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TCC: Unpaid Dividend Refund Is Not a Refund

A pair of recent Tax Court of Canada judgments highlight the unsustainable position taken by the CRA that a statute-barred dividend refund that cannot be recovered by the taxpayer nonetheless reduces taxpayer’s “refundable dividend tax on hand” (“RDTOH”) balance.

We have written in this space before about the Tax Court’s strict interpretation of the three-year time limitation to receive a dividend refund under subsection 129(1) of the Income Tax Act. A consequence of this limitation is that where a taxpayer has missed the three-year filing deadline to obtain a dividend refund there can be “trapped” RDTOH which will require that the corporation pay a taxable dividend at some point in the future in order receive a dividend refund. The CRA, though, continues to take the position that the original taxable dividend reduces the RDTOH balance even where the dividend refund cannot be paid due to the three-year window being missed.

This issue was recently considered in two cases:  Presidential MSH Corporation v. The Queen (2015 TCC 61) and Nanica Holdings Limited v. The Queen (2015 TCC 85). In both cases, the issue was the same – whether the definition of “dividend refund” in subsection 129(3) refers to an amount that was paid or credited to the corporation or is merely a notional account that is automatically reduced notwithstanding that the corporation did not receive a refund. This latter position had been explicitly rejected by the Tax Court in Tawa Developments Inc. v. The Queen (2011 TCC 440). In Presidential and Nanica, the Tax Court held that an unpaid dividend refund is not a refund at all.

Yet the CRA apparently continues to enforce the Act as though the dividend refund is notional – no amount is required to be paid in order for the corporation to obtain a “dividend refund” and therefore the RDTOH balance is reduced without payment.

Fortunately, the Tax Court takes a more sensible interpretation in the recent decisions.

In Presidential, the Court undertook a textual, contextual and purposive analysis of the dividend refund concept, concluding that a payment was required before the RDTOH balance could be reduced. In rendering his judgement, however, Justice David Graham noted that the relevant provisions lack clarity and urged Parliament to take corrective measures to clear up the language in this area.

In Nanica, which was released after the decision in Presidential, Justice Valerie Miller reached the same conclusion, ultimately agreeing with the earlier decisions that “the phrase ‘dividend refund’ in section 129 is the refund of an amount”. There is no reduction of the RDTOH balance where the corporation does not receive a refund.

In light of these decisions, we hope the CRA will align its assessing position with the clear interpretation of the Tax Court.

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TCC: Unpaid Dividend Refund Is Not a Refund

FCA: TCC Erred in Awarding Costs on Basis of Pre-Appeal Conduct

The Tax Court has in recent years demonstrated a willingness to use cost awards to control the parties’ conduct. This includes awarding lump-sum amounts, which may depart markedly from the “tariff” amounts described in Tariff B of Schedule II of the Tax Court’s General Procedure Rules. Further, the Court has wrestled with the weight – if any – that the parties’ conduct prior to an appeal should carry in respect of a cost award.

In Martin v. The Queen (2013 TCC 38), the taxpayer successfully challenged a section 160 assessment in respect of certain amounts paid to her by her spouse. There was evidence the auditor had deliberately misled the taxpayer during an audit, and the taxpayer had spent considerable time and money enduring the audit and objection process before her ultimate success in the Tax Court.

On the issue of costs, the taxpayer asked for (i) solicitor-client costs, or (ii) a fixed amount under Rule 147, or (iii) the tariff costs. The Crown argued that only tariff costs should be awarded. Describing the case as “very unusual, difficult, and hopefully exceptional, case”, the Tax Court considered the pre-appeal conduct of the CRA (among other factors) and awarded the taxpayer a lump sum amount of $10,635 (2014 TCC 50).

The Tax Court repeated its view that costs may be awarded against the Crown where it pursues a meritless case in the Tax Court:

[21] … There are perhaps some arguments and some cases that the Canada Revenue Agency just should not pursue. The Crown is not a private party. By reassessing a taxpayer and failing to resolve its objection, the Crown is forcing its citizen/taxpayers to take it to Court. If the Crown’s position does not have a reasonable degree of sustainability, and is in fact entirely rejected, it is entirely appropriate that the Crown should be aware it is proceeding subject to the risk of a possibly increased award of costs against it if it is unsuccessful.

The Crown appealed and the taxpayer cross-appealed.

