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There’s A Litigation App For That?

We were intrigued to learn that KosInteractive LLC has created the U.S. “Fed Courts” app for Android and Apple devices which contains helpful information about U.S. federal courts rules of procedure and court information. The app provides access to the PACER (Public Access to Court Electronic Records) database, and the procedural rules for appellate, bankruptcy, civil, and criminal proceedings. The federal rules of evidence and the U.S. Supreme Court procedural rules are also available. One drawback – the information isn’t searchable or indexed with hyperlinks.

In any event, there seems to be no Canadian equivalent for litigation or procedural apps.

A quick search in the Apple iTunes stores for “Canada tax” returns 54 results, including an array of federal and provincial tax calculators. ”Canada courts” returns five items, including apps related to the Controlled Drugs and Substances Act, mortgage foreclosures, U.S. Miranda warnings, and a car dealership. A search for “Ontario civil procedure” returns one item, and “Canada tax court” returns zero items.

We are reminded of the very helpful event app developed by the Canadian Tax Foundation that has become a regular feature of the Foundation’s national and regional conferences.

We are confident that Canadian tax professionals would welcome a broader array of court and litigation procedure apps that would provide mobile access to most or all of the court and procedural information we’re stuffing into our oversized litigation bags.

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There’s A Litigation App For That?

CRA Provides Update on NPO Project

In 2009, the CRA commenced a broad review of the non-profit organization sector. You or your clients may have received a CRA questionnaire asking that the NPO provide information or documents in respect of its structure, activities, bylaws, finances, and membership.

Generally, NPOs have been exempt from tax in Canada since the introduction of the income tax in 1917. Under paragraph 149(1)(l) of the Income Tax Act, no Part I tax is payable by a club, society or association that is not a charity, is organized and operated for any purpose other than profit, and no part of the income of which is payable to any proprietor, member or shareholder. Currently, there may be up to 80,000 NPOs in Canada that qualify for the tax exemption under paragraph 149(1)(l). Prior to 2009, the CRA had not undertaken a general review of this sector.

Recently, the CRA published a report and Q&A on the Non-Profit Organization Risk Identification Project (NPORIP). In its report, the CRA stated the review revealed that many NPOs would fail to meet at least one of the requirements set out in paragraph 149(1)(l) of the Act:

The NPORIP was designed to provide the CRA with insight into the way certain organizations—those seeking an exemption from tax under paragraph 149(1)(l) of the Act—operate under the income tax rules. The NPORIP has given the CRA a better understanding of the issues these organizations face in complying with the Act, and, in particular, has highlighted a number of areas where the non-profit sector’s understanding of the law differs from that of the CRA. In addition, the NPORIP has revealed a significant issue with compliance by these organizations in several key areas.

The report provides only a high-level summary of its findings, none of which are surprising:

  • The NPORIP identified a small number of cases where the NPO was, in fact, a charity;
  • The NPORIP identified a small number of cases where the NPO’s governing documents (such as articles of incorporation, letters patent, and by-laws) indicated that it was not organized exclusively for a purpose other than profit;
  • The NPORIP noted a variety of activities with apparent profit motives carried out by a wide range of NPOs; and
  • The NPORIP identified a small number of cases where the NPO had income payable or made available for the personal benefit of a proprietor, member, or shareholder.

The report states that the CRA will seek to improve its education and outreach in the NPO sector, so as to increase awareness and compliance. Additionally, the CRA indicated that a copy of the report had been provided to the Department of Finance for the purpose of reviewing the NPO legislative framework.

We don’t think the report is the final word on this issue from either the CRA or the Department of Finance. In fact, in its 2014 federal budget, the Department of Finance stated:

… Budget 2014 announces the Government’s intention to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. This review will not extend to registered charities or registered Canadian amateur athletic associations. As part of the review, the Government will release a consultation paper for comment and will further consult with stakeholders as appropriate.

We expect that future legislative changes (i.e., increased reporting requirements) may be forthcoming in the next few years.

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CRA Provides Update on NPO Project

Tax Court Rules Amounts Paid Out of Ponzi Scheme Not Taxable

The tax treatment of amounts paid out of failed Ponzi schemes is once again in the news. In Roszko v. The Queen (2014 TCC 59), the Tax Court of Canada allowed the taxpayer’s appeal and held that amounts paid out of a fraudulent scheme were not taxable as interest income.

