We are often asked to provide a “likelihood of success” opinion (frequently with percentage thresholds) with respect to a proposed transaction. As anyone whose been asked for such an opinion knows, it is far from an exact science.

This document has been around for a while, but recently arrived on our desks again. It is a helpful (and humourous) listing of each percentage along with its corresponding ”plain english” explanation.

Enjoy!

The role of intent in the determination of whether a worker is an employee or independent contractor has taken on greater significance in the last decade or so. However, despite a series of decisions on the issue from the Tax Court and the Federal Court of Appeal, there appeared to be some inconsistency in respect of how and when intent was to be considered when applying the “four-in-one” test from Wiebe Door Services Ltd. v. The Queen ([1986] 3 F.C. 553) and 1671122 Ontario Ltd. v. Sagaz Industries Canada Inc. (2001 SCC 59).

In 1392644 Ontario Inc. (o/a Connor Homes) et al. v. The Queen (unreported; see court files 2010-948(CPP)I, 2010-949(CPP)I, 2010-950(EI)I, 2010-951(EI)I, 2011-237(EI)I, 2011-239(CPP)I, 2011-241(EI)I, 2011-242(CPP)I), the Tax Court held that several workers were employees of the appellant companies.

In the Federal Court of Appeal (2013 FCA 85), the taxpayers argued that the Tax Court judge had erred by (i) placing weight on the findings of fact made in other judgments involving the same appellants before the Tax Court, and (ii) not considering and misapplying the test for determining whether a worker is an employee or an independent contractor, particularly by not giving proper weight to the intention of the parties as expressed in their contracts.

On the first issue, the Federal Court of Appeal held that the lower court had noted that the facts in the present appeal were essentially the same as those considered previously in three separate appeals before three other judges of the Tax Court. However, in this case, the lower court judge had reviewed the parties’ evidence, weighed it, and reached his own conclusions based on it. Thus, there was no error committed by the lower court judge.

On the second issue – the role of intent – the Federal Court of Appeal noted the jurisprudential trend towards affording substantial weight to the stated intention of the parties (see, for example, Wolf v. The Queen (2002 FCA 96), Royal Winnipeg Ballet v. The Queen (2006 FCA 87)). However, the Court of Appeal noted, there was some difficulty in the application of the approach described in Wolf and Royal Winnipeg Ballet. The Court of Appeal emphasized that the parties’ may describe their relationship as they see fit, but the legal effect that results from the relationship is not to be determined at the sole subjective discretion of the parties. The Federal Court of Appeal stated:

[38] Consequently, Wolf and Royal Winnipeg Ballet set out a two-step process of inquiry that is used to assist in addressing the central question, as established in Sagaz and Wiebe Door, which is to determine whether the individual is performing or not the services as his own business on his own account.

[39] Under the first step, the subjective intent of each party to the relationship must be ascertained. This can be determined either by the written contractual relationship the parties have entered into or by the actual behavior of each party, such as invoices for services rendered, registration for GST purposes and income tax filings as an independent contractor.

[40] The second step is to ascertain whether an objective reality sustains the subjective intent of the parties. … the subjective intent of the parties cannot trump the reality of the relationship as ascertained through objective facts. In this second step, the parties’ intent as well as the terms of the contract may also be taken into account since they color the relationship. … the relevant factors must be considered “in the light of” the parties’ intent. However, that being stated, the second step is an analysis of the pertinent facts for the purposes of determining whether the test set out in Wiebe Door and Sagaz has been in fact met, i.e., whether the legal effect of the relationship the parties have established is one of independent contractor or of employer-employee.

The Court of Appeal noted that, in the present case, the lower court judge had proceeded in an inverse order (i.e., dealing with the parties’ intent at the end of his analysis). The Court of Appeal stated that the first step of the analysis should always be to determine the intent of the parties. However, despite the lower court’s inverse analysis, the judge had reached the correct conclusion regarding the status of the workers.

The Federal Court of Appeal dismissed the taxpayers’ appeals.

This is helpful guidance from the Federal Court of Appeal on the manner and stage at which intent should be considered when determining whether a worker is an employee or independent contractor.