The Federal Court of Appeal noted that a discretionary cost award should only be set aside if the judge made an error in principle or if the award is plainly wrong (see Hamilton v. Open Window Bakery (2004 SCC 9) and Sun Indalex Finance LLC v. United Steelworkers (2013 SCC 6)).

In the Court of Appeal, the Crown alleged that the Tax Court judge had made an error of fact  (i.e., the finding that the CRA auditor had been deceitful in providing incorrect information), and an error of law (i.e., relying on the auditor’s deceitful conduct as a basis for awarding increased costs).

On the first issue, the Court held there was no error of law because the Crown admitted the auditor had engaged in deceitful behavior. On the second issue, the Court noted that conduct that occurs prior to a proceeding may be taken into account if such conduct unduly and unnecessarily prolongs the proceeding (see Merchant v. Canada (2001 FCA 19) and Canada v. Landry (2010 FCA 135)). However, the Court stated that the audit and objection stages are not a “proceeding”, which is defined in section 2 of the Rules as an appeal or reference. Accordingly, the Court stated, “the Judge erred in principle in allowing an amount incurred in respect of costs unrelated to the appeal which were incurred at the objection stage. Those expenses, by definition, were not incurred as part of the appeal ‘proceeding’”.

In respect of the cross-appeal, the Court of Appeal considered whether the lower court had erred in declining to award solicitor-client costs. The Court held there was no error because such costs could not include pre-appeal costs, and even if such costs could be awarded, solicitor-client costs are awarded only where there has been reprehensible, scandalous or outrageous misconduct connected with the litigation (see also Scavuzzo v. The Queen (2006 TCC 90)).

The Court allowed the appeal, dismissed the cross-appeal, set aside the lower court’s cost award and substituted a cost award of $4,800 plus disbursements and taxes (2015 FCA 95).

The Court of Appeal decision in Martin may have failed to address all relevant provisions of Rule 147, which arguably provide for very broad discretion for awarding costs. For example, paragraph 147(3)(j) of the Tax Court Rules states the Court may consider “any other matter relevant to the question of costs”.

The Court of Appeal’s decision also raises an issue regarding the circumstances in which deceitful pre-appeal conduct may unduly or unnecessarily prolong a proceeding – wouldn’t such a hindrance follow in every case of deceitful conduct by a party?

Further, the Court of Appeal appeared particularly concerned that the taxpayer’s pre-appeal expenses could not be addressed in the cost award, but it seems clear that the Tax Court had exercised its discretion to award a lump sum based not only on the quantum of the pre-appeal costs but on the existence of the auditor’s deceitful behavior and the Crown’s obstinate approach and refusal to resolve – at any stage – an uncomplicated tax dispute.

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FCA: TCC Erred in Awarding Costs on Basis of Pre-Appeal Conduct

Loss Determinations: No Time Like the Present

Under subsection 152(1.1) of the Income Tax Act, a taxpayer may apply for a determination of losses for a tax year.

A taxpayer typically requests a loss determination after the CRA has issued a nil assessment. This is because no objection may be filed against a nil assessment, and thus one of the ways to challenge the adjustments underlying the nil assessment (i.e., the adjustments to losses or other tax balances) is to force the issuance of a Notice of Determination/Redetermination of Losses, which then triggers the right to file a Notice of Objection. If the taxpayer does not request a loss determination, the taxpayer may challenge the quantum of the losses in a subsequent year in which the losses are applied.

However, the timing of the loss determination request is an important issue – if the losses cannot be applied until several years after the tax year at issue, this could create uncertainty and additional (and perhaps burdensome) record-keeping requirements for the taxpayer.

This issue was considered in CRA Document No. 2014-0550351C6 (November 18, 2014), in which the CRA was asked whether it would issue a determination of loss to a taxpayer who requests one upon filing of its return (i.e., rather than at the later time when a nil assessment is issued).

Under subsection 152(1.1), where the CRA ascertains the amount of a taxpayer’s non-capital loss or net capital loss (or certain other losses), and the taxpayer has not reported that amount on the taxpayer’s return, the taxpayer may request that the CRA determine the amount of the loss and the CRA must make that determination and send a notice of determination to the taxpayer.

In the present case, the CRA stated that subsection 152(1.1) provides that two requirements must be satisfied before a loss determination may be made: First, the CRA must ascertain the amount of the taxpayer’s loss to be an amount that differs from the amount reported by the taxpayer in its return, and (ii) the taxpayer requests the loss determination.