Roszko follows two recent decision on this issue. In Johnson v. The Queen (2012 FCA 253), the Federal Court of Appeal held that amounts paid out of a Ponzi scheme in excess of the duped taxpayer’s original investment were taxable as income. And in Orman v. Marnat (2012 ONSC 549), the Ontario Superior Court of Justice held that amounts received out of a Ponzi scheme were not investment income (see also this article on the court’s consideration of whether it could rectify certain corporate documents of two companies that had invested in the fraud).

In Roszko, the taxpayer was induced to invest in TransCap Corporation, which was allegedly trading commodities, on the basis that the investment would return 18% to 22% annually. In 2006, the taxpayer made an initial investment of $100,000, which was structured as a loan.  In 2006 and 2007, the taxpayer loaned a total of $800,000 to TransCap. From 2006 to 2009, TransCap paid to the taxpayer a total of $408,000 as follows: $22,500 in 2006, $81,000 in 2007, $156,000 in 2008, and $148,500 in 2009.

In December 2009, the taxpayer became suspicious of the activities of TransCap, which lead to an investigation by the Alberta Securities Commission, which eventually determined that TransCap had perpetrated a fraud on investors.

The issue before the Tax Court was whether the $156,000 received by the taxpayer in 2008 was interest income under paragraph 12(1)(c) of the Income Tax Act.

The Tax Court cited the Federal Court of Appeal’s decision in Johnson for the proposition that there can indeed be a source of income in a Ponzi scheme. However, the Tax Court held that the facts in the Johnson case – wherein the Federal Court of Appeal held that the $1.3 million received by the taxpayer out of the Ponzi scheme was taxable – were different from the facts of the present case. Specifically, in Roszko, the taxpayer’s agreement with TransCap stipulated how the funds were to be invested, the taxpayer was lead to believe the funds would be so invested, the funds were not invested in that manner (i.e., the taxpayer’s contractual rights were not respected), it was agreed that TransCap perpetrated a fraud, and the fraud was described in a decision of the Alberta Securities Commission.

The Tax Court held that the facts of Roszko were more like those in the case of Hammill v. The Queen, in which the Federal Court of Appeal held that a fraudulent scheme from beginning to end cannot give rise to a source of income from the victim’s point of view and hence cannot be considered as a business under any definition.

The Tax Court noted that, in Roszko, the Crown had argued that the income was property income in the form of interest. However, the Tax Court held the amount received by the taxpayer was not income from property, but rather a return of capital to the extent of the original amounts invested. The Tax Court noted that excess returns might be considered income. The Tax Court allowed the appeal .

This is a victory for the taxpayer for the 2008 tax year, but the unanswered question that looms in the background is how the taxpayer’s overall loss ($392,000) on the Ponzi scheme investment will be treated for tax purposes.

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Tax Court Rules Amounts Paid Out of Ponzi Scheme Not Taxable

Bitcoins: More Guidance from the CRA

Tax authorities around the world continue to wrestle with the tax issues arising from the use and sale of Bitcoin currency. Sweden recently announced that it will treat Bitcoin as an asset, and Finland has stated that it will treat Bitcoin as a commodity. China has placed restrictions on the use of Bitcoin. Generally, the price fluctuations and uncertainties around the use and sale of Bitcoins seemed to have generated more questions than answers.

In Canada, the use of Bitcoin currency appears to be gaining popularity - Bitcoin ATMs have popped up in several cities, and various retailers and even some charities are accepting Bitcoins for payments or donations. However, the Canadian government apparently does not consider it a currency. The Canadian tax implications of Bitcoin transactions have been considered by the CRA and tax professionals, and now the CRA has published some additional guidance on the subject.

In CRA Document No. 2013-0514701I7 “Bitcoins” (December 23, 2013), the CRA summarized its views on how certain transactions involving the use or sale of Bitcoins may be taxed under the Income Tax Act and Excise Tax Act.