A tax dispute with the Canada Revenue Agency may be an unwelcome and unpleasant experience for a taxpayer. In addition to the potentially complex tax issues, the dispute resolution process itself can be a nuanced and challenging process. However, an appeal to the Tax Court of Canada offers taxpayers a chance to have their disputes considered by “fresh eyes,” which could result in a victory, settlement or other efficient resolution.

In the March 15, 2013 issue of The Lawyers Weekly, I discuss some of the ways a tax appeal differs from a typical civil trial.

At the Canadian Tax Foundation’s recent Ontario Tax Conference (October 29-30), the Canada Revenue Agency provided an update on its current audit priorities and activities as part of the conference’s “Tax Administration Panel“.

The CRA was represented by Fiona Harrison, Manager of the Resources Section at the CRA’s Income Tax Rulings Directorate, and Jeff Sadrian, National Director of the CRA’s Large Business Audit Programs.

In the course of the presentation, the CRA discussed a variety of issues (see the “Tax Administration Panel” conference slides), including “red tape” reduction, the CRA’s trust audit project, Regulation 105 waivers, ABIL claims, and omission penalties under s. 163(1). The CRA confirmed that it determines audit priorities based on the “highest risk”, and that it is continuing its “intelligence-based risk assessment” of taxpayers to determine which files will be selected for audit.

Other highlights included:

• Folios – The CRA considers many existing Interpretation Bulletins to be out of date. The CRA intends to reorganize the information in the existing publications in new Folio chapters (i.e., all information relating to specific subjects will be “grouped” together). The CRA plans to update the Folios on an on-going basis, and the first 10-12 Folio chapters are likely to be published before the end of 2012.
• Entity Classification - In a reversal of an earlier position (see, for example, CRA Document No. 2011-0415141E5 “Tax status of a German Family Trust” (August 4, 2011)), the CRA will once again accept requests for rulings on the classification of foreign entities.
• Inter-Provincial Trusts – Where a trust claims to be resident, and pays tax, in one province, and the trust is later reassessed as resident in another province, the CRA will reassess the trust only for the difference between the tax paid in the first province and the tax owing in the second province.
• U.S. LLCs – The CRA continues to disagree with the Tax Court’s decision in TD Securities (USA) LLC. v. The Queen (2010 TCC 186). The CRA’s view is that a fiscally-transparent U.S. LLC does not qualify as a resident of the U.S. for the purposes of the Canada-U.S. Tax Treaty, and is not a “qualifying person” under Article XXIX-A of the Treaty.
• Section 56(2) – The CRA stated that it is aware of “elaborate arrangements” utilized to divert business income to family members. The CRA stated that, where such arrangements include the use of a trust, section 56(2) may be applied in respect of distributions from the trust provided the requirements of the provision are otherwise met (see Neuman v. The Queen (98 D.T.C. 6297 (S.C.C.)). In other words, the CRA may apply s. 56(2) to the actions of a trustee.

(The Tax Administration Panel conference slides are republished with permission of the Canadian Tax Foundation.)

The Supreme Court of Canada will release its decision in The Queen v. GlaxoSmithKline Inc. (F.C.) (33874) on Thursday, October 18, at 9:45 a.m.

In earlier proceedings, the Tax Court dismissed the taxpayer’s appeal, and the Federal Court of Appeal allowed the taxpayer’s appeal (see our posts on those decisions here and here).

The Crown’s factum may be found here, and GSK Canada’s factum here. Oral arguments were heard by the Supreme Court of Canada in January 2012 (see our post on the arguments here). The decision will be the first for the Supreme Court on the issue of transfer pricing.

The two main questions placed before the Supreme Court were:

1. Did the Federal Court of Appeal err by applying the reasonable business person test to the interpretation of s. 69(2) of the Act?
2. Did the Federal Court of Appeal err in interpreting s. 69(2) by failing to apply the arm’s-length principle on a transaction-by-transaction basis and on the basis that members of the multinational group are operating as separate entities?

In a cross-appeal by GSK Canada, the Supreme Court was asked to consider whether the Federal Court of Appeal erred in ordering that the matter be returned to the trial judge for further determination.

We will blog the decision shortly after its release tomorrow.

In Hine v. The Queen (2012 TCC 295), a decision released last week, the Tax Court of Canada considered whether a taxpayer was “grossly negligent” in relying on his accountant (who happened to be his wife) to prepare his tax return, and whether the taxpayer’s written offer to settle (asking the Crown to concede entirely) should be considered when making a cost award.