In Inco Limited v. The Queen (2004 TCC 373), the Tax Court stated,

[13] … subsection 152(1.1) of the Act clearly contemplates and establishes a procedure involving sequential steps or events that must take place in order for there to be a valid loss determination. These steps are: (a) the Minister ascertains the amount of a taxpayer’s non-capital loss for a taxation year in an amount that differs from the one reported in the taxpayer’s income tax return; (b) the taxpayer requests that the Minister determine the amount of the loss; (c) the Minister thereupon determines the amount of the loss and issues a notice of loss determination to the taxpayer.

We also note that, in a previous technical interpretation (CRA Document No. 2011-0401241I7 “Adjustments outside the normal assessment period” (September 7, 2011)), the CRA stated,

Paragraph 4 of Interpretation Bulletin IT-512 “Determination and redetermination of losses” also clarifies the CRA’s position on the requirements for a loss determination to be issued:

4. Where at the initial assessing stage or as a consequence of a reassessment arising from an audit or other investigative action by the Department the Minister ascertains a loss in an amount other than that reported by the taxpayer, a notice of assessment or reassessment (including a notice of “nil” assessment or reassessment) will be issued with an explanation of the changes. As well, the notice will inform the taxpayer that upon request the Minister will make a determination of the loss so ascertained and issue a notice of determination/redetermination. In this context, the Minister will not be considered to have ascertained that the amount of a loss differs from an amount reported by the taxpayer where the difference fully reflects a change requested by the taxpayer as a result of amended or new information.

Therefore, where the difference in the amount of a loss for the year reflects an amendment by the taxpayer, this is not considered to be “ascertained” by the Minister, and therefore, on its own, does not meet the requirements for subsection 152(1.1) loss determination. Therefore, in this case, because the taxpayer is requesting the changes and the Minister would not be “ascertaining” the amount of the loss, the taxpayer cannot request a loss determination.

In CRA Document No. 2014-0550351C6, the CRA restated that, if it accepts the amount of the loss reported in the taxpayer’s return, the CRA has not ascertained the loss to be an amount that differs from the amount reported in the return. Accordingly, the first condition of subsection 152(1.1) would not be met, and the CRA could not issue a loss determination at the time the return was filed.

In the CRA’s view, the Act would need to be amended to allow for the issuance of a loss determination at the time the taxpayer files its return.

In other words, the present is no time to request a loss determination. Unless the Act is amended to alter the timing requirements, such a request must wait until the time at which the CRA determines the taxpayer’s loss to be an amount different from the amount reported in the return.

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Loss Determinations: No Time Like the Present

CRA Charities Directorate Publishes 2015 Program Update

The CRA Charities Directorate has published its 2015 Program Update (previous updates are available here).

The CRA Charities Directorate has in recent years been actively updating and promoting the dissemination of its charity information, seeking the views of charities and other entities, and using technology to connect with charities and donors. However, the highest profile news stories in recent memory have focused on the Charities Directorate’s review/audit of charities that may be engaged in political activities and the allegation that these audits may be politically motivated (see our previous post here).

Selected highlights from the 2015 update include:

  • The Charities Directorate will, pursuant to subsection 241(3.2) of the Income Tax Act, disclose public information about every charity, including governing documents, registration applications, directors/trustees lists, financial statements and CRA communications;
  • The Charities Directorate has produced 22 videos and webinars for donors and charities, including videos addressing political activities and the first-time donors super-credit;
  • In 2014, the Charities Directorate sent over 70,000 reminders to charities to file their annual returns, over 8,000 reminders to file their financial statements, and over 5,000 notices to charities that they had not properly completed parts of their returns;
  • The Charities Directorate audits approx 1% of charities each year. In 2013-14, 845 audits were completed and which resulted in a variety of outcomes;
  • The Charities Directorate revokes the registered status of approximately 1,870 charities each year, of which 54% were voluntary, 43% were for failure to file an annual return, 2% were for cause following an audit, and 1% for loss of corporate status;
  • Of the 86,000 charities in Canada, 22% are organized and operated for the relief of poverty, 16% for the advancement of education, 38% for the advancement of religion, and 23% for other purposes beneficial to the community;
  • The Charities Directorate is in the third year of a four-year review of political activities of registered charities. The screening process for selecting charities for audit is based on the content of a charity’s T3010 form, complaints and concerns from the public, internal referrals, related files discovered during audit, media reports and other publicly-available information, and self-identification. The Charities Directorate has identified 60 charities for political activity audits, including 2 for relief of poverty, 12 for advancement of education, 7 for advancement of religion, and 37 for other purposes beneficial to the community (i.e., animal welfare, upholding human rights, protecting the environment, international development, promoting health, and community development);
  • Of these 60 audits, 21 have been completed, 28 remain on-going, and 11 will be started before the end of the project. The completed audits have resulted in six education letters, eight compliance agreements, five notices of intention to revoke, one voluntary revocation, and one annulment.