Buying and Selling Goods or Services in Exchange for Bitcoins

The CRA stated that the use of Bitcoins to purchase goods or services would be treated as a form of barter transaction (see, for example, Interpretation Bulletin IT-490 “Barter Transactions” (July 5, 1992)). The CRA’s view is that each party to a barter transaction has received something that is equal to the value of whatever is given up. For Canadian tax purposes, if a business sells goods or services in exchange for Bitcoins, that business must report its income from the transaction in Canadian dollars (i.e., the fair market value of the Bitcoins at the time of the sale). GST/HST would be applicable on the fair market value of the Bitcoins that were used to pay for the goods or services.

Donation of Bitcoins

The CRA stated that, if Bitcoins are transferred to a qualified donee, the fair market value of the Bitcoins at the time of the donation must be used in determining the value of the gift for tax purposes (see also CRA Pamphlet P113 “Gifts and Income Tax”). The determination of the fair market value is a question of fact.

Buying and Selling Bitcoins

The CRA stated that the trading or sale of Bitcoins like a commodity (i.e., speculating on the changes in the value of Bitcoins) may result in a gain or loss on account of income or capital. This determination can only be made on a case-by-case basis and on the specifics facts of each situation (see, for example, Interpretation Bulletin IT-479R “Transactions in Securities” (February 29, 1984)). Generally, the income tax consequences relating to the tax treatment of gains or losses arising from the purchase and sale of Bitcoins would be the same as for transactions involving other types of commodities.

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Bitcoins: More Guidance from the CRA

Supreme Court of Canada to Release Two Decisions on Tax and Rectification

On Thursday November 28, the Supreme Court of Canada will release its decisions in the companion cases of Agence du Revenu du Québec v. Services Environnementaux AES Inc., et al. (Docket #34235) and Agence du Revenu du Québec v. Jean Riopel, et al. (Docket #34393).

The narrow question on appeal is under what circumstances the Superior Court of Quebec may correct a written instrument that does not reflect the parties’ intentions. More broadly, the issue is how and to what extent the equitable principles of rectification operate in the context of the Quebec Civil Code. These will be the first substantive decisions of the Supreme Court on tax and the doctrine of rectification.

See our previous posts on the cases here and here.

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Supreme Court of Canada to Release Two Decisions on Tax and Rectification

CRA Considers Tax Treatment of Crowdfunding

Hot on the heels of the CRA’s recent publication of a “fact sheet” on its views on the tax treatment of Bitcoin currency (which has been in the news recently – see articles here and here), the CRA has published two technical interpretations on the tax treatment of “crowdfunding“.

In CRA Document No. 2013-0508971E5 (October 25, 2013) and CRA Document No. 2013-0509101E5 ”Crowdfunding” (October 29, 2013) the CRA was asked about the tax treatment of amounts received by taxpayers through a crowdfunding arrangement.

The CRA stated that it understood crowdfunding to be a way of raising funds for a broad range of purposes, using the internet, where conventional forms of fundraising funds might not be possible (and which may or may not involve the issuance of securities).

The CRA stated that, depending on the specific circumstances, crowdfunding amounts received by the taxpayer could represent a loan, capital contribution, gift, income or a combination thereof. The CRA noted its position described in Interpretation Bulletin IT-334R2 “Miscellaneous Receipts” (February 21, 1992) that voluntary payments received by virtue of a taxpayer’s profession or carrying on of a business are considered taxable receipts. The CRA also noted that, on the other hand, a non-taxable windfall may exist where the taxpayer made no organized effort to receive the payment and neither sought nor solicited the payment. The CRA’s view is that a business has commenced where the taxpayer has started some significant activity that is a regular part of the business or that is necessary to get the business going (see Interpretation Bulletin IT-364 “Commencement of Business Operations” (March 14, 1977)). Conversely, a gift may exist where the donor transfers property with no right, privilege, material benefit or advantage conferred in return.

These two recent technical interpretations follow an earlier publication (CRA Document No. 2013-0484941E5 “Crowdfunding” (August 13, 2013)), in which the CRA stated that amounts received by a taxpayer from crowdfunding activities would generally be included in the taxpayer’s income pursuant to subsection 9(1) of the Income Tax Act as income from carrying on a business (and that certain expenses may be deductible).