The decision in Hine is helpful in determining (a) whether the taxpayer was grossly negligent in relying entirely on his tax preparer, and (b) whether a settlement offer may be ignored by the Tax Court in awarding costs.

Gross Negligence – 163(2)

The taxpayer was a general contractor who was in the business of “flipping” homes. In 2006, he sold a renovated house for $319,000. The taxpayer reported a loss of $131,653 for the year. In the course of an audit that commenced in 2008, the CRA discovered that the taxpayer had failed to report $157,965 of business income on the sale of the house. The CRA reassessed to include the additional income and imposed a gross negligence penalty under subsection 163(2) of the Income Tax Act. Only the gross negligence penalty was at issue in the appeal.

Generally, under subsection 163(2), the CRA may impose a penalty equal to the greater of $100 and 50% of the avoided tax where the taxpayer knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in a return.

The courts have been consistent in holding that a high degree of negligence or intentional acting is required in order for the gross negligence penalty to apply (see, for example, Udell v. M.N.R., 70 DTC 6019 (Ex. Ct.)). However, there has been less consistency in the application of the penalty where the taxpayer relied on the work of his/her tax preparer. Generally, in such cases, there must be gross negligence on the part of the tax preparer, and there must be some element of privity or wilful blindness on the part of the taxpayer such that he/she acquiesced in the making of the false statement or should have taken further steps to confirm the accuracy of the return.

In Hine, the taxpayer handed over responsibility for the bookkeeping and tax returns to his wife, who had a background in financial accounting but was not a professional accountant. The taxpayer relied entirely on his wife to keep proper records and prepare his returns. The wife’s error resulted in the underreported income, and neither the taxpayer nor his wife detected the error before filing the return.

In argument, the taxpayer relied on a line of cases establishing that reliance on professional advisors does not necessarily lead to a finding of gross negligence (see, for example, Findlay v. The Queen (2000 DTC 6345 (Fed. C.A.)), Gallery v. The Queen (2008 TCC 583) and Down v. M.N.R. (93 DTC 591) (T.C.C.)). The Crown relied on a line of cases that states that a taxpayer cannnot escape his or her own liability under subsection 163(2) by simply handing over all tax affairs to a professional advisor (see, for example, Panini v. The Queen (2006 FCA 224), Hougassian v. The Queen (2007 TCC 293) and Brygman v. M.N.R. (79 DTC 858) (Tax R.B.)).

The Tax Court found that the taxpayer and his wife intended to be diligent and accurate in reporting the taxpayer’s income, and an honest confusion led to the error.

Finally, the Tax Court held that the determination of the issue of whether the taxpayer and his advisor were grossly negligent was unaffected by the their spousal relationship. On the facts of the case, the taxpayer’s “blind faith in his wife” was not unreasonable. The Tax Court allowed the taxpayer’s appeal.

Costs

After the court’s decision, the taxpayer sought costs above the usual tariff amounts on the basis that a settlement offer had been made before the hearing. The taxpayer argued that the offer should be considered under paragraph 147(3)(d) of the Tax Court of Canada Rules (General Procedure) and enhanced costs awarded.

In his written offer, the taxpayer had set out certain submissions he intended to make at the hearing and argued that the gross negligence penalty was unsupportable. The taxpayer offered to settle the matter, without costs, if the Crown reassessed accordingly (i.e., conceding the penalty in its entirety). The taxpayer stated that if the Crown did not accept the settlement offer the taxpayer would seek solicitor and client costs if successful at trial. The Crown rejected the offer.

The Tax Court dismissed the taxpayer’s request for enhanced costs and stated that “… An ‘offer’ that the other party to the litigation withdraw in order to avoid a threat of enhanced costs cannot, in this circumstances, be considered to be an ‘offer of settlement’.” Further, the court stated that, “To have ‘settled’ the case as offered by the Appellant would have been to abdicate the responsibilities imposed on the Department of Justice.” (See also CIBC World Markets Inc. v. The Queen (2012 FCA 3) on the difficulties of making a settlement offer where there is a “yes-no” question at issue in the appeal.)

Accordingly, parties to a tax dispute should ensure that their offers are “settlement” offers and not “withdrawal” offers and that the offer is the type of offer that can indeed be accepted by the other party. Otherwise a court may decline to consider the offer when assessing costs.