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CRA Charities Directorate Publishes 2015 Program Update

CRA Appoints New Ombudsman

The CRA has appointed a new Taxpayers’ Ombudsman, the second since the position was created in 2008.

From the CRA news release:

April 10, 2015 – Ottawa – Canada Revenue Agency

The Honourable Kerry-Lynne D. Findlay, P.C., Q.C., M.P., Minister of National Revenue, today announced the appointment of the new Taxpayers’ Ombudsman, Ms. Sherra Profit. Minister Findlay underscored the Canada Revenue Agency’s (CRA) commitment to maintain its strong relationship with the Office of the Taxpayers’ Ombudsman in order to provide Canadians with fair, equitable and respectful service.

The Office of the Taxpayers’ Ombudsman was established in 2008 and operates independently from the CRA. Its mandate is to uphold the Taxpayer Bill of Rights and provide an impartial review of unresolved taxpayer service complaints. This Government created the Taxpayer Bill of Rights, as well as the Office of the Taxpayer’s Ombudsman, and is committed to offering the highest level of service to Canadians.

Ms. Profit has more than 15 years of experience practicing law in a wide range of areas. Ms. Profit holds a Bachelor of Laws Degree from the University of Saskatchewan, and a Bachelor of Arts Degree from St. Francis Xavier University. She was called to the bar on April 14, 2000, in Prince Edward Island.

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CRA Appoints New Ombudsman

Westerhoff and McCallum: More from the OCA on Expert Evidence

The Ontario Court of Appeal released its decision last week in Westerhof v. Gee Estate and McCallum v. Baker (2015 ONCA 206), which are the companion cases to Moore v. Getahun.  All three appeals were heard together.

The legal issue before the Court in Westerhof  and McCallum was whether participant experts and non-party experts could give opinion evidence without having to comply with Rule 53.03, which describes the deadlines and content requirements for expert reports.

The Court of Appeal held that the Divisional Court erred in concluding that the type of evidence – whether fact or opinion – is the key factor in determining to whom Rule 53.03 applies.

Rather, the Court of Appeal was unanimous in that participant experts and non-party experts may give opinion evidence without complying with Rule 53.03.  As a result, Rule 53.03 does not apply to the opinion evidence of a non-party expert or participant expert where he or she has formed a relevant opinion based on personal observations or examinations relating to the subject matter of the litigation for a purpose other than the litigation.

Background

At the trial of Mr. Westerhof, the plaintiff proposed to call evidence from nine medical witnesses.  From the outset, the trial judge ruled that the medical witnesses who treated or assessed the plaintiff but did not comply with Rule 53.03 would not be entitled to give opinion evidence concerning their diagnosis or prognosis, even though they had not been retained for the purpose of the litigation. Those witnesses were also prevented from giving evidence of the history they had taken from Westerhof. The Divisional Court upheld the trial judge’s conclusion.  The Court of Appeal did not agree and reversed the decision, ordering a new trial.

At the trial of Mr. McCallum, the defendant appealed that decision on the basis, inter alia, that the trial judge erred by allowing treating medical practitioners who had not complied with Rule 53.03 to give “an avalanche” of opinion evidence.  The Court of Appeal dismissed this appeal.

Principles set out by the Court of Appeal

Simmons J.A., writing on behalf of the Court of Appeal, concluded that a witness with special skill, knowledge, training or experience who has not been engaged by or on behalf of a party to the litigation may give opinion evidence for the truth of its contents without complying with Rule 53.03 where:

  • The opinion to be given is based on the witness’s observation of or participation in the events at issue; and
  • The witness formed the opinion to be given as part of the ordinary exercise of his or her skill, knowledge, training and experience while observing or participating in such events.

