being used in furtherance of the appellant's provision of financial services. Owen J stated (at para. 48) that "this argument fails to recognize that the Advisers are independent contractors and that their use of the subleased space is in furtherance of their own business objectives," noted (at para. 49) "that the Advisers cannot use the subleased space without also using the common-use space," and (at para. 50) that "the direct purpose of the available space was to rent the space to Advisers", which was relevant rather than "the indirect (or ultimate) purpose of having space available … to facilitate the sale of Financial Products."
Likewise, Owen J found (at para. 54) that, absent a sham, "the amount of vacant space that is required for rental to Advisers is a business judgment best left to Sun Life... ."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Excise Tax Act - Section 141.01 - Subsection 141.01(2) | vacant office space was used for future taxable supplies | 89 |