In what circumstances can a party obtain a large lump-sum cost award after a favourable Tax Court decision?

That was the question considered by the Tax Court in Velcro Canada Inc. v. The Queen (2012 TCC 273), in which the Tax Court awarded the successful taxpayer a lump sum cost award of $60,000 plus disbursements. The Court’s reasoning has provided some helpful clarification on the manner in which the Court will determine the nature and amount of a cost award.

In the main appeal (Velcro Canada Inc. v. The Queen, 2012 TCC 57), the Appellant taxpayer was successful in establishing that a Dutch holding company was the “beneficial owner” of royalties paid by a related Canadian company. (See our previous commentary on the decision by FMC’s Matt Peters here.)

At the costs hearing, the Appellant argued that the Tax Court should award enhanced costs because the Appellant had been entirely successful in the appeal, the amount in issue was in excess of $9 million, the issues raised were of national and international importance, and the novelty of the issues required additional time and resources in preparing for and conducting the appeal.

The Respondent’s view was that costs should be assessed in accordance with Tariff B of Schedule II of the Tax Court of Canada Rules (General Procedure). The Respondent argued that the main issue had previously been considered in the ground-breaking case of Prévost Car Inc. v. The Queen (2008 TCC 231; aff’d 2009 FCA 57), and that the Appellant had not adduced evidence of the work and effort put into the appeal. Further, no exceptional circumstances existed that would justify the Court exercising its discretion to award costs beyond the Tariff.

The Tax Court considered the factors discussed in section 147 of the General Procedure Rules and Tariff B of Schedule II thereto, and concluded that no exceptional circumstances were required to justify a deviation from the Tariff. In fact, the discretion of the Tax Court is quite wide – the Tariff may be relied on, but only if the Court chooses to do so. The Court stated:

[16] Under the Rules, the Tax Court of Canada does not even have to make any reference to Schedule II, Tariff B in awarding costs. The Court may fix all or part of the costs, with or without reference to Schedule II of Tariff B and it can award a lump sum in lieu of or in addition to taxed costs. The Rules do not state or even suggest that the Court follow or make reference to the Tariff. …

[17] It is my view that in every case the Judge should consider costs in light of the factors in Rule 147(3) and only after he or she considers those factors on a principled basis should the Court look to Tariff B of Schedule II if the Court chooses to do so. … [emphasis in original]

The Court went on to consider the result in the proceeding (taxpayer was entirely successful), the amount in issue (more than $9 million), the importance of the issues (very important domestically and internationally), any settlement offer in writing (there wasn’t one), the volume of work (considerable effort required), the complexity of the issues (relatively straight-forward but in a complex factual matrix), and the conduct of the parties (very well pleaded and impressive presentations at the hearing). The Court awarded $60,000 plus disbursements to the Appellant.

The Court’s decision is significant because it signals an evolution in the approach to cost awards from the currently accepted practice.

As most tax litigators know, a general practice developed whereby large lump-sum cost awards were sought only in exceptional circumstances (i.e., where one party had engaged in misconduct or unnecessary procedural wrangling). The decision of Associate Chief Justice Rossiter appears to open the door to the possibility of seeking large lump-sum cost awards in any proceeding because, according to the Court, the Judge should look first to section 147 of the Rules and may, but not necessarily, look to the Tariff.

It seems that this approach accords with the Tax Court’s recent focus, and emphasis, on the importance of settlements. The parties to a tax appeal should not lightly dismiss the Court’s reasoning in Velcro Canada when considering whether to settle a matter before going to trial.

By FMC’s Tax team in cooperation with CCH

On March 29, Canada’s Finance Minister Jim Flaherty tabled the 2012 federal budget, which was met with, as expected, detractors and supporters of the announced spending and tax measures. The Department of Finance’s focus was, obviously, on reducing spending for the foreseeable future, and the only surprise was that the spending reductions were not as extensive as many had anticipated.