The Court also tried to clear the confusion that often arises from referring to these witnesses as “fact witnesses” because their evidence is derived from their observations of or involvement in the underlying facts.  Simmons J.A. preferred to refer to these witnesses as “participant experts,” which takes into account that in addition to providing evidence relating to their observations of the underlying facts, they may also give opinion evidence admissible for its truth.  As with all evidence, and especially opinion evidence, the Court reiterated that it retains its gatekeeper function in relation to opinion evidence from participant experts and non-party experts.

Six factors were cited by the Court as reasons why the Divisional Court erred:

  1. The Divisional Court failed to refer to a single case under the pre-2010 jurisprudence, which support the conclusion that Rule 53.03 does not apply to opinion evidence given by participant experts. The Court reiterated its view in Moore that “the 2010 amendments to rule 53.03 did not create new duties but rather codified and reinforced … basic common law principles.”  The Court found no basis for the Divisional Court to conclude that the pre-2010 jurisprudence did not continue to apply following the 2010 amendments to the Rules relating to expert witnesses.
  2. Apart from Westerhof, no cases were brought to the Court’s attention that support the view that participant experts are obliged to comply with Rule 53.03 when giving evidence concerning treatment opinions.
  3. There was nothing in Justice Osborne’s Report on the Civil Justice Reform Project that indicated an intention to address participant experts or non-party experts; rather, the focus was litigation experts – expert witnesses engaged by or on behalf of a party to provide opinion evidence in relation to a proceeding.
  4. The use of the words “expert engaged by or on behalf of a party to provide [opinion] evidence in relation to a proceeding” in Rule 4.1.01 and Form 53 makes it clear that an expert must be “engaged by or on behalf of a party to provide [opinion] evidence in relation to the proceeding before the rule applies.  The Court concluded that witnesses, albeit ones with expertise, testifying to opinions formed during their involved in a matter, do not come within this description.  They are not engaged by a party to form their opinions, and they do not form their opinions for the purpose of the litigation.
  5. The Court was not persuaded that disclosure problems exist in relation to the opinions of participant experts and non-party experts requiring that they comply with Rule 53.03.  Quite often, these experts will have prepared documents summarizing their opinions about the matter contemporaneously with their involved, which can be obtained as part of the discovery process.  In addition, it is open to a party to seek disclosure of any opinions, notes or records of participant experts and non-party experts the opposing party intends to rely on at trial.
  6. Requiring participant witnesses and non-party experts to comply with Rule 53.03 can only add to the cost of the litigation, create the possibility of delay because of potential difficulties in obtaining Rule 53.03 compliant reports, and add unnecessarily to the workload of persons not expected to have to write Rule 53.03 compliant reports.

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Westerhoff and McCallum: More from the OCA on Expert Evidence

Highlights from the Toronto Centre CRA & Professionals Group Breakfast Seminar – February 19, 2015

On February 19, 2015, at the Toronto Centre CRA & Professionals Group Breakfast Seminar CRA representatives provided an update on two topics: 1) online CRA e-services, and 2) Regulation 102 and Regulation 105 waivers for non-residents.

An Overview of E-Services for Tax Professionals and Businesses

Maxime Leger and Marc Boisseau, Senior Programs Officers at the Assessment and Benefit Services Branch, provided updates regarding CRA e-services under the My Account, My Business Account and Represent a Client portals. In general, these online portals allow taxpayers, or designated representatives, to submit documents, view and manage various tax accounts online.

My Account

  • Two levels are now required to login and access My Account. In level 1, the taxpayer is required provide personal information (social insurance number, date of birth, postal code, amounts entered on income tax and benefit return) to create a user ID and password. In level 2, the taxpayer receives the CRA security code.
  • After obtaining online access to My Account, Taxpayers can view Notice of Assessment and the status of tax returns. If the taxpayer registers to manage online mail, the CRA will no longer send paper copies. The taxpayer will receive email notifications to check My Account.
  • Taxpayers can register for online mail through NETFILE or EFILE software, by filing a T1 return, online using My Account service or by speaking with an agent.
  • Canadian resident individuals, corporations, and certain partnerships and trusts that, at any time during the year, own certain foreign property costing more than $100,000 are required to file Form T1135 Foreign Income Verification Statement. As of February 9, 2015, individual taxpayers are able to file this form electronically for the 2014 tax year. In the future, electronic filing will be extended to corporations and partnerships.