These views from the CRA are helpful guidance for those who have undertaken or are considering crowdfunding. We agree that a taxpayer’s specific circumstances will be determinative of the tax treatment of the crowdfunded amounts (i.e., on a case-by-case basis). However, because of the various activities for which crowdfunding may be sought, and the ease with which crowdfunding may be accessed, it is less clear when a taxpayer’s activities (including seeking crowdfunding and any other associated activities) will result in the conclusion that a taxpayer has commenced carrying on business.

Accordingly, taxpayers who seek and obtain crowdfunding (for business and non-business purposes) should be aware of the potential tax implications, particularly in light of fact-specific results and the CRA’s evolving views on the subject.

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CRA Considers Tax Treatment of Crowdfunding

U.S. Supreme Court Justice Scalia on Advocacy and Judging

The U.S. Supreme Court’s Fall term began on October 7, and there has been no shortage of recent articles on the docket and Judges of the Court. In a previous post, David Spiro noted a remarkable piece on U.S. Supreme Court Chief Justice John Roberts’ advocacy practice before he was appointed to the Court, and in a recent issue of New York Magazine, Justice Antonin Scalia provided his candid views on advocacy and judging.

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U.S. Supreme Court Justice Scalia on Advocacy and Judging

The Tax Court of Canada and the World of Opera

Moliere once said, “Of all the noises known to man, opera is the most expensive.”

In Knapik-Sztramko v. The Queen (2013-799(IT)I, October 17, 2013), the Tax Court of Canada managed to reduce some of that cost, at least for one opera performer.

The taxpayer was an opera singer. In 1997, she entered a vocal competition organized by the Gerda Lissner Foundation. The taxpayer won the competition and from 1997 to 2006 she received monies for the payment of singing coaches, stage training, accommodation and travel expenses. The CRA reassessed the taxpayer to include in her income the amounts received from the Foundation.

Under paragraph 56(1)(n), a taxpayer must include in his/her income any amount received as or on account of a prize other than a “prescribed prize”. Section 7700 of the Income Tax Regulations states,

7700. For the purposes of subparagraph 56(1)(n)(i) of the Act, a prescribed prize is any prize that is recognized by the public and that is awarded for meritorious achievement in the arts, the sciences or service to the public but does not include any amount that can reasonably be regarded as having been received as compensation for services rendered or to be rendered.

In this case, the Crown conceded that the prize was recognized by the public and was for meritorious achievement in the arts. However, the Crown argued, the prize was paid as compensation for services. In the Crown’s view, the taxpayer had undertaken certain activities (coaching, training, career development, etc.) for, and provided services to, the Foundation in exchange for the money.

The Tax Court found that the taxpayer had provided no services to the Foundation, and that the activities undertaken by the taxpayer were consistently comprised of training, support and education to enhance her performance abilities:

The identification of the appellant as someone worthy of specialized study and training was the basis for awarding the prize from the Foundation’s perspective. This prize was not a relationship of, or in substitution for, employment, but a prize awarded on merit with reasonable conditions attached in order to ensure that the burgeoning talent identified was further refined by the benefactor.

The Tax Court allowed the taxpayer’s appeal.

The tax treatment of prizes is a nuanced area, dovetailing as it does with the taxation of scholarships, bursaries, fellowships and employment income. The issue seems to garner public attention every four years when the CRA responds to queries as to whether Olympic medal-winning athletes are subject to tax in Canada on their prizes (answer: Canadian athletes, yes (see CRA Document No. 2004-0098691E5 “Prizes paid to amateur athletes” (January 21, 2005), CRA Document No. 2008-0300071M4 “Olympic medals” (June 26, 2009) and CRA Document No. 2012-0458181M4 “Olympic performance awards” (September 18, 2012)); non-resident athletes, no (see subsection 115(2.3) of the Income Tax Act)).

The Tax Court’s decision in Knapik-Sztramko is a helpful case in a limited body of jurisprudence on what qualifies as a non-taxable prize under paragraph 56(1)(n) and Regulation 7700.

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The Tax Court of Canada and the World of Opera

Unhappy Returns? The CRA Interprets Subsection 220(3) of the Income Tax Act

In CRA Document No. 2013-0487181I7 “Extension of the reassessment period” (July 12, 2013), the CRA was asked to provide its views on the operation of subsection 220(3) of the Income Tax Act.