Fraser Milner Casgrain LLP (FMC) worked in collaboration with CCH to produce editorial commentary on the content and potential effects of the 2012 federal budget for clients and those in the business and legal community. Some of the significant topics relating to corporate and business tax changes include:

• Expanding eligibility of clean energy equipment for capital cost allowance
• Reducing or eliminating some existing tax credits (such as the tax credit for mineral exploration and overseas employment)
• Changing the rates and qualifying expenditures for the SR&ED program
• Denying paragraph 88(1)(d) “bumps” for partnership interests
• Amending thin capitalization, transfer pricing and foreign affiliate rules
• Allowing split- and late-designations for eligible dividends
• Enhancing transparency and accountability for charities, and including gifts to foreign charitable organizations
• Changing the provisions regarding group sickness/accident insurance plans, retirement compensation arrangements and employee profit sharing plans

For further information or to read FMC and CCH’s commentary, download the complete analysis from FMC’s website.

Typically, a simple informal request by a taxpayer to the CRA for copies of the T20 Audit Report, T401 Appeals Report or other documents will result in disclosure of those documents. However, sometimes these informal requests are met with resistance.

Assuming that there is no issue regarding the disclosure of taxpayer information under section 241 of the Income Tax Act, there are few reasons, if any, for the CRA not to provide these documents to a taxpayer upon an informal request.

In fact, the CRA has published CRA Document P148 “Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act” (2009), which lists the records available to taxpayers, including audit reports and working papers; scientific, appraisal and valuation reports; records of discussions between auditors and appeals officers; and others.

Additionally, the CRA recently published the answer it provided at the 2011 STEP Conference in response to a question about obtaining information and documents in the possession of the CRA (see CRA Document 2011-0403751C6 “2011 STEP Conference – Q8 – Access to Information” (June 2-3, 2011)).

In short, the CRA stated that its Access to Information and Privacy (ATIP) Directorate promotes and encourages informal disclosure of documents by the CRA. The formal request procedures under the Access to Information Act (ATIA) and the Privacy Act (PA) are intended to complement and not replace existing procedures for access to government and personal information. The CRA stated that documents or reports created by an auditor or appeals officer should be given to the taxpayer without requiring the taxpayer to make a formal request under the ATIA and PA.

This is a helpful published position that should be referred to by the taxpayer if he/she is encounters resistance on an informal request for information/documents in the CRA’s possession.

Tax law geeks call it “form over substance” – how Canadians are taxed on their actual relationships and transactions rather than what they intended those to be.

However, mistakes can be made – and sometimes the tax assessed is not reflective of the true nature of the situation at hand.

In the March 16, 2012 issue of The Lawyers Weekly, I discuss the ways in which mistakes may be fixed so as to avoid unintended and adverse tax consequences.

On Friday January 6, 2012, the University of Toronto and the University of British Columbia National Centre for Business Law presented a panel discussion on the recent decision of the Supreme Court of Canada in Copthorne Holdings Ltd. v. The Queen.

The discussion, held at Flavelle House at the University of Toronto’s Faculty of Law, was hosted by U of T’s Professor Ben Alarie. The panelists included Professor David Duff (UBC Faculty of Law), Deen Olsen (Department of Justice), Mark Brender (Osler Hoskin and Harcourt LLP), Robert Couzin (Couzin Taylor LLP), Phil Jolie (Canada Revenue Agency), and Professor Tim Edgar (Osgoode Hall Law School).

The general view of the panelists was that the decision was well-written and comprehensive, but does not add much that is new or insightful to the existing GAAR jurisprudence.

Deen Olsen noted that there are six points the Department of Justice believes are important in interpreting the Supreme Court’s reasoning about “series of transactions”:

1. “Series of transactions” in subsection 248(10) is to be interpreted expansively.
2. The taxpayer bears the onus of rebutting the Minister’s assumption that particular transactions form part of a series.
3. Which transactions are included in a series will depend of the facts of each case.
4. A “strong nexus” is not required for a transaction to be included in a series.
5. Transactions will not be included in a series where subsequent transactions are only a mere possibility or connected with an extreme degree of remoteness.
6. The analysis of whether certain transactions form part of a series may be undertaken prospectively or retrospectively.