My Business Account

  • My Business Account has been expanded to allow taxpayers to file returns, Notices of Objection and refunds in regards to excise duties, excise taxes, air travelers security charges and softwood lumber products export charges.
  • This account also permits additional GST/HST elections i.e. GST20-1 Notice of Revocation of an Election for GST/HST Reporting Period by a Listed Financial Institution and RC7220 Election for GST/HST and QST Reporting Period for a Selected Listed Financial Institution
  • Updated options such as payment searches for payments made but not credited to the account and requests to transfer misallocated credits have been added to the Payroll Accounts.
  • Taxpayers can now authorize the CRA to withdraw pre-authorized debits from bank accounts. Taxpayers and designated representatives may manage direct deposits directly through My Business Account.

Represent a Client

  • The CRA noted that business authorization requests can be submitted online and will be reviewed and processed within five business days.
  • A non-resident representative living in the U.S. who wants to access the Represent a Client portal can obtain a non-resident representative number (NRRN) by completing the RC391 Application for a CRA NRRN.
  • Additional changes are expected in April 2015 to permit representatives to register new businesses and add program accounts on behalf of taxpayers.
  • The Tax Data Delivery Service allows authorized representatives to electronically receive information to help client income tax and benefit returns. It delivers tax information including T4 slips (i.e., T4A, T4E, T4A(OAS), T4A(P)), Home Buyers’ Plan, tuition carryover amounts.
  • To use this service, representatives must be a registered electronic filer, registered in Represent a Client, use an EFILE certified product and have a valid Form T1030 Authorizing or Cancelling a Representative.

Mobile Apps

  • In addition to the updated services provided in the online portals, the CRA also introduced new mobile apps.
  • In August 2014, the CRA Business Tax Reminder was released for small and medium sized enterprises with annual revenues of $20 million or less and less than 500 employees. This app allows taxpayers to create reminders and alerts for key dates related to instalment payments, returns, and remittances. See our post here.
  • More recently, on February 9, 2015, the CRA released MyCRA. This new app allows individual taxpayers to view Notices of Assessment, tax return status, and RRSP and TFSA contribution room. In the future it will permit taxpayers to update contact information and enroll for direct deposit.

Non-Resident Taxation in Canada – Regulation 102/105

Claudio DiRienzo, Policy and Technical Advisor at the Specialty Audit Division Compliance Programs Branch, provided an update on issues pertaining to Regulations 102 and 105. In general, these regulations require payors of non-residents rendering services in Canada to withhold and remit tax on the payments subject to treaty-based waivers.

Reduce Red Tape

  • The CRA acknowledged current frustrations among taxpayers and representatives with the cumbersome Regulation 105 and 102 processes and noted that the CRA continues to consult with stakeholders and tax professionals to reduce red tape. However, the CRA emphasized that certain processes were required to comply with existing legislation. The CRA suggested that amendments be made to the current legislation to help streamline the waiver process.
  • Centres of Expertise have been established for the waivers to ensure consistency among waiver requests. To shorten processing times, the CRA advised that comprehensive information be provided and a Business Number (BN) or Individual Tax Number (ITN) be applied for in advance.
  • CRA Document No. IC 75-6R2 states that approximately 30 days are required to review waiver applications. However, the CRA noted in reality the wait time varies on inventory and workload.

R102J and R102R Waivers

  • The CRA commented on the difference between R102J and R102R waivers. Both are treaty-based waivers used by non-residents to reduce the amount of withholding. The R102J is a joint employer and employee waiver and applies only to amounts less than $5,000 if the other country has a tax treaty with Canada or amounts less than $10,000 if the other country is the US. The waiver is effective for a year. To accommodate employers, the waiver is retroactive for 60 days prior to the date granted and an ITN or SIN can be provided at the end of the year.
  • In contrast, the R102R does not have the 60-day retroactive concession and requires a SIN or ITN at the time the waiver is granted.

Short Waivers Granted

  • The CRA acknowledged concerns that Regulation 102R waivers were being issued for short time periods (i.e., six months). As a result, taxpayers were required to reapply for waivers for the remainder of the taxation year. The CRA explained that this arose out of concerns that the employee would constitute a permanent establishment of the employer under Article XV, the Dependent Personal Services provision of the Canada-U.S. Tax Treaty.
  • The CRA representatives responsible for processing waivers do not make determinations in regards to a permanent establishment at the time of the waiver. This determination is made at the time of filing.
  • The CRA noted that it has now revised its position. If the applicant provides the approximate number of days he or she will be in Canada and approximate remuneration amounts, the waiver applies for a full calendar year.