Subsection 220(3) of the Act states,

220(3) The Minister may at any time extend the time for making a return under this Act. [emphasis added]

A corporate taxpayer failed to file a T2 return of income for a year. The CRA issued an arbitrary assessment pursuant to subsection 152(7) of the Act. Three years later, the taxpayer filed its T2 return, but the CRA refused to reassess as the “normal reassessment period” had expired (see subsection 152(4) of the Act).

In its technical interpretation, the CRA stated,

“Subsection 220(3) provides the Minister with the discretion to extend the time for making a return under the Act. However, such discretion must be exercised for a taxation year that has not become statute-barred.”

The CRA may be correct about the result in this particular case, but a few points should be clarified.

It is clear that the Minister’s discretion under subsection 220(3) is not subject to any limitation.

Practically, however, if the Minister exercises her discretion under subsection 220(3), certain other provisions relating to the Minister’s ability to assess the taxpayer’s return could be engaged. For example, the normal reassessment period does not run until the CRA issues an initial assessment. Or, the nature of the taxpayer could impact the CRA’s ability to reassess: Subsection 152(4.2) of the Act allows the Minister to reassess tax, interest and penalties for a taxation year at any time after the end of the normal reassessment period if the taxpayer makes a request for a reassessment within 10 years after the end of that taxation year. However, subsection 152(4.2) applies only to individuals and testamentary trusts.

In the present case, while the CRA could, pursuant to subsection 220(3), extend the time for filing a T2 return, the CRA could not reassess the return because the normal reassessment period had expired and another relieving provision – such as subsection 152(4.2) – did not apply.

In another case, the result could be different.

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Unhappy Returns? The CRA Interprets Subsection 220(3) of the Income Tax Act

Take a Chance: Judicial Review of the CRA’s Discretionary Power under s. 152(4.2) of the Income Tax Act

In Radonjic v. The Queen (2013 FC 916), the taxpayer brought an application for judicial review of the CRA’s refusal to make certain adjustments to the taxpayer’s tax returns after the normal reassessment period had expired.

In 2003, the taxpayer start playing online poker. After consulting with his accountant, the taxpayer treated his gambling winnings as income in 2004, 2005, 2006 and 2007. Later, he concluded that his gambling winnings were likely not taxable. Accordingly, the taxpayer filed a request for an adjustment under subsection 152(4.2) of the Income Tax Act asking that the income tax he had paid be returned to him.

The CRA denied the taxpayer’s adjustment request. The taxpayer then brought an application for judicial review of the decision to deny the adjustment request.

The Federal Court noted that the standard of review for the CRA’s exercise of discretion under subsection 152(4.2) is reasonableness (see Dunsmuir v. New Brunswick (2008 SCC 9), Caine v. C.R.A. (2011 FC 11), and Hoffman v. Canada (2010 FCA 310)). In other words, the court should intervene only if the decision was unreasonable in the sense that it falls outside the “range of possible, acceptable outcomes which are defensible in respect of the facts and law”.

The Federal Court considered the parties’ positions on the issue and the various court decisions that have addressed the taxation of gambling gains and losses (see, for example, Cohen v. The Queen (2011 TCC 262), and Leblanc v. The Queen (2006 TCC 680)).

The court concluded that the CRA had fully considered all of the taxpayer’s submissions, and that there was no evidence of procedural unfairness or bad faith by the CRA.

However, the court concluded that the CRA had misinterpreted or misunderstood the taxpayer’s activities, and had drawn unreasonable and unsupportable conclusions about the tax treatment of the taxpayer’s gambling winnings:

[51] … The Minister’s exercise of her discretion under subsection 152(4.2) of the Act in this case lacks intelligibility and justification and, in my view, falls outside the range of possible, acceptable outcomes which are defensible in respect of the facts and law.

Overall, the court found that the taxpayer was simply an enthusiastic and ever-hopeful poker player engaged in a personal endeavour.

The court quashed the CRA’s decision and returned the matter to the CRA for reconsideration in accordance with the court’s reasons.

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Take a Chance: Judicial Review of the CRA’s Discretionary Power under s. 152(4.2) of the Income Tax Act