Phil Jolie stated that it will be “business as usual” for the CRA with respect to its approach to the application of the GAAR. Mr. Jolie noted a few specific points regarding the CRA’s interpretation of the decision:

1. The decision does not say that a comparison of the difference in tax result between dividend treatment and capital gains treatment is irrelevant to the GAAR analysis.
2. Though the decision does not say that there is a general anti-surplus stripping policy in the Income Tax Act, the CRA may still be able to argue in “bits and pieces” based on the jurisprudence that such a policy does exist.
3. Despite the Court’s comment that the GAAR does not include a “smell test”, such a test does likely exist and the CRA’s analysis of a transaction will look at any anomalous result (i.e., the bad smell) but the CRA will ask why the result is anomalous and whether an argument exists that the outcome was the result of an abuse of the Act (in other words, the smell test is part of the process but not the end of the process).
4. The Court’s statement that it must be “clear” that the taxpayer abused the Act must mean that the Minister must prove the abuse on a “balance of probabilities”.
5. Paid up capital, as a tax attribute, is likely becoming less valuable because of the reduction of the withholding rate on dividends to 5% in the tax treaties between Canada and its major trading partners.
6. There is likely no anti-PUC trading scheme in the Act because the Act is not concerned with PUC trading in the same way that it is concerned with, and precludes, loss trading (i.e., the prohibition on loss trading is intended “to keep factories open” whereas an anti-PUC trading regime would not accomplish that goal).

The afternoon concluded with remarks by the former Chief Justice of the Tax Court of Canada, Donald G.H. Bowman, who noted that the unanimous 9-0 decision was a credit to Chief Justice Beverley McLachlin as the Court produced a well-written and sensible decision, which many in the tax community had wished for in Lipson v. The Queen.

The Copthorne decision will continue to provoke analysis and discussion.  The conversation will continue with a second conference in Toronto sponsored by the Canadian Tax Foundation on January 26.

The federal government announced today that it is interested in receiving comments on proposals to improve the caseload management of the Tax Court of Canada. Specifically, the potential changes would:

• Allow a taxpayer to elect to proceed by way of the Informal Procedure where the aggregate of all amounts in issue in an income tax appeal is equal to or less than $25,000 (or where a loss does not exceed $50,000).
• Require a taxpayer to proceed by way of the General Procedure for GST/HST appeals involving an amount in dispute in excess of $50,000.
• Allow the Tax Court of Canada to dispose of one or more issues raised in an appeal separately, so that some issues can be resolved independently from others.
• Allow the Tax Court of Canada to hear a question affecting a group of two or more taxpayers that arises out of substantially similar transactions, and provide that the resulting judicial determination is binding across the group.

The Informal Procedure limits (i.e., $12,000 / loss not in excess of $24,000) have been unchanged since 1993. There is a general consensus that it is now time to increase that threshold so as to facilitate greater access to the Tax Court under the Informal Procedure.

In addition, the Tax Court has, in recent years, had to deal with an increasing number of “group appeals” but has not had the ability to bind other similarly situated taxpayers. The proposed rules would give the Tax Court greater power to deal with a growing list of group appeals in a more expeditious manner.

The Department of Finance announcement is here.

The Department of Finance backgrounder is here.

All parties in the “Branksome Hall” parking cases (Geraldine Anthony, Heather Friesen, Leslie Morgan, Jarrod Baker v. The Queen) have filed their Memoranda of Fact and Law in the Federal Court of Appeal. The hearing has been scheduled for December 1, 2011 in Toronto.

The issues are whether parking provided to the Appellants by their employer (a private school in Toronto) was a benefit taxable under paragraph 6(1)(a) of the Income Tax Act (the “Act”) and, if so, how the value of that benefit should be assessed.

The Appellants, along with approximately 100 other employees of Branksome Hall, were reassessed for their 2003 and 2004 taxation years to include $92 per month (inclusive of GST and PST) in their income representing the value of free parking provided by their employer. These four appeals were chosen as test cases and were heard on common evidence.

In the decision of the Tax Court, Mr. Justice Brent Paris found that (a) the Appellants received a taxable benefit within the meaning of paragraph 6(1)(a) of the Act because they had a right to a parking spot by virtue of their employment, the benefit to them was not incidental to any benefit to their employer and they saved money by being given a parking spot, (b) relying on Schroter v. The Queen (2010 FCA 98), the value of that taxable benefit was its fair market value and (c) the fair market value of the taxable benefit was $75 per month in 2003 and $77 per month in 2004.