Secondments

  • The CRA also commented on the use of secondment arrangements to manage Regulation 102 and 105 issues. A secondment is the temporary assignment of loan of an employee between two entities. The CRA noted that whether withholding is required under a secondment arrangement is a question of fact. In order to waive withholding a genuine employer-employee relationship must exist.
  • No Regulation 105 withholding is required for reasonable reimbursements under a secondment. CRA Document No. IC 75-6R2, which provides guidelines on secondment arrangements, states that administrative overhead of $250 per month per employee constitutes a reasonable reimbursement.

Updates in Case Law and Administrative Policy

  • The CRA noted that it accepts the Weyerhaeuser Company Limited v. The Queen (2007 TCC 65) decision, which generally held that not all payments to non-residents are subject to withholding tax. However, the CRA noted that they would only apply Regulation 105 consistently with this decision if the taxpayer’s information is documented at the time the payment is made.
  • The CRA is currently in the process of developing a set of guidelines and policy directions for Regulation 102 and Regulation 105 and updating CRA Document No. IC 75-6R2. An online portal for waivers is expected to be launched in 2016.

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Highlights from the Toronto Centre CRA & Professionals Group Breakfast Seminar – February 19, 2015

Two New Judges Appointed to Tax Court of Canada

Two new judges have been appointed to the Tax Court of Canada.

From the news release published by the Department of Justice:

OTTAWA, February 6, 2015 – The Honourable Peter MacKay, P.C., Q.C., M.P. for Central Nova, Minister of Justice and Attorney General of Canada, today announced the following appointments:

The Honourable Dominique Lafleur, a lawyer with KPMG in Montreal is appointed a judge of the Tax Court of Canada to replace Madam Justice L. Lamarre, who has been appointed Associate Chief Justice of the Tax Court of Canada.

Madam Justice Lafleur received a Bachelor of Laws from the University of Montréal in 1989 and a Master’s degree in Taxation from the University of Sherbrooke in 1993. She was admitted to the Bar of Quebec in 1990.

Madam Justice Lafleur had been a lawyer with KPMG in Montreal since 2014. Prior to that, she had been counsel with Heenan Blaikie LLP, LLC in Montréal (1996-2014) and with Mendelson Rosentzveig Schacter (1991-96) working in the area of taxation. She had been a member of the consultative committee and Chair of Taxation and Public Finance at the University of Sherbrooke since 2006 and had been a speaker at study sessions and conferences on taxation for the Canadian Tax Foundation.

The Honourable Sylvain Ouimet, a lawyer with the Department of Justice Canada in Ottawa and Montreal is appointed a judge of the Tax Court of Canada to replace Mr. Justice P. Bédard, who resigned effective August 31, 2014.

Mr. Justice Ouimet received a Bachelor in Business Administration (Finance) from l’Université du Québec à Montréal in 1993 and a Bachelor of Laws from l’Université de Montréal in 1997. He also earned a “Certificat en initiation au droit français” from l’Université de Poitiers in France in 1996. He was admitted to the Bar of Quebec in 1999.

Mr. Justice Ouimet had been a lawyer with the Department of Justice’s Ottawa and Montreal offices working in the area of taxation since 2002. Previously, he had been a competition law officer for Industry Canada in Gatineau (2001-02) and an analyst for Laboratoires Abbott Limitée in Montreal (2000).

These appointments are effective immediately.

Two New Judges Appointed to Tax Court of Canada

Moore v. Getahun: Expert Witnesses

On January 29, 2015, the Ontario Court of Appeal released its widely-anticipated reasons in Moore v. Getahun (2015 ONCA 55).

In the lower court’s controversial decision released last year, the court criticized the practice of counsel reviewing draft expert reports and communicating with experts. The court stated that counsel should not review or comment on draft expert reports because of the risk that such reports could be shaped by the views expressed by counsel. This criticism caused considerable concern in the legal profession, as well as in the community of expert witnesses (see our previous post on the Moore case here).

The Court of Appeal dismissed the appeal, holding that the determinations made on the expert evidence issue by the lower court judge did not affect the actual outcome of the trial.

Importantly, Justice Sharpe, writing for the majority of the Court of Appeal, held that the trial judge erred in concluding that it was improper for counsel to assist an expert witness in the preparation of the expert’s report.

Justice Sharpe stated that “the ethical and professional standards of the legal profession forbid counsel from engaging in practices likely to interfere with the independence and objectivity of expert witnesses” and that “it would be bad policy to disturb the well-established practice of counsel meeting with expert witnesses to review draft reports.”