The Appellants take issue with the finding of a taxable benefit in the circumstances and the legal test used by the Tax Court to determine its quantum. The Appellants argue that there was no economic benefit to them and the provision of parking was incidental to the infrastructure of their place of employment. They also contend that their case is nothing like Schroter v. The Queen, in which a corporate executive was rewarded with a free parking pass at his downtown office tower on his promotion. If the free parking at Branksome Hall is determined to be a taxable benefit, the Appellants argue that the value should be computed on the basis of the employer’s cost of providing that privilege, which is “in accordance with the text, context and purpose of [the Act], provides certainty, predictability and fairness, and is most appropriate in this case.” Finally, the Appellants argue that the Tax Court’s decision would have far reaching implications if left undisturbed. For example, a domestic caregiver who enjoys free parking on the driveway of an employer’s home would potentially be subject to tax on that “benefit”.

For the written submissions of the appellants, see the Memorandum of Fact and Law of Geraldine Anthony, Jarrod Baker, Leslie Morgan and Heather Friesen.

For the written submissions of the respondent, see the Memorandum of Fact and Law of the Crown.

On September 6, 2011, the Federal Court of Appeal (Nadon, Trudel and Mainville, JJ.A.) heard an appeal by Saipem UK Limited (“Saipem UK”) against a decision of the Tax Court of Canada interpreting Article 22 of the Canada-UK Tax Treaty. The appeal was dismissed from the bench with costs.

The Tax Court had dismissed Saipem’s appeal and held that subsection 88(1.1) of the Income Tax Act does not discriminate on the basis of nationality since the determination of whether a corporation is a “Canadian corporation” is not dependent on a corporation’s nationality (i.e., a corporation incorporated outside Canada may be a Canadian resident based on the “management and control” test).

Mr. Justice Nadon delivered the following reasons for judgment:

[1] Notwithstanding Mr. Lefebvre’s forceful arguments, we have not been persuaded that the judge made any error which would allow us to intervene.

[2] More particularly, with regard to article 22(1) of the Canada – United Kingdom Tax Convention (the Tax Treaty), we are all of the view, substantially for the reasons given by the judge, that the provisions of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) as amended, at issue discriminate on the basis of residency and not nationality and, as a result, do not constitute discrimination against the Appellant under the Tax Treaty. With regard to article 22(2) of the Tax Treaty, we are all of the view, also for the reasons given by the judge, that the provisions at issue do not constitute less favourable treatment of the Appellant.

[3] In the end, Mr. Lefebvre’s argument, in effect, is that Canada should not be allowed, in the particular circumstances of this case, to discriminate against the Appellant on the basis of residency. Unfortunately, there is nothing in the Tax Treaty to support that view.

[4] Consequently, the appeal will be dismissed with costs in favour of the Respondent.

See our earlier post on the Saipem case.

On September 06, 2011, the Federal Court of Appeal is scheduled to hear an appeal by Saipem UK Limited (“Saipem UK”) against a decision of the Tax Court of Canada interpreting Article 22 of the Canada-UK Tax Treaty.

Saipem UK was a UK-incorporated company and non-resident of Canada that carried on business in Canada through a PE. Saipem UK acquired Saipem Energy International Limited (SEI), another UK-incorporated company and non-resident of Canada that carried on business in Canada through a PE. SEI was wound-up into Saipem UK under section 88 of the Canada Income Tax Act, and Saipem UK  deducted certain non-capital losses of SEI pursuant to subsection 88(1.1). The Minister of National Revenue disallowed the deduction by Saipem UK on the basis that the corporations were not “Canadian Corporations” (i.e., incorporated or resident in Canada) as required by subsection 88(1.1).

Before the Tax Court, Saipem UK argued that subsection 88(1.1) violated Article 22 of the Canada-UK Tax Treaty, which prohibits a Contracting State from discriminating against a non-resident taxpayer on the basis of nationality.

The Tax Court dismissed Saipem UK’s appeal and held that subsection 88(1.1) does not discriminate on the basis of nationality since the determination of whether a corporation is a “Canadian Corporation” is not dependent on a corporation’s nationality (i.e., a corporation incorporated outside Canada may be a Canadian resident based on the “management and control” test).

For the appellant’s notice of appeal, see the Notice of Appeal of Saipem UK Limited.

For the written submissions of the appellant, see the Memorandum of Fact and Law of Saipem UK Limited.

For the written submissions of the respondent, see the Memorandum of Fact and Law of the Crown.