Justice Sharpe further stated that “[C]ounsel play a crucial mediating role by explaining the legal issues to the expert witness and then by presenting complex expert evidence to the court.  It is difficult to see how counsel could perform this role without engaging in communication with the expert as the report is being prepared.”

With respect to the issue of continuous disclosure of consultations regarding draft reports, Justice Sharpe held that “absent a factual foundation to support a reasonable suspicion that counsel improperly influenced the expert, a party should not be allowed to demand production of draft reports or notes of interactions between counsel and expert witnesses.”  In Justice Sharpe’s view, making preparatory discussions and drafts subject to automatic disclosure would be contrary to existing doctrine and would inhibit careful preparation.  Further, compelling production of all drafts, good and bad, would discourage parties from engaging experts to provide careful and dispassionate opinions, but would instead encourage partisan and unbalanced reports.  Moreover, allowing open-ended inquiry into the differences between a final report and an earlier draft would run the risk of needlessly prolonging proceedings.

Accordingly, the Court of Appeal rejected the trial judge’s holding that counsel should not review draft reports with experts, as well as her holding that all changes in the reports of expert witnesses should be routinely documented and disclosed.

The Court of Appeal’s decision in Moore seems to have lifted the haze caused by the trial judge’s decision and clarified the role of the expert and the manner in which expert reports are to be prepared under the 2010 amendments to rule 53.03 of the Ontario Rules of Civil Procedure. Further, the Court of Appeal’s decision is important guidance in respect of the preparation and presentation of expert reports in trial courts across the country.

Moore v. Getahun: Expert Witnesses

ConocoPhillips: FCA Confirms Tax Court’s Jurisdiction to Determine Questions of Timing and the Validity of a Notice of Objection

In ConocoPhillips Canada Resources Corp. v. The Queen (2014 FCA 297), the Federal Court of Appeal overturned a Federal Court decision (2013 FC 1192) and dismissed an application for judicial review by the taxpayer finding that the Federal Court lacked jurisdiction in this case.

ConocoPhillips had commenced an application for judicial review as a result of a dispute between the CRA about whether a Notice of Reassessment had been validly sent to the taxpayer.  The CRA alleged that it mailed a Notice of Reassessment on November 7, 2008. ConocoPhillips alleged that it never received the Notice of Reassessment and that it first learned of the reassessment on April 14, 2010.

Accordingly, when ConocoPhillips filed a Notice of Objection on June 7, 2010, the CRA advised that it would not consider the objection on the grounds that it was not filed within 90 days of the alleged mailing date (i.e., November 7, 2008) and that no request for an extension of time was made within the year following the alleged mailing date of the reassessment.

The Federal Court considered the question of jurisdiction and found that it had jurisdiction because the Court was not being asked to consider the validity of the reassessment (which can only be determined by the Tax Court of Canada) but rather, was only being asked to review the CRA’s decision not to consider the objection.

Based on the standard of reasonableness, the Federal Court found in favour of ConocoPhillips on the basis that the CRA had not sufficiently engaged the evidence to appropriately render an opinion whether or not the reassessment was mailed on the alleged date. The Court set aside that decision.

The Crown appealed to the Federal Court of Appeal on the basis that the Federal Court lacked jurisdiction on this issue.  The Federal Court of Appeal allowed the appeal.

Section 18.5 of the Federal Courts Act provides that judicial review in the Federal Court is not available where, inter alia, an appeal is permitted on the issue before the Tax Court of Canada.  In the present case, the Federal Court of Appeal stated that, pursuant to subsection 169(1)(b) of the Income Tax Act (Canada), ConocoPhillips could have appealed to the Tax Court after 90 days had elapsed following the date its objection was initially filed and the Tax Court would have been the correct forum to determine if, or when, the Notice of Reassessment was mailed and when the time for filing a Notice of Objection expired.

The Federal Court of Appeal clarified that the Minister’s obligation to consider a Notice of Objection is triggered regardless of whether a Notice of Objection may have been filed within the required time-frame. Further, the Minister’s decision on this issue is not an impediment to filing an appeal to the Tax Court pursuant to paragraph 169(1)(b) of the Income Tax Act (Canada). Accordingly, judicial review of this issue was not available in the Federal Court.

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ConocoPhillips: FCA Confirms Tax Court’s Jurisdiction to Determine Questions of Timing and the Validity of a Notice of Objection